FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended: December 31, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from: ______ to ______
XEROX CORPORATION
(Exact name of registrant as specified in its charter)
1-4471
(Commission file number)
New York 16-0468020
(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 1600, Stamford, Connecticut 06904
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 968-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1 par value New York Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: (X) No: ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
( )
The aggregate market value of the voting stock of the registrant held by non-
affiliates as of February 28, 1997 was: $21,775,109,185.
(Cover Page Continued)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Class Outstanding at February 28, 1997
Common Stock, $1 Par Value 324,016,042 Shares
Documents Incorporated By Reference
Portions of the following documents are incorporated herein by reference:
Part of 10-K in
Document Which Incorporated
Xerox Corporation 1996 Annual Report to Shareholders I & II
Xerox Corporation Notice of 1997 Annual Meeting of III & IV
Shareholders and Proxy Statement (to be filed not
later than 120 days after the close of the fiscal
year covered by this report on Form 10-K).
This Form 10-K contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. The
words "anticipate," "believe," "estimate," "expect," "intends" and similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. The Company does not intend to
update these forward-looking statements.
PART I
Item 1. Business
Overview
Xerox Corporation (Xerox or the Company) is The Document Company and a leader
in the global document market, providing document solutions that enhance
business productivity. References herein to "us" or "our" refer to Xerox and
consolidated subsidiaries unless the context specifically requires otherwise.
We distribute our products in the Western Hemisphere through divisions and
wholly-owned subsidiaries. In Europe, Africa, the Middle East and parts of
Asia including Hong Kong, India and China, we distribute through Rank Xerox
Limited and related companies (Rank Xerox) in which we have an 80 percent
financial interest and The Rank Group Plc (Rank Group) has a 20 percent
financial interest. In Japan and other areas of the Pacific Rim, Australia and
New Zealand, document processing products are distributed by Fuji Xerox Co.
Ltd. (Fuji Xerox), an unconsolidated joint venture, which is equally owned by
Fuji Photo Film Company, Ltd. of Japan and Rank Xerox. On February 28, 1995,
we paid Rank Group 620 million pounds sterling, or $972 million, to increase
our financial interest in Rank Xerox to 80 percent from 67 percent.
Beginning in 1995, the results of our Insurance operations were accounted for
as discontinued operations. The Document Processing business is now the only
component of continuing operations.
Our Document Processing activities encompass developing, manufacturing,
marketing, servicing and financing a complete range of document processing
products and services designed to make offices around the world more
productive. We believe that documents will play a central role in business,
government, education and other organizations far into the future and that
efficient processing of documents offers significant opportunities for
productivity improvements. The financing of Xerox equipment is generally
carried out by Xerox Credit Corporation (XCC) in the United States and
internationally by foreign financing subsidiaries and divisions in most
countries in which we operate. Document Processing operations employed 86,700
people worldwide at year-end 1996.
In 1993, we announced a worldwide Document Processing restructuring program to
significantly reduce our cost base and to improve productivity. The activities
associated with this program have reduced employment by 14,000. We have
achieved our restructuring program objectives with pre-tax cost reductions of
approximately $350 million in 1994, $650 million in 1995 and $770 million in
1996. A portion of the savings is being reinvested to reengineer business
processes, to support the expansion in growth markets and to mitigate pricing
pressures.
Continuing Operations - Document Processing
The Document Processing Strategy
We believe that documents represent the knowledge base of an organization and
will play a dynamic and central role in business, government, education and
other organizations far into the future:
- - Increasingly, documents are being created and stored in digital electronic
form.
- - The use of electronically created paper documents will continue to
increase.
As The Document Company, we believe that by helping our customers navigate and
manage the world of documents, we can help them improve their productivity and
grow their businesses. We help customers make documents better, make better
documents, and work better with documents.
We create customer value by providing innovative document technologies,
products, systems, services and solutions that allow our customers to:
- - Move easily within and between the electronic and paper forms of documents.
- - Scan, store, retrieve, view, revise and distribute documents electronically
anywhere in the world.
- - Print or publish documents on demand, at the point closest to the need,
including those locations of our customers' customers.
- - Integrate the currently separate modes of producing documents, such as the
data center, production publishing and office environments into a seamless,
user-friendly enterprise-wide document systems network - with technology
acting as an enabler.
We have formed alliances to bring together the diverse infrastructures that
currently exist and to nurture the development of an open document services
environment to support complementary products from our partners and customers.
We are working with more than 50 industry organizations to make office,
production and electronic printing an integrated, seamless part of today's
digital work place.
Market Overview
We estimate that the global document market that we serve, excluding Japan and
the Pacific Rim countries served by Fuji Xerox, was over $100 billion in 1996
and is estimated to grow to about $175 billion in 2000.
We have traditionally had a strong position in the general office document
market, which is expected to grow at 7 percent per year, or about two to three
times real economic growth. The remaining production systems market segments,
which include production publishing and production printing, are expected to
grow at a substantially higher rate. With our many new product introductions
during this decade, our participation in the global document market has been
considerably broadened and is expected to increase. This growth will be
driven by the transfer of document production from offset printing to digital
publishing, the increase in customer requirements for network and distributed
printing, and the accelerating demand for color documents.
Xerox Focus
We believe that our competitive advantages lie in our ability to continually
improve the features and performance of our products and services based on
demonstrated customer needs; competitive pricing; our excellent reputation for
performance and service; our substantial on-going investment in research and
development; expanded sales coverage through our direct sales force, agents
and retail chains; our leadership position in the rapidly growing document
outsourcing business; maintenance of our strong market position in emerging
markets; and an expanded presence in the burgeoning home office market. As a
result, we believe we are well positioned to participate fully in the
anticipated growth in the market segments in which we compete.
Digital Products
Our digital products fall into four categories: black-and-white production
publishing, black-and-white laser printing, color laser copying and printing,
and black-and-white digital office systems.
Production Publishing
The era of production publishing was launched in 1990 when we announced the
DocuTech family which was a major step beyond our traditional reprographics
market into the publishing industry. We estimate that the black-and-white
digital production publishing market was $2 billion in 1996 and is estimated
to grow to over $4 billion in 2000. Having installed to date more than 14,000
systems all over the world, our production publishing revenues in 1996 were
$1.8 billion.
Digital production publishing technology is increasingly replacing older,
traditional short-run offset printing as customers seek improved productivity
and cost savings, faster turnaround of document preparation, and the ability
to print documents "on demand." We offer the widest range of solutions
available in the marketplace - from dial-up lines through the Internet to
state-of-the-art networks - and we are committed to expanding these print-on-
demand solutions as new technology and applications are developed.
The DocuTech family of digital publishers scans hard copy and converts it into
digital documents, or accepts digital documents directly from networked
personal computers or workstations. A user-friendly electronic cut-and-paste
workstation allows the manipulation of images or the creation of new
documents. For example, in only a few minutes, a page of word-processed text,
received over a network, can be combined with a photograph scanned from hard
copy and enhanced electronically: cropped, positioned precisely, rotated,
brightened or sharpened. Digital masters can be prepared in a fraction of the
time necessary to prepare offset plates, thereby allowing fast turnaround
time. Further time can be saved, and frequently significant shipping costs,
by transmitting electronically and printing where the documents are required.
DocuTech prints high-resolution (600 dots per inch) pages at up to 135
impressions per minute. The in-line finisher staples completed sets or
finishes booklets with covers and thermal-adhesive bindings. Because the
finished document can be stored as a digital document, hard copy documents can
be printed on demand, or only as required, thus avoiding the long production
runs and high storage and obsolescence costs associated with offset printing.
The concept of print-on-demand took another major step in 1995 when we
introduced the 6135 Production Publisher. It makes print-for-one publishing
practical; personalized publishing runs can now be as short as one or two
prints.
Laser Printing
We estimate that the high-end black-and-white laser printing market was over
$6 billion in 1996 and is expected to grow to about $10 billion in 2000. Our
revenues from high-end black-and-white laser printers grew 7 percent in 1996
to $2.1 billion.
This market has largely consisted of high-end host-connected printers and low-
end desktop printers. We expect significant future growth for robust, fully
featured printers serving multiple users on networks. This growth will be
driven by the increase in personal computers and workstations on networks,
client-server processing, accelerating growth in the demand for enterprise-
wide distributed printing, and declining electronics costs. These faster,
more reliable printers will print collated multiple sets on both sides of the
paper, insert covers and tabs, and staple or bind; but without the labor-
intensive steps of printing an original and manually preparing the documents
on copiers. In addition, documents can be printed on these printers from
remote data center computers, enabling the efficiencies of distributing
electronically and then printing, rather than printing paper documents and
then distributing them.
We have had a strong position in the high-end, high-volume electronic printing
market segment since 1977. We are well positioned to capitalize on the growth
in the electronic printing market because of both our innovative technologies
and our understanding of customer requirements for distributed printing from
desktop and host computers. Our goal is to integrate office, production and
data-center electronic printing into a single, seamless, user-friendly
network.
Xerox pioneered and continues to be a worldwide leader in electronic laser
printing, which combines computer, laser, communications and xerographic
technologies. We market a broad line of robust printers with speeds that
range from five pages per minute to the industry's fastest cut-sheet printer
at 135 pages per minute, and continuous-feed production printers at speeds up
to 420 pages per minute. Many of these printers have simultaneous interfaces
that can be connected to multiple host computers as well as local area
networks.
Breakthrough technology allows printing, in a single pass through our
highlight color printers, black-and-white plus one customer-changeable color
(as well as shades, textures and mixtures of each) at production speeds up to
92 pages per minute. Other manufacturers' highlight color printers require
additional passes to add variable color, which increase cost, reduce speed and
reliability and introduce the possibility of color misalignment.
Productivity-enhancing features include printing collated multiple sets on
both sides of the paper, inserting covers and tabs, printing checks with
magnetic ink character recognition (MICR), and stapling; all on cut sheet
plain paper, with sizes up to 11 by 17 inches.
During 1995, we significantly expanded our opportunities with the introduction
of two major new printer series that will redefine our role in the electronic
production printing industry. With the DocuPrint CF Series family, we entered
the market for very high-volume, continuous-feed printers at speeds up to 420
pages per minute. The new DocuPrint IPS Series makes the IBM Advanced
Function Presentation (AFP) architecture directly available to our production
printing customers.
Color Laser Copying and Printing
We estimate that the color laser copying and printing market was $5 billion in
1996 and is expected to grow to $14 billion in 2000. Our revenues from color
laser copiers and printers grew 59 percent in 1996 to almost $1 billion.
The use of color originals in the office is accelerating. Independent studies
have concluded that color documents are more effective in communicating
information and that decision-maker performance improves with the use of color
documents. The vast majority of industry shipments of workstations and
personal computers have color monitors, creating the need for economical,
convenient and reliable, high-quality color copying and printing.
The color market has largely consisted of ink-jet and laser copiers and
printers. Ink-jet technology offers very low equipment cost but is slow and
lacks the image quality that most customers require for important documents
such as presentations and proposals. Laser copiers and printers offer near-
offset image quality, excellent running speeds, and the accessories necessary
to produce finished sets.
We entered the color laser market in 1991 with the introduction of the Xerox
5775 color copier/printer and the 4700 printer, both of which print full-color
at 7.5 pages per minute. We have since expanded the product line with the 4900
color laser printer, which prints full color at three pages per minute; the
MajestiK color copier/printer series, which print full color at 6 pages per
minute; the XPrint family of networked desktop color laser printers, which
print at resolutions up to 600 x 600 dots per inch; and the Regal color
copier/printer, which prints full color at 9 pages per minute.
The DocuColor 40, which was introduced in early 1996, copies and prints at 40
full-color pages per minute and is the industry's fastest and most affordable
digital color document production system. In less than a full year, the
DocuColor 40 achieved a market share of approximately two-thirds of the
installations for the total production color industry and 50 percent of the
installed population of production color products.
