FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended: December 31, 1997
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from: ______ to ______
XEROX CORPORATION
(Exact name of registrant as specified in its charter)
1-4471
(Commission file number)
New York 16-0468020
(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 1600, Stamford, Connecticut 06904
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 968-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1 par value New York Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: (X) No: ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
( )
The aggregate market value of the voting stock of the registrant held by non-
affiliates as of February 27, 1998 was: $31,263,825,255.
(Cover Page Continued)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Class Outstanding at February 27, 1998
Common Stock, $1 Par Value 327,031,139 Shares
Documents Incorporated By Reference
Portions of the following documents are incorporated herein by reference:
Part of 10-K in
Document Which Incorporated
Xerox Corporation 1997 Annual Report to Shareholders I & II
Xerox Corporation Notice of 1998 Annual Meeting of III & IV
Shareholders and Proxy Statement (to be filed not
later than 120 days after the close of the fiscal
year covered by this report on Form 10-K).
Forward-Looking Statements
From time to time Xerox Corporation (the Registrant or the Company) and its
representatives may provide information, whether orally or in writing,
including certain statements in this Form 10-K under Part I, Item 1
"Business," Part II, Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Part II, Item 8 "Financial
Statements and Supplementary Data," which are deemed to be "forward-looking"
within the meaning of the Private Securities Litigation Reform Act of 1995
("Litigation Reform Act"). These forward-looking statements and other
information relating to the Company are based on the beliefs of management as
well as assumptions made by and information currently available to management.
The words "anticipate," "believe," "estimate," "expect," "intend," and similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Registrant with respect to future events and are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. The Registrant does not intend
to update these forward-looking statements.
In accordance with the provisions of the Litigation Reform Act we are making
investors aware that such "forward-looking" statements, because they relate to
future events, are by their very nature subject to many important factors
which could cause actual results to differ materially from those contained in
the "forward-looking" statements. Such factors include but are not limited to
the following:
Competition - the Registrant operates in an environment of significant
competition, driven by rapid technological advances and the demands of
customers to become more efficient. There are a number of companies worldwide
with significant financial resources which compete with the Registrant to
provide document processing products and services in each of the markets
served by the Registrant, some of whom operate on a global basis. The
Registrant's success in its future performance is largely dependent upon its
ability to compete successfully in its currently-served markets and to expand
into additional market segments.
Transition to Digital - presently black and white light-lens copiers represent
over half the Registrant's revenues. This segment of the general office is
mature with anticipated declining industry revenues as the market transitions
to digital technology. Some of the Registrant's new digital products replace
or compete with the Registrant's current light-lens equipment. Changes in the
mix of products from light-lens to digital, and the pace of that change as
well as competitive developments could cause actual results to vary from those
expected.
Pricing - the Registrant's ability to succeed is dependent upon its ability to
obtain adequate pricing for its products and services which provide a
reasonable return to shareholders. Depending on competitive market factors,
future prices the Registrant can obtain for its products and services may vary
from historical levels.
Financing Business - a significant portion of the Registrant's profits arise
from the financing of its customers' purchase of the Registrant's equipment.
On average, 75 to 80 percent of equipment sales are financed through the
Registrant. The Registrant's ability to provide such financing at competitive
rates and realize profitable spreads is highly dependent upon its own costs of
borrowing which, in turn, depend upon its credit ratings. Significant changes
in such ratings could reduce the profitability of such financing business
and/or make the Registrant's financing less attractive to customers thus
reducing the volume of financing business done. The Registrant's present
credit ratings permit ready access to the credit markets. There is no
assurance that these credit ratings can be maintained and/or ready access to
the credit markets can be assured.
Productivity - the Registrant's ability to sustain and improve its profit
margins is largely dependent on its ability to maintain an efficient, cost-
effective operation. Productivity improvements through process reengineering,
design efficiency and supplier cost improvements are required to offset labor
and materials cost inflation and competitive price pressures.
International Operations - the Registrant derives approximately half its
revenue from operations outside of the United States. In addition, the
Registrant manufactures many of its products and/or their components outside
the United States. The Registrant's future revenue, cost and profit results
could be adversely affected by a number of factors, including changes in
foreign currency exchange rates, changes in economic conditions from country
to country, changes in a country's political conditions, trade protection
measures, licensing requirements and local tax issues.
New Products/Research and Development - the process of developing new high
technology products and solutions is inherently complex and uncertain. It
requires accurate anticipation of customers' changing needs and emerging
technological trends. The Registrant must then make long-term investments and
commit significant resources before knowing whether these investments will
eventually result in products that achieve customer acceptance and revenues
required to provide anticipated returns from these investments.
Disengagement from Insurance Business - during the process of disengaging from
the insurance business, the Registrant will continue to be subject to all the
business risks and rewards of the remaining unit, Crum & Forster Holdings,
Inc. (CFI). Until CFI is actually sold, no assurances can be given as to the
ultimate impact on the Registrant's total results from operations or whether
the proceeds from CFI's sale will equal its carrying value. The insurance
business is subject to cyclical competitive conditions, judicial decisions
affecting insurers' liabilities, and by volatile and unpredictable
developments, including changes in the propensity of courts to grant large
awards, fluctuations in interest rates, inflationary pressures that may tend
to affect the size of losses and changes in the investment environment that
affect market prices of insurance companies' investments. CFI's operating
results have historically been influenced by these industry trends, as well as
by its exposure to uncollectible reinsurance, which had been greater than for
most other insurers.
PART I
Item 1. Business
Overview
Xerox Corporation (Xerox or the Company) is The Document Company and a leader
in the global document market, providing document solutions that enhance
business productivity. References herein to "us" or "our" refer to Xerox and
consolidated subsidiaries unless the context specifically requires otherwise.
We distribute our products in the Western Hemisphere through divisions and
wholly-owned subsidiaries. In Europe, Africa, the Middle East and parts of
Asia including Hong Kong, India and China, we distribute through Xerox Limited
(formerly Rank Xerox) and related companies (collectively Xerox Limited). In
June 1997, we completed the acquisition of The Rank Group's remaining 20
percent financial interest in Rank Xerox Limited and related companies for 940
million pounds sterling, or approximately $1.5 billion. Fuji Xerox Co.,
Limited, an unconsolidated entity jointly owned by Xerox Limited and Fuji
Photo Film Company Limited, develops, manufactures and distributes document
processing products in Japan and the Pacific Rim. Japan represents
approximately 90 percent of Fuji Xerox revenues, and Australia, New Zealand,
Singapore and Malaysia represent the remaining 10 percent. Fuji Xerox
conducts business in other Pacific Rim countries through joint ventures and
distributors.
Beginning in 1995, the results of our Insurance operations were accounted for
as discontinued operations. Since that time the Document Processing business
has been the only component of continuing operations.
Our Document Processing activities encompass developing, manufacturing,
marketing, servicing and financing a complete range of document processing
products and services designed to make offices around the world more
productive. We believe that the document is a tool for productivity, and that
documents - both electronic and paper - are at the heart of most business
processes. Documents are the means for storing, managing, and sharing
business knowledge. Document technology is key to improving productivity
through information and knowledge management and we believe no one knows the
document - paper to digital, digital to paper - better than we do. The
financing of Xerox equipment is generally carried out by Xerox Credit
Corporation (XCC) in the United States and internationally by foreign
financing subsidiaries and divisions in most countries in which we operate.
Document Processing operations had 91,400 Xerox employees worldwide at year-
end 1997.
Continuing Operations
The Document Processing Strategy
We believe that documents represent the knowledge base of an organization and
play a dynamic and central role in business, government, education and other
organizations:
- - Increasingly, documents are being created and stored in digital electronic
form.
- - The use of electronically created paper documents will continue to
increase.
As The Document Company, we believe that by helping our customers navigate and
manage the world of documents, we can help them improve their productivity and
grow their businesses. We help customers make documents better, make better
documents, and work better with documents.
We create customer value by providing innovative document technologies,
products, systems, services and solutions that allow our customers to:
- - Move easily within and between the electronic and paper forms of documents.
