F I N A N C I A L R E V I E W
Consolidated Statements of Income
- --------------------------------------------------------------------------------------------
Year ended December 31 (in millions, except per-share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------
Revenues
Sales $ 9,892 $9,256 $8,750
Service and rentals 7,268 7,107 6,830
Finance income 1,006 1,015 1,008
- --------------------------------------------------------------------------------------------
Total Revenues 18,166 17,378 16,588
- --------------------------------------------------------------------------------------------
Costs and Expenses
Cost of sales 5,363 5,126 4,984
Cost of service and rentals 3,739 3,597 3,442
Equipment financing interest 520 513 507
Research and development expenses 1,079 1,044 949
Selling, administrative and general expenses 5,225 5,074 4,719
Gain on affiliates' sales of stock, net - (11) -
Other, net 99 91 138
- --------------------------------------------------------------------------------------------
Total Costs and Expenses 16,025 15,434 14,739
- --------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and
Minorities' Interests 2,141 1,944 1,849
Income Taxes 728 700 615
Equity in Net Income of Unconsolidated Affiliates 127 123 131
Minorities' Interests in Earnings of Subsidiaries 88 161 191
- --------------------------------------------------------------------------------------------
Income from Continuing Operations 1,452 1,206 1,174
Discontinued Operations - - (1,646)
- --------------------------------------------------------------------------------------------
Net Income (Loss) $ 1,452 $ 1,206 $ (472)
- --------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share
Continuing Operations $ 4.31 $ 3.55 $ 3.46
Discontinued Operations - - (5.05)
- --------------------------------------------------------------------------------------------
Basic Earnings per Share $ 4.31 $ 3.55 $ (1.59)
- --------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share
Continuing Operations $ 4.04 $ 3.32 $ 3.21
Discontinued Operations - - (4.53)
- --------------------------------------------------------------------------------------------
Diluted Earnings per Share $ 4.04 $ 3.32 $ (1.32)
- --------------------------------------------------------------------------------------------
The accompanying notes on pages 46 to 65 are an integral part of
the consolidated financial statements.
- --------------------------------------------------------------------------------------------
30 X E R O X C O R P O R A T I O N
F I N A N C I A L R E V I E W
Our Results of Operations and Financial Condition
Summary of Total Company Results
Document Processing revenues grew 7 percent on a pre- currency basis to $18.2
billion in 1997, driven by 15 percent growth in equipment sales and 35 percent
growth in document outsourcing (excluding equipment accounted for as sales).
Pre-currency service revenue growth was 1 percent in 1997. The strong equipment
sales growth was the direct result of our investments in sales coverage and
excellent customer acceptance of our new digital products. Revenues increased 6
percent on a pre-currency basis to $17.4 billion in 1996 and 7 percent to $16.6
billion in 1995.
Beginning in 1995, the results of our Insurance operations were
accounted for as discontinued operations. The Document Processing business is
the only component of continuing operations.
The following table summarizes net income and diluted earnings per
share (EPS):
- --------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Document Processing before
Brazil tax gain $1,452 $1,206 $1,076
Brazil tax gain - - 98
------ ------ ------
Continuing operations 1,452 1,206 1,174
Discontinued operations - - (1,646)
------ ------ ------
Net income (loss) $1,452 $1,206 $ (472)
- --------------------------------------------------------------------------------
EPS
Document Processing before
Brazil tax gain $4.04 $ 3.32 $ 2.94
Brazil tax gain - - .27
------ ------ ------
Continuing operations 4.04 3.32 3.21
Discontinued operations - - (4.53)
------ ------ ------
Diluted EPS $4.04 $ 3.32 $(1.32)
- --------------------------------------------------------------------------------
Income from continuing operations increased 20 percent in 1997 and 12 percent in
1996, excluding the impact of a $98 million gain from a reduction in the
Brazilian tax rate in 1995.
Diluted earnings per share from continuing operations increased 22
percent in 1997 and 13 percent in 1996, excluding the 1995 Brazilian tax gain.
Earnings per share have been adjusted to reflect the 3-for-1 stock split
effective June 6, 1996 and the December 31, 1997 adoption of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." (See page
36.)
Quarterly results of operations for 1997 and 1996 are shown on page 66.
Discontinued operations results for 1997 and 1996 were charged to
previously established reserves and did not affect reported net income. As a
result of the discontinuance of the insurance segment and the associated
after-tax charges of $1.546 billion, discontinued operations had a loss of
$1.646 billion in 1995. These charges included estimated losses on disposals,
additional insurance loss reserves and estimated future expenses associated with
excess of loss reinsurance coverage.
Diluted Earnings Per Share
$2.94% $3.32 $4.04
1995 1996 1997
* Continuing operations before Brazil tax gain
Document Processing
Pre-Currency Growth
To understand the trends in the business, we believe that it is helpful to
adjust revenue and expense growth (except for ratios) to exclude the impact of
changes in the translation of foreign currencies into U.S. dollars. We refer to
this adjusted growth as "pre-currency growth."
A substantial portion of our consolidated revenues is derived from
operations outside of the United States where the U.S. dollar is not the
functional currency, primarily in Europe. When compared with the average of the
major European currencies on a revenue-weighted basis, the U.S. dollar was
approximately 8 percent stronger in 1997, 2 percent stronger in 1996 and 10
percent weaker in 1995. As a result, foreign currency translation unfavorably
impacted revenues by 3 percentage points in 1997 and 1 percentage point in 1996,
and favorably impacted revenues by 3 percentage points in 1995.
We do not hedge the translation effect of revenues denominated in
currencies where the local currency is the functional currency.
X E R O X C O R P O R A T I O N 31
F I N A N C I A L R E V I E W
Revenues by Product Category
For the major product categories, the pre-currency revenue growth rates were:
- ---------------------------------------------------------
Pre-Currency Growth
----------------------
1997 1996 1995
- ---------------------------------------------------------
Total Revenues 7% 6% 7%
- ---------------------------------------------------------
Digital products 25 23 17
Light-lens copiers (2) (1) 2
Paper and other products 3 - 14
- ---------------------------------------------------------
Digital products include production publishing, color copying and
printing, production printing, our new family of Document Centre digital
black-and-white copiers, multifunction products and network printers. During
1997, digital products revenue growth rates accelerated on a quarterly basis,
increasing 18 percent, 24 percent, 26 percent and 31 percent in the first
through fourth quarters, respectively. Digital product revenues grew 25 percent
for the full year, driven by the full-year effects of products introduced in
1996 and the partial-year effects of new products introduced during 1997.
Digital products contributed 36 percent of total revenues in 1997, 30 percent in
1996 and 25 percent in 1995.
Revenues from the DocuTech family of production publishing products
reflected strong growth to $2.1 billion in 1997, up from $1.8 billion in 1996
and $1.4 billion in 1995. Our new 180 page-per-minute DocuTech Production
Publisher, which became available in July, contributed to this growth. Revenues
from color products reflected excellent growth to approximately $1.5 billion in
1997, up from $1.0 billion in 1996 and $600 million in 1995. The DocuColor 40,
our 40 page-per-minute
Worldwide Revenues (billions)
[X] United States: $9.2
[X] Latin America and Canada: $3.5
[X] Europe and Other: $5.5
Total Xerox: $18.2
[X] Fuji Xerox: $7.4
Pictured here is a world map.
color document production system, introduced in April 1996, continued to
contribute significantly to this growth.
Orders and installations of the new Document Centre digital
black-and-white copiers, introduced in April 1997, exceeded our expectations. As
a result, we more than doubled our planned production and exited the year with a
strong order backlog.
The light-lens copier revenue decline 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. Revenues from light-lens copying represented 51 percent
of total revenues in 1997, 56 percent in 1996 and 59 percent in 1995.
The annual fluctuations in paper and other products revenue growth was
principally due to swings in paper prices and OEM sales. Revenues from paper and
other products were 13 percent of total revenues in 1997, 14 percent in 1996 and
16 percent in 1995.
For the major product categories, the revenue shares were:
- ---------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------
Digital products 36% 30% 25%
Light-lens copiers 51 56 59
Paper and other products 13 14 16
- ---------------------------------------------------------
Revenues by Geography
Geographically, the pre-currency revenue growth rates were:
- ---------------------------------------------------------
Pre-Currency Growth
------------------------
1997 1996 1995
- ---------------------------------------------------------
Total Revenues 7% 6% 7%
United States 7 6 3
Xerox Limited 7 1 8
Other Areas 8 10 16
Memo: Fuji Xerox 3 11 10
- ---------------------------------------------------------
Revenues in the United States were 49 percent of total revenues in 1997, which
is consistent with prior years. Revenues of Xerox Limited (formerly Rank Xerox,
now 100 percent owned by Xerox) and related companies (collectively Xerox
Limited), which operate principally in Europe, represented 30 percent of total
revenues. Other Areas, principally Latin America, Canada and China, contributed
21 percent of total revenues.
Revenue growth in 1997 in the U.S. and Xerox Limited
was driven primarily by digital products, and in Xerox Limited,
by a strengthening economic environment in several European
markets. Revenue from light-lens copiers grew
32 X E R O X C O R P O R A T I O N
F I N A N C I A L R E V I E W
We brought together all of our supplies heritage in one organization to leverage
the strength of our brand in this very large market. Our challenge is to meet
our customers' needs as new technologies create new production possibilities,
enabling the full potential of documents while maximizing the effectiveness of
the hardware used to generate them.
Pictured here are copier and printer supplies.
modestly in the U.S. and declined modestly in Europe.
Xerox Limited's relatively flat revenue growth in 1996 reflected
weak economic environments in a number of major European markets.
Other Areas 1997 revenue reflects good growth in Brazil and China,
modest growth in Canada, and excellent growth in Mexico. Revenues in Brazil were
$1.8 billion in 1997, $1.6 billion in 1996 and $1.3 billion in 1995.
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. Xerox' exposure to economic turmoil in Asia is mitigated by our
joint ownership of Fuji Xerox. Modest revenue growth in 1997 reflects good
growth in the Asia Pacific countries and modest growth in Japan due to difficult
economic conditions. Revenue growth in 1996 and 1995 reflects strong growth in
Japan, driven by excellent growth in digital product sales and good growth in
the Asia Pacific countries.
Revenues by Stream
The pre-currency growth rates by type of revenue were:
- -------------------------------------------------------------
Pre-currency growth
-------------------------
1997 1996 1995
- -------------------------------------------------------------
Total revenues 7% 6% 7%
- -------------------------------------------------------------
Equipment sales (excluding OEM) 15 10 6
Non-equipment sales revenues 4 4 7
Supplies 2 6 9
Paper 2 (7) 39
Service 1 - 2
Rentals (9) - 1
Document outsourcing* 35 47 46
Finance income 2 1 (4)
- -------------------------------------------------------------
* Excludes equipment accounted for as equipment sales.
- -------------------------------------------------------------
Equipment Sales: The increased equipment sales growth (excluding OEM sales) is
due primarily to the introduction of a stream of state-of-the-art color and
black-and-white digital products in 1996 and 1997. Digital product equipment
sales grew 40 percent in 1997, 27 percent in 1996 and 13 percent in 1995.
Digital products represented 47 percent of equipment sales in 1997, 37 percent
in 1996 and 31 percent in 1995.
Non-equipment Sales: Non-equipment sales 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. Growth in these revenues is primarily a function of the
growth in our installed population of equipment, usage levels and pricing.
Supplies: Supplies growth has decelerated due principally to
the increase in document outsourcing, which includes
bundled supplies, and lower sales of OEM printer cartridges.
Paper Sales: Our strategy is to charge a spread over mill wholesale prices to
cover our costs and value added as a distributor. The increase in 1997 results
from volume increases that were partially offset by moderating industry-wide
price declines. In 1996, lower wholesale prices more than offset volume
increases. The significant growth in 1995 was primarily due to higher industry
prices.
Equipment Sales Growth (pre-currency)
[X] 1995 6%
[X] 1996 10%
1997 15%
X E R O X C O R P O R A T I O N 33
F I N A N C I A L R E V I E W
Service: Service revenue growth has been relatively flat, reflecting customer
preference for document outsourcing as well as competitive price pressures.
Rentals: 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.
Document Outsourcing: 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 and rental.
The excellent Document Outsourcing growth reflects the trend of customers
focusing on their core businesses and outsourcing their document processing
requirements to Xerox.
Finance Income: Our strategy for financing equipment sales in the industrialized
economies is to charge a spread over our cost of borrowing and to lock in that
spread by match funding the finance receivables with borrowings of similar
maturities. In 1997, good growth in the financing of equipment sales in the
U.S., Europe and Latin America has been partially offset by lower average
interest rates. In 1996, the strong growth in the financing of equipment sales
in Latin America was partially offset by the impacts of the continuing decline
in interest rates on financing contracts and the increasing customer preference
for document outsourcing rather than purchase and finance. On average, 75 to 80
percent of customers finance purchases of equipment through Xerox.
Costs and Expenses
The gross margins by revenue stream were:
- -------------------------------------------------------
Gross Margins
-------------------------
1997 1996 1995
- -------------------------------------------------------
Total 47.0% 46.9% 46.1%
- -------------------------------------------------------
Sales 45.8 44.6 43.0
Service, rentals and
document outsourcing 48.6 49.4 49.6
Finance income 48.3 49.5 49.7
- -------------------------------------------------------
The 1997 total gross margin was essentially unchanged from 1996. The 1996
improvement from 1995 was due to productivity-driven cost reductions and
favorable product and geographic mix, partially offset by pricing pressures. The
total gross margin is the key metric, as judgment is often needed to separate
the individual components of revenues and costs.
The improvement in sales gross margins was due principally to
productivity-driven cost reductions and favorable product and geographic mix,
partially offset by pricing pressures. The modest decline in service, rentals
and document outsourcing gross margins was due primarily to higher growth in
lower margin document outsourcing revenue, pricing pressures and adverse
currency, partially offset by productivity improvements. Lower document
outsourcing margins reflect the impact of the labor content in the document
outsourcing business.
Research and development (R&D) expense increased 3 percent in 1997, 10
percent in 1996 and was approximately 6 percent of revenue in both years. We
will continue to invest in technological development to maintain our premier
position in the rapidly changing document processing market and have
reprioritized our spending to focus on areas that will produce significant
growth such as digital, color, networking and solutions. Xerox R&D is
strategically coordinated with Fuji Xerox, which invested $612 million in R&D in
1997 for a combined increase of 7 percent to $1.7 billion.
Selling, administrative and general expenses (SAG) increased 5 percent
in 1997 on a pre-currency basis, 8 percent in 1996 and 5 percent in 1995. SAG as
a percent of revenues was 28.8 percent in 1997, 29.2 percent in 1996 and 28.4
percent in 1995. The improvement in 1997 was due primarily to productivity
initiatives and expense controls partially offset by investments to increase
worldwide sales coverage. The increase in the ratio in 1996 was primarily
34 X E R O X C O R P O R A T I O N
F I N A N C I A L R E V I E W
due to investments in sales coverage and marketing support. We expect the ratio
to decline in 1998 due to improved productivity and ongoing expense controls.
Worldwide employment increased by 4,700 in 1997 to 91,400 as a result
of hiring 2,500 employees to support our fast-growing document outsourcing
business, 1,300 associated with two small acquisitions and 1,000 for increased
sales coverage partially offset by reductions in other areas.
Gain on affiliates' sales of stock, net in 1996, reflects our share of
the increase in equity of certain small affiliated companies generated by the
sales of additional equity by these affiliates.
Other expenses, net, were $99 million in 1997, $91 million in 1996 and
$138 million in 1995. The increase of $8 million for 1997 reflects increased
non-financing interest expense associated with our June 1997 acquisition of The
Rank Group's remaining interest in Xerox Limited, increased currency losses from
balance sheet remeasurement due to currency devaluation in our Latin American
operations, and Year 2000 information systems remediation spending, partially
offset by certain non-recurring charges in 1996. Also, we reduced debt with the
proceeds from $650 million of mandatorily redeemable preferred securities issued
through a subsidiary trust in January 1997. This partially offset the increase
in non-financing interest expense because the after-tax impact of the dividend
on these securities is included in the income statement in Minorities' Interests
in Earnings of Subsidiaries. The reduction of $47 million for 1996 reflects
reduced interest expense due to lower rates, higher interest income and the
non-recurrence of several one-time charges in 1995.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates, and
Minorities' Interests in Earnings of Subsidiaries.
Income before income taxes was $2,141 million in 1997, $1,944 million
in 1996 and $1,849 million in 1995.