Digital Office Systems
The volume of paper documents used in the office continues to grow. Pages per
worker per day in the US have doubled in the last decade and productivity has
been impaired by the need to manage documents on computer monitors and as
hard-copy originals.
We intend to help customers improve productivity by controlling their
documents from a common interface; managing from the desktop; eliminating
gaps, steps and devices in the work process; and moving smoothly from digital
to paper and back.
Our strategy is, first, to build from our current strength, the copier. We
know how to design and build them with superior marking, paper handling and
finishing technology. We know our customers, their requirements and how to
sell to them. During 1997, we are introducing new stand-alone digital copiers
that will have all the features of our traditional light lens copiers, plus
many advantages, including improved image quality, faster scanning, fewer
controls and significantly reduced downtime. These digital copiers will sell
for a modest premium over light lens copiers.
Second, we will upgrade these copiers to digital office systems and connect
them to local and wide-area networks, as customers require, to gain
incremental volume from computer printing and ultimately to replace desktop
printers and single purpose copiers and faxes. The upgrades will have
compelling economics versus the alternative of purchasing comparable printers
and faxes.
We estimate that the digital copier and digital office systems market was over
$1 billion in 1996 and is estimated to grow to $14 billion in 2000. In 1996,
we entered the market for digital copiers and digital office systems on a
limited basis and our revenues were almost $100 million.
Our digital office systems, known as Document Centre Systems, were introduced
in late 1995 and bring production publishing productivity to the office. This
new category of robust and extensible systems combines many capabilities -
printing, scanning, faxing and copying documents - into a single digital
resource that can be accessed from either a personal computer or on a walk-up
basis. With interactive software, a user can easily control the various steps
of the document cycle - document input, management and output - from the
desktop. The seamless integration of services and interoperability will bring
new levels of efficiency to the office. These new systems are a portal to the
network and allow office workers to navigate between digital and paper
documents, share information and knowledge, and collaborate with other members
of their work groups. The multi-tasking architecture allows Document Centre
Systems to perform multiple functions concurrently.
The two initial models in the Document Centre product family are equipped with
integrated scanners for digital copying and printing services, accessible
either from the PC desktop or from the user interface on the devices
themselves. The Document Centre System 35 is designed for work groups of up
to 50 people, and copies and prints at 35 pages per minute with resolutions of
up to 600 by 2,400 dots per inch. It provides two-sided printing and several
document finishing options. The Document Centre System 20 is targeted for
work groups of up to 20 people, and copies and prints at 20 pages per minute
with 400 dots per inch resolution. Fax services, from the desktop or at the
device, are standard.
Light Lens Copying
We estimate that the market for light lens copying was approximately $33
billion in 1996 and that it will decline to $28 billion in 2000. Our revenues
from light lens copiers declined 1 percent in 1996 to over $9.7 billion.
We market the broadest line of light lens copiers and duplicators in the
industry, ranging from a three copies-per-minute personal copier to a 135
copies-per-minute fully-featured duplicator to special copiers designed for
large engineering and architectural drawings up to 3 feet by 4 feet in size.
Many of our state-of-the-art products have improved ease of use, reliability,
copy quality, job recovery and ergonomics as well as productivity-enhancing
features, including zoom enlargement and reduction, highlight color, copying
on both sides of the paper, and collating and stapling which allow the
preparation of completed document sets.
We have a strong position with major accounts who demand a consistently high
level of service worldwide. Our competitive advantages include a focus on
customer call response times, diagnostic equipment that is state-of-the-art
and availability of 24-hour-a-day, seven-day-a-week service.
We also are increasing our leadership position in small commercial accounts,
the most competitive copier market segment, through marketing programs such as
sales through independent agents, retail outlets and trade associations like
the American Medical Association, which represents more than two million
current and prospective customers.
The market for commercial copiers is expanding rapidly in emerging countries
in Latin America, Eastern Europe, the Commonwealth of Independent States
(formerly the Soviet Union), Africa, China and India. Although 1996 revenue
growth slowed because of difficult economic environments, all of these markets
grew faster than the growth in the developed markets over the past five years.
Although we expect that light lens copiers will increasingly be replaced by
digital copiers and Document Centre Systems, we intend to continually upgrade
our light lens products to maintain a leadership position in the industry.
Other Products
We also offer a wide range of other document processing products including
ink-jet and electrostatic printers, multifunction products, facsimile
products, scanners, personal computer and workstation software, and integrated
systems solutions.
We also sell cut-sheet paper to our customers for use in their Document
Processing products.
Summary of Revenues by Product Category
The following table summarizes our revenues by major product category. The
revenues for light lens copiers and digital products include equipment and
supply sales, service and rental revenues, and finance income. These revenues
exclude the impact of foreign currency exchange rate fluctuations which are
shown combined with the revenues from paper and other products.
Year ended December 31 (in billions) 1996 1995 1994
Light lens copiers $ 9.7 $ 9.8 $ 9.7
Digital products 5.3 4.3 3.7
Paper, other products, currency 2.4 2.5 1.7
Total revenues $17.4 $16.6 $15.1
Xerox Competitive Advantages
Customer Satisfaction
Our highest priority is customer satisfaction. Our research shows that
satisfied customers are far more likely to repurchase products and that the
cost of selling a replacement product to a satisfied customer is far less than
selling to a "new" customer. We regularly survey customers on their
satisfaction, measure the results, analyze the root causes of dissatisfaction,
and take steps to correct any problems.
Because of our emphasis on customer satisfaction, we offer a Total
Satisfaction Guarantee, one of the simplest and most comprehensive offered in
any industry: "If you are not satisfied with our equipment, we will replace
it without charge with an identical model or a machine with comparable
features and capabilities." This guarantee applies for at least three years
to equipment acquired from and continuously maintained by Xerox or its
authorized agents.
Quality
We were an early pioneer in total quality management and are the only company
to have won all three of the following prestigious quality awards: the
Malcolm Baldrige National Quality Award in the United States in 1989, the
European Quality Award in 1992 and the Deming Prize in Japan, won by Fuji
Xerox in 1980. In addition, we have won top quality awards in Argentina,
Australia, Belgium, Brazil, Canada, China (Shanghai), Colombia, France,
Germany, Hong Kong, India, Ireland, Mexico, the Netherlands, Norway, Portugal,
the United Kingdom, and Uruguay. Our "Leadership Through Quality" program has
enabled us to improve productivity, accelerate the introduction of new
products, improve customer satisfaction and increase market share. Xerox
products have been consistently rated among the world's best by independent
testing organizations.
Research and Development
The Xerox research and development (R&D) program is directed toward the
development of new products and capabilities in support of our document
processing strategy. Our research scientists are deeply involved in the
formulation of corporate strategy and key business decisions. They regularly
meet with customers and have dialogues with our business divisions to ensure
they understand customer requirements and are focused on products that can be
commercialized.
In 1996, R&D expense was $1,044 million compared with $949 million in 1995 and
$895 million in 1994. We expect to increase our investment in technological
development in 1997 and over the longer term to maintain our premier position
in the rapidly changing document processing market. Our R&D spending is
strategically coordinated with Fuji Xerox. The R&D investment by Fuji Xerox
was $537 million in 1996, bringing the total to $1.6 billion.
Marketing
Xerox document processing products are principally sold directly to users by
our worldwide sales force of approximately 13,000 employees. We also market
through a network of independent agents, dealers, distributors and value-added
resellers and have arrangements with U.S. retail marketing channels, including
Sears, Office Depot, Office Max, Service Merchandise, Staples, Wal-Mart,
Costco, The Wiz, Price Club and MicroAge, to market low-end products not
generally suited for distribution through our direct sales force. These
products are now sold through approximately 3,000 retail stores.
In 1991, Xerox International Partners (XIP), a 51 percent-owned partnership,
was formed between Xerox and Fuji Xerox to supply printer engines to original
equipment manufacturers. XIP has also contracted to supply printer engines to
resellers.
Service
We have a worldwide service force of approximately 25,000 employees. In our
opinion, this direct service force is a significant competitive advantage:
the service force is continually trained on our new products and its
diagnostic equipment is state-of-the-art. 24-hour-a-day, seven-day-a-week
service is available in most metropolitan areas in the United States. We are
able to guarantee a consistent level of service nationwide and worldwide
because our service force is not focused exclusively on metropolitan areas and
it does not rely on independent local dealers for service.
Revenues
Our total document processing revenues were $17.4 billion in 1996, of which 49
percent were generated in the United States, 31 percent in Europe, and 20
percent in the remainder of the world (excluding the unconsolidated $8.1
billion of Fuji Xerox revenues in Japan and much of the Pacific Rim).
Revenues from supplies, paper, service, rentals, facilities management and
other revenues, and income from customer financing represented 66 percent of
total revenues in 1996. Because these revenues are derived from the installed
base of equipment and are therefore less volatile than equipment sales
revenues, they provide significant stability to overall revenues. Growth in
these revenues is primarily a function of the growth in our installed
population of equipment, usage and pricing. The balance of our revenues is
derived from equipment sales. These sales, which drive the non-equipment
revenues, depend on the flow of new products and are more affected by economic
cycles.
Most of our customers have their equipment serviced by and use supplies sold
by us. The market for cut-sheet paper is highly competitive and revenue
growth is significantly affected by pricing. Our strategy is to charge a
spread over mill wholesale prices. After a number of years of decline, rental
revenues were essentially flat during 1996, 1995, and 1994.
Our document outsourcing business provides printing, publishing, duplicating
and related services at more than 4,000 customer locations in 36 countries,
including legal and accounting firms, financial institutions, insurance
agencies and manufacturing companies. Our revenues from these services, which
are largely in the U.S., increased 39 percent to $1.3 billion in 1996.
We offer our document processing customers financing of their purchases of
Xerox equipment primarily through XCC in the United States, largely by wholly-
owned financing subsidiaries in Europe, and through divisions in Canada and
Latin America.
While competition for this business from banks and other finance companies
remains extensive, we actively market our equipment financing services on the
basis of customer service, convenience and competitive rates. Approximately
80 percent of U.S. equipment sales and 75 percent of European equipment sales
are financed through Xerox. Over time, the growth rate of financing income is
expected to correspond to the growth rate of equipment sales and trends in
interest rates.
International Operations
Our international operations account for 51 percent of Document Processing
revenues. Our largest interest outside the United States is Rank Xerox.
Marketing and manufacturing operations are also conducted through joint
ventures in India and China. Marketing and manufacturing in the Americas
Customer Operations organization are conducted through subsidiaries or
distributors in 40 countries. Fuji Xerox develops, manufactures and
distributes document processing products in Japan and other areas of the
Pacific Rim, Australia and New Zealand.
Our financial results by geographical area for 1996, 1995 and 1994, which are
presented on pages 29, 30, and 52 of the Company's 1996 Annual Report to
Shareholders, are hereby incorporated by reference in this document in partial
answer to this item.
Discontinued Operations - Insurance and Other Financial Services
The discussion in the first thirteen paragraphs under the caption
"Discontinued Operations - Insurance and Other Financial Services" on pages 43
through 45 and under the captions "Other Financial Services" and "Third-Party
Financing and Real-Estate" on page 47 set forth under the caption "Financial
Review" in the Company's 1996 Annual Report to Shareholders is hereby
incorporated by reference in this document in partial answer to this item.
As used herein, the "Remaining insurance companies" include Coregis Group,
Inc., Crum & Forster Holdings, Inc., Industrial Indemnity Holdings, Inc.,
Westchester Specialty Group, Inc., and The Resolution Group, Inc. ("TRG").