- - Scan, store, retrieve, view, revise and distribute documents electronically
anywhere in the world.
- - Print or publish documents on demand, at the point closest to the need,
including those locations of our customers' customers.
- - Integrate the currently separate modes of producing documents, such as the
data center, production publishing and office environments into a seamless,
user-friendly enterprise-wide document systems network - with technology
acting as an enabler.
We have formed alliances to bring together the diverse infrastructures that
currently exist and to nurture the development of an open document services
environment to support complementary products from our partners and customers.
We are working with more than 50 industry organizations to make office,
production and electronic printing an integrated, seamless part of today's
digital work place.
Market Overview
We estimate that the global document market that we serve, excluding Japan and
the Pacific Rim countries served by Fuji Xerox, was approximately $118 billion
in 1997 and is estimated to grow at a 14 percent annual rate to about $175
billion in 2000. With our many new product introductions during this decade,
and in particular, during 1997, our participation in the global document
market has been considerably broadened from the slower growing segments of the
market to the faster growing segments of the market. This growth will be
driven by the transition to digital copying and printing in the office, the
transfer of document production from offset printing to digital publishing,
the increase in customer requirements for network and distributed printing,
the accelerating demand for color documents, and increasingly, our
participation in the small office / home office / personal document processing
market.
We have traditionally had a strong position in the general office document
market, the largest segment, which is projected to reach approximately $64
billion in 2000. Growth in this market is driven by the transition to the use
of digital and color documents. The production market, which includes
production publishing and production printing, is expected to grow at an
annual rate of 10 percent, reaching $24 billion in 2000. The small office /
home office / personal document processing market is growing at an annual rate
of more than 25 percent due to increases in the number of home offices and
small businesses. This market segment acquires product primarily through
indirect distribution channels. Finally, document outsourcing, the fastest
growing served market segment, is projected to grow 35 to 40 percent annually,
reaching $11 billion by 2000, as customers' increasingly focus on their core
competencies and outsource their document processing requirements.
Xerox Focus
We believe that our competitive advantages lie in our ability to continually
improve the features and performance of our document processing products,
services and solutions based on demonstrated customer needs; competitive
pricing; our excellent reputation for performance and service; our substantial
on-going investment in research and development; expanded sales coverage
through our direct sales force, agents, retail chains, value added resellers
and systems integrators; our leadership position in the rapidly growing
document outsourcing business; maintenance of our strong market position in
emerging markets; and an expanded presence in the burgeoning small office /
home office / personal document processing market. As a result, we believe we
are well positioned to participate in the anticipated growth in the market
segments in which we compete.
Digital Products
Our digital products consist of four categories: black-and-white production
publishing, black-and-white production printing, color laser copying and
printing, and black-and-white digital copiers. During 1997, digital product
revenues grew 25 percent on a pre-currency basis, driven by the annualized
impact of new products introduced in 1996 as well as new products introduced
during 1997. Digital products contributed 36 percent of total revenues in
1997, 30 percent in 1996, and 25 percent in 1995.
Production Publishing
The era of production publishing was launched in 1990 when we announced the
DocuTech Production Publishing family which was a major step beyond our
traditional reprographics market into the publishing industry. Having
installed to date more than 16,000 DocuTech systems around the world, our
production publishing revenues in 1997 were $2.1 billion.
Digital production publishing technology is increasingly replacing older,
traditional short-run offset printing as customers seek improved productivity
and cost savings, faster turnaround of document preparation, and the ability
to print documents "on demand." We offer the widest range of solutions
available in the marketplace - from dial-up lines through the Internet to
state-of-the-art networks - and we are committed to expanding these print-on-
demand solutions as new technology and applications are developed.
The DocuTech family of digital production publishers scans hard copy and
converts it into digital documents, or accepts digital documents directly from
networked personal computers or workstations. A user-friendly electronic cut-
and-paste workstation allows the manipulation of images or the creation of new
documents. For example, in only a few minutes, a page of word-processed text,
received over a network, can be combined with a photograph scanned from hard
copy and enhanced electronically: cropped, positioned precisely, rotated,
brightened or sharpened. Digital masters can be prepared in a fraction of the
time necessary to prepare offset plates, thereby allowing fast turnaround
time. Further time can be saved, and frequently significant inventory and
shipping costs, by transmitting electronically and printing where the
documents are required.
DocuTech prints high-resolution (600 dots per inch) pages at up to 180
impressions per minute. The in-line finisher staples completed sets or
finishes booklets with covers and thermal-adhesive bindings. Because the
finished document can be stored as a digital document, hard copy documents can
be printed on demand, or only as required, thus avoiding the long production
runs and high storage and obsolescence costs associated with offset printing.
The concept of print-on-demand took another major step in 1995 when we
introduced the DocuTech 6135. It makes print-for-one publishing practical;
personalized publishing runs can now be as short as one or two prints.
Another significant step forward was taken in 1997 when the DocuTech 6180 was
introduced, increasing output speed to 180 cut-sheet pages per minute.
Production Printing
Our revenues from production black-and-white computer printers grew 9 percent
pre-currency in 1997 to $2.3 billion.
This market has largely consisted of high-end host-connected printers and low-
end desktop printers. We expect significant future growth for robust, fully
featured printers serving multiple users on networks. This growth will be
driven by the increase in personal computers and workstations on networks,
client-server processing, accelerating growth in the demand for enterprise-
wide distributed printing, and declining electronics costs. These faster,
more reliable printers print collated multiple sets on both sides of the
paper, insert covers and tabs, and staple or bind, but without the labor-
intensive steps of printing an original and manually preparing the documents
on copiers. In addition, documents can be printed on these printers from
remote data center computers, enabling the efficiencies of distributing
electronically and then printing, rather than printing paper documents and
then distributing them.
We have had a strong position in the production, high-volume computer printing
market segment since 1977. We are well positioned to capitalize on the growth
in the computer printing market because of our innovative technologies and our
understanding of customer requirements for distributed printing from desktop
and host computers. Our goal is to integrate office, production and data-
center computer printing into a single, seamless, user-friendly network.
Xerox pioneered and continues to be a worldwide leader in computer laser
printing, which combines computer, laser, communications and xerographic
technologies. We market a broad line of robust printers with speeds that
range from five pages per minute to the industry's fastest cut-sheet printer
at 180 pages per minute, and continuous-feed production printers at speeds up
to 420 pages per minute. Many of these printers have simultaneous interfaces
that can be connected to multiple host computers as well as local area
networks.
Breakthrough technology in our highlight color printers allows printing, in a
single pass, black-and-white plus one customer-changeable color (as well as
shades, tints, textures and mixtures of each) at production speeds up to 184
pages per minute. Other manufacturers' highlight color printers require
additional passes to add variable color, which increase cost, reduce speed and
reliability and introduce the possibility of color misalignment.
Productivity-enhancing features include printing collated multiple sets on
both sides of the paper, inserting covers and tabs, printing checks with
magnetic ink character recognition (MICR), and stapling; all on cut sheet
plain paper, with sizes up to 11 by 17 inches.
In 1995, we significantly expanded our opportunities with the introduction of
two major new printer series that redefine our role in the electronic
production printing industry. With the DocuPrint CF Series family, we entered
the market for very high-volume, continuous-feed printers at speeds up to 420
pages per minute. The DocuPrint IPS Series makes the IBM Advanced Function
Presentation (AFP) architecture directly available to our production printing
customers.
In 1997, we introduced the DocuPrint 180 which prints on one or both sides of
a page, on a wide variety of paper sizes and weights, and at 180 pages per
minute. We also introduced the DocuPrint 184 hc (highlight color) which pairs
two 92 page-per-minute Xerox highlight color laser printers with one print
server for cut-sheet, highlight color production speeds up to 184 pages per
minute.
Color Laser Copying and Printing
Our revenues from color laser copiers and printers grew 46 percent pre-
currency in 1997 to $1.5 billion.