The effective tax rates were 34 percent in 1997, 36 percent in 1996 and
39 percent in 1995. The 1995 rate excludes a $98 million benefit from the
revaluation of the deferred tax liability due to a change in the Brazilian
statutory income tax rate. The 1997 tax rate benefited from implementation of
certain tax strategies as well as the profit mix of our worldwide operations.
The decline in the 1996 tax rate was primarily due to the lower Brazilian tax
rate.
Equity in Net Income of Unconsolidated Affiliates is principally Xerox
Limited's share of Fuji Xerox income. Total equity in income increased 4 percent
in 1997 to $127 million due principally to Fuji Xerox income growth and
increases in income from a number of smaller investments. Strong pre-currency
growth in Fuji Xerox income was largely offset by currency translation due to
the weakening of the Japanese yen compared with the U.S. dollar. Total equity in
income declined 6 percent in 1996 to $123 million principally due to one-time
declines in income from smaller investments. The Xerox Limited 50 percent share
of Fuji Xerox income was $119 million in 1997, $116 million in 1996 and $112
million in 1995.
Minorities' Interests in Earnings of Subsidiaries, principally The Rank
Group Plc's share of Xerox Limited profits, were $88 million in 1997, $161
million in 1996 and $191 million in 1995. In 1997, minorities' interests
declined primarily due to our acquisition of The Rank Group's remaining interest
in Xerox Limited, effective June 1997, partially offset by the after-tax impact
of the $48 million dividend on the mandatorily redeemable preferred securities
discussed above. In 1996, minorities' interests declined primarily due to lower
Xerox Limited profits.
Modi Xerox, our affiliate in India, covers the territory with a trained
telemarketing team to seize new market opportunities. Modi Xerox has 13 years of
experience in India, a key emerging market for Xerox because of the huge
document processing potential.
Pictured here is a Modi-Xerox employee.
X E R O X C O R P O R A T I O N 35
F I N A N C I A L R E V I E W
SATIZ, a Fiat Group Company, turned to Xerox when it decided to reengineer its
complete multi-lingual document processes, from the step of inputting text and
data (received in Italian from technical writers) into a new electronic system,
to the step of preparing and distributing worldwide all the after sales
documentation on both paper and CD-ROM.
An important step is the translation process. Help came from the Xerox
Research Centre Europe, Grenoble, France, which concentrates on eliminating the
language barriers that exist in multilingual organizations and markets. Here,
research results in linguistics are being commercialized via Xerox Translation
and Authoring Systems (XTRAS). XTRAS tools help global companies write and
translate technical material, like user or maintenance manuals.
Income
In 1997, Document Processing income of $1,452 grew 20 percent compared with
$1,206 million in 1996. 1996 income grew 12 percent from $1,076 million in 1995
before the Brazilian tax gain.
Return on Assets
Return on Assets (ROA) is an important measure throughout all levels of the
Document Processing organization, combining a focus on both asset turnover and
margin improvement.
The internal measurement for ROA is defined as Document Processing
before tax profits plus Equity in Net Income of Unconsolidated Affiliates,
divided by average ROA Assets. ROA Assets are Document Processing assets less
investments in affiliates and Xerox equipment financing debt.
ROA as defined above was 18.0 percent in 1997, 17.8 percent in 1996 and
18.5 percent in 1995.
Adoption of SFAS No. 128 -"Earnings per Share" Effective December 31, 1997, we
adopted SFAS No. 128 - "Earnings per Share." SFAS No. 128 simplifies the
calculation of earnings per share ("EPS") and replaces primary EPS with basic
EPS and replaces fully diluted EPS with diluted EPS. Basic EPS is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. The computation of diluted EPS
is similar to the computation of basic EPS except that it gives effect to all
potentially dilutive instruments that were outstanding during the period. All
EPS amounts have been restated to reflect this new standard. For Xerox, the
movement from "fully diluted" to "diluted" increased EPS by one cent in 1996 and
1997 and had no effect on 1995 EPS before Discontinued Operations.
Functional Currency Change in Brazil
Effective July 1, 1997, we changed the functional currency for our Brazilian
operation from the U.S. dollar to the Brazilian real because the Brazilian
economy is no longer considered hyperinflationary. The effect of this change on
our reported results was immaterial.
Acquisition of Remaining Interest in Xerox Limited In June 1997, the company
completed the acquisition of The Rank Group's remaining 20 percent financial
interest in Xerox Limited and related companies for (pound)940 million, or
approximately $1.5 billion. The transaction was earnings accretive in 1997,
increasing diluted earnings per share by 14 cents for the full year. The
transaction was funded entirely by debt consisting of (pound)500 million of
third-party debt and (pound)440 million of notes payable issued to The Rank
Group.
Share Repurchase
In February 1996, the Board of Directors authorized the repurchase of up to $1
billion of Xerox common stock. Through the 1997 second quarter, the Company
repurchased 8.5 million shares for $422 million. As a result of the Xerox
Limited transaction, we suspended the repurchase program during the second
quarter because the use of the Company's financial resources to fund the $1.5
billion acquisition of The Rank Group's remaining interest in Xerox Limited
produced greater value for Xerox shareholders.
Year 2000
As with all major companies, certain of our information systems and products
will require remediation or replacement over the next two years in order to
render these systems Year 2000 compliant. The Year 2000 problem is the result of
computer programs written with two digits, rather than four, to define the
applicable year. During 1997, we incurred $28 million of Year 2000 remediation
costs that are included in
36 X E R O X C O R P O R A T I O N
F I N A N C I A L R E V I E W
Other, net in the Consolidated Statements of Income. We estimate that future
remediation costs associated with the Year 2000 problem will be approximately
$85 million and $31 million during 1998 and 1999, respectively. These costs will
be expensed as incurred. We believe that the remediation or replacement of our
information systems and products will occur in a timely fashion so that the Year
2000 problem will not result in significant operating problems with our
information systems and products. However, if such remediations or replacements
are not completed in a timely manner, the Year 2000 problem could potentially
have a material adverse impact on our operations.
Capital Resources and Liquidity
Total debt, including ESOP and Discontinued Operations debt not shown separately
in our consolidated balance sheets, increased to $12,903 million at December 31,
1997 from $12,448 million in 1996 and $11,794 million in 1995.
We manage the capital structure of our non-financing operations
separately from that of our captive finance companies, which employ a more
highly leveraged capital structure typical of captive finance companies.
- --------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Total debt* as of January 1 $12,448 $11,794 $10,955
- --------------------------------------------------------------------------------
Non-Financing Businesses:
Document Processing operations
cash generation (1,026) (678) (543)
Purchase of The Rank Group's
interests in Rank Xerox
(now Xerox Limited) 1,534 - 972
Mandatorily redeemable preferred
securities (637) - -
ESOP (60) (53) (49)
Discontinued businesses (541) 47 (399)
- --------------------------------------------------------------------------------
Subtotal Non-Financing (730) (684) (19)
Financing Businesses 760 706 494
Shareholder dividends 475 438 389
Equity redemption and other changes (50) 194 (25)
- --------------------------------------------------------------------------------
Total debt* as of December 31 $12,903 $12,448 $11,794
- --------------------------------------------------------------------------------
* Includes discontinued operations.
- --------------------------------------------------------------------------------
For analytical purposes, total equity includes common equity, ESOP preferred
stock, mandatorily redeemable preferred securities and minorities' interests.
Total equity increased to $6,454 million at December 31, 1997 from $5,931
million in 1996 and $5,396 million in 1995.
The following is a three-year summary of the changes in total equity:
- --------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Total equity as of January 1 $5,931 $5,396 $6,042
Income from continuing operations 1,452 1,206 1,174
Loss from discontinued operations - - (1,646)
Change in unrealized gains on
investment securities - - 432
Mandatorily redeemable preferred
securities 637 - -
Shareholder dividends (475) (438) (389)
Purchase of treasury stock (116) (306) -
Exercise of stock options 99 84 109
Change in minorities' interests (716) 88 (276)
Translation adjustments (463) (138) (3)
All other, net 105 39 (47)
- --------------------------------------------------------------------------------
Total equity as of December 31 $6,454 $5,931 $5,396
- --------------------------------------------------------------------------------
The following table summarizes the results of capital and coverage
calculations commonly used to measure the Company's financial strength:
- --------------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Non-Financing:
Debt $ 2,974* $ 2,960 $ 3,012
Equity 4,662* 4,565 4,045
- --------------------------------------------------------------------------------
Total capital $ 7,636 $ 7,525 $ 7,057
- --------------------------------------------------------------------------------
Debt-to-capital 38.9% 39.3% 42.7%
Ratio of earnings to fixed charges 4.89x 4.67x 3.79x
Ratio of earnings to interest expense 7.24x 6.65x 5.17x
EBITDA**-to-debt 96.4% 89.6% 80.0%
- --------------------------------------------------------------------------------
Financing:
Debt $10,248 $ 9,488 $ 8,782
Equity 1,473 1,366 1,351
- --------------------------------------------------------------------------------
Total capital $11,721 $10,854 $10,133
- --------------------------------------------------------------------------------
Debt-to-equity ratio 7.0x 7.0x 6.5x
- --------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.63x 1.66x 1.71x
- --------------------------------------------------------------------------------
* Includes $318.5 million (one-half) share of mandatorily redeemable
preferred securities for purposes of this analysis.
** Earnings before interest, taxes, depreciation and amortization.
- --------------------------------------------------------------------------------
In 1997, a year-to-year improvement in the debt-to- capital ratio was
achieved despite the addition of more than $1.5 billion of debt related to the
acquisition of The Rank Group's remaining interest in Xerox Limited. Especially
strong cash generation within non-financing operations, lower debt resulting
from the sales of Coregis Group, Inc. (Coregis), Industrial Indemnity Holdings,
Inc. (II) and The Resolution Group, Inc. (TRG), and the issuance of mandatorily
redeemable preferred securities enabled the improvement. Income growth was the
primary factor contributing to a 3.4 percentage point improvement to the ratio
during 1996. In 1995, the ratio
X E R O X C O R P O R A T I O N 37
F I N A N C I A L R E V I E W
Financial Review
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31 (in millions) 1997 1996
- --------------------------------------------------------------------------------
Assets
Cash $ 75 $ 104
Accounts receivable, net 2,145 2,022
Finance receivables, net 4,599 4,386
Inventories 2,792 2,676
Deferred taxes and other current assets 1,155 964
- --------------------------------------------------------------------------------
Total Current Assets 10,766 10,152
Finance receivables due after one year, net 7,754 6,986
Land, buildings and equipment, net 2,377 2,256
Investments in affiliates, at equity 1,332 1,282
Goodwill 1,375 623
Other assets 1,103 1,121
Investment in discontinued operations 3,025 4,398
- --------------------------------------------------------------------------------
Total Assets $27,732 $26,818
- --------------------------------------------------------------------------------
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 3,707 $ 3,536
Accounts payable 776 577
Accrued compensation and benefits costs 811 761
Unearned income 205 208
Other current liabilities 2,193 2,122
- --------------------------------------------------------------------------------
Total Current Liabilities 7,692 7,204
Long-term debt 8,779 8,424
Postretirement medical benefits 1,079 1,050
Deferred taxes and other liabilities 2,469 2,429
Discontinued operations liabilities -
policyholders' deposits and other 1,693 2,274
Deferred ESOP benefits (434) (494)
Minorities' interests in equity of subsidiaries 127 843
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures of
the Company 637 -
Preferred stock 705 721
Common shareholders' equity 4,985 4,367
- --------------------------------------------------------------------------------
Total Liabilities and Equity $27,732 $26,818
- --------------------------------------------------------------------------------
Shares of common stock issued and outstanding at December 31, 1997 were (in
thousands) 326,241. Shares of common stock issued and outstanding at December
31, 1996 were (in thousands) 325,902 and 323,681, respectively.
The accompanying notes on pages 46 to 65 are an integral part of the
consolidated financial statements.
- --------------------------------------------------------------------------------
38 X E R O X C O R P O R A T I O N
F I N A N C I A L R E V I E W
Financial Review
increased by 6.7 percentage points versus year-end 1994 as proceeds from the
sales of Constitution Re Corporation (Constitution Re), Viking Insurance
Holdings, Inc. (Viking) and Xerox Financial Services Life Insurance Company and
related companies (Xerox Life) were more than offset by the 1995 purchase of a
part of The Rank Group's interests in Xerox Limited and non-cash charges in
connection with our decision to sell the then-remaining insurance units.
Coverage metrics related to our non-financing businesses have shown
strong, consistent improvement throughout the past three years. Within the
financing business, the ratio of earnings to fixed charges remains strong
despite an increase in 1996, from 6.5:1 to 7.0:1, in our financing business
debt-to-equity guideline.
We "match fund" our financing operations by arranging fixed-rate
liabilities with maturities similar to the underlying customer financing assets.
Our 7.0 to 1 debt-to-equity guideline reflects both the high quality of the
underlying assets and the strong financial returns from our captive financing
businesses.
Non-Financing Operations
The following table summarizes 1997, 1996 and 1995 document processing
non-financing operations cash generation and usage:
- --------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Document Processing
Non-Financing:
Income $1,248 $1,004 $ 970
Depreciation and amortization 739 715 719
- --------------------------------------------------------------------------------
Subtotal $1,987 $1,719 $1,689
- --------------------------------------------------------------------------------
Capital expenditures/assets sold (484) (470) (348)
Equipment on operating leases (347) (403) (475)
Restructuring payments (88) (197) (331)
Working capital/other (42) 29 8
- --------------------------------------------------------------------------------
Net Cash Generation $1,026 $ 678 $ 543
- --------------------------------------------------------------------------------
Document processing non-financing businesses generated $1,987 million
of cash from operations in 1997 or 16 percent more than in 1996. Net cash
generation after investments to fund the growth of the businesses was $1,026
million, an increase of $348 million. The growth was largely due to higher
income, higher growth in accounts payable and accrued compensation and benefits
costs, and lower restruc
Pictured here are Xerox employees and Xerox
customers standing behind a Xerox copier.
Bradesco Seguros is a leading Brazilian insurance company that uses several
DocuPrint 4890 and DocuPrint 4635 MX printers, which combine leading-edge
highlight color and Magnetic Ink Character Recognition (MICR) marking
technologies with exceptional paper handling capabilities at speeds up to 92 and
135 pages-per-minute. Bradesco Seguros prints insurance and financial documents
with highlighted variable information, as well as checks and payment coupons
with MICR symbols. Photographed here are Carlos Avelar, Branch Manager, Xerox do
Brasil; Geraldo Teixeira, Director Bradesco Seguros; Carlos Henrique Schmitz,
Director, Bradesco Seguros; and Jorge Luiz Goncalves, Account Manager, Xerox do
Brasil.
turing payments. Net cash generation was $135 million higher in 1996 than in
1995 as income growth, lower restructuring payments and lower inventory growth
more than offset higher capital spending and tax payments.
Discontinued non-financing businesses generated $541 million in 1997 as
a result of the sales of Coregis, II and TRG. These businesses experienced net
cash usage of $47 million in 1996 versus $399 million of generation in 1995
reflecting the sales in 1995 of Constitution Re, Viking and Xerox Life.
Financing Businesses
Customer financing-related debt grew by $760 million in 1997, $54 million more
than in 1996, reflecting growth in equipment sales partially offset by currency
translation effects and the 1996 increase in our financing business
debt-to-equity guideline from 6.5 to 1 to 7.0 to 1. Financing debt growth of
$706 million in 1996 was $212 million more than in 1995 due to higher equipment
sales growth and the modest increase in our leverage guideline.
Debt related to discontinued third party financing and real estate
activities, which is included in financing business debt, totaled $117 million
in 1997, $223 million in 1996 and $231 million in 1995. Asset sales and
portfolio run-off account for the 1997 decline. In 1996, asset sales and
X E R O X C O R P O R A T I O N 39
F I N A N C I A L R E V I E W
Pictured here is the Inxight logo.
What value is an entire database of information if you can't find the one piece
of it you need? The challenge of making information make sense is what Inxight,
a Xerox New Enterprise Company, hopes to solve with its VizControls and
LinguistX technologies originally developed at Xerox' Palo Alto Research Center
(PARC) and Xerox Research Centre Europe, Grenoble, France. Inxight's
visualization technology gives users a way to easily cull relevant information
for analysis. Inxight licenses VizControls to companies such as Comshare to help
make information products more manageable. Comshare uses Inxight technology in
Commander Decision, a product that allows company executives to get their hands
on the information they need (sales results, trends, business plans,
competition, etc.) to make better decisions. Inxight was launched as a Xerox New
Enterprise company in December 1996. Xerox New Enterprises (XNE) is our business
development arm that focuses on high-growth-potential new technology ventures.