Property and Casualty Reserves
Overview
Losses from claims and related claims handling and legal expense comprise the
majority of costs from providing insurance products. Therefore, unpaid losses
and loss expenses are generally the largest liability on a property and
casualty insurer's balance sheet. However, because insurance coverage is
provided for situations in which the certainty of loss cannot be predicted,
ultimate losses which will be incurred on policies issued are difficult to
estimate and are subject to constant reevaluation as new information becomes
available. The Remaining insurance companies, like most insurance companies
utilize a variety of loss trending and analysis techniques to estimate
anticipated ultimate losses and the time frames when claims are likely to be
reported and paid. Loss development patterns vary significantly by type of
insurance coverage and are affected by the economic, social, judicial,
weather-related and geological conditions in different geographic areas.
In order to moderate the potential impact of unusually severe or frequent
losses, the Remaining insurance companies cede (i.e., transfer) through
reinsurance mechanisms a portion of their gross policy premiums to reinsurers
in exchange for the reinsurer's agreement to share a portion of the covered
losses. Although the ceding of insurance does not discharge the original
insurer from its primary liability to its policyholder, the reinsurer that
accepts the risk assumes an obligation to the original insurer. The ceding
insurer retains a contingent liability with respect to reinsurance ceded to
the extent that the reinsurer might not be able to meet its obligations.
The net liability retained by the Remaining insurance companies on individual
risks varies by product and by the nature of the risk. Insured liabilities
can be reinsured either by treaty, wherein reinsurers agree in advance to
provide coverage above retained limits or for a specified percentage of losses
attributable to specific products, or by facultative arrangements, wherein
reinsurance is provided for individual risks based on individual negotiations.
Reserve provisions are established by the Remaining insurance companies to
provide for the estimated level of claim payments which will be made under the
policies they write. Over the policy period, as premiums are earned, a
portion of the premiums is set aside as gross loss and loss expense reserves
for incurred but not reported ("IBNR") losses in anticipation of claims which
will be incurred, net of anticipated salvage and subrogation. IBNR reserves
also include amounts to supplement case reserves, when established, to provide
for potential further loss development. In addition, gross reserves are
established for internal and external loss expenses associated with handling
the claims inventory. These expenses are characterized as "allocated loss
expenses" when they are attributable to a specific claim or series of claims
and "unallocated loss expenses" when not similarly attributable. When a claim
is reported, case reserves are established on the basis of all pertinent
information available at the time. Legal defense costs that can be assigned
to a related claim file and can be included as part of the loss under the
contract are generally established as part of the gross case reserve.
Reinsurance recoverables on gross reserves are recorded for amounts that are
anticipated to be recovered from reinsurers and are determined in a manner
consistent with the liabilities associated with the reinsured policies. Net
reserves are gross reserves less anticipated reinsurance recoverables (net of
uncollectible reinsurance reserves)and salvage and subrogation on those
reserves.
The effect of inflation on gross reserves is considered implicitly through
utilization of historical paid loss and loss expense development when
estimating the liability for unpaid losses and loss expenses by using
actuarial methods. The effect of inflation on individual case basis reserves
reflects the direction of economic price levels.
Estimates of the ultimate value of unpaid claims are based in part on
historical data that reflect past inflation, as well as management's
assessment of severity and frequency, industry trends and related costs.
Monitoring of Insurance Reserves
Gross and net reserves for business written in both current and prior years is
continually monitored by the Remaining insurance companies, and senior
management of Talegen Holdings, Inc. ("Talegen") reviews these reserves on a
periodic basis. Each of the Remaining insurance companies employs experienced
actuarial staff, who as fellows of the Casualty Actuarial Society and members
of the American Academy of Actuaries, are qualified loss reserve specialists
who perform regular actuarial reviews of claim development and resulting
reserve requirements. On a semi-annual or more frequent basis, detailed
analyses of gross reserves, ceded reserves and reserves net of reinsurance are
conducted by line of business and accident year. Actual claims activity is
monitored quarterly and compared to expected levels to detect variances or
trends indicating changes in reserve requirements. When unique or special
reserve issues are identified, the Remaining insurance companies and/or
Talegen routinely seek additional outside expertise from a variety of
consulting actuaries. In addition, at year end, the reserves for each of the
Remaining insurance companies are independently analyzed and certified by an
outside actuary appointed by the Remaining insurance company's Board of
Directors.
Overall reserve levels are affected by the types of and amounts of insurance
coverage currently being written and the trends developing from newly reported
claims and claims which have been paid and closed. Adjustments are made to
reserves in the period they can be reasonably estimated to reflect evolving
changes in loss development patterns and various other factors. Such factors
include increased damage awards by the courts, known changes in judicial
interpretations of legal liability for asbestos, environmental and other
latent exposure claims and changes in judicial interpretation of the scope of
coverage provided by general liability and umbrella policies. Many of these
judicial interpretations are still evolving. Generally, the greater the
projected time to settlement, the greater the complexity of estimating
ultimate claim costs and the more likely that such estimates will change as
new information becomes available.
Use of Reinsurance and Management of Reinsurance Collection
Most of the Remaining insurance companies made significant use of reinsurance
during the 1970's and early 1980's. Since that time, the Remaining insurance
companies have generally increased the portion of business they retain while
reducing the number of reinsurers used for their reinsurance contracts. During
1996 and 1995, excluding the reinsurance ceded to pools, associations and
similar organizations, 88% and 85%, respectively, of total written premiums
ceded to reinsurers were placed with approximately 35 reinsurers.
Talegen and the Remaining insurance companies have reinsurance security
committees composed of senior management who approve those reinsurers with
whom Talegen and the Remaining insurance companies will do business. The
criteria under which such approvals are granted have become increasingly
restrictive over the past several years.
The potential uncollectibility of ceded reinsurance has been an industry-wide
issue. With respect to the management of recoveries due from reinsurers, the
Remaining insurance companies operate under common guidelines for the early
identification of potential collection problems and they utilize the services
of the Resolution Reinsurance Service Company (a subsidiary of TRG) which
employs a specialized group of work-out experts to aid in the more
complicated cases. This unit aggressively pursues collection of reinsurance
recoverables through mediation, arbitration and, where necessary, litigation
to enforce the Remaining insurance companies contractual rights against
reinsurers. Nevertheless, periodically, it becomes necessary for management
to adjust reserves for potential losses to reflect their ongoing evaluation of
developments which affect recoverability, including the financial difficulties
that some reinsurers can experience. Based upon the review of financial
condition and assessment of other available information, the Remaining
insurance companies maintain a provision for uncollectible amounts due from
reinsurers. The balance of reinsurance recoverable is considered to be valid
and collectible.
Ridge Re Coverage
Under the terms of the reinsurance coverage provided by Ridge Reinsurance
Limited ("Ridge Re") and subject to the limits established for each of the
Remaining insurance companies, Ridge Re will reimburse the Remaining insurance
companies for 85% of net aggregate increases, if any, to ultimate net unpaid
loss and loss expenses and uncollectible reinsurance reserves which develop on
its 1992 and prior accident years as carried at December 31, 1992 (net of all
salvage, subrogation and other recoverables). At December 31, 1996, Ridge Re
recognized approximately $650 million of the $1,245 million excess of loss
reinsurance coverage estimated to be required based on actuarial projections.
The Ridge Re coverage is guaranteed by Xerox Financial Services, Inc., and,
subject to certain commutation provisions, remains in effect until all 1992
and prior accident year claims are paid. Cessions to Ridge Re, while
beneficial to the Remaining insurance companies, do not result in a benefit to
the Insurance segment or consolidated Xerox accounts.
Statutory and GAAP Reporting of Net Unpaid Losses and Loss Expenses
The liability for net unpaid losses and loss expenses required by generally
accepted accounting principles ("GAAP") differs from the liability reported in
accordance with Statutory Accounting Practices ("SAP"). Because not all GAAP
adjustments to the recorded SAP liability can be associated with subsequent
developments of the liabilities on other than an arbitrary basis, developments
on the loss and loss expense reserve development table are prepared in
accordance with SAP.
Loss Development Data
In Note 10 on pages 52 through 55 of the Company's 1996 Annual Report to
Shareholders, which is hereby incorporated by reference in this document in
partial answer to this item, the net liability for unpaid losses and loss
expenses is reconciled for each of the years in the three-year period ended
December 31, 1996. Included therein are current year and prior year
development data.
As a result of claim activity during 1996 and after reflection of prior
experience, it is management's judgment that the total net liability for
unpaid losses and loss expenses at December 31, 1996 is reasonably stated.
The loss and loss expense reserve development table illustrates the
development of statutory balance sheet liabilities for 1986 through 1996 for
the Remaining insurance companies before cessions to Ridge Re. Net unpaid
loss and loss expense reserves and accident year development have been
restated to exclude the reserves of Constitution Reinsurance Corporation and
Viking Insurance Company of Wisconsin, which were sold during 1995. The first
line of the table is the estimated GAAP liability for unpaid losses and loss
expenses, net of reinsurance recoverable, recorded at the balance sheet date
for each year. The second line on the table reconciles the GAAP liability for
net unpaid losses and loss expenses to the SAP liability for unpaid losses and
loss expenses. The lower section of the table shows the updated amount of the
previously recorded SAP liability based on experience as of the close of each
succeeding year.
The estimate for unpaid losses and loss expenses is increased or decreased as
more information becomes known about the claims until all claims are settled.
Deficiencies or redundancies represent aggregate changes in estimates, as
calculated on a statutory basis, for all prior calendar years. The effect as
calculated under GAAP on income for the latest three years is shown in Note 10
on pages 52 through 55 of the Company's 1996 Annual Report to Shareholders,
which is hereby incorporated by reference in this document in partial answer
to this item. These changes in estimates have been reflected in the Remaining
insurance companies' calendar year operating results. Because the Remaining
insurance companies recognize adjustments to reserves for changes in loss
development patterns and various other factors, such as social and economic
trends and known changes in judicial interpretation of legal liability in the
period in which they become known, it is not appropriate to extrapolate future
deficiencies or redundancies based solely on this table.
Loss and Loss Expense Reserve Development
Year ended December 31 (in millions) 1986 1987 1988 1989 _
Liability for unpaid losses and loss
expenses - GAAP (net of reinsurance) $ 4,127 $ 4,824 $ 5,200 $ 5,637
GAAP to SAP differences (256) (241) (208) (215)
Liability for unpaid losses and loss
expense - SAP (net of reinsurance) 3,871 4,583 4,992 5,422
Paid (cumulative) as of:
End of year - - - -
One year later 1,187 1,323 1,246 1,560
Two years later 2,080 2,188 2,269 2,635
Three years later 2,701 2,933 3,043 3,690
Four years later 3,224 3,472 3,854 4,018
Five years later 3,611 4,150 4,053 4,508
Six years later 4,180 4,316 4,432 4,887
Seven years later 4,278 4,571 4,751 5,159
Eight years later 4,476 4,859 4,985
Nine years later 4,720 5,066
Ten years later 4,904
Liability estimated as of:
End of year 3,871 4,583 4,992 5,422
One year later 3,893 4,681 5,052 5,611
Two years later 4,314 4,870 5,247 5,591
Three years later 4,527 5,168 5,171 6,408
Four years later 4,928 5,073 5,953 6,329
Five years later 4,803 5,832 5,903 6,428
Six years later 5,495 5,854 6,029 6,770
Seven years later 5,546 5,959 6,381 7,049
Eight years later 5,673 6,314 6,666
Nine years later 6,045 6,598
Ten years later 6,322
Deficiency $(2,451) $(2,015) $(1,674) $(1,627)
End of Year:
Gross liability
Reinsurance recoverable
Net liability
One Year Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Two Years Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Three Years Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Four Years Later:
Gross re-estimated liability
Re-estimated recoverable
Net re-estimated liability
Gross cumulative deficiency
1990 1991 1992 1993 1994 1995 1996 _
$ 5,848 $ 5,743 $ 6,109 $ 5,972 $ 5,618 $ 6,471 $ 6,327
(287) (299) (370) (254) (216) (827) (625)
5,561 5,444 5,739 5,718 5,402 5,644 5,702
- - - - - - -
1,542 1,721 1,080 1,303 1,242 1,173
2,882 2,518 2,153 2,264 2,142
3,412 3,381 2,939 2,969
4,062 4,008 3,480
4,563 4,418
4,894
5,561 5,444 5,739 5,718 5,402 5,644 5,702
5,658 6,340 5,734 5,711 5,944 5,903
6,484 6,274 5,771 6,216 6,165
6,370 6,326 6,230 6,410
6,429 6,747 6,401
6,803 6,957
7,057
$(1,496) $(1,513) $ (662) $ (692) $ (763) $ (259) $ -
$ 9,469 $ 8,526 $ 7,849 $ 8,143 $ 8,337
3,730 2,808 2,447 2,499 2,635
5,739 5,718 5,402 5,644 5,702
9,444 8,590 8,616 8,753
3,710 2,879 2,672 2,850
5,734 5,711 5,944 5,903
9,482 9,316 9,154
3,711 3,100 2,989
5,771 6,216 6,165
10,188 9,810
3,958 3,400
6,230 6,410
10,649
4,248
6,401
$(1,180) $(1,284) $(1,305) $ (610) $ -
Asbestos, Environmental and Other Latent Exposure Claims
The discussion under the captions "Latent Exposures" and "Reserves for the
Remaining Insurance Companies" on pages 46 through 47 in the Company's 1996
Annual Report to Shareholders is hereby incorporated by reference in this
document in partial answer to this item.