The use of color originals in the office is accelerating. Independent studies
have concluded that color documents are more effective at communicating
information and that decision-making performance improves with the use of
color documents. The vast majority of industry shipments of workstations and
personal computers have color monitors, creating the need for economical,
convenient and reliable, high-quality color copying and printing.
The color market has largely consisted of ink-jet and laser copiers and
printers. Laser copiers and printers offer near-offset image quality,
excellent printing speeds, and the accessories necessary to produce finished
sets.
We entered the color laser market in 1991 with the introduction of the Xerox
5775 color copier/printer and the 4700 printer, both of which print full-color
at 7.5 pages per minute. We have since expanded the product line with the
4900 color laser printer, which prints full color at three pages per minute;
the MajestiK color copier/printer series, which print full color at 6 pages
per minute; the XPrint family of networked desktop color laser printers, which
print at resolutions up to 600 x 600 dots per inch; and the Regal color
copier/printer, which prints full color at 9 pages per minute.
The DocuColor 40, which was introduced in early 1996, copies and prints at 40
full-color pages per minute and is the industry's fastest and most affordable
digital color document production system. It has a market share of more than
50 percent.
During 1997, we introduced the DocuColor 70, a continuous feed full-color
digital press, based on a print engine from Xeikon with Xerox-exclusive
digital front-ends, that produces 70 high-quality, full-color impressions per
minute. We also introduced the DocuColor 5750 Empress copier/printer which
produces 6 full color copies per minute and the DocuColor 5799 which operates
at 9 full color copies per minute. Finally, for networked workgroups, we
introduced the DocuPrint C55, a full-featured, compact color laser printer
that prints three full color pages per minute and includes automatic image
enhancement and an embedded web server, and is the lowest-cost product of its
kind.
Black and White Digital Copiers
The volume of paper documents used in the office continues to grow. Pages per
worker per day in the U.S. have doubled in the last decade and productivity
has been impaired by the need to manage documents on computer monitors and as
hard-copy originals.
We intend to help customers improve productivity by controlling their
documents from a common interface; managing from the desktop; eliminating
gaps, steps and devices in the work process; and moving smoothly from digital
to paper and back.
Our strategy is, first, to build from our current strength, the copier. We
know how to design and build copiers with superior marking, paper handling and
finishing technology. We know our customers, their requirements and how to
sell sophisticated, fully featured copiers. In April 1997, we introduced the
Document Centre family of four new stand-alone black and white digital copiers
at speeds of 20, 30, 40, and 65 pages per minute, that are better quality,
more reliable, and more feature rich than light-lens copiers and are priced at
a modest premium over comparable light-lens copiers. A fax option is also
available.
Second, beginning in 1998, as customers are ready, we will connect the digital
copiers to their networks so that their digital copiers can also be used as
robust, high-speed network printers to gain incremental volume from computer
printing and ultimately to replace desktop printers and single-purpose copiers
and faxes. The fax option and network upgrades have compelling economics
versus the alternative of purchasing comparable printers and faxes since the
print engine, output mechanics and most of the software required are part of
the base digital copier.
Orders and installations of the available Document Centre digital black and
white copier models exceeded our expectations during 1997 and, as a result, we
more than doubled production. 1997 revenues from the 20 and 30 page-per-minute
Document Centre 220 and 230 and the limited fourth quarter availability of the
65 page-per-minute Document Centre 265 were $300 million.
Light-lens Copying
Our revenues from light-lens copiers declined 2 percent pre-currency in 1997
to $9.6 billion. The decline in light-lens copier revenues reflects several
important factors, including customer transition to our new digital black-and-
white products and continued price pressures. We believe the trend over the
past few years will continue whereby digital products' revenues represent an
increasing share of total revenues and light-lens copier revenues will
represent a declining share of total revenues. Revenues from light-lens
copying represented 51 percent of total revenues in 1997, 56 percent in 1996
and 59 percent in 1995.
We market the broadest line of light-lens copiers and duplicators in the
industry, ranging from a three copies-per-minute personal copier to a 135
copies-per-minute fully-featured duplicator to special copiers designed for
large engineering and architectural drawings up to 3 feet by 4 feet in size.
Many of our state-of-the-art products have improved ease of use, reliability,
copy quality, job recovery and ergonomics as well as productivity-enhancing
features, including zoom enlargement and reduction, highlight color, copying
on both sides of the paper, and collating and stapling which allow the
preparation of completed document sets.
We have a strong position with major accounts who demand a consistently high
level of service worldwide. Our competitive advantages include a focus on
customer call response times, diagnostic equipment that is state-of-the-art
and availability of 24-hour-a-day, seven-day-a-week service.
We also are increasing our leadership position in small commercial accounts,
the most competitive copier market segment, through marketing programs such as
telemarketing, sales through independent agents, retail outlets and trade
associations.
We expect that light-lens copiers will increasingly be replaced by digital
copiers. However, some portions of the market will continue to be serviced by
light-lens copiers for many years, such as customers who care principally
about price or whose work processes do not require digital products.
Therefore, we intend to continually upgrade our light-lens products to
maintain a leadership position in the industry.
Other Products
We also offer a wide range of other document processing products including
ink-jet and electrostatic printers, multi-function products, facsimile
products, scanners, personal computer and workstation software, and integrated
systems solutions.
We also sell cut-sheet paper to our customers for use in their document
processing products.
Summary of Revenues by Product Category
The following table summarizes our revenues by major product category. The
revenues for light-lens copiers and digital products include equipment and
supplies sales, service, rental and document outsourcing revenues, and finance
income. These revenues exclude the impact of foreign currency exchange rate
fluctuations which are shown combined with the revenues from paper and other
products.
Year ended December 31 (in billions) 1997 1996 1995
Light-lens copiers $ 9.6 $ 9.7 $ 9.8
Digital products 6.7 5.4 4.3
Paper, other products, currency 1.9 2.3 2.5
Total revenues $18.2 $17.4 $16.6
Xerox Competitive Advantages
Customer Satisfaction
Our highest priority is customer satisfaction. Our research shows that
satisfied customers are far more likely to repurchase products and that the
cost of selling a replacement product to a satisfied customer is far less than
selling to a "new" customer. We regularly survey customers on their
satisfaction, measure the results, analyze the root causes of dissatisfaction,
and take steps to correct any problems.
Because of our emphasis on customer satisfaction, we offer a Total
Satisfaction Guarantee, one of the simplest and most comprehensive offered in
any industry: "If you are not satisfied with our equipment, we will replace
it without charge with an identical model or a machine with comparable
features and capabilities." This guarantee applies for at least three years
to equipment acquired from and continuously maintained by Xerox or its
authorized agents.
Quality
We were an early pioneer in total quality management and are the only company
to have won all three of the following prestigious quality awards: the
Malcolm Baldrige National Quality Award in the United States in 1989 and Xerox
Business Services, our outsourcing division, won the award in the services
category in 1997, the European Quality Award in 1992 and the Deming Prize in
Japan, won by Fuji Xerox in 1980. In addition, we have won top quality awards
in Argentina, Australia, Belgium, Brazil, Canada, China (Shanghai), Colombia,
France, Germany, Hong Kong, India, Ireland, Mexico, the Netherlands, Norway,
Portugal, the United Kingdom, and Uruguay. Our "Leadership Through Quality"
program has enabled us to improve productivity, accelerate the introduction of
new products, improve customer satisfaction and increase market share. Xerox
products have been consistently rated among the world's best by independent
testing organizations.
Research and Development
Xerox research and development (R&D) is directed toward the development of new
products and capabilities in support of our document processing strategy. Our
research scientists are deeply involved in the formulation of corporate
strategy and key business decisions. They regularly meet with customers and
have dialogues with our business divisions to ensure they understand customer
requirements and are focused on products that can be commercialized.
In 1997, R&D expense was $1,079 million compared with $1,044 million in 1996
and $949 million in 1995. We expect to increase our investment in
technological development in 1998 and over the longer term to maintain our
premier position in the rapidly changing document processing market. Our R&D
spending is strategically coordinated with Fuji Xerox. The R&D investment by
Fuji Xerox was $612 million in 1997, for a combined increase of 7 percent to
$1.7 billion.