Ultimately, these companies either will be merged into the Xerox mainstream,
become majority owned, become publicly traded subsidiaries or be sold.
run-off more than offset growth in reported real estate-related debt caused by
our decision to fund the retirement of off-balance-sheet debt with lower cost
Company borrowing.
Funding Plans for 1998
Any term funding related to our non-financing businesses will be based on the
interest rate environment and overall capital market conditions. Our underlying
strategy is to continue to extend funding duration while balancing the typical
yield curve benefit of floating rates and the reduced volatility obtained from
fixed-rate financing.
Customer financing-related debt is planned to increase in line with
1998 sales growth, while third party financing and real estate-related debt is
expected to continue to decline. Decisions in 1998 regarding the size and timing
of term funding for our financing businesses will be made based on match funding
needs, refinancing requirements and capital market conditions.
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 $7.0 billion global
revolving credit agreement with a group of banks expires in 2002. This facility
is unused and available to provide back-up to Xerox, Xerox Credit Corporation
(XCC), Xerox Capital (Europe) plc (XCE) and Xerox Overseas Holdings PLC (XOH)
commercial paper borrowings that amounted to $3.8 billion at December 31, 1997.
Xerox or XCC may access the facility up to its $7.0 billion limit. XCE or XOH
have access subject to a $4.0 billion limit. Total drawdowns cannot exceed $7.0
billion.
At December 31, 1997, Xerox, XCE and XOH had combined, U.S. shelf
capacity of $2,250 million and XCC had U.S. shelf capacity of $1,875 million. In
addition, a $2 billion Euro-debt facility is available to Xerox, XCC, XCE and
XOH, of which $1,193 million remained unused at December 31, 1997.
Risk Management
Xerox is typical of multinational corporations in that it is exposed to market
risk from changes in foreign currency exchange rates and interest rates that
could affect our results of operations and financial condition.
We have entered into certain financial instruments to manage interest
rate and foreign currency exposures. These instruments are held solely for
hedging purposes and include interest rate swap agreements, forward exchange
contracts and foreign currency swap agreements. We do not enter into derivative
instrument transactions for trading purposes, and, employ long-standing policies
prescribing that derivative instruments are only to be used to achieve a set of
very limited objectives.
Currency derivatives are primarily arranged in conjunction with
underlying transactions that give rise to foreign currency- denominated payables
and receivables: for example, an option to buy foreign currency to settle the
importation of goods from foreign suppliers, or a forward exchange contract to
fix the dollar value of a foreign currency-denominated loan.
As of December 31, 1997 and 1996 our primary foreign currency market
exposures include the Japanese yen, British pound sterling, Brazilian real, U.S.
dollar, French franc and Canadian dollar.
40 X E R O X C O R P O R A T I O N
F I N A N C I A L R E V I E W
In order to manage the risk of foreign currency exchange rate
fluctuations, we hedge a significant portion of all transactions (except for
amounts "permanently" invested) denominated in a currency other than the
functional currency applicable to each of our legal entities. From time to time,
when cost-effective, currency derivatives are used to hedge international equity
investments.
Consistent with the nature of the economic hedge of such foreign
currency exchange contracts, associated unrealized gains or losses would be
offset by corresponding decreases or increases in the value of the underlying
asset or liability being hedged. Assuming a 10 percent appreciation or
depreciation in foreign currency exchange rates as of December 31, 1997, the
potential change in fair value of our net foreign currency position would
approximate $46 million.
The amount permanently invested in foreign subsidiaries and affiliates,
primarily Xerox Limited, Fuji Xerox and Xerox do Brasil, and translated into
dollars using the year-end exchange rate, is $6 billion at December 31, 1997.
Assuming a 10 percent appreciation or depreciation of the U.S. dollar against
all currencies from the quoted foreign currency exchange rates at December 31,
1997, the unrealized loss or gain would amount to $599 million.
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 during a period of rising interest rates. Conversely, this
practice effectively eliminates 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 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 variable-rate obligations. The transactions performed
within each of these three categories enable more cost-effective management of
interest rate exposures. The potential risk attendant to this strategy is the
performance of the swap counterparty. We address this risk by arranging swaps
with a diverse group of strong-credit counterparties, regularly monitoring their
credit ratings and determining the replacement cost, if any, of existing
transactions.
On an overall worldwide basis, and including the impact of our hedging
activities, weighted average interest rates for 1997, 1996 and 1995 approximated
6.6 percent, 6.9 percent and 7.7 percent, respectively.
Many of the financial instruments we use are sensitive to changes in
interest rates. Hypothetically, interest rate changes result in gains or losses
related to the market value of our term debt and interest rate swaps due to
differences between current market interest rates and the stated interest rates
within the instrument. Applying an assumed 10 percent reduction or increase in
the yield curves at December 31, 1997, the fair value of our term debt and
interest swaps would increase or decrease, by approximately $93 million.
Our currency and interest rate hedging are typically unaffected by
changes in market conditions as forward contracts, options and swaps are
normally held to maturity consistent with our objective to lock in currency
rates and interest rate spreads on the underlying transactions.
Pictured here is the Xerox Sixth Sense
Technology team.
Xerox people are team players. Teams that achieve a "black belt" in teamwork
earn the title X Team a group of innovative people who deliver results and whose
best practices are shared across organizational lines. It is the highest level
of team recognition in Xerox. This team worked on the delivery of Sixth Sense
Technology, an exclusive Xerox service offering that allows Customer Service
Engineers to use laptop computers and software to monitor and diagnose a
machine's performance remotely. Photographed (top to bottom) here are Steve
Pleavin, Chuck Boyle, Kelly Langan, Arturo Lorenzo, Wilbur Thornton, Dan Auman,
Carol Goldstein, Norm Kriehn, Nancy Nam, Dennis Martin and Carl Edmunds.
X E R O X C O R P O R A T I O N 41
F I N A N C I A L R E V I E W
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Year ended December 31 (in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Income from continuing operations $ 1,452 $ 1,206 $ 1,174
Adjustments required to reconcile
income to cash flows from operating
activities:
Depreciation and amortization 739 715 719
Provision for doubtful accounts 265 259 235
Provision for postretirement
medical benefits, net of payments 29 38 40
Minorities' interests in earnings
of subsidiaries 88 161 191
Undistributed equity in income of
affiliated companies (84) (84) (90)
Increase in inventories (517) (422) (663)
Increase in finance receivables (1,629) (1,220) (701)
Increase in accounts receivable (188) (180) (173)
Increase in accounts payable
and accrued compensation and
benefit costs 250 63 179
Net change in current and deferred
income taxes 361 293 263
Other, net (294) (519) (575)
- --------------------------------------------------------------------------------
Total 472 310 599
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cost of additions to land, buildings and
equipment (520) (510) (438)
Proceeds from sales of land, buildings
and equipment 36 40 90
Net change in payables to Discontinued Operations (208) (51) (57)
Purchase of additional interest in Xerox Limited (812) - (972)
Other, net 45 14 -
- --------------------------------------------------------------------------------
Total (1,459) (507) (1,377)
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in debt 5 990 766
Dividends on common and preferred stock (475) (438) (389)
Proceeds from sale of common stock 140 95 111
Repurchase of preferred and common stock (116) (316) (41)
Dividends to minority shareholders (6) (68) (86)
Proceeds received from (returned to)
minority shareholders (1) 32 20
Proceeds from issuance of mandatorily
redeemable preferred securities 637 - -
- --------------------------------------------------------------------------------
Total 184 295 381
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash (18) (6) (5)
Cash provided (used) by continuing operations (821) 92 (402)
Cash provided (used) by discontinued operations 792 (124) 497
- --------------------------------------------------------------------------------
Increase (decrease) in cash (29) (32) 95
Cash at beginning of year 104 136 41
- --------------------------------------------------------------------------------
Cash at end of year $ 75 $ 104 $ 136
- --------------------------------------------------------------------------------
The accompanying notes on pages 46 to 65 are an integral part of the
consolidated financial statements.
- --------------------------------------------------------------------------------
42 X E R O X C O R P O R A T I O N
F I N A N C I A L R E V I E W
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 42.
Operating activities generated positive cash flows in each of the past
three years. Cash generation of $472 million in 1997 was $162 more than in 1996
despite a $1,629 million net increase to customer finance receivables associated
with growth in equipment sales. Conversely, 1996 cash flow from operating
activities was $289 million less than in 1995 as income growth and improved
inventory performance did not fully offset finance receivables growth.
Investing activities resulted in net cash usage in all three years.
Cash used for investing activities was $952 higher in 1997 than in 1996 largely
due to payment to The Rank Group of the initial installment under our agreement
to purchase The Rank Group's remaining interests in the former Rank Xerox. Net
usage in 1996 was $507 million or $870 million less than in 1995. Lower 1996
usage primarily reflected the absence of a 1995 payment to The Rank Group that
increased our financial interest in Rank Xerox from 67 percent to 80 percent.
Excluding (pound)440 million ($720 million) of notes payable to The
Rank Group, cash generated by financing activities continued to decline as
strong cash generation from our continuing non-financing businesses, and
proceeds from sales of discontinued businesses, have offset the need for
additional borrowing related to financing business growth.
Overall, including payments to The Rank Group of $812 million and $972
million in 1997 and 1995, respectively, continuing operations used $821 million
of cash in 1997, generated $92 million in 1996 and used $402 million in 1995.
Discontinued operations provided $792 million of cash in 1997, used
$124 million in 1996 and provided $497 million in 1995.
Cash balances were $75 million at year-end 1997, versus $104 million in
1996 and $136 million in 1995, consistent with our objective to minimize
investments that do not provide added value to our shareholders.
Discontinued Operations - Insurance
and Other Financial Services
The net investment in the discontinued financial services businesses, which
include Insurance, Other Financial Services and Third Party Financing and Real
Estate, totaled $1,332 million at December 31, 1997 compared with $2,124 million
and $2,000 million at December 31, 1996 and 1995, respectively. The decrease
primarily reflects the sale of Coregis Group, Inc. (Coregis), Industrial
Indemnity Holdings, Inc. (II) and The Resolution Group, Inc. (TRG), somewhat
offset by scheduled funding of reinsurance coverage to the Talegen Holdings,
Inc. (Talegen) companies and TRG by Ridge Reinsurance Limited (Ridge Re) and
interest for the period on the assigned debt.
Status of Insurance
In 1995, we recorded a $1,546 million after-tax charge in connection with
agreements to sell all of our "Remaining" insurance companies, which included
Coregis, Crum & Forster Holdings, Inc. (CFI), II, Westchester Specialty Group,
Inc. (WSG), TRG and three insurance-related service companies.
On September 11, 1996, those agreements were terminated. No additional
charges were considered necessary as a result of the termination. In September
1996, the Board of Directors of Xerox formally approved a plan of disposal under
which we retained investment bankers to assist us in the simultaneous
disposition of each of the Remaining insurance and service companies.
Significant progress was made during the past year in the disposition
of these companies at values consistent with expectations at the time we
discontinued the insurance
Pictured here are Xerox customers.
REMARK, Minsk, Belarus, is a fast growing advertising agency made up of 20 young
people with creative ideas and color know-how. They use a Xerox 5790 to print
brochures and leaflets and a Xerox 8954 plotter for printing large-format
posters and ads. Here (left to right) are Dimitri Lunyov, Dimitri Yarota,
Gennadi Yermakovich and Edward Berezin. REMARK also creates advertising for
Xerox in Belarus, including this advertisement for the C55 color laser printer.
X E R O X C O R P O R A T I O N 43
F I N A N C I A L R E V I E W
operations in 1995. As of January 2, 1998, the sale of four of the five
Remaining insurance companies was completed, as was the disposition of one
service company. Specifically:
- - In the first quarter, we sold certain assets of Apprise Corp., one of
Talegen's insurance-related service companies. The financial terms of this
transaction were not material.
- - In the second quarter, we completed the sale of Coregis for $375 million in
cash and the assumption of $75 million in debt.
- - In the third quarter, we completed the sale of II for $365 million in cash and
the assumption of $79 million in debt.
- - In the fourth quarter, we completed the sale of TRG for $150 million in cash
and a $462 million performance-based instrument to an investor group. Ultimate
recovery of the value of this instrument will be dependent on TRG's future
cash flows available for dividends.
- - And, on January 2, 1998, we completed the sale of WSG for $338 million in
cash, less approximately $70 million in transaction-related costs.
The disengagement strategy for the last remaining insurance company,
CFI, includes the option of either a private sale or an initial public offering
(IPO) of CFI stock, whichever delivers better shareholder value. Pursuant to
this strategy, subsequent to year-end, a Form S-1 Registration Statement for the
IPO was filed with the Securities and Exchange Commission. During the disposal
process, we remain subject to all business risks and rewards of the remaining
unit. Until
Pictured here is a London-theme bus.
This entire job - starting from the digital image in the computer and including
printing by our customer Pixus Digital Printing, Lafayette, La., on ColorgrafX
equipment, to transfer to vinyl and application on the vehicle - took only two
days to complete. ColorgrafX provides color printing systems for production of
large color documents like banners, billboards and backlit signs.
CFI is actually sold, no assurances can be given as to the ultimate impact on
our total results from operations or whether the proceeds from CFI's sale will
equal its carrying value.
Xerox Financial Services, Inc. (XFSI) continues to provide aggregate
excess of loss reinsurance coverage (the Reinsurance Agreements) to certain of
the current and former Talegen units and TRG through Ridge Re, a wholly owned
subsidiary of XFSI. The coverage limits total $1,109 million, which is net of 15
percent coinsurance. Through December 31, 1997, Ridge Re had provided for
approximately $648 million of this available coverage and it is possible that
some additional reserves could ultimately be needed, although this is not
currently anticipated. XFSI has guaranteed to the current and former Talegen
units and TRG that Ridge Re will meet all of its financial obligations under the
Reinsurance Agreements. Related premium payments to Ridge Re are made by XFSI
and guaranteed by us. As of December 31, 1997, there were five remaining annual
installments of $45 million, plus finance charges. We have also guaranteed that
Ridge Re will meet its financial obligations on $578 million of the Reinsurance
Agreements and we have provided a $400 million partial guaranty of Ridge Re's
$800 million letter of credit facility. This facility is required to provide
security with respect to aggregate excess of loss reinsurance obligations under
contracts with the current and former Talegen units and TRG.
XFSI may also be required, under certain circumstances, to purchase
over time additional redeemable preferred shares of Ridge Re, up to a maximum of
$301 million.
Prior Sales of Talegen Insurance Companies In April 1995, Constitution Re
Corporation was sold for $421 million in cash. In July 1995, Viking was sold for
approximately $103 million in cash plus future upward price adjustments based on
loss reserve development.
Net Investment in Insurance
The net investment in Insurance at December 31, 1997 totaled $1,076 million
compared with balances of $1,846 million and $1,678 million at December 31, 1996
and 1995, respectively. The decrease in 1997 over 1996 primarily reflects the
sales of Coregis, II and TRG somewhat offset by contractual payments to Ridge Re
for annual premium installments and associated finance charges and interest on
the assigned insurance debt.
44 X E R O X C O R P O R A T I O N
F I N A N C I A L R E V I E W
Property and Casualty Operating Trends
The industry's profitability can be significantly affected by cyclical
competitive conditions, judicial decisions affecting insurers' liabilities and
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 most other insurers.
Other Financial Services
The net investment in Other Financial Services at December 31, 1997 was $125
million compared with $101 million and $114 million at December 31, 1996 and
1995, respectively. The increase in the investment primarily reflects the effect
of a transfer from Insurance that had no effect on the total net investment in
the discontinued financial services businesses.
On June 1, 1995, XFSI completed the sale of Xerox Financial Services
Life Insurance Company and related companies (Xerox Life). In connection with
the transaction, OakRe Life Insurance Company (OakRe), a wholly owned XFSI
subsidiary, has assumed responsibility, via Coinsurance Agreements, for existing
Single Premium Deferred Annuity (SPDA) policies issued by Xerox Life. The
Coinsurance Agreements include a provision for the assumption (at their
election) by the purchaser's 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. Other policies (of Immediate,
Whole Life and Variable annuities as well as a minor amount of SPDAs) were sold
and are now the responsibility of the purchaser's companies.
As a result of the Coinsurance Agreements, at December 31, 1997, OakRe
retained approximately $1.5 billion of investment portfolio assets (transferred
from Xerox Life) 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 through the year 2000 and will be assumed under the
Agreements as described above. Xerox Life's portfolio was designed to recognize
that policy renewals extended liability "maturities," thereby permitting
investments with average duration somewhat beyond the rate reset periods.
OakRe's practice is to selectively improve this match over time as market
conditions allow.
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, 1997. 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.