Item 2. Properties
The Company owns a total of eleven principal manufacturing and engineering
facilities and leases an additional such facility. The domestic facilities
are located in California, New York and Oklahoma, while the international
facilities are located in Brazil, Canada, England, France, Holland and Mexico.
The Company also has four principal research facilities; two are owned
facilities in New York and Canada, and two are leased facilities in California
and France.
In addition, within the Company, there are numerous facilities which encompass
general offices, sales offices, service locations and distribution centers.
The principal owned facilities are located in the United States, England, and
Mexico. The principal leased facilities are located in the United States,
Brazil, Canada, England, Mexico, France, Germany and Italy.
The Company's Corporate Headquarters facility, located in Connecticut, is
leased; a training facility, located in Virginia, is owned by the Company. In
the opinion of Xerox management, its properties have been well maintained, are
in sound operating condition and contain all the necessary equipment and
facilities to perform the Company's functions.
Item 3. Legal Proceedings
The information set forth under Note 15 "Litigation" on pages 63-64 of the
Company's 1996 Annual Report to Shareholders is incorporated by reference in
this document in answer to this item.
In the action by the independent service organizations, in a revised expert
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.
On July 21, 1993, the Company was notified that it had been named as a
respondent by the United States Environmental Protection Agency ("EPA") in a
unilateral Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") section 106 (a) Administrative Order regarding the Metcoa
Radiation Site in Pulaski, PA. The Order directs the Company and 21 other
companies to perform remedial work at the Site. The order alleges that these
parties are jointly and severally liable to perform the work. Under CERCLA,
a respondent that does not comply with the Order could be subject to a civil
penalty of $25,000 for each day of noncompliance and be liable for punitive
damages at least equal to treble the EPA's cost of cleaning up the Site. The
Company denies that it is liable to perform the work described in the Order.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information set forth under the following captions on the indicated pages
of the Company's 1996 Annual Report to Shareholders is hereby incorporated by
reference in this document in answer to this Item:
Caption Page No.
Stock Listed and Traded 71
Dividends and Stock Prices 71
Eleven Years in Review - Common Shareholders
of Record at Year-End 70 and 71
Item 6. Selected Financial Data
The following information, as of and for the five years ended December 31,
1996, as set forth and included under the caption "Eleven Years in Review" on
pages 70 and 71 of the Company's 1996 Annual Report to Shareholders, is hereby
incorporated by reference in this document in answer to this Item:
Revenues
Income (loss) from continuing operations
Primary earnings (loss) per common share from continuing operations
Total assets
Long-term debt
Preferred stock
Dividends declared
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under the caption "Our Results of Operations and
Financial Condition" under the caption "Financial Review" on pages 27-34, 36-
41, and 43-47 of the Company's 1996 Annual Report to Shareholders other than
the pictures and captions to the pictures is hereby incorporated by reference
in this document in answer to this Item.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of Xerox Corporation and subsidiaries
and the notes thereto and the report thereon of KPMG Peat Marwick LLP,
independent auditors, which appear on pages 26, 35, 42, 48-67, and 69 of the
Company's 1996 Annual Report to Shareholders, are hereby incorporated by
reference in this document in answer to this Item. In addition, also included
is the quarterly financial data included under the caption "Quarterly Results
of Operations (Unaudited)" on page 68 of the Company's 1996 Annual Report to
Shareholders.
The financial statement schedule required herein is filed as "Financial
Statement Schedules" pursuant to Item 14 of this Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
The information set forth in "Proposal 1--Election of Directors" in the
Company's Notice of the 1997 Annual Meeting of Shareholders and Proxy
Statement, to be filed pursuant to Regulation 14A not later than 120 days
after the close of the fiscal year covered by this report on Form 10-K, is
hereby incorporated by reference in this document in answer to this Part III.
Executive Officers of Xerox
The following is a list of the executive officers of Xerox, their current
ages, their present positions and the year appointed to their present
positions. There are no family relationships between any of the executive
officers named.
Each officer is elected to hold office until the meeting of the Board of
Directors held on the day of the next annual meeting of shareholders, subject
to the provisions of the By-Laws.
Year
Appointed
to Present Officer
Name Age Present Position Position Since_
Paul A. Allaire* 58 Chairman of the Board, Chief 1991 1983
Executive Officer and Chairman
of the Executive Committee
William F. Buehler 57 Executive Vice President and 1995 1991
Chief Staff Officer
A. Barry Rand 52 Executive Vice President, 1992 1986
Operations
Barry D. Romeril 53 Executive Vice President and 1993 1993
Chief Financial Officer
Stuart B. Ross 59 Executive Vice President; 1990 1979
Chairman and Chief Executive
Officer, Xerox Financial
Services, Inc.
Allan E. Dugan 56 Senior Vice President, 1992 1990
Corporate Strategic Services
John A. Lopiano 58 Senior Vice President; President, 1995 1993
Production Systems Group
Mark B. Myers 58 Senior Vice President, Corporate 1992 1989
Research and Technology
David R. Myerscough 56 Senior Vice President; 1996 1989
Corporate Business Strategy
* Member of Xerox Board of Directors.
Executive Officers of Xerox, Continued
Year
Appointed
to Present Officer
Name Age Present Position Position Since_
Richard S. Paul 55 Senior Vice President and 1992 1989
General Counsel
Brian E. Stern 49 Senior Vice President; President, 1996 1993
Office Document Products Group
Eunice M. Filter 56 Vice President, Treasurer 1990 1984
and Secretary
Philip D. Fishbach 55 Vice President and Controller 1995 1990
James H. Lesko 45 Vice President; President, 1996 1993
Desktop Products Group
Carlos Pascual 51 Vice President; President, 1995 1994
U.S. Customer Operations
Each officer named above, with the exception of Barry D. Romeril, has been an
officer or an executive of Xerox or its subsidiaries for at least the past
five years.
Prior to joining Xerox in 1993, Mr. Romeril had been Group Finance Director at
British Telecommunications Plc since 1988. From 1987 to 1988 he was Finance
Director at BTR, Plc.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) and (2) The financial statements, independent auditors' reports
and Item 8 financial statement schedules being filed herewith or
incorporated herein by reference are set forth in the Index to Financial
Statements and Schedule included herein.
(3) The exhibits filed herewith or incorporated herein by reference are
set forth in the Index of Exhibits included herein.
(b) A Current Report on Form 8-K dated October 31, 1996 reporting Item 5
"Other Events" was filed during the last quarter of the period covered
by this Report.
(c) The management contracts or compensatory plans or arrangements listed
in the Index of Exhibits that are applicable to the executive officers
named in the Summary Compensation Table which appears in Registrant's
1997 Proxy Statement are preceded by an asterisk (*).
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
XEROX CORPORATION
By: /s/ Barry D. Romeril_________
Executive Vice President and
Chief Financial Officer
March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
March 27, 1997
Signature Title
Principal Executive Officer:
Paul A. Allaire /s/ Paul A. Allaire______________
Chairman, Chief Executive Officer
and Director
Principal Financial Officer:
Barry D. Romeril /s/ Barry D. Romeril_____________
Executive Vice President and
Chief Financial Officer
Principal Accounting Officer:
Philip D. Fishbach /s/ Philip D. Fishbach___________
Vice President and Controller
Directors:
/s/ B. R. Inman Director
/s/ Yotaro Kobayashi Director
/s/ Ralph S. Larsen Director
/s/ John D. Macomber Director
/s/ George J. Mitchell Director
/s/ N. J. Nicholas, Jr. Director
/s/ John E. Pepper Director
/s/ Martha R. Seger Director
/s/ Thomas C. Theobald Director
Report of Independent Auditors
To the Board of Directors and Shareholders of Xerox Corporation
Under date of January 23, 1997, we reported on the consolidated balance sheets
of Xerox Corporation and consolidated subsidiaries as of December 31, 1996 and
1995 and the related consolidated statements of income and cash flows for each
of the years in the three-year period ended December 31, 1996, as contained in
the Xerox Corporation 1996 Annual Report to Shareholders on pages 26, 35, 42,
and 48-67. These consolidated financial statements and our report thereon are
incorporated by reference in the 1996 Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
January 23, 1997
Index to Financial Statements and Schedule
Financial Statements:
Consolidated statements of income of Xerox Corporation and subsidiaries for
each of the years in the three-year period ended December 31, 1996
Consolidated balance sheets of Xerox Corporation and subsidiaries as of
December 31, 1996 and 1995
Consolidated statements of cash flows of Xerox Corporation and subsidiaries
for each of the years in the three-year period ended December 31, 1996
Notes to consolidated financial statements
Report of Independent Auditors
Quarterly Results of Operations (unaudited)
The above consolidated financial statements, related notes, report
thereon and the quarterly results of operations which appear on pages
26, 35, 42, 48-67, 68, and 69 of the Company's 1996 Annual Report to
Shareholders are hereby incorporated by reference in this document.
Commercial and Industrial (Article 5) Schedule:
II - Valuation and qualifying accounts
All other schedules are omitted as they are not applicable, or the information
required is included in the financial statements or notes thereto.
SCHEDULE II
Valuation and Qualifying Accounts
Year ended December 31, 1996, 1995 and 1994
Additions
Balance at charged to Deductions, Balance
beginning costs and net of at end
(in millions) of period expenses recoveries of period
1996
Allowance for Losses on:
Accounts Receivable $ 90 $ 73 $ 71 $ 92
Finance Receivables 322 186 161 347
Deferred Tax Valuation
Allowance 20 - 20 -
$432 $259 $252 $439
1995
Allowance for Losses on:
Accounts Receivable $ 79 $ 81 $ 70 $ 90
Finance Receivables 320 154 152 322
Deferred Tax Valuation
Allowance 34 - 14 20
$433 $235 $236 $432
1994
Allowance for Losses on:
Accounts Receivable $ 62 $ 70 $ 53 $ 79
Finance Receivables 300 132 112 320
Deferred Tax Valuation
Allowance 34 - - 34
$396 $202 $165 $433
Index of Exhibits
Document and Location
(3) (a) Restated Certificate of Incorporation of Registrant filed by the
Department of State of New York on October 29, 1996.
Incorporated by reference to Exhibit 3(a)(1) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30,
1996.
(b) By-Laws of Registrant, as amended through May 29, 1991.
Incorporated by reference to Exhibit 3(b)(2) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1991.
(4) (a) Indenture dated as of January 15, 1990 between Registrant and
BankAmerica National Trust Company (as successor in interest to
Security Pacific National Trust Company (New York)) relating
to unlimited amounts of debt securities which may be issued
from time to time by Registrant when and as authorized by or
pursuant to a resolution of Registrant's Board of Directors.