Marketing
Xerox document processing products are principally sold directly to customers
by our worldwide sales force of approximately 13,500 employees and through a
network of independent agents, dealers, retail chains, value-added resellers
and systems integrators. To market low-end copiers, laser printers, and
multi-function devices, we are significantly expanding our indirect
distribution channels. We currently have arrangements with U.S. retail
marketing channels including CompUSA, Office Depot, OfficeMax, and Staples,
and office channels that include distributors and value added resellers like
MicroAge, Ingram Micro, Tech Data, and Computer 2000. Our strategy is to
target high-growth markets through high-volume distribution of laser and ink-
jet printers, multi-function products, personal copiers, fax machines, and
supplies with a goal to be the fastest growing source of personal and
networked document solutions in retail and reseller channels worldwide.
Consistent with this strategy, in September 1997, we announced our new
DocuPrint N32 Network Laser Printer, starting at $2,900, the fastest, most
advanced, least expensive model of its kind, offering "copier-like" features
such as multiple-set printing, stapling and collating.
In 1991, Xerox International Partners (XIP), a 51 percent-owned partnership,
was formed between Xerox and Fuji Xerox to supply printer engines to original
equipment manufacturers. XIP has also contracted to supply printer engines to
resellers.
Service
We have a worldwide service force of approximately 24,000 employees. In our
opinion, this direct service force represents a significant competitive
advantage: the service force is continually trained on our new products and
its diagnostic equipment is state-of-the-art. 24-hour-a-day, seven-day-a-week
service is available in most metropolitan areas in the United States. We are
able to guarantee a consistent level of service nationwide and worldwide
because our service force is not focused exclusively on metropolitan areas and
it does not rely on independent local dealers for service.
Revenues
Our total document processing revenues were $18.2 billion in 1997, of which 49
percent were generated in the United States, 30 percent in Europe, and 21
percent in the remainder of the world, principally Brazil, the rest of Latin
America, Canada, and China (excluding the unconsolidated $7.4 billion of Fuji
Xerox revenues in Japan and much of the Pacific Rim).
Revenues from supplies, paper, service, rentals, document outsourcing and
other revenues, and income from customer financing represented 62 percent of
total revenues in 1997, 66 percent in 1996, and 67 percent in 1995. Because
these revenues are derived from the installed base of equipment and are
therefore less volatile than equipment sales revenues, they 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. The balance of our revenues is derived from equipment
sales. These sales, which drive the non-equipment revenues, depend on the
flow of new products and are more affected by economic cycles.
Most of our customers have their equipment serviced by and use supplies sold
by us. The market for cut-sheet paper is highly competitive and revenue
growth is significantly affected by pricing. Our strategy is to charge a
spread over mill wholesale prices. Rental revenues declined in 1997 and were
flat in 1996 and 1995, due primarily to customers' preference for document
outsourcing and the continuing trend of increased equipment sales.
Our document outsourcing business provides printing, publishing, duplicating
and related services at more than 5,000 customer locations in 40 countries,
including legal and accounting firms, financial institutions, insurance
agencies and manufacturing companies. Revenues from our document outsourcing
business increased 58 percent pre-currency to $2.0 billion in 1997. Document
outsourcing revenues are split between equipment sales and document
outsourcing. Where document outsourcing contracts include revenue accounted
for as equipment sales, this revenue is included in equipment sales. All
other document outsourcing revenue, including service, equipment rental,
supplies, paper and labor are included in document outsourcing. This has the
effect of diverting some revenues from supplies, paper, service, rental, and
finance income.
We offer our document processing customers financing of their purchases of
Xerox equipment primarily through XCC in the United States, largely by wholly-
owned financing subsidiaries in Europe, and through divisions in Canada and
Latin America. While competition for this business from banks and other
finance companies remains extensive, we actively market our equipment
financing services on the basis of customer service, convenience and
competitive rates. On average, 75 to 80 percent of equipment sales are
financed through Xerox.
International Operations
Our international operations account for 51 percent of Document Processing
revenues. Our largest interest outside the United States is Xerox Limited.
Marketing and manufacturing operations are also conducted through joint
ventures in India and China. Marketing and manufacturing in Latin America are
conducted through subsidiaries or distributors in over 35 countries. Fuji
Xerox develops, manufactures and distributes document processing products in
Japan and other areas of the Pacific Rim, Australia and New Zealand.
Our financial results by geographical area for 1997, 1996 and 1995, which are
presented on pages 32, 33, 49, and 50 of the Company's 1997 Annual Report to
Shareholders, are hereby incorporated by reference in this document in partial
answer to this item.
Acquisition of XLConnect Solutions, Inc.
Accelerating our strategy to achieve high growth through networked document
solutions, we announced on March 5, 1998 an agreement to acquire XLConnect
Solutions, Inc. (XLConnect), an information technology services company, and
its parent company, Intelligent Electronics, Inc. (Intelligent Electronics),
for $415 million in cash. The transaction must be approved by the
stockholders of both Intelligent Electronics and XLConnect. Closing is
subject to customary closing conditions, including regulatory approval.
We believes that this acquisition will strengthen our worldwide services
capabilities to design, build and support networks that implement enterprise-
wide document solutions for our customers. In addition, we believe that
XLConnect's expertise will complement and extend our highly profitable
document services outsourcing business, which grew 58 percent in 1997, to $2
billion.
XLConnect, with 1,500 employees, 27 locations throughout the United States and
1997 revenue of $135 million, provides network management, consulting, design,
and integration services for medium and large companies.
The growth in network computing has led to a tremendous increase in both the
volume of digital documents and the convergence of document management and
communication with other technologies, including imaging, voice and data. We
believe that this acquisition will infuse us with hundreds of talented and
trained network specialists who will design and build publishing, workflow and
other document solutions, including Internet-based solutions, for our
customers. We believe the experts at XLConnect will help us develop and
deliver our document solutions for virtually any networked environment.
Our digital printers, copiers and other document products, operating in
conjunction with a suite of document management, workflow and imaging
software, create networked business solutions that improve productivity in the
office, print shop and production-printing environments. The purchase of
XLConnect provides us strategic access to a nationwide information technology
services capability, including applications developed by XLConnect, that
position us at the forefront of the networked enterprise. XLConnect's senior
management team will remain with the company.
We anticipate that the earnings impact from this acquisition will be about
neutral in 1998 and positive in 1999 and thereafter.
Discontinued Operations - Insurance and Other Financial Services
The discussion under the caption "Discontinued Operations - Insurance and
Other Financial Services" on pages 43 through 45 set forth under the caption
"Financial Review" and the information set forth under Note 8 "Discontinued
Operations" on pages 50 through 53 in the Company's 1997 Annual Report to
Shareholders are hereby incorporated by reference in this document in partial
answer to this item.
As discussed in the incorporated sections referenced in the preceding
paragraph, as of January 2, 1998, the last remaining insurance company was
Crum & Forster Holdings, Inc. (CFI). However, on March 11, 1998, we announced
an agreement to sell CFI to Fairfax Financial Holdings Limited (Fairfax) of
Toronto. Upon closing, the transaction will effectively complete the sale of
the Talegen Holdings, Inc. insurance properties.
Under terms of the agreement, Fairfax will acquire the stock of CFI for total
consideration of $680 million, including the repayment of $115 million of
debt. We will incur approximately $75 million in transaction-related costs.
The transaction, expected to close by the third quarter, is subject to
customary closing conditions and regulatory approval.
Upon completion of this transaction, we will have effectively completed our
exit from insurance and financial services. A final write-off of less than
$200 million after-tax will be taken in the first quarter of 1998.
A discussion of CFI's property and casualty reserves follows.