Third Party Financing and Real Estate
Third Party Financing and Real Estate assets at December 31, 1997, 1996 and 1995
totaled $298 million, $450 million and $489 million, respectively. The proceeds
from the asset sales and run-off activity were consistent with the amounts
contemplated in the formal disposal plan.
Forward Looking Statements
This document contains forward-looking statements and
information relating to Xerox that are based on our beliefs and assumptions and
information currently available to us. The words "anticipate," "believe,"
"estimate," "expect," "intends" and similar expressions, as they relate to us,
are intended to identify forward-looking statements. Information concerning
certain factors that could cause actual results to differ materially is included
in the Company's third quarter 1997 10-Q. We do not intend to update these
forward-looking statements.
Pictured here is color printer ink.
Fuji Xerox integrated research and artistic development facilities are at the
forefront of document technologies. Research in color imaging has led to a
number of successful color products, contributing to the No. 1 position in Japan
in color for Fuji Xerox.
X E R O X C O R P O R A T I O N 45
N O T E S
Notes to Consolidated Financial Statements
(Dollars in millions, except per-share data and unless otherwise indicated)
1 Summary of Significant Accounting Policies
Basis of Consolidation. The consolidated financial statements include the
accounts of Xerox Corporation and all majority-owned subsidiaries (the Company).
All significant intercompany accounts and transactions have been eliminated.
References herein to "we" or "our" refer to Xerox and consolidated subsidiaries
unless the context specifically requires otherwise.
Xerox Limited (formerly Rank Xerox Limited), Rank Xerox Holding BV,
Rank Xerox Investment Limited, R-X Holdings Limited and their respective
subsidiaries are referred to as Xerox Limited.
Investments in which we have a 20 to 50 percent ownership interest are
generally accounted for on the equity method.
Upon the sale of stock by a subsidiary, we recognize a gain or loss
equal to our proportionate share of the increase or decrease in the subsidiary's
equity. During 1996, we recognized a pre-tax net gain of $11 from such
transactions.
Effective 1997, Fuji Xerox changed its reporting period from a fiscal
year ending October 20 to a fiscal year ending December 20. The results of
operations during the period between the end of the 1996 fiscal year and the
beginning of the new fiscal year (the stub period) amounted to a gain of $8. The
gain was credited to retained earnings to avoid reporting more than 12 months'
results of operations in one year.
Effective January 1, 1995, we changed the reporting periods of Xerox
Limited and the 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 1995 consolidated statement of cash flows.
Business Segment Information. We operate 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 our products represent an integrated document services
solution.
Earnings Per Share. Basic earnings per share are based on net income less
preferred stock dividend requirements divided by the average common shares
outstanding during the period. Diluted earnings per share assume exercise of
in-the-money stock options outstanding and full conversion of convertible debt
and convertible preferred stock into common stock at the beginning of the year
or date of issuance, unless they are antidilutive.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Goodwill. Goodwill represents the cost of acquired businesses in excess of the
net assets purchased and is amortized on a straight-line basis, generally over
40 years. Goodwill is reported net of accumulated amortization, and the
recoverability of the carrying value is evaluated on a periodic basis by
assessing current and future levels of income and cash flows as well as other
factors. Accumulated amortization at December 31, 1997 and 1996 was $71 and $41,
respectively.
Accounting Changes. Effective December 1997, we adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128
simplifies the calculation
46 X E R O X C O R P O R A T I O N
N O T E S
of earnings per share (EPS), replaces primary EPS with basic EPS and replaces
fully diluted EPS with diluted EPS. See Note 18 on page 65.
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. The computation of diluted EPS is similar to the computation of
basic EPS except that it gives effect to all potentially dilutive instruments
that were outstanding during the period. All earnings per share amounts in
Xerox' annual report have been restated to reflect this new standard. 1997
primary and fully diluted EPS of $4.25 and $4.03, respectively, have been
restated as basic and diluted EPS of $4.31 and $4.04, respectively. 1996 primary
and fully diluted EPS of $3.49 and $3.31, respectively, have been restated as
basic and diluted EPS of $3.55 and $3.32, respectively.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Commencing in 1998, SFAS No. 130 will
require companies to report comprehensive income, and SFAS No. 131 will require
companies to report segment performance as it is used internally to evaluate
segment performance. These statements merely provide for additional disclosure
requirements.
Revenue Recognition. Revenues from the sale of equipment under installment
contracts and from sales-type leases are recognized at the time of sale or at
the inception of the lease, respectively. Associated finance income is earned on
an accrual basis under an effective annual yield method. Revenues from equipment
under other leases are accounted for by the operating lease method and are
recognized over the lease term. Service revenues are derived primarily from
maintenance contracts on our equipment sold to customers and are recognized over
the term of the contracts.
Provisions for Losses on Uncollectible Receivables. The provisions for losses on
uncollectible trade and finance receivables are determined principally on the
basis of past collection experience.
Inventories. Inventories are carried at the lower of average cost or market.
Buildings and Equipment. Our fixed assets are depreciated over their estimated
useful lives. Depreciation is computed using principally the straight-line
method. Significant improvements are capitalized; maintenance and repairs are
expensed. See Note
5 on page 49.
Classification of Commercial Paper and Bank Notes Payable. It is our policy to
classify as long-term debt that portion of commercial paper and notes payable
that is intended to match fund finance receivables due after one year to the
extent that we have the ability under our revolving credit agreement to
refinance such commercial paper and notes payable on a long-term basis. See Note
9 on page 53.
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 certain 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 is used in
remeasuring the local currency transactions of these subsidiaries, and the
resulting exchange adjustments are included in income. Aggregate foreign
currency losses were $85, $27 and $18 in 1997, 1996 and 1995, respectively, and
are included in Other, net in the consolidated statements of income.
Effective July 1, 1997, we changed the functional currency for our
Brazilian operation from the U.S. dollar to the Brazilian real, as the Brazilian
economy is no longer considered hyperinflationary. The effect of this change was
immaterial.
Reclassifications. Prior years' financial statements have been restated to
reflect certain reclassifications to conform with the 1997 presentation. The
impact of these changes is not material and did not affect net income.
X E R O X C O R P O R A T I O N 47
N O T E S
2 Acquisition
In June 1997, we acquired the remaining 20 percent of Xerox Limited from The
Rank Group Plc (Rank) in a transaction valued at (pound)940 million, or
approximately $1.5 billion. As a result of this transaction, we now own 100
percent of Xerox Limited. The transaction was funded entirely by debt consisting
of (pound)500 million of third-party debt and (pound)440 million of notes
payable issued to Rank, which will be paid in deferred installments, half by
June 29, 1998 and the other half by June 30, 1999. An additional payment of up
to (pound)60 million would be made in 2000 based upon achievement of certain
Xerox Limited earnings growth targets by 1999. The purchase price (including
transaction costs) was allocated such that goodwill increased by $737, minority
interest in equity of subsidiaries was reduced by approximately $720, with the
balance of $70 applied to other assets and liabilities, primarily investment in
affiliates, at equity.
On February 28, 1995, we paid Rank (pound)620 million, or approximately
$972, for 40 percent of Rank's financial interest in Xerox Limited. The
transaction increased our financial interest in Xerox Limited to 80 percent from
67 percent. Our additional interest in the operating results of Xerox Limited 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 Finance Receivables, Net
Finance receivables represent installment sales and sales-type leases resulting
from the marketing of our business equipment products. These receivables
generally mature over two to five years and are typically collateralized by a
security interest in the underlying assets. The components of finance
receivables, net at December 31, 1997, 1996 and 1995 follow:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Gross receivables $15,035 $13,872 $12,696
Unearned income (2,850) (2,551) (2,207)
Unguaranteed residual values 557 398 308
Allowance for doubtful accounts (389) (347) (322)
- --------------------------------------------------------------------------------
Finance receivables, net 12,353 11,372 10,475
Less current portion 4,599 4,386 4,069
- --------------------------------------------------------------------------------
Amounts due after one year, net $ 7,754 $ 6,986 $ 6,406
- --------------------------------------------------------------------------------
Contractual maturities of our gross finance receivables subsequent to
December 31, 1997 follow:
- --------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter
- --------------------------------------------------------------------------------
$5,653 $4,044 $2,930 $1,709 $571 $128
- --------------------------------------------------------------------------------
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.
4 Inventories
The components of inventories at December 31, 1997, 1996 and 1995 follow:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Finished goods $1,549 $1,570 $1,646
Work in process 97 80 88
Raw materials 406 322 295
Equipment on operating
leases, net 740 704 627
- --------------------------------------------------------------------------------
Inventories $2,792 $2,676 $2,656
- --------------------------------------------------------------------------------
Equipment on operating leases consists of our business equipment
products that are rented to customers and are depreciated to estimated residual
value. Depreciable lives vary from two to four years. In order to more precisely
match depreciable lives to the duration of lease contracts with customers,
during 1996, we increased the depreciable lives of certain equipment on
operating leases such that the equipment is now predominately depreciated over
three to four years. The effect of this change was not material. Our 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, 1997, 1996 and 1995 amounted to $1,198, $1,259 and $1,065,
respectively. Scheduled minimum future rental revenues on operating leases with
original terms of one year or longer are:
- --------------------------------------------------------------------------------
1998 1999 2000 Thereafter
- --------------------------------------------------------------------------------
$406 $210 $78 $42
- --------------------------------------------------------------------------------
Total contingent rentals, principally usage charges in excess of
minimum allowances relating to operating leases, for the years ended December
31, 1997, 1996 and 1995 amounted to $186, $199 and $190, respectively.
48 X E R O X C O R P O R A T I O N
N O T E S
5 Land, Buildings and Equipment, Net The components of land, buildings and
equipment, net at December 31, 1997, 1996 and 1995 follow:
- --------------------------------------------------------------------------------
Estimated
Useful
Lives
(Years) 1997 1996 1995
- --------------------------------------------------------------------------------
Land $ 88 $ 89 $ 85
Buildings and building
equipment 20 to 40 1,012 991 941
Leasehold improvements Lease term 403 378 347
Plant machinery 4 to 12 1,870 1,862 1,907
Office furniture and
equipment 3 to 10 1,285 1,231 1,161
Other 3 to 20 190 218 201
Construction in progress 310 250 231
- --------------------------------------------------------------------------------
Subtotal 5,158 5,019 4,873
Less accumulated
depreciation 2,781 2,763 2,768
- --------------------------------------------------------------------------------
Land, buildings and
equipment, net $2,377 $2,256 $2,105
- --------------------------------------------------------------------------------
We lease certain land, buildings and equipment, substantially all of which are
accounted for as operating leases. Total rent expense under operating leases for
the years ended December 31, 1997, 1996 and 1995 amounted to $419, $421 and
$425, respectively. Future minimum operating lease commitments that have
remaining non-cancelable lease terms in excess of one year at December 31, 1997
follow:
- --------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter
- --------------------------------------------------------------------------------
$313 $243 $190 $146 $113 $358
- --------------------------------------------------------------------------------
In certain circumstances, we sublease space not currently required in
operations. Future minimum sublease income under leases with non-cancelable
terms in excess of one year amounted to $29 at December 31, 1997.
In 1994, we awarded a contract to Electronic Data Systems Corp. (EDS)
to operate our worldwide data processing and telecommunications network through
the year 2004. Minimum payments due EDS under the contract follow:
- --------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter
- --------------------------------------------------------------------------------
$296 $257 $229 $217 $198 $278
- --------------------------------------------------------------------------------
6 Investments in Affiliates, at Equity Investments in corporate joint ventures
and other companies in which we generally have a 20 to 50 percent ownership
interest at December 31, 1997, 1996 and 1995 follow:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Fuji Xerox $1,231 $1,173 $1,223
Other investments 101 109 91
- --------------------------------------------------------------------------------
Investments in affiliates,
at equity $1,332 $1,282 $1,314
- --------------------------------------------------------------------------------
Xerox Limited, a consolidated subsidiary, 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 in Japan and other
areas of the Pacific Rim, Australia and New Zealand, except for China. As
disclosed in Note 2 on page 48, in June 1997 we purchased Rank Group Plc's
remaining interest in Xerox Limited. In order to record the acquired assets at
fair value, $137 of goodwill was allocated to Xerox Limited's investment in Fuji
Xerox and is being amortized over 40 years. Condensed financial data of Fuji
Xerox for its last three fiscal years follow:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Summary of Operations
Revenues $7,415 $8,091 $8,500
Costs and expenses 6,882 7,546 7,989
- --------------------------------------------------------------------------------
Income before income taxes 533 545 511
Income taxes 295 313 287
- --------------------------------------------------------------------------------
Net income $ 238 $ 232 $ 224
- --------------------------------------------------------------------------------
Xerox Limited's equity in
net income $ 119 $ 116 $ 112
- --------------------------------------------------------------------------------
Xerox' equity in net income $ 109 $ 93 $ 88
Balance Sheet Data
Assets
Current assets $2,461 $3,008 $3,518
Non-current assets 2,942 3,168 3,085
- --------------------------------------------------------------------------------
Total assets $5,403 $6,176 $6,603
- --------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities $2,218 $2,546 $2,675
Long-term debt 286 427 594
Other non-current liabilities 679 850 884
Shareholders' equity 2,220 2,353 2,450
- --------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $5,403 $6,176 $6,603
- --------------------------------------------------------------------------------
7 Geographic Area Data
Revenues and assets of Xerox Limited are substantially attributable to European
operations; its consolidated operations in Africa, Asia and the Middle East
together constitute less than 2 percent of our consolidated amounts. The Other
Areas classification reflects Brazil and to a lesser extent, Canada, Mexico and
other Latin American countries.
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.
X E R O X C O R P O R A T I O N 49
N O T E S
Geographic area data for our continuing operations follow:
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Revenues from Unrelated Entities
United States $ 9,191 $ 8,583 $ 8,068
Xerox Limited 5,511 5,501 5,495
Other areas 3,464 3,294 3,025
- --------------------------------------------------------------------------------
Total $18,166 $17,378 $16,588
- --------------------------------------------------------------------------------
Intercompany Revenues
United States $ 1,455 $ 1,377 $ 1,376
Xerox Limited 187 230 226
Other areas 557 425 463
- --------------------------------------------------------------------------------
Total $ 2,199 $ 2,032 $ 2,065
- --------------------------------------------------------------------------------
Total Revenues
United States $10,646 $ 9,960 $ 9,444
Xerox Limited 5,698 5,731 5,721
Other areas 4,021 3,719 3,488
Less intercompany
revenues (2,199) (2,032) (2,065)
- --------------------------------------------------------------------------------
Total $18,166 $17,378 $16,588
- --------------------------------------------------------------------------------
Income from Continuing
Operations (Before
Intercompany Eliminations
United States $ 638 $ 444 $ 370
Xerox Limited 390 432 409
Other areas 437 375 364
- --------------------------------------------------------------------------------
Total $ 1,465 $1,251 $ 1,143
- --------------------------------------------------------------------------------
Income from Continuing Operations
(After Intercompany Eliminations)
United States $ 642 $ 414 $ 418
Xerox Limited 392 431 408
Other areas 418 361 348
- --------------------------------------------------------------------------------
Total $ 1,452 $ 1,206 $ 1,174
- --------------------------------------------------------------------------------
Assets
United States $11,179 $10,354 $ 9,876
Xerox Limited 8,591 7,844 7,566
Other areas 4,937 4,222 3,756
- --------------------------------------------------------------------------------
Subtotal 24,707 22,420 21,198
Investment in discontinued
operations 3,025 4,398 4,810
- --------------------------------------------------------------------------------
Total $27,732 $26,818 $26,008
- --------------------------------------------------------------------------------
8 Discontinued Operations
In January 1993, we announced our intent to sell or otherwise disengage from our
Insurance and Other Financial Services (IOFS) businesses. Since that time, we
have disposed of a number of these businesses through sale and run-off
collection activities. At December 31, 1997, our sole remaining non-Document
Processing operation is the Insurance business, which excludes our other
discontinued businesses consisting of Other Financial Services and Third Party
Financing and Real Estate, which are primarily in asset run-off. A discussion of
the status of IOFS's three segments follows.
Insurance. In 1993, Talegen Holdings, Inc. (Talegen) completed a restructuring
which established and capitalized seven insurance operating groups as
independent legal entities: Constitution Re Corporation (CRC), Coregis Group,
Inc. (Coregis), Crum & Forster Holdings, Inc. (CFI), Industrial Indemnity
Holdings, Inc. (II), The Resolution Group, Inc. (TRG), Viking Insurance
Holdings, Inc. (Viking) and Westchester Specialty Group, Inc. (WSG).
Since the restructuring, we have disposed of all of the insurance
operating groups except CFI. Details of these disposals follow:
In April 1995, CRC was sold for $421 in cash, which approximated book
value. In July 1995, Viking was sold for approximately $103 in cash plus future
upward price adjustments based on loss reserve development. The proceeds
approximated book value. The proceeds of both transactions were used to retire
debt.