Incorporated by reference to Exhibit 4(a) to Registration No.
33-33150.
(b) Indenture dated as of December 1, 1991 between Registrant and
Citibank, N.A. relating to unlimited amounts of debt securities
which may be issued from time to time by Registrant when and
as authorized by or pursuant to a resolution of Registrant's
Board of Directors.
Incorporated by reference to Exhibit 4(a) to Registration No.
33-44597.
(c) Indenture dated as of September 20, 1996 between Registrant and
Citibank, N.A. relating to unlimited amounts of debt securities
which may be issued from time to time by Registrant when and as
authorized by or pursuant to a resolution of Registrant's Board
of Directors.
Incorporated by reference to Exhibit 4(a) to Registration
Statement No. 333-13179.
(d) Indenture dated as of March 1, 1988, as supplemented by the First
Supplemental Indenture dated as of July 1, 1988, between Xerox
Credit Corporation (XCC) and The First National Bank of Chicago
relating to unlimited amounts of debt securities which may be
issued from time to time by XCC when and as authorized by XCC's
Board of Directors or the Executive Committee of the Board of
Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-20640 and to Exhibit 4(a)(2) to XCC's Current
Report on Form 8-K dated July 13, 1988.
(e) Indenture dated as of March 1, 1989, as supplemented by the First
Supplemental Indenture dated as of October 1, 1989, between XCC
and Citibank, N.A. relating to unlimited amounts of debt
securities which may be issued from time to time by XCC when and
as authorized by XCC's Board of Directors or Executive Committee
of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-27525 and to Exhibit 4(a)(2) to XCC's
Registration Statement No. 33-31367.
(f) Indenture dated as of October 1, 1991, as supplemented by the
First Supplemental Indenture dated as of May 1, 1992, between XCC
and Citibank, N.A. relating to unlimited amounts of debt
securities which may be issued from time to time by XCC when and
as authorized by XCC's Board of Directors or Executive Committee
of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-43470.
(g) Indenture dated as of May 1, 1994, between XCC and State Street
Bank and Trust Company (formerly, The First National Bank of
Boston) relating to unlimited amounts of debt securities which may
be issued from time to time by XCC when and as authorized by XCC's
Board of Directors or Executive Committee of the Board of
Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-53533 and to Exhibits 4(a)(1) and 4(a)(2) to
XCC's Registration Statement No. 33-43470.
(h) Indenture dated as of October 2, 1995, between XCC and State
Street Bank and Trust Company relating to unlimited amounts of
debt securities which may be issued from time to time by XCC when
and as authorized by XCC's Board of Directors or Executive
Committee of the Board of Directors.
Incorporated by reference to Exhibit 4(a) to XCC's Registration
Statement No. 33-61481.
(i) Instruments with respect to long-term debt where the total amount
of securities authorized thereunder does not exceed 10% of the
total assets of the Registrant and its subsidiaries on a
consolidated basis have not been filed. The Registrant agrees to
furnish to the Commission a copy of each such instrument upon
request.
(10) The management contracts or compensatory plans or arrangements
listed below that are applicable to the executive officers named
in the Summary Compensation Table which appears in Registrant's
1997 Proxy Statement are preceded by an asterisk (*).
*(a) Registrant's 1976 Executive Long-Term Incentive Plan, as amended
through February 4, 1991.
Incorporated by reference to Exhibit (10)(a) to the Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1991.
*(b) Registrant's 1991 Long-Term Incentive Plan, as amended through
July 15, 1991.
Incorporated by reference to Exhibit 10(b) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1991.
(c) Registrant's 1996 Non-Employee Director Stock Option Plan.
Incorporated by reference to Registrant's Notice of the 1996
Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A.
*(d) Description of Registrant's Annual Performance Incentive Plan.
*(e) Registrant's 1993 Restatement of Unfunded Retirement Income
Guarantee Plan.
Incorporated by reference to Exhibit 10(e) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993.
*(f) 1996 Restatement of Registrant's Unfunded Supplemental Retirement
Plan.
(g) Registrant's 1981 Deferred Compensation Plan, 1985
Restatement, as amended through April 2, 1990.
Incorporated by reference to Exhibit 10(h) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1990.
(h) 1996 Amendment and Restatement of Registrant's Restricted Stock
Plan for Directors.
Incorporated by reference to Registrant's Notice of the 1996
Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A.
*(i) Form of severance agreement entered into with various executive
officers.
Incorporated by reference to Exhibit 10(j) to Registrant's
Quarterly Report on Form 10-Q for the Quarter ended June 30,
1989.
*(j) Registrant's Contributory Life Insurance Plan.
Incorporated by reference to Exhibit 10(s) to Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1989.
(k) 1996 Amendment and Restatement of Registrant's 1989 Deferred
Compensation Plan for Directors.
Incorporated by reference to Exhibit 10(l) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
*(l) 1993 Amendment and Restatement of Registrant's 1989 Deferred
Compensation Plan for Executives.
*(m) Executive Performance Incentive Plan.
Incorporated by reference to Registrant's Notice of the 1995
Annual Meeting of Shareholders and Proxy Statement pursuant to
Regulation 14A.
(11) Statement re computation of per share earnings.
(12) Computation of Ratio of Earnings to Fixed charges.
(13) Pages 26 through 71 of Registrant's 1996 Annual Report
to Shareholders.
(21) Subsidiaries of the Registrant.
(23) Consent of KPMG Peat Marwick LLP.
(27) Financial Data Schedule (in electronic form only).
EXHIBIT 10(d)
Annual Performance Incentive Plan
Under the Annual Performance Incentive Plan, executive officers of the Company
may be entitled to receive performance related cash payments provided that
annual, Committee-established performance objectives are met. At the beginning
of the year, the Executive Compensation and Benefits Committee approves for
each officer not participating in the Executive Performance Incentive Plan, an
annual incentive target and maximum opportunity expressed as a percentage of
annual base salary. The Committee also establishes overall Document
Processing threshold, target and maximum measures of performance and
associated payment schedules. For 1996, the performance measures are profit
before tax (35%), revenue growth (20%), cash generation (15%), customer
satisfaction (15%), and employee satisfaction (15%). Additional goals are
also established for each officer that include business unit specific and/or
individual performance goals and objectives. The weights associated with each
business unit specific or individual performance goal and objective used vary
and range from 10 percent to 55 percent of the total. Actual performance
payments are subject to approval by the Committee following the end of the
year.
EXHIBIT 10(f)
As amended through December 9, 1996
1996 Restatement
of
XEROX CORPORATION
UNFUNDED SUPPLEMENTAL RETIREMENT PLAN
XEROX CORPORATION, a New York corporation having its principal executive
office in the City of Stamford, County of Fairfield and State of Connecticut,
hereby adopts the XEROX CORPORATION UNFUNDED SUPPLEMENTAL RETIREMENT PLAN
effective on the Effective Date as follows:
Restatement December 9, 1996
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UNFUNDED SUPPLEMENTAL RETIREMENT PLAN
Section 1. Plan Name
The plan name is the Xerox Corporation Unfunded Supplemental Retirement Plan
(the "Plan").
Section 2. Effective Date
The original effective date of the Plan is June 30, 1982. The Plan was
restated on three previous occasions, effective February 4, 1985, January 1,
1990 and December 6, 1993. This Restatement is effective as of December 9,
1996.
Section 3. Purpose of the Plan
The Plan is designed to address special circumstances involved in the
retirement of executives.
Section 4. Covered Employees
The following employees of the Company are covered by the Plan:
A. All employees who were corporate officers of Xerox Corporation (the
"Company") at grade level 25 and above on the original effective date of the
Plan (the "Grandfathered Officers").
B. All employees who were corporate officers at grades 23 or 24 on the
original effective date of the Plan or who first become corporate officers of
the Company at grade level 23 and above after the original effective date of
the Plan and do not fall within categories D through G below (the "Officers").
C. Certain employees who received a letter dated September 2, 1982 from
David T. Kearns regarding Executive Retirement Guidelines (the "Guideline
Employees").
D. All employees who are corporate officers of the Company on the date of
this 1996 Restatement who first commenced employment with the Company on or
after attainment of age 40 and whose names appear on Schedule A ("Schedule A")
presented at the meeting of the Executive Compensation and Benefits Committee
held December 9, 1996 and made part of the records of that
-2-
meeting which Schedule is incorporated herein by reference and made a part of
the Plan ("Grandfathered Mid-Career Officers").
E. All employees who after the date of this 1996 Restatement first commence
employment with the Company on or after attainment of age 40 who are elected
corporate officers and whose names are added to Schedule A upon selection by
the Chief Executive Officer of the Company as maintained with records of the
Executive Compensation department of the Company which Schedule as so modified
from time to time is incorporated herein by reference and made a part hereof
("Mid-Career Officer Hires").
F. All employees who are in payroll Band A of the Company on the date of
this 1996 Restatement who first commenced employment with the Company on or
after attainment of age 40 and whose names are set forth on Schedule B
("Schedule B") which has been approved by the Vice President responsible for
Human Resources and placed with the records of the Executive Compensation
department of the Company which Schedule is incorporated herein by reference
and made a part of the Plan ("Grandfathered Mid-Career Band A Employees").
G. All employees who after the date of this 1996 Restatement first commence
employment with the Company on or after attainment of age 40 who are hired
into payroll Band A selected by the Vice President of the Company responsible
for Human Resources, or his or her designee, such selection to be evidenced by
the placement of the employee's name on Schedule C to be maintained from time
to time by such Vice President or his or her designee, which Schedule is
incorporated herein by reference and made a part of the Plan ("Mid-Career Band
A Hires")
H. Grandfathered Mid-Career Officers, Mid-Career Officer Hires,
Grandfathered Mid-Career Band A Employees and Mid-Career Band A Hires are
sometimes together referred to as "Mid-Career Executives".
I. The employees referred to in paragraphs A through G above are together
referred to herein as "Participants".
Section 5. Eligibility for Benefits
Participants must have attained the following age and completed the
following Years of Service to be eligible for benefits under the Plan:
A. Grandfathered Officers and Guideline Employees -- age 55, Years of
Service -- 5.
B. Officers -- age 60, Years of Service -- 10.
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C. Grandfathered Mid-Career Officers -- the age set forth opposite their
respective names on Schedule A, Years of Service -- 5.
D. Mid-Career Officer Hires -- the age determined by the Chief Executive
Officer of the Company as reflected in Schedule A, Years of Service -- 5.
E. Grandfathered Mid-Career Band A Employees -- the age set forth opposite
their respective names on the Schedule B, Years of Service -- 5.
F. Mid-Career Band A Hires -- the age determined by the Vice President
responsible for Human Resources or his or her delegate as set forth on
Schedule C referred to above, Years of Service -- 5.
Section 6. Supplemental Retirement Benefit
A. The benefit payable under the Plan shall be a monthly retirement benefit
equal to the greater of 1 or 2 below with the "Adjustments" set forth below:
1. One and two-thirds percent of Average Monthly Compensation of the
Participant multiplied by the number of full and fractional Years of
Participation up to thirty less
a) One and two-thirds percent of the Social Security Benefit
multiplied by the number of full and fractional Years of Participation up to
thirty; and
b) The monthly retirement benefit payable under the Company's
Retirement Income Guarantee Plan ("RIGP") (stated as a Life Annuity)* as it is
in effect as of and from time to time after January 1, 1990.
2. One percent of Average Monthly Compensation of the Participant
multiplied by the Participant's full and fractional Years of Participation
(but this amount when added to the Participant's Social Security Benefit shall
not exceed eighty-five percent of the Average Monthly Compensation of the
Participant) less the amounts specified in subsection b) of subsection 1 of
this Section 6A.