Property and Casualty Reserves
Overview
Losses from claims and related claims handling and legal expense comprise the
majority of costs from providing insurance products. Therefore, unpaid losses
and loss expenses are generally the largest liabilities on a property and
casualty insurer's balance sheet. However, because insurance coverage is
provided for situations in which the certainty of loss cannot be predicted,
ultimate losses which will be paid on policies issued are difficult to
estimate and are subject to constant reevaluation as new information becomes
available and as new techniques are developed to analyze available data. CFI,
like most insurance companies, utilizes a variety of loss trending and
analysis techniques to estimate anticipated ultimate losses and the time
frames in which claims are likely to be reported and paid. Loss development
patterns vary significantly by type of insurance coverage and are affected by
the economic, social, judicial, weather-related and geological conditions in
different geographic areas.
In order to moderate the potential impact of unusually severe or frequent
losses, CFI cedes a portion of its gross policy premiums to reinsurers in
exchange for the reinsurers' agreements to share a portion of the covered
losses. Although the ceding of insurance does not discharge the original
insurer from its primary liability to its policyholder, the reinsurer 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 the reinsurer might not be able to meet its obligations.
Reserves are established by CFI to provide for the estimated level of claim
payments that will be made under the policies they write. Over the policy
period, as premiums are earned, a portion of the premiums is set aside as
gross loss and loss expense reserves for incurred but not reported (IBNR)
losses in anticipation of claims that have not yet been reported. IBNR
reserves also include amounts to supplement case reserves, when established,
to provide for potential further loss development. In addition, gross
reserves are established for internal and external loss expenses associated
with handling the claims inventory. These expenses are characterized as
allocated loss expenses when they are attributable to a specific claim or
series of claims and unallocated loss expenses when not similarly
attributable. When a claim is reported, case reserves are established on the
basis of all pertinent information available at the time. Legal defense cost
that can be assigned to a related claim file and can be included as part of
the loss under the contract is generally established as part of the gross case
reserve. Reinsurance recoverables on gross reserves are recorded for amounts
that are anticipated to be recovered from reinsurers and are determined in a
manner consistent with the liabilities associated with the reinsured policies.
Net reserves are gross reserves less anticipated reinsurance recoverables (net
of uncollectible reinsurance) and salvage and subrogation on those reserves.
The effect of inflation on gross reserves is implicitly considered when
estimating the liability for unpaid losses and loss expenses. The effect of
inflation on individual case basis reserves reflects the direction of economic
price levels as they affect the individual claims being reserved. Estimates
of the ultimate value of unpaid claims are based in part on historical data
that reflect past inflation, as well as management's assessment of severity
and frequency, industry trends and related costs.
Monitoring of Insurance Reserves
CFI monitors its liabilities arising from business written and adjusts carried
reserves as conditions change and new information emerges. An oversight
committee at Talegen Holdings, Inc. (Talegen) has also reviewed and approved
all reserve funding increases. CFI employs an actuarial staff, some members
of which, as Fellows of the Casualty Actuarial Society and members of the
American Academy of Actuaries, are qualified loss reserve specialists who
perform regular actuarial reviews of claim development and resulting reserve
requirements. On a semi-annual or more frequent basis, detailed actuarial
studies of gross reserves and reserves net of reinsurance are conducted by
line of business and accident year. Actual claims activity is monitored
monthly and compared to expected levels to detect variances or trends
indicating changes in liabilities.
Estimates of loss and loss expense liabilities are affected primarily by the
types of and amounts of insurance coverage currently being written and the
trends developing from newly reported claims and claims which have been paid
and closed. Adjustments are made to reserves in the period they can be
reasonably estimated to reflect evolving changes in loss development patterns
and various other factors. Such factors can include increased damage awards
by the courts, known changes in judicial interpretations of legal liability
for asbestos, environmental and other latent exposure claims and changes in
judicial interpretation of the scope of coverage provided by general liability
and umbrella policies. Many of these judicial interpretations are still
evolving. Generally, the greater the projected time to settlement, the
greater the complexity of estimating ultimate claim costs and the more likely
that such estimates will change as new information becomes available.
Use of Reinsurance and Management of Reinsurance Collection
CFI made significant use of reinsurance during the 1970's and early 1980's.
Since that time, CFI generally has increased the portion of business they
retain while reducing the number of reinsurers used for their reinsurance
contracts. During 1997 and 1996, excluding the reinsurance ceded to pools,
associations and similar organizations, 90% and 89%, respectively, of total
written premiums ceded by CFI to reinsurers were placed with up to 38
reinsurers.
Talegen has a reinsurance security committee which currently approves those
reinsurers with whom CFI will do business. The approval process utilizes
credit analyses prepared by The Resolution Reinsurance Services Company
(RRSC), a subsidiary of The Resolution Group, Inc. These credit analyses are
reviewed by the committee to assess the creditworthiness of each reinsurer.
The credit criteria under which such approvals are granted have become
increasingly restrictive over the past several years as CFI has intentionally
placed business with what is believed to be financially secure reinsurers.
The potential uncollectibility of ceded reinsurance has been an industry-wide
issue. With respect to the management of recoveries due from reinsurers, CFI
operates under guidelines for the early identification of potential collection
problems and utilizes the services of RRSC, which employs a specialized group
of work-out experts to aid in the more complicated cases. Based upon the
review of financial condition and assessment of other available information,
CFI maintains a provision for uncollectible amounts due from reinsurers.
Statutory and GAAP Reporting of Net Unpaid Losses and Loss Expenses
The liability for unpaid losses and loss expenses required by generally
accepted accounting principles (GAAP) differs from the liability reported in
accordance with statutory accounting practices (SAP). Because certain GAAP
adjustments to the recorded SAP liability can not be associated with
subsequent developments of the liabilities on other than an arbitrary basis,
developments on the loss and loss expense reserve development table are
prepared in accordance with SAP.
Loss Development Data
CFI's reserves were increased in 1995, 1996 and 1997 primarily to make
provision for latent liabilities, uncollectible reinsurance associated with
latent liabilities, and construction defects exposure. CFI's net reserves,
exclusive of Ridge Reinsurance Limited (Ridge Re), a wholly owned subsidiary
of Xerox Financial Services, Inc., benefits, for prior accident years were
increased by $16 million in 1997, by $173 million in 1996 and $326 million
during 1995. The net reserve strengthening for the three-year period ended
December 31, 1997 totaling $515 million included increases of $335 million for
latent liabilities, $125 million for construction defects exposures and $85
million for uncollectible reinsurance, while experience in other reserve
categories during this period resulted in a reduction to net reserves of $30
million. The strengthening made by CFI in 1996 and 1997 was charged to
discontinued operations reserves established for this purpose and, therefore,
did not impact our earnings. Each of these exposures and the increases
recorded are more fully discussed in the paragraphs below.
Latent liabilities include reserves for environmental, asbestos and other
types of latent exposures, such as those associated with breast implants,
chemical exposure, tobacco products and other exposures which can result in
insurance claims that were not contemplated when policies were originally
written. Prior to 1995, CFI established case and IBNR reserves for latent
exposure claims that had been reported. The IBNR reserves were established
primarily to cover adverse development on known claims. Case reserves were
and continue to be determined by a specialized claim and legal staff.
Building on methodologies first published by the Casualty Actuarial Society in
the third quarter of 1994, Talegen completed the first phase of a project to
develop and implement methods to provide estimates of ultimate losses for
asbestos and environmental exposures. This resulted in a model that, in turn,
was the basis for increasing CFI's reserves in 1995 for latent liabilities by
$186 million on a net basis. During 1996, the model was further refined and
tested, and the amount and quality of data used in modeling was significantly
enhanced. These improvements led to a 1996 reserve increase for latent
exposures of $145 million on a net basis. In 1997, CFI increased its reserves
for latent exposures by $4 million on a net basis.