In the fourth quarter of 1995, we recorded a $1,546 loss on disposal in
connection with agreements to sell Coregis, CFI, II, WSG, TRG and three
insurance-related service companies (collectively referred to as the Remaining
companies). In September 1996, those agreements were terminated. No additional
charges were considered necessary as a result of the termination. In September
1996, the Board of Directors formally approved a plan of disposal under which we
retained investment bankers to assist us in the simultaneous disposition of each
of the Remaining companies.
During 1997 and January 1998, we made significant progress in the
disposition of these companies, including the completed sales of four of the
five Remaining insurance companies and one insurance-related service company.
Specifically, the following occurred:
In the first quarter of 1997, we sold certain assets of Apprise Corp.,
one of Talegen's insurance-related service companies. The financial terms of
this transaction were not material.
In May 1997, we completed the sale of Coregis for $375 in cash and the
assumption of $75 in debt.
In August 1997, we completed the sale of II for $365 in cash and the
assumption of $79 in debt.
In October 1997, we completed the sale of TRG for $150 in cash and a
$462 performance-based instrument to an
50 X E R O X C O R P O R A T I O N
N O T E S
investor group. We will participate in the future cash flows of TRG via the
performance-based instrument. The recovery of this instrument is dependent upon
the sufficiency of TRG's available cash flows, as defined. Based on current
forecasts at December 31, 1997, we expect to realize $462 for this instrument.
However, the ultimate realization may be greater or less than this amount.
On January 2, 1998, we completed the sale of WSG for $338 in cash less
approximately $70 in transaction-related costs.
The disengagement strategy for the last remaining insurance company,
CFI, includes the option of either a private sale or an initial public offering
(IPO) of CFI stock, whichever delivers better shareholder value. Pursuant to
this strategy, subsequent to year-end, a Form S-1 Registration Statement for the
IPO was filed with the Securities and Exchange Commission.
The values received for the companies disposed of in 1997 and January
1998 were consistent with their carrying values. The net proceeds of the sales
transactions after transaction related costs were used primarily to retire debt.
At December 31, 1997, the Insurance business consists of Talegen
(primarily WSG and CFI), Ridge Reinsurance Limited (Ridge Re), and headquarters
costs and interest expense associated with the insurance activities of Xerox
Financial Services, Inc. (XFSI), a wholly owned subsidiary.
XFSI continues to provide aggregate excess of loss reinsurance coverage
(the Reinsurance Agreements) to certain of the current and former Talegen units
and TRG through Ridge Re, a wholly owned subsidiary of XFSI. The coverage limits
total $1,109, which is net of 15 percent coinsurance. Through December 31, 1997,
Ridge Re had provided for approximately $648 of this available coverage and it
is possible that some additional reserves could ultimately be needed, although
this is not currently anticipated. XFSI has guaranteed to the current and former
Talegen units and TRG that Ridge Re will meet all of its financial obligations
under the Reinsurance Agreements. Related premium payments to Ridge Re are made
by XFSI and guaranteed by us. As of December 31, 1997, there were five remaining
annual installments of $45, plus finance charges. We have also guaranteed that
Ridge Re will meet its financial obligations on $578 of the Reinsurance
Agreements and we have provided a $400 partial guaranty of Ridge Re's $800
letter of credit facility. This facility is required to provide security with
respect to aggregate excess of loss reinsurance obligations under contracts with
the current and former Talegen units and TRG.
XFSI may also be required, under certain circumstances, to purchase,
over time, additional redeemable preferred shares of Ridge Re, up to a maximum
of $301.
Insurance Financial Information. Summarized operating results of Insurance for
the three years ended December 31, 1997 follow:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Revenues
Insurance premiums earned $1,338 $1,708 $ 1,888
Investment and other income 386 435 464
- --------------------------------------------------------------------------------
Total Revenues 1,724 2,143 2,352
- --------------------------------------------------------------------------------
Costs and Expenses
Insurance losses and loss expenses 1,345 1,667 2,031
Insurance acquisition costs and other
operating expenses 518 557 619
Interest expense 173 203 231
Administrative and general expenses 62 10 556
- --------------------------------------------------------------------------------
Total costs and expenses 2,098 2,437 3,437
Realized capital gains 36 4 60
- --------------------------------------------------------------------------------
Income (loss) before income taxes (338) (290) (1,025)
Income tax benefits 143 100 357
- --------------------------------------------------------------------------------
Net income (loss) from operations* (195) (190) (668)
Loss on disposal - - (978)
- --------------------------------------------------------------------------------
Income (loss) from Insurance** $ (195) $ (190) $(1,646)
- --------------------------------------------------------------------------------
* The 1995 amount includes $568 of after-tax reserve provisions.
** The 1997 and 1996 operating results exclude the gains and losses related to
sales of the Insurance subsidiaries. The 1997 and 1996 results, including
the sale-related impacts, were charged to reserves established for this
purpose and, therefore, did not impact our earnings.
- --------------------------------------------------------------------------------
The net assets at December 31, 1997, 1996 and 1995 of the Insurance
businesses included in our consolidated balance sheets as discontinued
operations are summarized as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Insurance Assets
Investments $4,597 $ 7,889 $ 7,871
Reinsurance recoverable 1,459 2,458 2,616
Premiums and other receivables 592 1,082 1,191
Deferred taxes and other assets 1,082 1,201 1,450
- --------------------------------------------------------------------------------
Total Insurance assets $7,730 $12,630 $13,128
- --------------------------------------------------------------------------------
Insurance Liabilities
Unpaid losses and loss expenses $4,999 $ 8,572 $ 8,761
Unearned income 541 812 859
Notes payable 250 215 372
Other liabilities 864 1,185 1,458
- --------------------------------------------------------------------------------
Total Insurance liabilities $6,654 $10,784 $11,450
- --------------------------------------------------------------------------------
Investment in Insurance, net $1,076 $ 1,846 $ 1,678
- --------------------------------------------------------------------------------
X E R O X C O R P O R A T I O N 51
N O T E S
At December 31,1997 and 1996, intercompany receivables aggregating
approximately $206 and $414, 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 us. Substantially all of these funding commitments will be paid at
the time the CFI sale is completed.
The Investments caption consists mainly of short-term investments as
shown below. At December 31, 1997, approximately 99 percent of the fixed
maturity investments are investment grade securities. The amortized cost and
fair value of the investment portfolio at December 31, 1997 follow:
- --------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
Fixed maturities $1,046 $1,066
Short-term investments 3,531 3,531
- --------------------------------------------------------------------------------
Total investments $4,577 $4,597
- --------------------------------------------------------------------------------
Activity related to unpaid losses and loss expenses for the three years
ended December 31, 1997 follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Unpaid Losses and Loss Expenses
Gross unpaid losses and loss expenses,
January 1 $ 8,572 $8,761 $8,809
Reinsurance recoverable 2,245 2,290 2,391
- --------------------------------------------------------------------------------
Net unpaid losses and loss expenses,
January 1 6,327 6,471 6,418
Incurred related to:
Current year accident losses 1,100 1,364 1,461
Prior year accident losses 245 303 570
- --------------------------------------------------------------------------------
Total incurred 1,345 1,667 2,031
- --------------------------------------------------------------------------------
Paid related to:
Current year accident losses 308 407 427
Prior year accident losses 982 1,215 1,203
- --------------------------------------------------------------------------------
Total paid 1,290 1,622 1,630
- --------------------------------------------------------------------------------
Sales of subsidiaries (2,463) - (769)
- --------------------------------------------------------------------------------
Other adjustments (319) (189) 421
- --------------------------------------------------------------------------------
Net unpaid losses and loss expenses,
December 31 3,600 6,327 6,471
Reinsurance recoverable 1,399 2,245 2,290
- --------------------------------------------------------------------------------
Gross unpaid losses and loss expenses,
December 31 $ 4,999 $8,572 $8,761
- --------------------------------------------------------------------------------
Other Financial Services. In 1995, we completed the sale of Xerox Financial
Services Life Insurance Company and related companies (Xerox Life) for
approximately $104 before settlement costs and capital funding of OakRe Life
Insurance Company (OakRe), a single-purpose XFSI subsidiary. 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, 1997 and 1996, we have
retained on our consolidated balance sheet approximately $1.5 and $2.0 billion,
respectively, of investment portfolio assets and reinsurance reserves related to
Xerox Life's 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. This letter of credit expires in 2000, and it is unused
and available at December 31, 1997. 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.
Third Party Financing and Real Estate. During the last seven years, we made
substantial progress in disengaging from the Third Party Financing and Real
Estate businesses that were discontinued in 1990. During the three years ended
December 31, 1997, we received net cash proceeds of $252 ($152 in 1997, $36 in
1996 and $64 in 1995) from the sale of individual assets and from run-off
collection activities. The amounts received were consistent with our 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. Collections in 1998 are
expected to be less than we received in 1997.
Total Discontinued Operations. The consolidated financial statements present the
Insurance, Other Financial Services and Third Party Financing and Real Estate
businesses as 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
52 X E R O X C O R P O R A T I O N
N O T E S
primarily determined based on our annual average domestic borrowing costs.
Assigned interest expense for the discontinued businesses for the years ended
December 31, 1997, 1996 and 1995 was $201, $226 and $255, respectively.
Summarized information of discontinued operations for the three years
ended December 31, 1997 follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Summary of Operations
Income (loss) before income taxes $ - $ - $(1,025)
Income tax benefits - - 357
Loss on disposal - - (978)
- --------------------------------------------------------------------------------
Net income (loss) $ - $ - $(1,646)
- --------------------------------------------------------------------------------
Balance Sheet Data
Assets
Insurance
Investment, net $1,076 $1,846 $ 1,678
- --------------------------------------------------------------------------------
Other Financial Services
Investments 1,537 1,991 2,508
Other assets, net 114 111 135
- --------------------------------------------------------------------------------
OFS assets 1,651 2,102 2,643
- --------------------------------------------------------------------------------
Third Party Financing and
Real Estate
Gross finance receivables 303 401 472
Unearned income and other (5) 49 17
- --------------------------------------------------------------------------------
Investment, net 298 450 489
- --------------------------------------------------------------------------------
Investment in discontinued operations $3,025 $4,398 $ 4,810
- --------------------------------------------------------------------------------
Liabilities
OFS policyholders' deposits $1,523 $1,998 $ 2,528
Other OFS liabilities 3 3 1
Assigned debt 167 273 281
- --------------------------------------------------------------------------------
Discontinued operations liabilities $1,693 $2,274 $ 2,810
- --------------------------------------------------------------------------------
Net investment in discontinued
operations $1,332 $2,124 $ 2,000
- --------------------------------------------------------------------------------
At December 31, 1997 and 1996, approximately $1.9 billion and $2.5 billion,
respectively, of third party indebtedness assigned to the Insurance operations
is included in the consolidated balance sheet caption Long-term debt.
Based on current estimates, we believe that the proceeds received from
disposal of the remaining net discontinued assets will be consistent with our
net carrying value of these businesses.
9 Debt
Short-Term Debt. Short-term borrowings data at December 31, 1997 and 1996
follow:
- --------------------------------------------------------------------------------
Weighted
average
interest
rates at
12/31/97 1997 1996
- --------------------------------------------------------------------------------
Notes payable 4.05% $1,164 $ 762
Foreign commercial paper 5.83% 629 864
- --------------------------------------------------------------------------------
Total short-term debt 1,793 1,626
Current maturities of long-term debt 1,914 1,910
- --------------------------------------------------------------------------------
Total $3,707 $3,536
- --------------------------------------------------------------------------------
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, 1997 and 1996 follows:
- --------------------------------------------------------------------------------
Weighted
average
interest
rates at
12/31/97 1997 1996
- --------------------------------------------------------------------------------
U.S. Operations
Xerox Corporation (parent company)
Guaranteed ESOP notes due 1998-2004 7.62% $ 434 $ 494
Notes due 1997 - - 275
Notes due 1998 6.67 585 -
Notes due 1999 5.52 730 454
Notes due 2000 7.33 600 600
Notes due 2001 6.85 212 212
Notes due 2002 8.13 200 225
Notes due 2003 5.01 147 -
Notes due 2004 7.15 200 200
Notes due 2006 7.25 25 50
Notes due 2007 7.38 25 25
Notes due 2011 7.01 50 205
Notes due 2016 7.20 250 250
Notes due 2026 6.25 350 350
Other debt due 1997-2014 7.20 126 128
Capital lease obligations 6.85 3 4
- --------------------------------------------------------------------------------
Subtotal 3,937 3,472
- --------------------------------------------------------------------------------
Xerox Credit Corporation
Notes due 1997 - - 877
Notes due 1998 7.42 795 420
Notes due 1999 8.25 300 300
Notes due 2000 5.53 201 153
Notes due 2001 6.04 126 100
Notes due 2002 2.88 250 -
Notes due 2007 7.13 25 -
Notes due 2011 7.68 - 200
Notes due 2012 7.18 225 -
Floating rate notes due 2048 5.65 60 61
Other notes due 1997 and 2000 - 4 13
- --------------------------------------------------------------------------------
Subtotal 1,986 2,124
- --------------------------------------------------------------------------------
Total U.S. operations $5,923 $5,596
- --------------------------------------------------------------------------------
X E R O X C O R P O R A T I O N 53
N O T E S
- --------------------------------------------------------------------------------
Weighted
average
interest
rates at
12/31/97 1997 1996
- --------------------------------------------------------------------------------
International Operations
Various obligations, payable in:
Canadian dollars due 1997-2007 11.40% $ 124 $ 192
Dutch guilders due 1997-2000 5.61 66 108
French francs due 1997-1999 5.13 21 47
German marks due 1997-1999 6.33 51 146
Pounds sterling due 1997-2003 8.75 206 257
Swiss francs due 1997-2000 3.30 35 57
Italian lira due 1997-1998 7.30 123 113
U.S. dollars due 1997-1999 6.15 229 133
Other currencies due 1997-2001 7.14 207 274
Capital lease obligations 7.67 3 -
- --------------------------------------------------------------------------------
Total international operations 1,065 1,327
- --------------------------------------------------------------------------------
Other borrowings deemed long-term 3,872 3,684
Subtotal 10,860 10,607
Less current maturities 1,914 1,910
- --------------------------------------------------------------------------------
Total long-term debt $ 8,946 $ 8,697
- --------------------------------------------------------------------------------
Consolidated Long-Term Debt Maturities. Payments due on long-term debt for the
next five years and thereafter follow:
- --------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter
- --------------------------------------------------------------------------------
$1,914 $1,285 $1,040 $456 $619 $1,674
- --------------------------------------------------------------------------------
These payments do not include amounts relating to domestic commercial
paper and foreign bank notes payable, which have been classified as long-term
debt under the caption Other borrowings deemed long-term. These borrowings are
classified as long-term because we have the intent to refinance them on a
long-term basis and the ability to do so under our revolving credit agreement.
Certain of our debt agreements allow us to redeem outstanding debt
prior to scheduled maturity. Outstanding debt issues with these call features
are classified in the preceding five-year maturity table in accordance with
management's current expectations. The actual decision as to early redemption
will be made at the time the early redemption option becomes exercisable and
will be based on prevailing economic and business conditions.
Lines of Credit. In October 1997, we replaced the then-existing $5 billion
revolving credit agreement with a $7 billion revolving credit agreement with a
group of banks. This new Revolver, maturing 2002, is also accessible by the
following wholly owned subsidiaries: Xerox Credit Corp. (up to a $7 billion
limit), and by Xerox Capital (Europe) plc and Xerox Overseas Holdings PLC (up to
a $4 billion limit) with our guarantee. Any amounts borrowed under this facility
would be at rates based, at the borrower's option, on spreads above certain
reference rates such as LIBOR. This agreement is unused and is available to back
commercial paper borrowings of our domestic operations, Xerox Capital (Europe)
plc and Xerox Overseas Holdings PLC which amounted to $3.8 billion at December
31, 1997. In addition, our foreign subsidiaries had unused committed long-term
lines of credit used to back short-term indebtedness that aggregate $0.2 billion
in various currencies at prevailing interest rates.
Match Funding of Finance Receivables and Indebtedness. We employ a match funding
policy for customer financing assets and related liabilities. Under this policy,
which is more fully discussed in the accompanying Financial Review on page 41,
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, 1997, these operations had approximately $12.5
billion of net finance receivables, which will service approximately $10.2
billion of assigned short- and long-term debt, including $0.1 billion of debt
assigned to discontinued third party financing businesses.