"Average Monthly Compensation" shall be determined under RIGP without regard
to the dollar limitation contained in the Plan as required by Section
401(a)(17) of the Internal Revenue Code of 1986, as amended, or any successor
thereto.
________________________________________________________________
* Defined terms in RIGP shall have the same meanings in the Plan, except as
otherwise noted herein.
-4-
"Social Security Benefit" shall mean the monthly benefit which a retired
Participant or a terminated Participant receives or would be entitled to
receive at the age at which unreduced retirement benefits are then paid under
the US Social Security Act (or at his sixty-second birthday, in the case of a
retired Participant who has at least thirty Years of Service or who, on such
Participant's retirement, is the pilot of an airplane operated by the
Company), as a primary insurance amount under the U.S. Social Security Act, as
amended, whether he or she applies for such benefit or not, and even though he
or she may lose part or all of such benefit for any reason.
The amount of such Social Security Benefit to which the retired or
terminated Participant is or would be entitled shall be computed by the
Administrator for the purposes of the Plan as of the January 1 of the calendar
year of retirement or termination. In computing such amount, the
Administrator shall use estimated benefit tables developed by the Plan's
actuary, the five-year average compensation of the Participant and the
assumption that the Participant's compensation prior to the fifth year
preceding the year of termination grew in accordance with average national
wages.
B. Grandfathered Officers -- Adjustments shall be
1. The monthly benefit and the Social Security Benefit shall be
calculated at the rate of 3 1/3% of Average Monthly Compensation and of the
Social Security Benefit, respectively, for each full or fractional Year of
Participation up to a maximum of 15 Years of Participation.
2. There shall be no reduction in the benefit payable upon retirement on
or after attainment of age 55 on account of payment commencing prior to
attainment of age 65.
3. Amounts included in the Participant's Executive Expense Allowance
shall be included in determining Average Monthly Compensation.
C. Officers -- Adjustments shall be that there shall be no reduction in the
benefit payable upon retirement on or after attainment of age 60 on account of
payment commencing prior to attainment of age 65 and no part of the Executive
Expense Allowance shall be included in determining Average Monthly
Compensation.
D. Guideline Employees -- An adjustment shall be that there shall be no
reduction in the benefit payable upon retirement on or after attainment of age
55.
-5-
E. Mid-Career Executives -- Adjustments shall be
1. The monthly benefit and the Social Security Benefit shall be calculated at
the rate of 2.5% of the Average Monthly Compensation and of the Social
Security Benefit, respectively, for each full or fractional Year of
Participation up to a maximum of 20 Years of Participation.
2. There shall be no reduction in the benefit payable upon retirement on or
after attainment of age 60 on account of payment commencing prior to
attainment of age 65 and no part of the Executive Expense Allowance, if any,
shall be included in determining Average Monthly Compensation.
F. All Participants -- Adjustments shall be
1. Average Monthly Compensation shall be calculated including any
compensation deferred by the Participant during the period used in calculating
Average Monthly Compensation (except that there shall not be included any
increase in Participant's compensation which became payable under the
Company's policy of increasing compensation by the amount which cannot be
added to the Participant's accounts under the Company's Profit Sharing and
Savings Plan ("Profit Sharing Plan") by reason of the limitation contained in
Section 415 of the Internal Revenue Code of 1986, as amended).
2. The following additional amounts shall be deducted from the hypothetical
monthly benefit:
(a) The value of the portion of the Participant's Account under the
Company's Deferred Compensation Plan, if any, resulting from the Retirement
Account portion of the Profit Sharing Adjustment (as defined in such Deferred
Compensation Plan) translated into an annuity (single life or joint and
survivor, as appropriate) payable commencing on the date of retirement.
(b) The benefit payable under the Company's Unfunded Retirement Income
Guarantee Plan ("Unfunded RIGP").
(c) The aggregate amount of cash payments received by the Participant,
if any, under the Company's policy of increasing compensation by the amount
which could not be added to the Participant's Retirement Account under the
Profit Sharing Plan as it was in effect prior to January 1, 1990 by reason of
the limitation contained in Section 415 of the Code, as such sum would have
increased or decreased during the period from the time as of which it
-6-
would otherwise have been credited to such Participant's Retirement Account to
the relevant time if such sum had been invested in the Balanced Fund under the
Profit Sharing Plan, translated into an annuity (single life or joint and
survivor, as appropriate) payable commencing on the date of retirement.
G. Notwithstanding anything to the contrary in this Plan, in the event of a
change in control of the Company, as hereinafter defined, each Participant
shall be entitled to a benefit hereunder without regard to his or her age or
Years of Service at the time of such change in control (including, without
limitation, the benefit provided under Section 7 hereof, if applicable). Upon
the occurrence of a change in control of the Company, the benefit of each
Participant shall be payable in a lump sum within five days of such change in
control equal in amount to the present value of a benefit expressed in the
form provided in Section 9 hereof, commencing on the later of (i) the date of
such change in control, (ii) the date the Participant attains age 55 or (iii)
in the case of a Grandfathered Officer or Mid-Career Executive, the date such
Participant attains the age specified in Schedule A, B or C, and based upon
such Participant's compensation and Years of Service as of the date of such
change in control. A "change in control of the Company" shall be deemed to
have occurred if (A) any "person", as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
other than the Company, any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, or any company owned, directly
or indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 20 percent or more of
the combined voting power of the Company's then outstanding securities; or (B)
during any period of two consecutive years, individuals who at the beginning
of such period constitute the Board, including for this purpose any new
director (other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in this Section)
whose election or nomination for election by the Company's shareholders was
approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof.
H. Upon the termination of employment of a Participant following a change
in control of the Company, such Participant, if he or she has otherwise
satisfied the requirements of Section 5 hereof, shall be entitled to a benefit
equal to the benefit to which he or she would have been entitled without
application of Section 6F, reduced (but not below zero) to reflect the value
of the benefit he or she received pursuant to Section 6G.
-7-
I. For purposes of Section 6G hereof, the present value of a benefit shall
be calculated based upon the interest rate which would be used by the Pension
Benefit Guaranty Corporation for purposes of valuing immediate annuities with
respect to plans terminating on the date on which the change in control of the
Company occurs and the 1983 GAM mortality table. For purposes of Section G
hereof, notwithstanding a Participant's age and Years of Service at the time
of a change in control of the Company, each Participant shall be treated as
though he or she has reached retirement age for purposes of RIGP.
Section 7. Minimum Benefit
In no event shall the monthly retirement benefit payable to any Participant
other than Mid-Career Executives under the Plan be less than an amount which,
when added to the benefits payable under RIGP, 25% of the amount of the Social
Security Benefit and the amounts described in Section 6F2 above, is equal to
25% of such Participant's Average Monthly Compensation as adjusted in Section
6F1 for Participants and Section 6B3 for Grandfathered Officers.
Section 8. Pre-Retirement Spouse's Benefit
The spouse of a Participant who dies after completing the appropriate age
and number of Years of Service pursuant to Section 5 while still employed by
the Company shall be entitled to a survivor benefit, commencing on the death
of the Participant, in an amount equal to one-half of the retirement benefit
to which the Participant would have been entitled under the Plan if the
Participant had retired on the last day of the month coincident with or next
following the date of the Participant's death.
Section 9. Form of Benefit
The normal form of benefit payable under the Plan shall be the same as to
which the Participant is entitled under RIGP. Participant may convert such
form of benefit into a different available form in the same manner and to the
same extent as he/she can elect a different form of benefit under RIGP.
Except as otherwise provided in Section 6G in no event is the benefit payable
in a lump sum.
Section 10. Participant's Rights Unsecured
The benefits payable under this Plan shall be unfunded. Consequently, no
assets shall be segregated for purposes of the Plan and placed beyond the
reach of the Company's general creditors. The right of any Participant to
receive benefits under the provisions of the Plan shall be an unsecured claim
against the general assets of the Company.
-8-
Section 11. Other Plan Provisions
Other Plan provisions necessary to determine any benefit under the Plan
shall be the same as those described in RIGP.
Section 12. Duties of Administrator
The Plan shall be administered by the Administrator in accordance with its
terms and purposes. The Administrator shall determine the amount and manner
of payment of the benefits due to or on behalf of each Participant from the
Plan and shall cause them to be paid by the Company accordingly. The
Administrator shall be appointed by the Vice President, Human Resources of the
Company.
Section 13. Finality of Decisions
The decisions made by and the actions taken by the Administrator in the
administration of the Plan shall be final and conclusive on all persons, and
the Administrator shall not be subject to individual liability with respect to
the Plan.
Section 14. Amendment and Termination
It is the intention of the Company to continue the Plan indefinitely. The
Company expressly reserves the right to amend the Plan at any time and in any
particular manner, provided that any such amendment shall be made in
accordance with ERISA. Such amendments, other than amendments relating to
termination of the Plan or relating to benefit levels under Section 6 of the
Plan, may be effected by (i) the Board of Directors, (ii) a duly constituted
committee of the Board of Directors, or (iii) the Vice President of the
Company responsible for Human Resources or a representative thereof. In the
event such office is vacant at the time the amendment is to be made, the Chief
Executive Officer of the Company shall approve such amendment or appoint a
representative. Amendments relating to termination of the Plan or relating to
benefit levels under Section 6 of the Plan shall be effected pursuant to a
resolution duly adopted by the Board of Directors of the Company, or a duly
constituted committee of the Board of Directors of the Company, in accordance
with the Business Corporation Law of the State of New York.
Any amendment, alteration, modification or suspension shall be set forth in a
written instrument executed by any Vice President of the Company and by the
Secretary or an Assistant Secretary of the Company.
Section 15. No Employment Rights
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Nothing contained in the Plan shall be construed as a contract of employment
between the Company and a Participant, or as a right of any Participant to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge any of its employees, with or without cause.
Section 16. Assignment
The benefits payable under this Plan may not be assigned or alienated.
Section 17. Law Applicable
This Plan shall be governed by the laws of the State of New York.
Restatement adopted and approved as of December 9, 1996.
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EXHIBIT 10(l)
As amended through December 9, 1996
XEROX CORPORATION
1989 DEFERRED COMPENSATION PLAN FOR EXECUTIVES
1993 AMENDMENT AND RESTATEMENT
Preamble. This Plan is a private unfunded nonqualified deferred
compensation arrangement for executives and all rights shall be governed by
and construed in accordance with the laws of New York, except where preempted
by federal law. It is intended to provide a vehicle for setting aside funds
for retirement.
Section 1. Effective Date. The original effective date of the Plan is
January 1, 1989. The effective date of this amendment and restatement is
October 1, 1993.
Section 2. Eligibility. Any employee of Xerox Corporation (the
"Company"), and any employee of a wholly owned subsidiary of the Company which
has adopted this Plan with the approval of the Company's Board of Directors or
the Executive Committee of the Company's Board of Directors ("Participating
Subsidiary"), who is at Corporate Grade 19 (or its equivalent) or above, and
such additional group or groups of employees of the Company or of a
Participating Subsidiary as designated from time to time by the Administrator,
are eligible to participate in the Plan. A participant who terminates an
election to defer receipt of compensation is not eligible to participate again
in the Plan until twelve months after the effective date of such termination.
Section 3. Deferred Compensation Account. There shall be established for
each participant a deferred compensation account.
Section 4. Amount of Deferral. A participant may elect to defer receipt
of all or a specified part, expressed either in terms of a fixed dollar amount
or a percentage, of the compensation for services (in excess of the applicable
social security tax base for old age, survivor and disability benefits) as an
employee of the Company or a Participating Subsidiary otherwise payable to the
participant in the form of cash. Any amount deferred is credited to the
participant's deferred compensation account on the date such amount is
otherwise payable.
Section 5. Time of Election of Deferral. An election to defer
compensation must be made by a participant prior to the year in which the
participant would otherwise have an unrestricted right to such compensation.