Construction defect (CD) is a term used by the industry to refer to any third
party claim where property damage occurs or is alleged to have occurred as a
result of the insured's work, work performed on the insured's behalf or
product failure in condominiums, townhouses, single family homes or commercial
buildings involving one or more policy periods, excluding environmental
exposures. Although claims involving CD have been experienced by the
insurance industry and CFI historically, beginning in the late 1980's insurers
who had written general contractors or subcontractors policies in California
began to receive a growing number of CD cases, with claims spread over several
accident years. With increased emphasis on evaluating and understanding CD
exposure, substantial effort was undertaken to segregate data and develop
methodology to provide better estimates of ultimate losses associated with the
exposure. The efforts led to a net reserve increase for CFI during 1995 of
$12 million. Refinement of costing methods and estimation of the impact of
recent court decisions and legislation resulted in CFI increasing its net
reserves for California CD exposure during 1996 by $101 million. In 1997, CFI
increased its reserves for California CD exposure by $12 million on a net
basis.
Uncollectible reinsurance reserves are established by CFI to the extent that
its evaluation of the ability or willingness of reinsurers to indemnify ceded
exposure pursuant to reinsurance agreements indicates that they will not
receive full recovery of ceded balances. In general, latent liability claims
present a need to establish this reserve both because of their inherent
complexity and attendant issues and because these exposures arise under
insurance policies that, in many cases, were written during the 1950's, 1960's
and 1970's, when CFI used a large number of reinsurers, and applicable
reinsurance programs included reinsurers which subsequently encountered
financial difficulties. As reserves for latent liability exposure were
increased, CFI also increased reserves for uncollectible reinsurance.
Reserves for uncollectible reinsurance were increased by $32 million and $53
million in 1996 and 1995, respectively. There were no uncollectible
reinsurance reserve increases for prior periods in 1997.
The loss and loss expense reserve development table illustrates the
development of statutory balance sheet liabilities for 1987 through 1997 for
CFI before cessions to Ridge Re. The first line of the table is the estimated
GAAP liability for unpaid losses and loss expenses, net of reinsurance
recoverable, recorded at the balance sheet date for each year. The second
line on the table reconciles the estimated GAAP liability for net unpaid
losses and loss expenses to the estimated SAP liability for unpaid losses and
loss expenses. The lower section of the table shows the updated amount of the
previously recorded SAP liability based on experience as of the close of each
succeeding year.
The estimate for unpaid losses and loss expenses is increased or decreased as
more information becomes known about the claims until all claims are settled.
Deficiencies or redundancies represent aggregate changes in estimates, as
calculated on a statutory basis, for all prior calendar years. These changes
in estimates have been reflected in CFI's calendar year operating results.
Because CFI recognizes adjustments to reserves for changes in loss development
patterns and various other factors, such as social and economic trends and
known changes in judicial interpretation of legal liability in the period in
which they become known, it is not appropriate to extrapolate future
deficiencies or redundancies based solely on this table.
This page intentionally left blank.
Loss and Loss Expense Reserve Development
Year ended December 31 (in millions) 1987 1988 1989 1990
Liability for unpaid losses and loss
expenses - GAAP (net of reinsurance) $ 2,153 $ 2,185 $ 2,330 $ 2,424
GAAP to SAP differences (4) (6) (9) (26)
Liability for unpaid losses and loss
expenses - SAP (net of reinsurance) 2,149 2,179 2,321 2,398
Paid (cumulative) as of:
End of year - - - -
One year later 635 647 659 734
Two years later 1,096 1,092 1,190 1,280
Three years later 1,427 1,484 1,628 1,562
Four years later 1,711 1,819 1,828 1,843
Five years later 1,980 1,960 2,041 2,037
Six years later 2,080 2,118 2,196 2,148
Seven years later 2,200 2,250 2,290 2,267
Eight years later 2,319 2,330 2,396
Nine years later 2,385 2,423
Ten years later 2,470
Liability estimated as of:
End of year 2,149 2,179 2,321 2,398
One year later 2,125 2,312 2,472 2,390
Two years later 2,325 2,465 2,395 2,929
Three years later 2,497 2,345 2,903 2,809
Four years later 2,370 2,794 2,819 2,825
Five years later 2,781 2,739 2,855 3,006
Six years later 2,727 2,805 3,039 3,136
Seven years later 2,804 2,992 3,181 3,139
Eight years later 3,005 3,131 3,201
Nine years later 3,128 3,161
Ten years later 3,151
Deficiency $(1,002) $ (982) $ (880) $ (741)
End of Year:
Gross liability (1)
Reinsurance recoverable
Net liability
One Year Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Two Years Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Three Years Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Four Years Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Gross cumulative deficiency
(1) Gross liability information for CFI is not available for periods prior to
1993.
1991 1992 1993 1994 1995 1996 1997
$ 2,174 $ 2,357 $ 2,292 $ 2,173 $ 2,418 $ 2,619 $ 2,616
(16) 17 6 6 (11) (19) (22)
2,158 2,374 2,298 2,179 2,407 2,600 2,594
- - - - - - -
722 500 565 522 470 564
1,100 938 932 860 846
1,461 1,243 1,182 1,147
1,706 1,421 1,390
1,847 1,587
1,983
2,158 2,374 2,298 2,179 2,407 2,600 2,594
2,737 2,378 2,311 2,461 2,539 2,602
2,648 2,412 2,543 2,550 2,509
2,670 2,618 2,610 2,518
2,872 2,673 2,571
2,967 2,641
2,950
$ (792) $ (267) $ (273) $ (339) $ (102) $ (2) $ -
$ 3,102 $ 2,829 $ 3,128 $ 3,289 $ 3,407
804 650 721 689 813
2,298 2,179 2,407 2,600 2,594
3,112 3,274 3,290 3,445
801 813 751 843
2,311 2,461 2,539 2,602
3,513 3,388 3,368
970 838 859
2,543 2,550 2,509
3,603 3,460
993 942
2,610 2,518
3,655
1,084
2,571
$ (553) $ (631) $ (240) $ (156) $ -
Item 2. Properties
The Company owns a total of eleven principal manufacturing and engineering
facilities and leases an additional such facility. The domestic facilities
are located in California, New York and Oklahoma, while the international
facilities are located in Brazil, Canada, England, France, Holland and Mexico.
The Company also has four principal research facilities; two are owned
facilities in New York and Canada, and two are leased facilities in California
and France.
In addition, within the Company, there are numerous facilities which encompass
general offices, sales offices, service locations and distribution centers.
The principal owned facilities are located in the United States, England, and
Mexico. The principal leased facilities are located in the United States,
Brazil, Canada, England, Mexico, France, Germany and Italy.
The Company's Corporate Headquarters facility, located in Connecticut, is
leased. A training facility, located in Virginia, is owned by the Company.
In the opinion of Xerox management, its properties have been well maintained,
are in sound operating condition and contain all the necessary equipment and
facilities to perform the Company's functions.
Item 3. Legal Proceedings
The information set forth under Note 13 "Litigation" on page 61 of the
Company's 1997 Annual Report to Shareholders is incorporated by reference in
this document in answer to this item. On March 2, 1998, the court removed the
case from the trial calendar and the parties submitted a joint motion for the
appointment of a mediator to attempt to mediate the damage counterclaim.
On April 11, 1996, an action was commenced by Accuscan Corp. (Accuscan), in
the United States District Court for the Southern District of New York,
against Registrant seeking unspecified damages for infringement of a patent of
Accuscan which expired in 1993. The original suit was directed to facsimile
products and sought damages for sales between 1990 and 1993. In late January
1998, Accuscan provided to Registrant its expert report on the issue of
damages seeking $225,000,000 for infringement not only of facsimile machines
but other Registrant hardware. Registrant's expert report states that it is
believed that the appropriate amount of damages, if liability should be
established, is $150,000. Registrant (i) denies any liability to plaintiff,
(ii) denies that the patent in suit is valid or infringed, and (iii) asserts
that the damage calculations used by plaintiff are inconsistent with the facts
in numerous respects. Registrant intends to vigorously defend the action.
Trial is scheduled for March 23, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market Information, Holders and Dividends
The information set forth under the following captions on the indicated pages
of the Company's 1997 Annual Report to Shareholders is hereby incorporated by
reference in this document in answer to this Item:
Caption Page No.