Guarantees. At December 31, 1997, we have guaranteed the borrowings of our ESOP
and $2,616 of indebtedness of our foreign subsidiaries.
Interest. Interest paid by us on our short- and long-term debt, including
amounts relating to debt assigned to discontinued operations, amounted to $812,
$871 and $817 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Total Short- and Long-Term Debt. Our total indebtedness, excluding the direct
indebtedness of Talegen, at December 31, 1997 and 1996 is reflected in the
consolidated balance sheet captions as follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Short-term debt and current portion
of long-term debt $ 3,707 $ 3,536
Long-term debt 8,779 8,424
Discontinued operations liabilities -
policyholders' deposits and other 167 273
- --------------------------------------------------------------------------------
Total debt $12,653 $12,233
- --------------------------------------------------------------------------------
54 X E R O X C O R P O R A T I O N
N O T E S
A summary of changes in consolidated indebtedness for the three years
ended December 31, 1997 follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Increase (decrease) in
short-term debt, net $ (276) $ 973 $ 94
Proceeds from long-term debt 1,807 2,998 3,169
Principal payments on long-term debt (1,632) (2,989) (2,497)
- --------------------------------------------------------------------------------
Subtotal (101) 982 766
Less change in debt of
discontinued operations (106) (8) -
- --------------------------------------------------------------------------------
Total change in debt of
continuing operations $ 5 $ 990 $ 766
- --------------------------------------------------------------------------------
10 Financial Instruments
Derivative Financial Instruments. Certain financial instruments with
off-balance-sheet risk have been entered into by us to manage our interest rate
and foreign currency exposures. These instruments are held solely for hedging
purposes and include interest rate swap agreements, forward exchange contracts
and foreign currency swap agreements. We do not enter into derivative instrument
transactions for trading or other speculative purposes.
We typically enter into simple, unleveraged derivative transactions
which, by their nature, have low credit and market risk. Our policies on the use
of derivative instruments prescribe an investment-grade counterparty credit
floor and at least quarterly monitoring of market risk on a counterparty-by-
counterparty basis. We utilize numerous counterparties to ensure that there are
no significant concentrations of credit risk with any individual counterparty or
groups of counterparties. Based upon our ongoing evaluation of the replacement
cost of our derivative transactions and counterparty creditworthiness, we
consider the risk of credit default significantly affecting our financial
position or results of operations to be remote.
We employ the use of hedges to reduce the risks that rapidly changing
market conditions may have on the underlying transactions. Typically, our
currency and interest rate hedging activities are not affected by changes in
market conditions, as forward contracts and swaps are arranged and normally held
to maturity in order to lock in currency rates and interest rate spreads related
to underlying transactions.
None of our hedging activities involves exchange traded instruments.
Interest Rate Swaps. We enter into interest rate swap agreements to manage
interest rate exposure. An interest rate swap is an agreement to exchange
interest rate payment streams based on a notional principal amount. We follow
settlement accounting principles for interest rate swaps whereby the net
interest rate differentials to be paid or received are recorded currently as
adjustments to interest expense.
Virtually all customer financing assets earn fixed rates of interest.
Accordingly, through the use of interest rate swaps in conjunction with the
contractual maturity terms of outstanding debt, we "lock in" an interest spread
by arranging fixed-rate interest obligations with maturities similar to the
underlying assets. Additionally, customer financing assets are consistently
funded with liabilities denominated in the same currency. We refer to the
effects of these conservative practices as "match funding" our customer
financing assets. This practice effectively eliminates the risk of a major
decline in interest margins resulting from adverse changes in the interest rate
environment. Conversely, this practice does effectively eliminate the
opportunity to materially increase margins when interest rates are declining.
More specifically, pay fixed/receive variable interest rate swaps are
often used in place of more expensive fixed-rate debt for the purpose of match
funding fixed-rate customer contracts.
Pay variable/receive variable interest rate swaps ("basis swaps") are
used to transform variable rate, medium-term debt into commercial paper or local
currency LIBOR rate obligations. Pay variable/receive fixed interest rate swaps
are used to transform term fixed-rate debt into variable rate obligations.
During 1997, three such agreements were cancelled in connection with the early
retirement of three medium-term notes. The transactions performed within each of
these three categories enable the cost-effective management of interest rate
exposures. During 1997, the average notional amount of an interest rate swap
agreement was $28.
At December 31, 1997 and 1996, the total notional amounts of these
transactions, based on contract maturity, follow:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Commercial paper/bank borrowings $ 1,991 $ 1,822
Medium-term debt 5,388 4,000
Long-term debt 4,313 3,444
- --------------------------------------------------------------------------------
Total $11,692 $ 9,266
- --------------------------------------------------------------------------------
X E R O X C O R P O R A T I O N 55
N O T E S
For the three years ended December 31, 1997, no pay fixed/receive variable
interest rate swap agreements were terminated prior to maturity.
The aggregate notional amounts of interest rate swaps by maturity date and
type at December 31, 1997 and 1996 follow:
- --------------------------------------------------------------------------------------
1999- 2002-
1997 1998 2001 2016 Total
- --------------------------------------------------------------------------------------
1997
Pay fixed/receive variable $ -- $ 1,136 $ 4,203 $ 2,330 $ 7,669
Pay variable/receive variable -- 320 203 0 523
Pay variable/receive fixed -- 535 982 1,983 3,500
- --------------------------------------------------------------------------------------
Total -- $ 1,991 $ 5,388 $ 4,313 $11,692
- --------------------------------------------------------------------------------------
Memo:
Interest rate paid -- 6.20% 6.22% 6.03% 6.14%
Interest rate received $ -- 6.18% 5.55% 6.22% 5.90%
- --------------------------------------------------------------------------------------
1996
Pay fixed/receive variable $ 1,224 $ 925 $ 3,612 $ 419 $ 6,180
Pay variable/receive variable 455 0 332 25 812
Pay variable/receive fixed 143 0 760 1,371 2,274
- --------------------------------------------------------------------------------------
Total $ 1,822 $ 925 $ 4,704 $ 1,815 $ 9,266
- --------------------------------------------------------------------------------------
Memo:
Interest rate paid 6.21% 6.69% 6.48% 5.97% 6.35%
Interest rate received 5.90% 5.37% 5.82% 7.10% 6.04%
- --------------------------------------------------------------------------------------
Forward Exchange Contracts. We utilize forward exchange contracts to hedge
against the potentially adverse impacts of foreign currency fluctuations on
foreign currency denominated receivables and payables; firm foreign currency
commitments; and investments in foreign operations. Firm foreign currency
commitments generally represent committed purchase orders for foreign-sourced
inventory. These contracts generally mature in six months or less. At December
31, 1997 and 1996, we had outstanding forward exchange contracts of $1,977 and
$2,259, respectively. Of the outstanding contracts at December 31, 1997, the
largest single currency represented was the pound sterling. Contracts
denominated in British pounds sterling, U.S. dollars, Brazilian reais, French
francs and Canadian dollars accounted for over 75 percent of our forward
exchange contracts. On contracts that hedge foreign currency denominated
receivables and payables, gains or losses are reported currently in income, and
premiums or discounts are amortized to income and included in Other, net in the
consolidated statements of income. Gains or losses, as well as premiums or
discounts, on contracts that hedge firm commitments are deferred and
subsequently recognized as part of the underlying transaction. At December 31,
1997, we had a net deferred loss of $38. Gains or losses on contracts that hedge
an investment in a foreign operation are reported currently in the balance sheet
as a component of cumulative translation adjustments. The premium or discount on
contracts that hedge an investment in a foreign operation are amortized to
income and included in Other, net in the consolidated statements of income.
During 1997, the average notional amount of a forward exchange contract amounted
to $13.
Foreign Currency Swap Agreements. We enter into cross-currency interest rate
swap agreements, whereby we issue foreign currency denominated debt and swap the
proceeds with a counterparty. In return, we receive and effectively denominate
the debt in local currencies. Currency swaps are utilized as hedges of the
underlying foreign currency borrowings, and exchange gains or losses are
recognized currently in Other, net in the consolidated statements of income. At
December 31, 1997, cross-currency interest rate swap agreements with an
aggregate notional amount of $1,708 remained outstanding.
56 X E R O X C O R P O R A T I O N
N O T E S
Fair Value of Financial Instruments. The estimated fair
values of our financial instruments at December 31, 1997
and 1996 follow:
- -------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------
Cash $ 75 $ 75 $ 104 $ 104
Accounts receivable, net 2,145 2,145 2,022 2,022
Short-term debt 1,793 1,793 1,626 1,626
Long-term debt 10,860 11,189 10,607 10,766
Interest rate and currency
swap agreements -- 25 -- (61)
Forward exchange contracts -- (44) -- 19
- -------------------------------------------------------------------------
The fair value amounts for Cash, Accounts receivable, net and Short-term debt
approximate carrying amounts due to the short maturities of these instruments.
The fair value of Long-term debt was estimated based on quoted market prices
for these or similar issues or on the current rates offered to us for debt of
the same remaining maturities. The difference between the fair value and the
carrying value represents the theoretical net premium we would have to pay to
retire all debt at such date. We have no plans to retire significant portions of
our long-term debt prior to scheduled maturity. We are not required to determine
the fair value of our finance receivables, the match funding of which is the
source of much of our interest rate swap activity.
The fair values for interest rate and cross-currency swap agreements and
forward exchange contracts were calculated by us based on market conditions at
year-end and supplemented with quotes from brokers. They represent amounts we
would receive (pay) to terminate/replace these contracts. We have no present
plans to terminate/replace significant portions of these contracts.
11 Employee Benefit Plans
Retirement Income Guarantee Plan (RIGP).
Approximately 54,000 salaried and union employees participate in the 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 our prior defined contribution plan
(Transitional Retirement Accounts or TRA).
At December 31, 1997, these domestic plans accounted for approximately 64
percent of our total pension assets and were invested as follows: domestic and
international equity securities - 69 percent; fixed-income investments - 30
percent; and real estate - 1 percent. No plan assets are invested in our stock.
The RIGP plans are in compliance with the minimum funding standards of the
Employee Retirement Income Security Act of 1974 (ERISA).
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 transition asset and prior service cost are amortized over 15
years. The assumptions used in the accounting for the U.S. defined benefit plans
follow:
- -------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------
Assumed discount rates 7.25% 7.75% 7.25%
Assumed rates for compensation
increases 4.13 4.50 4.25
Expected return on plan assets 9.50 9.50 9.50
- -------------------------------------------------------------------------
Our 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 our 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. We maintain various supplemental executive retirement plans (SERPs)
that are not tax-qualified and are unfunded.
We sponsor numerous pension plans for our international operating units in
Europe, Canada and Latin America, which generally provide pay- and
service-related benefits. Plan benefits are provided through a combination of
funded trusteed arrangements or through book reserves. The Xerox Limited pension
plan in the United Kingdom is the largest international plan and accounted for
approximately 25 percent of our total pension assets at December 31,
1997. It is primarily invested in marketable equity securities.
X E R O X C O R P O R A T I O N 57
N O T E S
Financial Information. Our 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 our 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, the Xerox Canada Limited non-registered
pension plan and the Xerox Limited 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 our retirement plans to the amounts
accrued in our consolidated balance sheets at December 31, 1997 and 1996
follows:
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Over- Under- Non- Over- Under- Non-
funded funded funded Total funded funded funded Total
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 6,354 $ 70 $ 271 $6,695 $5,549 $ 70 $ 252 $ 5,871
Effect of projected compensation increases 526 10 52 588 471 51 48 570
- -----------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (PBO) 6,880 80 323 7,283 6,020 121 300 6,441
Plan assets at fair value 7,640 68 -- 7,708 6,706 65 -- 6,771
- -----------------------------------------------------------------------------------------------------------------------------
Excess (deficit) of plan assets over PBO 760 (12) (323) 425 686 (56) (300) 330
Items not yet reflected in the financial statements:
Unamortized transition obligations (assets) (87) (1) 7 (81) (116) 17 10 (89)
Unrecognized prior service cost 27 1 6 34 40 -- (9) 31
Unrecognized net (gain) loss (394) 24 37 (333) (268) 30 29 (209)
- -----------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost recognized in the
consolidated balance sheets at December 31 $ 306 $ 12 $ (273) $ 45 $ 342 $ (9) $ (270) $ 63
- -----------------------------------------------------------------------------------------------------------------------------
The components of pension cost for the three years ended December 31, 1997
follow:
- ----------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
Defined benefit plans
Service cost $ 167 $ 164 $ 143
- ----------------------------------------------------------------------------
Interest cost - change in PBO due to:
Passage of time 215 201 186
Net investment income (loss)
allocated to TRA accounts 677 586 624
- ----------------------------------------------------------------------------
Subtotal 892 787 810
- ----------------------------------------------------------------------------
Net investment income on:
TRA assets (677) (586) (624)
Other plan assets (621) (417) (372)
- ----------------------------------------------------------------------------
Subtotal (1,298) (1,003) (996)
- ----------------------------------------------------------------------------
Net amortization and deferrals 344 150 120
- ----------------------------------------------------------------------------
Settlement and curtailment gains (31) (7) (32)
- ----------------------------------------------------------------------------
Defined benefit plans -
net pension cost 74 91 45
Defined contribution plans -
pension cost 23 17 13
Total pension cost $ 97 $ 108 $ 58
- ----------------------------------------------------------------------------
Plan assets consist of both assets legally allocated to the TRA accounts and
other defined benefit plan assets. The combined investment results of the assets
are shown, left, 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 $4.3 billion and $4.0
billion at December 31, 1997 and 1996, respectively. Our pension plans' funding
surplus tends to be less than that of comparable companies because a substantial
portion of plan assets are TRA-related and are equal to TRA-related liabilities.
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
58 X E R O X C O R P O R A T I O N
N O T E S
annual rate of 7.5 percent until it reaches the plan's annual maximum coverage
of approximately two times the 1995 level, the transition date to the new plan.
We also have other postretirement benefit plans that cover employees who
retired 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 7.5
percent in 1997 and declines to 5.25 percent in 2002 and thereafter. A 1
percentage point increase in the medical inflation assumptions would increase
the service and interest cost for these plans by $3 and the accumulated
postretirement benefit obligation by $47.
The discount rate used to determine the funded status was 7.25 percent, 7.75
percent and 7.25 percent at December 31, 1997, 1996 and 1995, respectively.
A reconciliation of the financial status of the plans as of December 31
follows:
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
Accumulated Postretirement
Benefit Obligation:
Retirees $ 592 $ 501 $ 506
Fully eligible employees 200 183 251
Other employees 237 208 219
- ---------------------------------------------------------------------------
Total 1,029 892 976
Unrecognized net gain 50 158 42
- ---------------------------------------------------------------------------
Accrued cost recognized in the
consolidated balance sheets $ 1,079 $ 1,050 $ 1,018
- ---------------------------------------------------------------------------
The components of postretirement benefit cost for the three years ended
December 31, 1997 follow:
- ---------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------
Service cost $25 $26 $19
Interest cost 66 63 70
Net amortization (4) (1) (4)
Settlement gain - - (8)
- ---------------------------------------------------------
Total $87 $88 $77
- ---------------------------------------------------------
These plans are most efficiently and customarily funded on a pay-as-you-go
basis.
Employee Stock Ownership Plan (ESOP) Benefits. In 1989, we established an ESOP
and sold to it 10 million shares of Series B Convertible Preferred Stock
(Convertible Preferred) of the Company for a purchase price of $785. Each ESOP
share is convertible into 3 common shares of the Company. 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. The ESOP debt is included in our consolidated
balance sheets because we guarantee the ESOP borrowings. A corresponding amount
classified as Deferred ESOP benefits represents our commitment to future
compensation expense related to the ESOP benefits.
The ESOP will repay its borrowings from dividends on the Convertible
Preferred and from our contributions. The ESOP's debt service is structured such
that our annual contributions (in excess of dividends) essentially correspond to
a specified level percentage of participant compensation. As the borrowings are
repaid, the Convertible Preferred is allocated to ESOP participants and Deferred
ESOP benefits are reduced by principal payments on the borrowings. Most of our
domestic employees are eligible to participate in the ESOP.
Information relating to the ESOP for the three years ended December 31,
1997 follows:
- -------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------
CInterest on ESOP Borrowings $38 $42 $45
Dividends declared on Convertible
Preferred Stock $57 $58 $59
- -------------------------------------------------------------------------
Cash contribution to the ESOP $39 $36 $34
- -------------------------------------------------------------------------
Compensation expense $40 $37 $35
- -------------------------------------------------------------------------
We recognize ESOP costs based on the amount committed to be contributed to
the ESOP plus related trustee, finance and other charges.