When an employee first becomes eligible to participate in the Plan, he may
elect to defer any compensation to which he or she has yet to have an
unrestricted right to payment. An election to totally terminate future
deferrals may be made at any time prior to the relevant payment date.
Section 6. Hypothetical Investment. Deferred compensation is assumed to
be invested, without charge, in the Balanced Fund, Income Fund, U. S. Stock
Fund, International Stock Fund, Small Company Stock Fund or Xerox Stock Fund
(the "Funds") established under the Profit Sharing Plan as elected by the
participant; provided, however, that the Administrator, as hereinafter
defined, shall have the right from time to time, without adversely affecting
participants' accruals in deferred compensation accounts, to substitute for
the Income Fund other hypothetical fixed return investments for the deferred
compensation.
Elections to make hypothetical investments in any one or more of the Funds
shall be subject to administrative rules adopted by the Administrator from
time to time.
No shares of Xerox stock will ever actually be issued to a participant
under the Plan.
Section 7. Value of Deferred Compensation Accounts and Installment
Payments. The value of each participant's deferred compensation account shall
reflect all amounts deferred, and gains and losses from the hypothetical
investments, and shall be determined on the last day of each month (the
"Valuation Dates"). Hypothetical investments in the Profit Sharing Plan shall
be valued as of the valuation date under such Plan coincident with or last
preceding the Valuation Date under this Plan. The value of hypothetical
investments not made under the Profit Sharing Plan shall be determined as of
each Valuation Date by the best information available to the Administrator.
Section 8. Manner of Electing Deferral. A participant may elect to defer
compensation by giving written notice to the Administrator on a form provided
by the Company, which notice shall include (1) the amount and/or percentage to
be deferred; (2) if more than one is offered under the Plan, the hypothetical
investment applicable to the amount deferred; (3) the number of installments
for the payment of the deferred compensation; and (4) the date of the first
installment payment. An employee may elect a single method of payment for all
circumstances, or separate elections covering the method of payment may be
made with respect to any of the following events: (A) Normal retirement at or
after age 65; (B) early retirement at age 60-64; (C) early retirement at age
55-59; (D) voluntary termination of employment; (E) involuntary termination of
employment; (F) termination of employment due to disability; (G) death; or (H)
while still employed by the Company. The Administrator may adopt rules of
general applicability regarding commencement and duration of payments under
the Plan which may be elected by participants.
Section 9. Payment of Deferred Compensation. No withdrawal may be made
from the participant's deferred compensation account, except as provided under
this Section and Sections 10 and 11.
The value of a participant's deferred compensation account is payable in
cash in annual installments on February 15 or August 15 following the first
occurrence of one of the events elected under Section 8 or following a fixed
period after one of such events based on the value of the participant's
deferred compensation account as of the second preceding Valuation Date.
Unless otherwise elected by a participant with the written approval of the
Administrator, payments of deferred compensation shall be made pursuant to the
following formula: the amount of the first payment shall be a fraction of the
value of the participant's deferred compensation account on the second
preceding Valuation Date, the numerator of which is one and the denominator of
which is the total number of installments elected, and the amount of each
subsequent payment shall be a fraction of the value on the second Valuation
Date preceding each subsequent payment date, the numerator of which is one and
the denominator of which is the total number of installments elected minus the
number of installments previously paid. There shall be added to each payment
determined in accordance with the foregoing, imputed interest for a period of
one month at the same annual rate credited to accounts invested in the Income
Fund under the Profit Sharing Plan for the month of December or June, as the
case may be. Any other payment method selected with the written approval of
the Administrator must in all events provide for payments in substantially
equal installments.
Section 10. Acceleration of Payment. (a) For Hardship. Upon written
approval from the Company's Chief Executive Officer (the Company's Board of
Directors, in the case of a request from the Chief Executive Officer), a
participant may be permitted to receive all or part of his accumulated
benefits if, in the discretion of the Chief Executive Officer (or the Board,
if applicable), it is determined that an emergency event beyond the
participant's control exists and which would cause such participant severe
financial hardship if the payment of his benefits were not approved. Any such
distribution for hardship shall be limited to the amount needed to meet such
emergency. A participant who makes a hardship withdrawal cannot reenter the
Plan for twelve months after the date of withdrawal.
(b) Upon a Change in Control. Within 5 days following the occurrence of
a change in control of the Company (as hereinafter defined), each participant
shall be entitled to receive a lump sum payment equal to the value of his
deferred compensation account.
For purposes hereof, a "change in control of the Company" shall be deemed
to have occurred if (A) any "person", as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any company
owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 20 percent or more of the combined voting power of the Company's
then outstanding securities; or (B) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board,
including for this purpose any new director (other than a director designated
by a person who has entered into an agreement with the Company to effect a
transaction described in this Section) whose election or nomination for
election by the Company's shareholders was approved by a vote of at least two-
thirds of the directors then still in office who were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof.
Section 11. Other Penalized Withdrawals. Notwithstanding the provisions
of Sections 9 and 10, a participant may be permitted to receive all or part of
his accumulated benefits at any time provided that (A) the Administrator
approves such distribution in his or her sole discretion, and (B) the
participant forfeits a portion of his account balance equal to a percentage of
the amount distributed. The percentage reduction shall be the greater of (A)
six percent, or (B) a percentage equal to one-half of the prime interest rate,
as determined by the Administrator.
Section 12. Time Of Hypothetical Investment. The amount in the
participant's deferred compensation account as of each Valuation Date which
has not been previously deemed invested shall be deemed invested in a
hypothetical investment on such date, based on the value of the hypothetical
investment on such date.
Section 13. Participant's Rights Unsecured. The benefits payable under
this Plan shall be unfunded. Consequently, no assets shall be segregated for
purposes of this Plan and placed beyond the reach of the Company's general
creditors. The right of any participant to receive future installments under
the provisions of the Plan shall be an unsecured claim against the general
assets of the Company.
Section 14. Statement of Account. Statements will be sent to each
participant during February and August and more frequently if the
Administrator so determines as to the value of their deferred compensation
accounts as of the end of December and June, respectively.
Section 15. Assignability. No right to receive payments hereunder shall
be transferable or assignable by a participant, except by will or by the laws
of descent and distribution.
In the event of a participant's death without having an election under
Section 8 (B) in effect regarding payment of his account after death, the
value of the participant's deferred compensation account shall be determined
as of the Valuation Date coincident with or immediately following death and
such amount shall be paid in a single payment to the participant's estate (a)
the first January 15 or July 15 following such Valuation Date, or (b) if such
payment cannot be made at the time specified in (a), it shall be made within
30 days after the participant's death. There shall be added to such payment,
interest for the full calendar months elapsed following such Valuation Date to
the payment date at the same annual rate credited to accounts invested in the
Income Fund under the Profit Sharing Plan for the month of such Valuation
Date.
In the event of a participant's death after installment payments have
commenced to be paid, the balance of the deferred compensation account shall
be paid to the participant's estate.
Section 16. Business Days. In the event any date specified herein falls
on a Saturday, Sunday or legal holiday, such date shall be deemed to refer to
the next business day thereafter.
Section 17. Administration. The Plan shall be administered by the Vice
President of the Company having responsibility for human resources (the
"Administrator"). The Administrator shall have the authority to adopt rules
and regulations for carrying out the plan, and interpret, construe and
implement the provisions of the Plan.
Section 18. Amendment. The Plan may at any time or from time to time be
amended, modified or terminated by the Board of Directors or the Executive
Committee of the Board of Directors of the Company. Upon termination the
Administrator in his or her sole discretion may pay out account balances to
participants. No amendment, modification or termination shall, without the
consent of a participant, adversely affect such participant's accruals in
his/her deferred compensation account.
Computation of Net Income Per Common Share
(Dollars in millions, except per-share data; shares in thousands)_____________
I. Primary Net Income (Loss) Per Common Share
Income (loss) from continuing operations
Accrued dividends on ESOP preferred stock, net
Accrued dividends on redeemable preferred stock
Call premium on redeemable preferred stock
Adjusted income (loss) from continuing operations
Discontinued operations
Change in accounting principles
Adjusted net income (loss)
Average common shares outstanding during the period
Common shares issuable with respect to common
stock equivalents for stock options, incentive and
exchangeable shares
Adjusted average shares outstanding for the period
Primary earnings (loss) per share:
Continuing operations
Discontinued operations
Change in accounting principles
Primary earnings (loss) per share
II.Fully Diluted Net Income (Loss) Per Common Share
Income (loss) from continuing operations
Accrued dividends on ESOP preferred stock, net
Accrued dividends on redeemable preferred stock
Call premium on redeemable preferred stock
ESOP expense adjustment, net of tax
Interest on convertible debt, net of tax
Adjusted income (loss) from continuing operations
Discontinued operations
Change in accounting principles
Adjusted net income (loss)
Average common shares outstanding during the period
Common shares issuable with respect to:
Stock options, incentive and exchangeable shares
Convertible debt
ESOP preferred stock
Adjusted average shares outstanding for the period
Fully diluted earnings (loss) per share:
Continuing operations
Discontinued operations
Change in accounting principles
Fully diluted earnings (loss) per share *
* Fully diluted discontinued operations net loss per share for the year
ended December 31, 1995 is computed by dividing adjusted net loss of
$(1,646) by the adjusted average shares outstanding for the period of
331,692 used in the computation of primary net income per common share.
This computation is necessitated by the anti-dilutive nature of convertible
debt and ESOP preferred stock which would otherwise decrease fully diluted
net loss per share for this period.
EXHIBIT 11
1996 1995 1994 1993 1992
$ 1,206 $ 1,174 $ 794 $ (193) $ 562
(43) (42) (41) (38) (39)
(1) (3) (12) (23) (23)
- - (11) - -
1,162 1,129 730 (254) 500
- (1,646) - 67 (818)
- - - - (764)
$ 1,162 $ (517) $ 730 $ (187) $ (1,082)
324,462 322,087 316,275 300,141 283,272
8,234 9,605 9,003 4,062 8,229
332,696 331,692 325,278 304,203 291,501
$ 3.49 $ 3.40 $ 2.24 $ (.83) $ 1.72
- (4.96) - .22 (2.81)
- - - - (2.62)
$ 3.49 $ (1.56) $ 2.24 $ (.61) $ (3.71)
$ 1,206 $ 1,174 $ 794 $ (193) $ 562
- - - (38) (39)
(1) (3) (12) (23) (23)
- - (11) - -
(3) (9) (7) - (8)
3 4 3 - 4
1,205 1,166 767 (254) 496
- (1,646) - 67 (818)
- - - - (764)
$ 1,205 $ (480) $ 767 $ (187) $ (1,086)
324,462 322,087 316,275 300,141 283,272
8,641 9,687 9,003 4,062 8,394
2,643 2,643 2,643 - 2,643
27,981 28,663 29,310 - 29,856
363,727 363,080 357,231 304,203 324,165
$ 3.31 $ 3.21 $ 2.15 $ (.83) $ 1.53
- (4.96) - .22 (2.81)
- - - - (2.62)
$ 3.31 $ (1.75) $ 2.15 $ (.61) $ (3.90)
EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
Year ended December 31 (in millions) 1996 1995 1994 1993* 1992
Fixed Charges:
Interest expense $ 592 $ 603 $ 520 $ 540 $ 627
Rental expense 140 142 170 180 187
Total fixed charges before
capitalized interest 732 745 690 720 814
Capitalized interest - - 2 5 17
Total fixed charges $ 732 $ 745 $ 692 $ 725 $ 831
Earnings available for fixed
charges:
Earnings** 2,067 $1,980 $1,602 $ (193) $1,183
Less undistributed income in
minority owned companies (84) (90) (54) (51) (52)
Add fixed charges before
capitalized interest 732 745 690 720 814
Total earnings available for
fixed charges $2,715 $2,635 $2,238 $ 476 $1,945
Ratio of earnings to
fixed charges (1)(2) 3.71 3.54 3.23 0.66 2.34
(1) The ratio of earnings to fixed charges has been computed based on the
Company's continuing operations by dividing total earnings available for
fixed charges, excluding capitalized interest, by total fixed charges.