Stock Listed and Traded 69
Xerox Common Stock Prices and Dividends 69
Eleven Years in Review - Common Shareholders
of Record at Year-End 68 and 69
Recent Sales of Unregistered Securities
During the quarter ended December 31, 1997, Registrant issued the following
securities in transactions which were not registered under the Securities Act
of 1933, as amended ("Act"):
(a) Securities Sold: On October 1, 1997 Registrant issued 1,306 shares of
Common Stock, par value $1 per share.
(b) No underwriters participated. The shares were issued to each of the non-
employee Directors of Registrant: A. A. Johnson, B. R. Inman, V. E. Jordan,
Jr., Y. Kobayashi, H. Kopper, R. S. Larsen, J. D. Macomber, G. J. Mitchell, N.
J. Nicholas, Jr., J. E. Pepper, M. R. Seger and T. C. Theobald.
(c) The shares were issued at a deemed purchase price of $84.1875 per share
(aggregate price of $109,949), based upon the market value on the date of
issuance, in payment of the quarterly Directors' fees pursuant to Registrant's
Restricted Stock Plan For Directors.
(d) Exemption from registration under the Act was claimed based upon Section
4(2) as a sale by an issuer not involving a public offering.
Item 6. Selected Financial Data
The following information, as of and for the five years ended December 31,
1997, as set forth and included under the caption "Eleven Years in Review" on
pages 68 and 69 of the Company's 1997 Annual Report to Shareholders, is hereby
incorporated by reference in this document in answer to this Item:
Revenues
Income (loss) from continuing operations
Per-Share Data - Earnings (loss) from continuing operations
Total assets
Long-term debt
Preferred stock
Per-Share Data - Dividends declared
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under the caption "Our Results of Operations and
Financial Condition" under the caption "Financial Review" on pages 31-37, 39-
41, and 43-45 of the Company's 1997 Annual Report to Shareholders other than
the pictures and captions to the pictures is hereby incorporated by reference
in this document in answer to this Item.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of Xerox Corporation and subsidiaries
and the notes thereto and the report thereon of KPMG Peat Marwick LLP,
independent auditors, which appear on pages 30, 38, 42, 46-65, and 67 of the
Company's 1997 Annual Report to Shareholders, are hereby incorporated by
reference in this document in answer to this Item. In addition, also included
is the quarterly financial data included under the caption "Quarterly Results
of Operations (Unaudited)" on page 66 of the Company's 1997 Annual Report to
Shareholders.
The financial statement schedule required herein is filed as "Financial
Statement Schedules" pursuant to Item 14 of this Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
The information set forth in "Proposal 1--Election of Directors" in the
Company's Notice of the 1998 Annual Meeting of Shareholders and Proxy
Statement, to be filed pursuant to Regulation 14A not later than 120 days
after the close of the fiscal year covered by this report on Form 10-K, is
hereby incorporated by reference in this document in answer to this Part III.
Executive Officers of Xerox
The following is a list of the executive officers of Xerox, their current
ages, their present positions and the year appointed to their present
positions. There are no family relationships between any of the executive
officers named.
Each officer is elected to hold office until the meeting of the Board of
Directors held on the day of the next annual meeting of shareholders, subject
to the provisions of the By-Laws.
Year
Appointed
to Present Officer
Name Age Present Position Position Since_
Paul A. Allaire* 59 Chairman of the Board, Chief 1991 1983
Executive Officer and Chairman
of the Executive Committee
G. Richard Thoman* 53 President and Chief 1997 1997
Operating Officer
William F. Buehler 58 Executive Vice President, 1997 1991
Business Operations
A. Barry Rand 53 Executive Vice President, 1992 1986
Customer Operations
Barry D. Romeril 54 Executive Vice President and 1993 1993
Chief Financial Officer
Stuart B. Ross 60 Executive Vice President; 1990 1979
Chairman and Chief Executive
Officer, Xerox Financial
Services, Inc.
Allan E. Dugan 57 Senior Vice President, 1992 1990
Corporate Strategic Services
John A. Lopiano 59 Senior Vice President; President, 1995 1993
Production Systems Group
Mark B. Myers 59 Senior Vice President, Corporate 1992 1989
Research and Technology
David R. Myerscough 57 Senior Vice President; 1996 1989
Corporate Business Strategy
* Member of Xerox Board of Directors.
Executive Officers of Xerox, Continued
Year
Appointed
to Present Officer
Name Age Present Position Position Since_
Carlos Pascual 52 Senior Vice President; President, 1997 1994
U.S. Customer Operations
Richard S. Paul 56 Senior Vice President and 1992 1989
General Counsel
Brian E. Stern 50 Senior Vice President; President, 1996 1993
Office Document Products Group
Eunice M. Filter 57 Vice President, Treasurer 1990 1984
and Secretary
Philip D. Fishbach 56 Vice President and Controller 1995 1990
Each officer named above, with the exception of G. Richard Thoman and Barry D.
Romeril, has been an officer or an executive of Xerox or its subsidiaries for
at least the past five years.
Prior to joining Xerox in 1997, Mr. Thoman had been with International
Business Machines Corporation (IBM) where he was Senior Vice President and
Chief Financial Officer from 1995 to 1997, and Group Executive for the
Personal Systems Group from 1994 to 1995. He was President and CEO of Nabisco
International from 1992 to 1994. He was Chairman and Co-CEO of Travel Related
Services for American Express from 1989 to 1992.
Prior to joining Xerox in 1993, Mr. Romeril had been Group Finance Director at
British Telecommunications Plc since 1988. From 1987 to 1988 he was Finance
Director at BTR, Plc.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) and (2) The financial statements, independent auditors' reports
and Item 8 financial statement schedules being filed herewith or
incorporated herein by reference are set forth in the Index to Financial
Statements and Schedule included herein.
(3) The exhibits filed herewith or incorporated herein by reference are
set forth in the Index of Exhibits included herein.
(b) A Current Report on Form 8-K dated October 9, 1997 reporting Item 7
"Financial Statements, Pro-Forma Financial Information and Exhibits"
was filed during the last quarter of the period covered by this Report.
(c) The management contracts or compensatory plans or arrangements listed
in the Index of Exhibits that are applicable to the executive officers
named in the Summary Compensation Table which appears in Registrant's
1998 Proxy Statement are preceded by an asterisk (*).
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
XEROX CORPORATION
By: /s/ Barry D. Romeril_________
Executive Vice President and
Chief Financial Officer
March 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
March 23, 1998
Signature Title
Principal Executive Officer:
Paul A. Allaire /s/ Paul A. Allaire______________
Chairman, Chief Executive Officer
and Director
Principal Financial Officer:
Barry D. Romeril /s/ Barry D. Romeril_____________
Executive Vice President and
Chief Financial Officer
Principal Accounting Officer:
Philip D. Fishbach /s/ Philip D. Fishbach___________
Vice President and Controller
Directors:
/s/ B. R. Inman Director
/s/ Antonia Ax:son Johnson Director
/s/ Yotaro Kobayashi Director
/s/ Ralph S. Larsen Director
/s/ John D. Macomber Director
/s/ George J. Mitchell Director
/s/ N. J. Nicholas, Jr. Director
/s/ John E. Pepper Director
/s/ Patricia F. Russo Director
/s/ Martha R. Seger Director
/s/ Thomas C. Theobald Director
/s/ G. Richard Thoman Director
Report of Independent Auditors
To the Board of Directors and Shareholders of Xerox Corporation
Under date of January 23, 1998, we reported on the consolidated balance sheets
of Xerox Corporation and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income and cash flows for each of the years
in the three-year period ended December 31, 1997, as contained in the Xerox
Corporation 1997 Annual Report to Shareholders on pages 30, 38, 42, and 46-65.