12 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, 1997 consi sts of the following:
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
Domestic income $1,082 $ 781 $ 747
Foreign income 1,059 1,163 1,102
- --------------------------------------------------------------------------
Income before income taxes $2,141 $1,944 $1,849
- --------------------------------------------------------------------------
X E R O X C O R P O R A T I O N 59
N O T E S
Provisions for income taxes from continuing operations for the three years
ended December 31, 1997 consist of the following:
- ---------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------
Federal income taxes
Current $ 253 $ 210 $ 285
Deferred 67 50 (21)
Foreign income taxes
Current 168 205 178
Deferred 158 166 110
State income taxes
Current 69 62 57
Deferred 13 7 6
- ---------------------------------------------------------
Income taxes $ 728 $ 700 $ 615
- ---------------------------------------------------------
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, 1997 follows:
- -------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------
U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
Foreign earnings and dividends
taxed at different rates (3.2) .5 2.2
Goodwill amortization .3 .3 .3
Tax-exempt income (.8) (.5) (.6)
Effect of tax rate changes on deferred
tax assets and liabilities -- -- (5.3)
State taxes 2.5 2.3 2.2
Change in valuation allowance for
deferred tax assets -- (1.0) (.8)
Other .2 (.6) .3
- -------------------------------------------------------------------
Effective income tax rate 34.0% 36.0% 33.3%
- -------------------------------------------------------------------
The 1997 effective tax rate of 34.0 percent is 2.0 percentage points lower
than 1996. This lower 1997 rate is primarily attributable to an increase in
foreign tax credits, refund of foreign taxes and mix of profits from our
worldwide operations.
The 1996 effective tax rate of 36.0 percent is 2.7 percentage points higher
than 1995. The lower 1995 rate was primarily caused by a decrease in Brazilian
corporate tax rates, which created a deferred tax benefit. Excluding the 1995
Brazilian deferred tax benefit, the 1996 effective tax rate was 2.6 percentage
points lower than 1995. This lower effective tax rate was primarily due to the
lower statutory tax rate in Brazil and the mix of profits from our worldwide
operations.
On a consolidated basis, including the effects of discontinued operations, we
paid a total of $241, $252 and $182 in income taxes to federal, foreign and
state income-taxing authorities in 1997, 1996 and 1995, respectively.
Total income tax expense (benefit) for the three years ended December 31,
1997 was allocated as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Income taxes on income
from continuing operations $ 728 $ 700 $ 615
Tax benefit included in
minorities' interests* (19) -- --
Discontinued operations (166) (84) (374)
Common shareholders' equity** (57) (15) (15)
- --------------------------------------------------------------------------------
Total $ 486 $ 601 $ 226
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Benefit relates to preferred securities as more fully described in Note 15
on page 61.
** For dividends paid on shares held by the ESOP; cumulative translation
adjustments; tax benefit on nonqualified stock options; 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, 1997
was approximately $4.5 billion. These earnings have been substantially
reinvested, and we do not plan to initiate any action that would precipitate the
payment of income taxes thereon. It is not practicable to estimate the amount of
additional tax that might be payable on the foreign earnings.
The tax effects of temporary differences that give rise to significant
portions of the deferred taxes at December 31, 1997 and 1996 follow:
- -----------------------------------------------------------
1997 1996
- -----------------------------------------------------------
Tax effect of future tax deductions
Depreciation $ 294 $ 397
Postretirement medical benefits 406 405
Restructuring reserves 22 70
Other operating reserves 299 296
Deferred intercompany profit 60 83
Allowance for doubtful accounts 95 69
Deferred compensation 151 138
Tax credit carryforwards 125 122
Research and development 256 158
Other 133 108
- -----------------------------------------------------------
Total $1,841 $1,846
- -----------------------------------------------------------
Tax effect of future taxable income
Installment sales and leases $(1,282) $(1,287)
Leverage leases (21) (31)
Deferred income (353) (205)
Other (192) (163)
- -----------------------------------------------------------
Total $(1,848) $(1,686)
- -----------------------------------------------------------
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, 1997, 1996 and 1995 amounted to
$516, $473 and $608, respectively.
60 X E R O X C O R P O R A T I O N
N O T E S
We conclude that it is more likely than not that the deferred tax
assets will be realized in the ordinary course of operations based on scheduling
of deferred tax liabilities and income from operating activities.
At December 31, 1997, we have tax credit carryforwards for federal income tax
purposes of $20 available to offset future federal income taxes through 2001 and
$105 available to offset future federal income taxes indefinitely.
13 Litigation
On March 10, 1994, a lawsuit was filed in the United States District Court
for the District of Kansas by two independent service organizations (ISOs) in
Kansas City and St. Louis and their parent company. Plaintiffs claim damages
predominately resulting from the Company's alleged refusal to sell parts for
high volume copiers and printers to plaintiffs prior to 1994. The Company's
policies and practices with respect to the sale of parts to ISOs were at issue
in an antitrust class action in Texas, which was settled by the Company during
1994. Claims for individual lost profits of ISOs who were not named parties,
such as the plaintiffs in the Kansas action, were not included in that class
action. In their complaint plaintiffs allege monetary damages in the form of
lost profits in excess of $10 million (to be trebled) and injunctive relief. In
a report prepared pursuant to Rule 26(a)2)B) of the Federal Rules of Civil
Procedure, an accountant retained by plaintiffs as an expert indicated that he
plans to testify at trial that, allegedly as a result of Xerox' conduct,
plaintiffs have lost profits of approximately $75 million. The Company has
asserted counterclaims against the plaintiffs alleging patent and copyright
infringement, misappropriation of Xerox trade secrets and conversion. On
December 11, 1995, the District Court issued a preliminary injunction against
the parent company for copyright infringement. On April 8, 1997, the District
Court granted partial summary judgment in favor of the Company on plaintiffs'
antitrust claims, ruling that the Company's unilateral refusal to sell or
license its patented parts cannot give rise to antitrust liability. The Court's
ruling did not preclude a finding of antitrust liability based upon other
allegations of exclusionary conduct, including the refusal to sell unpatented
parts. The District Court also granted summary judgment in favor of the Company
on its patent infringement claim, leaving open with respect to patent
infringement only the issues of willfulness and the amount of damages, and
granted partial summary judgment in favor of the Company with respect to some of
its claims of copyright infringement. On September 8, 1997, the United States
Court of Appeals for the Federal Circuit denied plaintiffs' petition for
permission to appeal the District Court's April 8, 1997 Order. A trial date
tentatively has been set for March 9, 1998 for the remaining issues in the case.
The Company denies any wrongdoing and intends to vigorously defend the remaining
claims and pursue its counterclaims.
14 Common Stock Split
At our annual meeting on May 16, 1996, shareholders approved an increase in
the number of authorized shares of common stock, from 350 million to 1.05
billion, to effect a three-for-one stock split. The effective date of the stock
split was June 6 for shareholders of record as of May 23. Shareholders' equity
has been restated to give retroactive recognition to the stock split in prior
periods by reclassifying from additional paid-in capital to common stock the par
value of the additional shares arising from the split. In addition, all
references in the financial statements to number of shares and per share amounts
have been restated.
15 Preferred Securities
We have 22 million authorized shares of cumulative preferred stock, $1 par
value. Outstanding preferred stock at December 31, 1997 and 1996 follows (shares
in thousands):
- ----------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------
Convertible
Preferred Stock 9,013 $705 9,212 $721
- ----------------------------------------------------------------
Convertible Preferred Stock. As more fully described in Note 11 on page 57, we
sold, for $785, 10 million shares of our Series B Convertible Preferred Stock
(ESOP shares) in 1989 in connection with the establishment of our ESOP. As
employees with vested ESOP shares leave the Company, these shares are redeemed
by us. We have the option to settle such redemptions with either shares of
common stock or cash.
X E R O X C O R P O R A T I O N 61
N O T E S
Preferred Stock Purchase Rights. We have a shareholder rights plan designed to
deter coercive or unfair takeover tactics and to prevent a person or persons
from gaining control of us without offering a fair price to all shareholders.
Under the terms of the plan, one preferred stock purchase right (Right)
accompanies each share of outstanding common stock. Each Right entitles the
holder to purchase from us one three-hundredth of a new series of preferred
stock at an exercise price of $250.
Within the time limits and under the circumstances specified in the plan, the
Rights entitle the holder to acquire either our common stock, the surviving
company in a business combination, or the purchaser of our assets, having a
value of two times the exercise price.
The Rights may be redeemed prior to becoming exercisable by action of the
Board of Directors at a redemption price of $.01 per Right. The Rights expire in
April 2007.
The Rights are non-voting and, until they become exercisable, have no
dilutive effect on the earnings per share or book value per share of our common
stock.
Deferred Preferred Stock. In October 1996, a subsidiary of ours issued 2 million
deferred preferred shares for Canadian (Cdn.) $50 million. The U.S. dollar value
was $37 and is included in Minorities' interests in equity of subsidiaries in
the consolidated balance sheet. These shares are mandatorily redeemable on
February 28, 2006 for Cdn. $90 million. The difference between the redemption
amount and the proceeds from the issue is being amortized, through the
redemption date, to minorities' interests in earnings of subsidiaries in the
consolidated statements of income. We have guaranteed the redemption value.
Company-obligated, mandatorily redeemable preferred securities of subsidiary
trust holding solely subordinated debentures of the Company. On January 29,
1997, a trust sponsored and wholly owned by the Company issued $650 aggregate
liquidation amount preferred securities (the "Original Preferred Securities") to
investors and 20,103 shares of common securities to the Company, the proceeds of
which were invested by the trust in $670.1 aggregate principal amount of the
Company's newly issued 8 percent Junior Subordinated Debentures due 2027 ("the
Original Debentures"). On June 13, 1997, pursuant to a registration statement
filed by the Company and the trust with the Securities and Exchange Commission,
Original Preferred Securities with an aggregate liquidation preference amount of
$644.2 and Original Debentures with a principal amount of $644.2 were exchanged
for a like amount of preferred securities (together with the Original Preferred
Securities, the "Preferred Securities") and 8 percent Junior Subordinated
Debentures due 2027 (together with the Original Debentures, the "Debentures")
which were registered under the Securities Act of 1993. The Debentures represent
all of the assets of the trust. The proceeds from the issuance of the Original
Debentures were used by the Company for general corporate purposes. The
Debentures and related income statement effects are eliminated in the Company's
consolidated financial statements.
The Preferred Securities accrue and pay cash distributions semi-annually at a
rate of 8 percent per annum of the stated liquidation amount of $1,000 per
Preferred Security. The Company has guaranteed (the "Guarantee"), on a
subordinated basis, distributions and other payments due on the Preferred
Securities. The Guarantee and the Company's obligations under the Debentures and
in the indenture pursuant to which the Debentures were issued and the Company's
obligations under the Amended and Restated Declaration of Trust governing the
trust, taken together, provide a full and unconditional guarantee of amounts due
on the Preferred Securities.
The Preferred Securities are mandatorily redeemable upon the maturity of the
Debentures on February 1, 2027, or earlier to the extent of any redemption by
the Company of any Debentures. The redemption price in either such case will be
$1,000 per share plus accrued and unpaid distributions to the date fixed for
redemption.
62 X E R O X C O R P O R A T I O N
N O T E S
16 Common Shareholders' Equity
The components of common shareholders' equity and the changes therein for the
three years ended December 31, 1997 follow:
- ------------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Gain
Common Common Additional (Loss) on Translation Treasury
Stock Stock Paid-In Retained Investment Adjust- Stock
(Shares in thousands) Shares Amount Capital Earnings Securities ments Shares
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 317,979 $ 321 $ 1,192 $ 3,197 $ (433) $ (100) --
Stock option, incentive plans and other 4,962 6 114 (11)
Xerox Canada Inc. exchangeable stock 1,365
Convertible securities 723 28
Net loss (472)
Net loss during stub period (21)
Cash dividends declared
Common stock ($1.00 per share) (327)
Preferred stock (62)
Tax benefits on ESOP dividends 17
Net unrealized gain on
investment securities 432
Translation adjustments -
net of minority shareholders'
interests of $17 (3)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 325,029 327 1,334 2,321 (1) (103) --
Purchase of treasury stock (6,493)
Stock option, incentive plans and other 596 (23) (15) 2,428
Xerox Canada Inc. exchangeable stock 103 1,347
Convertible securities 174 10 497
Net income 1,206
Cash dividends declared
Common stock ($1.16 per share) (379)
Preferred stock (59)
Tax benefits on ESOP dividends 16
Translation adjustments -
net of minority shareholders'
interests of ($24) (138)
Premiums from sale of put options 11
Tax benefits on stock options 21
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 325,902 327 1,353 3,090 (1) (241) (2,221)
Purchase of treasury stock (1,987)
Stock option, incentive plans and other 180 (117) (29) 3,648
Xerox Canada Inc. exchangeable stock 58 63
Convertible securities 101 9 497
Net income 1,452
Net income during stub period 8
Cash dividends declared
Common stock ($1.28 per share) (418)
Preferred stock (57)
Tax benefits on ESOP dividends 14
Translation adjustments -
net of minority shareholders'
interests of ($44) (463)
Premiums from sale of put options 13
Tax benefits on stock options 45
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 326,241 $ 327 $ 1,303 $ 4,060 $ (1) (704) 0
- ------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------
Treasury
Stock
(Shares in thousands) Amount Total
- -----------------------------------------------------------------
Balance at December 31, 1994 -- 4,177
Stock option, incentive plans and other 109
Xerox Canada Inc. exchangeable stock
Convertible securities 28
Net loss (472)
Net loss during stub period (21)
Cash dividends declared
Common stock ($1.00 per share) (327)
Preferred stock (62)
Tax benefits on ESOP dividends 17
Net unrealized gain on
investment securities 432
Translation adjustments -
net of minority shareholders'
interests of $17 (3)
- -----------------------------------------------------------------
Balance at December 31, 1995 -- 3,878
Purchase of treasury stock (306) (306)
Stock option, incentive plans and other 122 84
Xerox Canada Inc. exchangeable stock
Convertible securities 23 33
Net income 1,206
Cash dividends declared
Common stock ($1.12 per share) (379)
Preferred stock (59)
Tax benefits on ESOP dividends 16
Translation adjustments -
net of minority shareholders'
interests of ($24) (138)
Premiums from sale of put options 11
Tax benefits on stock options 21
- -----------------------------------------------------------------
Balance at December 31, 1996 (161) 4,367
Purchase of treasury stock (116) (116)
Stock option, incentive plans and other 245 99
Xerox Canada Inc. exchangeable stock
Convertible securities 32 41
Net income 1,452
Net income during stub period 8
Cash dividends declared
Common stock ($1.28 per share) (418)
Preferred stock (57)
Tax benefits on ESOP dividends 14
Translation adjustments -
net of minority shareholders'
interests of ($44) (463)
Premiums from sale of put options 13
Tax benefits on stock options 45
- -----------------------------------------------------------------
Balance at December 31, 1997 $ 0 $4,985
- -----------------------------------------------------------------
X E R O X C O R P O R A T I O N 63
N O T E S
Common Stock. We have 1.05 billion authorized shares of common stock, $1 par
value. At December 31, 1997 and 1996, 20.7 and 20.9 million shares,
respectively, were reserved for issuance under our incentive compensation plans.
In addition, at December 31, 1997, 2.6 million common shares were reserved for
the conversion of $53 of convertible debt and 27.0 million common shares were
reserved for conversion of ESOP-related Convertible Preferred Stock.
Treasury Stock. The Board of Directors has authorized us to repurchase up to $1
billion of our common stock. The stock will be repurchased from time to time on
the open market depending on market conditions. During 1997, we repurchased 2.0
million shares for $116. Common shares issued for stock option exercises,
conversion of convertible securities and other exchanges were partially
satisfied by reissuances of treasury shares. In the second quarter of 1997, the
repurchase program was suspended in connection with the acquisition of the
remaining interest in Xerox Limited.
Put Options. In connection with the share repurchase program, during 1997 and
1996, we sold 4.0 million and 2.8 million put options, respectively, that
entitle the holder to sell one share of our common stock to us at a specified
price. These put options are exercisable only at maturity and can be settled in
cash at our option. The put options had original maturities ranging from six
months to two years.
At December 31, 1997, 4.0 million put options remain outstanding with a
weighted average strike price of $54.32 per share.