These consolidated financial statements and our report thereon are
incorporated by reference in the 1997 Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
January 23, 1998
Index to Financial Statements and Schedule
Financial Statements:
Consolidated statements of income of Xerox Corporation and subsidiaries for
each of the years in the three-year period ended December 31, 1997
Consolidated balance sheets of Xerox Corporation and subsidiaries as of
December 31, 1997 and 1996
Consolidated statements of cash flows of Xerox Corporation and subsidiaries
for each of the years in the three-year period ended December 31, 1997
Notes to consolidated financial statements
Report of Independent Auditors
Quarterly Results of Operations (unaudited)
The above consolidated financial statements, related notes, report
thereon and the quarterly results of operations which appear on pages
30, 38, 42, 46-65, 67, and 66 of the Company's 1997 Annual Report to
Shareholders are hereby incorporated by reference in this document.
Commercial and Industrial (Article 5) Schedule:
II - Valuation and qualifying accounts
All other schedules are omitted as they are not applicable, or the information
required is included in the financial statements or notes thereto.
SCHEDULE II
Valuation and Qualifying Accounts
Year ended December 31, 1997, 1996 and 1995
Additions
Balance at charged to Deductions, Balance
beginning costs and net of at end
(in millions) of period expenses recoveries of period
1997
Allowance for Losses on:
Accounts Receivable $ 92 $ 84 $ 84 $ 92
Finance Receivables 347 181 139 389
Deferred Tax Valuation
Allowance - - - -
$439 $265 $223 $481
1996
Allowance for Losses on:
Accounts Receivable $ 90 $ 73 $ 71 $ 92
Finance Receivables 322 186 161 347
Deferred Tax Valuation
Allowance 20 - 20 -
$432 $259 $252 $439
1995
Allowance for Losses on:
Accounts Receivable $ 79 $ 81 $ 70 $ 90
Finance Receivables 320 154 152 322
Deferred Tax Valuation
Allowance 34 - 14 20
$433 $235 $236 $432
Index of Exhibits
Document and Location
(3) (a) Restated Certificate of Incorporation of Registrant filed by the
Department of State of New York on October 29, 1996.
Incorporated by reference to Exhibit 3(a)(1) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30,
1996.
(b) By-Laws of Registrant, as amended through February 2, 1998.
(4) (a) Indenture dated as of January 15, 1990 between Registrant and
BankAmerica National Trust Company (as successor in interest to
Security Pacific National Trust Company (New York)) relating
to unlimited amounts of debt securities which may be issued
from time to time by Registrant when and as authorized by or
pursuant to a resolution of Registrant's Board of Directors.
Incorporated by reference to Exhibit 4(a) to Registration No.
33-33150.
(b) Indenture dated as of December 1, 1991 between Registrant and
Citibank, N.A. relating to unlimited amounts of debt securities
which may be issued from time to time by Registrant when and
as authorized by or pursuant to a resolution of Registrant's
Board of Directors.
Incorporated by reference to Exhibit 4(a) to Registration No.
33-44597.
(c) Indenture dated as of September 20, 1996 between Registrant and
Citibank, N.A. relating to unlimited amounts of debt securities
which may be issued from time to time by Registrant when and as
authorized by or pursuant to a resolution of Registrant's Board
of Directors.
Incorporated by reference to Exhibit 4(a) to Registration
Statement No. 333-13179.
(d) Indenture dated as of October 1, 1997 among Registrant, Xerox
Overseas Holding PLC, Xerox Capital (Europe) plc (as successor to
Rank Xerox Capital (Europe) plc) and Citibank, N.A. relating to
unlimited amounts of debt securities which may be issued from time
to time by Registrant and unlimited amounts of guaranteed debt
securities which may be issued from time to time by the other
issuers when and as authorized by or pursuant to a resolution or
resolutions of the Board of Directors of Registrant or the other
issuers, as applicable.
Incorporated by reference to Exhibit 4(b) to Registration
Statement Nos. 333-34333, 333-34333-01 and 333-34333-02.
(e) Indenture dated as of March 1, 1988, as supplemented by the First
Supplemental Indenture dated as of July 1, 1988, between Xerox
Credit Corporation (XCC) and The First National Bank of Chicago
relating to unlimited amounts of debt securities which may be
issued from time to time by XCC when and as authorized by XCC's
Board of Directors or the Executive Committee of the Board of
Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-20640 and to Exhibit 4(a)(2) to XCC's Current
Report on Form 8-K dated July 13, 1988.
(f) Indenture dated as of March 1, 1989, as supplemented by the First
Supplemental Indenture dated as of October 1, 1989, between XCC
and Citibank, N.A. relating to unlimited amounts of debt
securities which may be issued from time to time by XCC when and
as authorized by XCC's Board of Directors or Executive Committee
of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-27525 and to Exhibit 4(a)(2) to XCC's
Registration Statement No. 33-31367.
(g) Indenture dated as of May 1, 1994, between XCC and State Street
Bank and Trust Company (formerly, The First National Bank of
Boston) relating to unlimited amounts of debt securities which may
be issued from time to time by XCC when and as authorized by XCC's
Board of Directors or Executive Committee of the Board of
Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-53533 and to Exhibits 4(a)(1) and 4(a)(2) to
XCC's Registration Statement No. 33-43470.
(h) Indenture dated as of October 2, 1995, between XCC and State
Street Bank and Trust Company relating to unlimited amounts of
debt securities which may be issued from time to time by XCC when
and as authorized by XCC's Board of Directors or Executive
Committee of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-61481.
(i) Instruments with respect to long-term debt where the total amount
of securities authorized thereunder does not exceed 10% of the
total assets of the Registrant and its subsidiaries on a
consolidated basis have not been filed. The Registrant agrees to
furnish to the Commission a copy of each such instrument upon
request.
(10) The management contracts or compensatory plans or arrangements
listed below that are applicable to the executive officers named
in the Summary Compensation Table which appears in Registrant's
1998 Proxy Statement are preceded by an asterisk (*).
*(a) Registrant's 1976 Executive Long-Term Incentive Plan, as amended
through February 4, 1991.
Incorporated by reference to Exhibit (10)(a) to the Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1991.
*(b) Registrant's 1991 Long-Term Incentive Plan, as amended through
May 15, 1997.
Incorporated by reference to Registrant's Notice of the 1997
Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A.
(c) Registrant's 1996 Non-Employee Director Stock Option Plan.
Incorporated by reference to Registrant's Notice of the 1996
Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A.
*(d) Description of Registrant's Annual Performance Incentive Plan.
*(e) Registrant's 1997 Restatement of Registrant's Unfunded Retirement
Income Guarantee Plan.
Incorporated by reference to Exhibit 10(e) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30,
1997.
*(f) 1997 Restatement of Registrant's Unfunded Supplemental Retirement
Plan.
Incorporated by reference to Exhibit 10(f) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30,
1997.
(g) Registrant's 1981 Deferred Compensation Plan, 1985
Restatement, as amended through April 2, 1990.
Incorporated by reference to Exhibit 10(h) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1990.
(h) 1996 Amendment and Restatement of Registrant's Restricted Stock
Plan for Directors.
Incorporated by reference to Registrant's Notice of the 1996
Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A.
*(i) Form of severance agreement entered into with various executive
officers.
Incorporated by reference to Exhibit 10(j) to Registrant's
Quarterly Report on Form 10-Q for the Quarter ended June 30,
1989.
*(j) Registrant's Contributory Life Insurance Program, as amended as of
January 30, 1998.
(k) Registrant's Deferred Compensation Plan for Directors, 1997
Amendment and Restatement.
Incorporated by reference to Exhibit 10(k) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30,
1997.
*(l) Registrant's Deferred Compensation Plan for Executives, 1997
Amendment and Restatement.
Incorporated by reference to Exhibit 10(l) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30,
1997.
*(m) Executive Performance Incentive Plan.
Incorporated by reference to Registrant's Notice of the 1995
Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A.
(11) Statement re computation of per share earnings.
(12) Computation of Ratio of Earnings to Fixed charges.
(13) Pages 30 through 69 of Registrant's 1997 Annual Report
to Shareholders.
(21) Subsidiaries of the Registrant.
(23) Consent of KPMG Peat Marwick LLP.
(27) Financial Data Schedule (in electronic form only).