Stock Option and Long-Term Incentive Plans. We have a long-term incentive
plan whereby eligible employees may be granted nonqualified stock options and
performance unit rights. Subject to vesting and other requirements, performance
unit rights are typically paid in cash, and stock options and rights are settled
with newly issued or treasury shares of our common stock. Stock options granted
prior to December 31, 1995 normally vest in two years and normally expire five
years from the date of grant. Stock options granted subsequent to December 31,
1995 vest in three years and will expire eight years from the date of grant. The
exercise price of the options is equal to the market value of our common stock
on the date of grant. The value of each performance unit is typically 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, 1997 and 1996, 4.3 and 7.7 million shares, respectively, were
available for grant of options or rights. The following table provides
information relating to the status of, and changes in, options granted:
- ------------------------------------------------------------------------------------------
Employee Stock Options 1997 1996 1995
- ------------------------------------------------------------------------------------------
Average Average Average
Stock Option Stock Option Stock Option
(Options in thousands) Options Price Options Price Options Price
- ------------------------------------------------------------------------------------------
Outstanding at January 1 11,103 $ 37 10,794 $ 33 9,726 $ 28
Granted 6,101 68 3,688 43 5,508 37
Canceled (150) 49 (365) 38 (228) 34
Exercised (3,487) 34 (2,939) 31 (4,092) 26
Surrendered for SARs -- -- (75) 15 (120) 16
Outstanding at December 31 13,567 52 11,103 37 10,794 33
- ------------------------------------------------------------------------------------------
Exercisable at end of year 4,425 4,444 3,585
- ------------------------------------------------------------------------------------------
Options outstanding and exercisable at December 31, 1997 are as follows:
- -----------------------------------------------------------------------------------------------------------------------
Thousands except per share data Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------
Weighted
Range of Average Remaining Weighted Average Number Weighted Average
Exercise Prices Number Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
$26.35 to $44.50 7,360 4.08 $38.59 4,379 $36.38
46.50 to 64.31 3,084 6.96 61.34 46 48.62
69.63 to 84.53 3,123 7.78 73.34 - -
- -----------------------------------------------------------------------------------------------------------------------
$26.35 to $84.53 13,567 5.59 $51.76 4,425 $36.50
- -----------------------------------------------------------------------------------------------------------------------
64 X E R O X C O R P O R A T I O N
N O T E S
We do not recognize compensation expense relating to employee stock options
because the exercise price of the option equals the fair value of the stock on
the date of grant. If we had determined the compensation based on the fair value
of the options on the date of grant in accordance with SFAS No. 123, the pro
forma net income and earnings per share would be as follows:
- --------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------
Net income - as reported $ 1,452 $ 1,206
Net income - pro forma 1,429 1,189
Basic Earnings per share - as reported 4.31 3.55
Basic Earnings per share - pro forma 4.24 3.50
Diluted Earnings per share - as reported 4.04 3.32
Diluted Earnings per share - pro forma 3.98 3.27
- --------------------------------------------------------------------------
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
As reflected in the pro forma amounts in the table above, the fair value of
each option granted in 1997 and 1996 was $18.06 and $10.50, respectively. The
fair value of each option granted was estimated on the date of grant using the
modified Black-Scholes option pricing model using the following weighted average
assumptions:
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
Risk-free interest rate 6.1% 5.7%
Expected life in years 5.0 5.5
Expected volatility 23.5% 22.0%
Expected dividend yield 1.9% 2.6%
- -----------------------------------------------------------------------------
17 Summarized Financial
Information of Xerox Overseas
Xerox Overseas Holdings PLC ("Xerox Overseas"), which was formed in November
1996, is the majority shareholder of Xerox Limited and also owns 100 percent of
those companies of Rank Group which were acquired in June 1997. The following
table presents combined financial information of Xerox Overseas and its
subsidiaries as if Xerox Overseas owned those subsidiaries since January 1,
1995.
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Income Statement Information:
Total Revenues $5,634 $5,630 $5,749
Income Before Income Taxes, Equity
Income and Minorities' Interests 386 561 777
Equity in Net Income of Unconsolidated Affiliates 144 135 15
Minorities' Interests in Earnings
of Subsidiaries 8 7 3
Net Income 393 502 563
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Balance Sheet Information:
Total Current Assets $3,081 $3,120
Total Current Liabilities 4,846 3,092
Total Non Current Assets 5,426 4,535
Total Non Current Liabilities 955 1,132
Minorities' Interests in Equity of Subsidiaries 24 21
- --------------------------------------------------------------------------------
18 Earnings per Share
A reconciliation of the numerators and denominators of the basic and diluted
EPS calculation follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Income Shares Per Income Shares Per Income Shares Per
(Numer- (Denom- Share (Numer- (Denom- Share (Numer- (Denom- Share
ator) inator) Amount ator) inator) Amount ator) inator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic EPS
Income from continuing operations $ 1,452 $ 1,206 $ 1,174
Accrued dividends on preferred stock (44) (44) (45)
Basic EPS 1,408 326,686 $ 4.31 1,162 327,194 $ 3.55 1,129 326,014 $ 3.46
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted EPS
Stock options and other incentives 3,964 5,321 5,615
ESOP Adjustment* 44 27,342 40 27,981 33 28,663
Convertible debt, net of tax 3 2,644 3 2,644 4 2,644
Diluted EPS $ 1,455 360,636 $ 4.04 $ 1,205 363,140 $ 3.32 $ 1,166 362,996 $ 3.21
- ------------------------------------------------------------------------------------------------------------------------------------
Note: Recalculation of per share amounts may be off by $0.01 in certain instances due to rounding.
* ESOP Adjustment includes preferred stock dividends, ESOP expense adjustment and related tax benefit.
- ------------------------------------------------------------------------------------------------------------------------------------
X E R O X C O R P O R A T I O N 65
N O T E S
Quarterly Results of Operations
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Full
In millions, except per share data Quarter Quarter Quarter Quarter Year
- ----------------------------------------------------------------------------------------------------------------------------
1997
Revenues $ 4,022 4,356 $ 4,376 $ 5,412 $ 18,166
Costs and Expenses 3,594 3,859 3,926 4,646 16,025
- ----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and Minorities' Interests 428 497 450 766 2,141
Income Taxes 150 175 153 250 728
Equity in New Income of Unconsolidated Affiliates 22 46 37 22 127
Minorities' Interests in Earnings of Subsidiaries 30 31 14 13 88
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 270 $ 337 $ 320 $ 525 $ 1,452
- ----------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
Income available for common shareholders $ 259 $ 326 $ 309 $ 515 $ 1,409
Average shares outstanding (thousands) 325,771 326,001 327,145 327,815 326,686
Basic Earnings per Share $ 0.79 $ 1.01 $0.94 $ 1.57 $ 4.31
- ----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share
Income available for common shareholders $ 271 $ 338 $ 320 $ 526 $ 1,455
Average shares outstanding (thousands) 361,773 359,750 361,140 361,766 360,636
Diluted Earnings per Share $ 0.75 $ 0.94 $ 0.89 $ 1.46 $ 4.04
- ----------------------------------------------------------------------------------------------------------------------------
1996
Revenues $3,928 $ 4,217 $ 4,158 $ 5,075 $ 17,378
Costs and Expenses 3,544 3,758 3,775 4,357 15,434
- ----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes, Equity Income and Minorities' Interests 384 459 383 718 1,944
Income Taxes 139 164 138 259 700
Equity in New Income of Unconsolidated Affiliates 20 42 30 31 123
Minorities' Interests in Earnings of Subsidiaries 28 44 25 64 161
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 237 $ 293 $ 250 $ 426 $ 1,206
- ----------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
Income available for common shareholders $ 225 $ 283 $ 240 $ 415 $ 1,163
Average shares outstanding (thousands) 328,291 327,062 327,458 326,926 327,194
Basic Earnings per Share $ 0.69 $ 0.86 $ 0.73 $ 1.27 $ 3.55
- ----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share
Income available for common shareholders $ 236 $ 293 $ 251 $ 426 $ 1,206
Average shares outstanding (thousands) 363,890 362,968 363,543 362,872 363,140
Diluted Earnings per Share $ 0.65 $ 0.81 $ 0.68 $ 1.18 $ 3.32
- ----------------------------------------------------------------------------------------------------------------------------
Note: Recalculation of earnings per share amounts may be off by $0.01 in certain instances due to rounding.
- ----------------------------------------------------------------------------------------------------------------------------
66 X E R O X C O R P O R A T I O N
N O T E S
Reports of Management and Independent Auditors
Report of Management
Xerox Corporation management is responsible for the integrity and objectivity of
the financial data presented in this annual report. The consolidated financial
statements were prepared in conformity with generally accepted accounting
principles and include amounts based on management's best estimates and
judgments.
The Company maintains an internal control structure designed to provide
reasonable assurance that assets are safeguarded against loss or unauthorized
use and that financial records are adequate and can be relied upon to produce
financial statements in accordance with generally accepted accounting
principles. This structure includes the hiring and training of qualified people,
written accounting and control policies and procedures, clearly drawn lines of
accountability and delegations of authority. In a business ethics policy that is
communicated annually to all employees, the Company has established its intent
to adhere to the highest standards of ethical conduct in all of its business
activities.
The Company monitors its internal control structure with direct management
reviews and a comprehensive program of internal audits. In addition, KPMG Peat
Marwick LLP, independent auditors, have audited the consolidated financial
statements and have reviewed the internal control structure to the extent they
considered necessary to support their report, which follows.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, meets regularly with the independent auditors, the internal
auditors and representatives of management to review audits, financial reporting
and internal control matters, as well as the nature and extent of the audit
effort. The Audit Committee also recommends the engagement of independent
auditors, subject to shareholder approval. The independent auditors and internal
auditors have free access to the Audit Committee.
/s/ Paul A. Allaire /s/ Barry D. Romeril
Paul A. Allaire Barry D. Romeril
Chairman of the Board and Executive Vice President and
Chief Executive Officer 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, 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. 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 30,
38, 42 and 46-65 present fairly, in all material respects, the financial
position of Xerox Corporation and consolidated subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Stamford, Connecticut
January 23, 1998
X E R O X C O R P O R A T I O N 67
N O T E S
Eleven Years in Review
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per-share data) 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Per-Share Data
Earnings (loss) from continuing operations
Basic $ 4.31 $ 3.55 $ 3.46 $ 2.27 $ (0.83) $ 1.74
Diluted 4.04 3.32 3.21 2.15 (0.83) 1.53
Dividends declared 1.28 1.16 1.00 1.00 1.00 1.00
- -----------------------------------------------------------------------------------------------------------------------------
Operations
Revenues $ 18,166 $ 17,378 $ 16,588 $ 15,084 $ 14,229 $ 14,298
Research and development expenses 1,079 1,044 949 895 883 922
Income (loss) from continuing operations 1,452 1,206 1,174 794 (193) 562
Net income (loss) 1,452 1,206 (472) 794 (126) (1,020)
- -----------------------------------------------------------------------------------------------------------------------------
Financial Position
Accounts and finance receivables, net $ 14,498 $ 13,394 $ 12,389 $ 11,759 $ 10,565 $ 10,250
Inventories 2,792 2,676 2,656 2,294 2,162 2,257
Land, buildings and equipment, net 2,377 2,256 2,105 2,108 2,219 2,150
Investment in discontinued operations 3,025 4,398 4,810 7,904 8,841 8,652
Total assets 27,732 26,818 26,008 27,278 26,999 25,792
Consolidated capitalization
Short-term debt 3,707 3,536 3,274 3,159 2,698 2,533
Long-term debt 8,946 8,697 8,148 7,355 7,386 8,105
Total debt 12,653 12,233 11,422 10,514 10,084 10,638
Deferred ESOP benefits (434) (494) (547) (596) (641) (681)
Minorities' interests in equity of
subsidiaries 127 843 755 1,021 844 885
Company-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely subordinated
debentures of the Company 637 -- -- -- -- --
Preferred stock 705 721 763 832 1,066 1,072
Common shareholders' equity 4,985 4,367 3,878 4,177 3,972 3,875
Total capitalization 18,673 17,670 16,271 15,948 15,325 15,789
- -----------------------------------------------------------------------------------------------------------------------------
Selected Data and Ratios
Common shareholders of record at year-end 54,689 55,908 54,262 56,414 65,820 68,877
Book value per common share 1 $ 15.21 $ 13.42 $ 11.83 $ 12.95 $ 12.56 $ 13.40
Year-end common stock market price $ 73.88 $ 52.63 $ 45.67 $ 33.00 $ 29.38 $ 26.42
Employees at year-end 91,400 86,700 85,900 87,600 97,000 99,300
Working capital $ 3,068 $ 2,948 $2,843 $2,411 $ 2,357 $ 2,578
Current ratio 1.4 1.4 1.4 1.4 1.4 1.5
Additions to land, buildings and equipment $ 520 $ 510 $ 438 $ 389 $ 470 $ 582
Depreciation on land, buildings and equipment $ 400 $ 372 $ 376 $ 446 $ 437 $ 418
- -----------------------------------------------------------------------------------------------------------------------------
* Data that conform with the 1997 basis of presentation were not available.
1 Book value per common share is computed by dividing common shareholders' equity by outstanding common shares
plus common shares reserved for the conversion of the Xerox Canada Inc. Exchangeable Class B Stock.
- -----------------------------------------------------------------------------------------------------------------------------
68 X E R O X C O R P O R A T I O N
N O T E S
- --------------------------------------------------------------------------
1991 1990 1989 1988 1987
- --------------------------------------------------------------------------
$ 1.25 $ 1.81 $ 1.47 $ 0.38 $ 1.03
1.23 1.74 1.45 0.38 1.02
1.00 1.00 1.00 1.00 1.00
- --------------------------------------------------------------------------
$13,438 $13,210 $12,095 $11,354 $10,537
890 848 809 794 722
436 599 488 148 353
454 243 704 388 578
- --------------------------------------------------------------------------
$ 8,952 $ 8,016 $ 7,272 $ 6,109 $ 4,948
2,091 2,148 2,413 2,558 2,286
1,950 1,851 1,781 1,803 1,639
9,164 9,695 * * *
24,342 24,116 * * *
2,038 1,828 1,482 1,174 *
7,825 8,726 9,247 6,675 *
9,863 10,554 10,729 7,849 5,771
(720) (756) (785) -- --
818 832 715 806 655
-- -- -- -- --
1,078 1,081 1,081 296 442
5,140 5,051 5,035 5,371 5,105
16,179 16,762 16,775 14,322 11,973
- --------------------------------------------------------------------------
71,213 74,994 78,876 84,864 86,388
$ 18.14 $ 17.91 $ 17.86 $ 17.41 $ 17.00
$ 22.83 $ 11.83 $ 19.08 $ 19.46 $ 18.88
100,900 99,000 99,000 100,000 99,200
$ 2,282 $ 2,537 * * *
1.5 1.6 * * *
$ 467 $ 405 $ 390 $ 418 $ 347
$ 397 $ 372 $ 370 $ 369 $ 320
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Consecutive Dividends Paid to Shareholders
The Company's Board of Directors, at a special meeting held January 22, 1998,
declared a 13 percent increase in the Xerox common stock dividend to $.36 per
share effective April 1, 1998. Xerox has declared dividends to its shareholders
for 69 consecutive years and has paid consecutive quarterly dividends since
1948.
At its February 2, 1998 meeting, the Company's Board of Directors declared
the regular quarterly $1.5625 per share dividend on the Company's preferred
stock. The Series B Convertible Preferred stock was issued in July 1989 in
connection with the formation of a Xerox Employee Stock Ownership Plan.
Both the common and preferred stock dividends are payable April 1 to
shareholders of record March 6.
Xerox Common Stock Prices and Dividends
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New York Stock Exchange First Second Third Fourth
Composite Prices Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------
1997 High $ 63.25 $ 79.38 $85.13 $88.00
Low 51.50 54.75 72.69 68.00
Dividends Paid .29 .32 .32 .32
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1996 High $ 47.33 $ 54.75 $ 58.25 $57.13
Low 39.79 42.08 46.25 44.63
Dividends Paid .25 .29 .29 .29
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During 1997, Xerox common stock reached an all-time high of $88.00 on October
22 and closed at $73.88 on December 31.
Stock Listed and Traded
Xerox common stock (XRX) is listed on the New York Stock Exchange and the
Chicago Stock Exchange. It is also traded on the Boston, Cincinnati, Pacific
Coast, Philadelphia, London and Switzerland exchanges.
Notes and Debentures
9 3/4% Notes Due 2000
Trustee:
First Trust of New York, N.A.
100 Wall Street
16th Floor
New York, NY 10005
212 361-2500
Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 8038
Boston, MA 02266-8038
800 828-6396
8 1/8% Notes Due 2002
7.15% Notes Due 2004
Trustee:
Citibank, N.A.
Corp. Trust Services
111 Wall Street
New York, NY 10043
800 422-2066
Registrar and Paying Agent:
The First National Bank of Boston
P.O. Box 8038
Boston, MA 02266-8038
800 828-6396
X E R O X C O R P O R A T I O N 69