Fixed charges consist of interest, including capitalized interest, and
one-third of rent expense as representative of the interest portion of
rentals. Debt has been assigned to discontinued operations based on
historical levels assigned to the businesses when they were continuing
operations, adjusted for subsequent paydowns. Discontinued operations
consist of the Company's Insurance and Other Financial Services businesses
and its real-estate development and third-party financing businesses.
(2) The Company's ratio of earnings to fixed charges includes the effect of
the Company's finance subsidiaries, which primarily finance Xerox
equipment. Financing businesses are more highly leveraged and, therefore,
tend to operate at lower earnings to fixed charges ratio levels than do
non-financial businesses.
* 1993 earnings were inadequate to cover fixed charges. The coverage
deficiency was $249 million.
** Sum of "Income (Loss) before Income Taxes, Equity Income and Minorities'
Interests" and "Equity in Net Income of Unconsolidated Affiliates."
<PAGE>
EXHIBIT 13
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31 (in millions, except per-share data) 1996 1995 1994
================================================
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Revenues
Sales $ 9,285 $ 8,750 $ 7,823
Service and rentals 7,078 6,830 6,255
Finance income 1,015 1,008 1,006
------------------------------------------------
Total Revenues 17,378 16,588 15,084
------------------------------------------------
Costs and Expenses
Cost of sales 5,132 4,984 4,668
Cost of service and rentals 3,591 3,442 3,028
Equipment financing interest 513 507 502
Research and development expenses 1,044 949 895
Selling, administrative and general expenses 5,074 4,719 4,363
Gain on affiliates' sales of stock, net (11) -- --
Other, net 91 138 114
------------------------------------------------
Total Costs and Expenses 15,434 14,739 13,570
------------------------------------------------
Income before Income Taxes, Equity Income and
Minorities' Interests 1,944 1,849 1,514
Income Taxes 700 615 595
Equity in Net Income of Unconsolidated Affiliates 123 131 88
Minorities' Interests in Earnings of Subsidiaries 161 191 213
------------------------------------------------
Income from Continuing Operations 1,206 1,174 794
Discontinued Operations -- (1,646) --
------------------------------------------------
Net Income (Loss) $ 1,206 $ (472) $ 794
================================================
Primary Earnings (Loss) per Share
- --------------------------------------------------------------------------------------------
Continuing Operations $ 3.49 $ 3.40 $ 2.24
Discontinued Operations -- (4.96) --
------------------------------------------------
Primary Earnings per Share $ 3.49 $ (1.56) $ 2.24
================================================
Fully Diluted Earnings (Loss) per Share
- --------------------------------------------------------------------------------------------
Continuing Operations $ 3.31 $ 3.21 $ 2.15
Discontinued Operations -- (4.96) --
------------------------------------------------
Fully Diluted Earnings per Share $ 3.31 $ (1.75) $ 2.15
================================================
</TABLE>
The accompanying notes on pages 48 to 67 are an integral part of the
consolidated financial statements.
26
<PAGE>
Our Results of Operations and Financial Condition
Summary of Total Company Results
Document Processing revenues grew 6 percent on a pre-currency basis to $17.4
billion in 1996, driven by 10 percent growth in equipment sales and 47 percent
growth in document outsourcing. Service and rental revenues were essentially
unchanged from 1995. The strong equipment sales growth is the direct result of
our investments in sales coverage and marketing support, and excellent customer
acceptance of our new digital products. Revenues increased 7 percent on a
pre-currency basis to $16.6 billion in 1995 and 7 percent to $15.1 billion in
1994.
Beginning in 1995, the results of our Insurance operations were accounted
for as discontinued operations. The Document Processing business is now the only
component of continuing operations.
The following table summarizes net income and earnings per share (EPS):
<TABLE>
<CAPTION>
(In millions) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Document Processing before
Brazil tax gain $ 1,206 $ 1,076 $ 794
Brazil tax gain -- 98 --
- -------------------------------------------------------------------------------
Continuing operations 1,206 1,174 794
Discontinued operations -- (1,646) --
- -------------------------------------------------------------------------------
Net Income (Loss) $ 1,206 $ (472) $ 794
===============================================================================
Fully Diluted EPS
Document Processing
before Brazil tax gain $ 3.31 $ 2.94 $ 2.15
Brazil tax gain -- .27 --
- -------------------------------------------------------------------------------
Continuing operations 3.31 3.21 2.15
Discontinued operations -- (4.96) --
- -------------------------------------------------------------------------------
Fully Diluted EPS $ 3.31 $ (1.75) $ 2.15
===============================================================================
</TABLE>
Document Processing income increased in 1996 by 12 percent and in 1995 by 36
percent, both before a $98 million gain from a reduction in the Brazilian tax
rate in 1995.
Fully diluted earnings per share for continuing operations increased 13
percent in 1996 and 37 percent in 1995, both before the Brazilian tax gain. The
earnings per share have been adjusted to reflect the 3 for 1 stock split
effective June 6, 1996.
Quarterly results of operations for 1996 and 1995 are shown on page 68.
The results for discontinued operations in 1996 were charged to reserves
previously established for such purposes and did not affect our reported net
income. Discontinued operations had a loss of $1.646 billion in 1995 compared
with break-even results in 1994. The 1995 results include fourth quarter
after-tax charges of $1.546 billion as a result of the discontinuance of the
Insurance segment. These charges consisted of a non-cash loss of $978 million
and $568 million primarily to cover additional insurance loss reserves and all
estimated future expenses associated with excess of loss reinsurance coverage.
[CHART APPEARS HERE]
Continuing Operations Fully Diluted Earnings Per Share*
1994 $2.15
1995 $2.94
1996 $3.31
* Before special items
Document Processing
Underlying Growth
To understand the trends in the business, we believe that it is helpful to
adjust revenue and expense growth (except for ratios) to exclude the impact of
changes in the translation of foreign currencies into U.S. dollars. We refer to
this adjusted growth as "underlying growth."
27
<PAGE>
[Pictured here is a flat panel display]
dpiX flat-panel display
Malcolm J. Thompson, Gayathri Sundaresan and Pedro Goncalves, dpiX, with a dpiX
flat-panel display that shows lifelike computer images and text as sharp as the
output from a laser printer. A new Eagle-5 cockpit avionics display gives
fighter aircraft a tactical edge with video and high resolution infrared
imagery.
dpiX, a Xerox New Enterprise company, designs and manufactures high-performance
products for image capture and display. dpiX has produced advanced flat-panel
displays that provide image resolution of 300 dots per inch over an area the
size of an 8.5-inch by 11-inch page. These displays are being used for
detail-critical applications, such as mapping, image analysis, avionics and
high-end computer graphics.
dpiX FlashScan X-ray image sensors replace X-ray film in medical imaging
systems, enabling a fully digital system for faster patient diagnosis. X-ray
images are captured in a fraction of a second and can be analyzed immediately on
a computer screen.
dpiX image capture-and-display products are an example of our effort to
capitalize on the most promising technological breakthroughs from our research
organizations. dpiX is part of Xerox New Enterprises, 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. In 1996, we concluded two
successful Initial Public Offerings to launch Documentum and Document Sciences
as publicly traded companies.
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 major European
currencies, the U.S. dollar was on average approximately 2 percent stronger in
1996, 10 percent weaker in 1995 and 2 percent stronger in 1994. As a result,
foreign currency translation had an unfavorable impact of 1 percentage point on
total revenues in 1996, a favorable impact of 3 percentage points on revenues in
1995, and an unfavorable impact of 1 percentage point in 1994.
Revenues denominated in currencies where the local currency is the
functional currency are not hedged for purposes of translation into U.S.
dollars.
Revenues by Product Category
<TABLE>
<CAPTION>
Underlying Growth
-------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues 6% 7% 7%
================================================================================
Digital products 23 17 20
Light lens copiers (1) 2 4
Paper and other products -- 14 3
================================================================================
</TABLE>
Revenues from digital products, composed of production publishing, color copying
and printing, data center printing, multifunction products and network printing,
represented 30 percent of total revenues in 1996, 25 percent in 1995 and 22
percent in 1994. Revenues from light lens copying represented 56 percent of
total revenues in 1996, 59 percent in 1995 and 63 percent in 1994. The revenues
from paper and other products were 14 percent of total revenues in 1996, 16
percent in 1995 and 15 percent in 1994.
Total revenues from the DocuTech family of production publishing products
reflected excellent growth to approximately $1.8 billion in 1996 from $1.4
billion in 1995 and $1.1 billion in 1994. Revenues from color products reflected
excellent growth to approximately $1.0 billion in 1996, $600 million in 1995 and
$400 million in 1994.
The DocuColor 40 and the Document Centre Systems family contributed 3
percentage points to the
28
<PAGE>
digital product revenue growth of 23 percent in 1996. The DocuColor 40, which
was introduced in early 1996, copies and prints at 40 full-color pages per
minute and is the industry's fastest and most affordable digital color document
production system. Document Centre Systems products, which were introduced in
late 1995, can print, scan, fax and copy documents for workgroups, with all
operations managed over the network from each user's personal computer or on a
walk-up basis. Revenues from these products accelerated throughout 1996 and
contributed 6 percentage points to the digital product revenue growth of 26
percent in the fourth quarter.
The decline in light lens copier revenue growth reflects several important
factors, including price pressures and difficult economic environments in Europe
and a number of emerging markets. Over time, digital products will take an
increasing share of total revenues. The fluctuations in other products revenues
were principally due to swings in paper prices and OEM sales.
Revenues by Geography
Geographically, the underlying revenue growth rates were:
<TABLE>
<CAPTION>
Underlying Growth
--------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues 6% 7% 7%
================================================================================
United States 6 3 7
Rank Xerox 1 8 7
Other Areas 10 16 7
Memo: Fuji Xerox 12 10 5
================================================================================
</TABLE>
United States revenues were 49 percent of total revenues in 1996 which is
consistent with prior years. Revenues of Rank Xerox Limited and related
companies (Rank Xerox), which manufacture and market our products in eastern
hemisphere countries, were 31 percent of total revenues. Revenues of Other
Areas, which primarily include operations principally in Latin America and
Canada, were 20 percent of total revenues.
Revenue growth in the United States was driven by excellent growth in
equipment sales of digital products and good growth in equipment sales of light
lens copiers. The decline in U.S. revenue growth in 1995 principally reflects
disruption in the sales force.
[Pictured here is a Xerox copier]
X Team members (left to right) are: Tony Jalali, Steven Lee, Kamran Rahbaran and
Karen LaPointe. What's an X Team? It is the Xerox designation for the highest
level of team achievement for an empowered team.
29
<PAGE>
The decline in revenue growth in Rank Xerox in 1996 reflects weak economic
environments principally in France, Germany, the U.K. and Spain.
The strong revenue growth in the Other Areas reflects excellent growth in
Brazil, strong growth in Canada and Mexico, and revenue declines in the rest of
Latin America and China due to difficult economic environments. The improved
revenue growth in the Other Areas in 1995 is attributable, in part, to a strong
demand in Brazil, partially offset by a significant revenue decline in Mexico
due to currency and the continuing economic disruption following devaluation of
the Mexican peso in December 1994. Our revenues in Brazil were approximately
$1.6 billion in 1996, $1.3 billion in 1995 and $0.9 billion in 1994.
Fuji Xerox Co., Ltd., an unconsolidated joint venture between Rank Xerox
Limited and Fuji Photo Film Company Limited, develops, manufactures and
distributes document processing products in Japan and other areas of the Pacific
Rim, Australia and New Zealand. The strong revenue growth in 1996 and 1995
reflects excellent growth in the Asia Pacific countries and strong growth in
Japan driven by excellent growth in digital product sales.
[Pictured here are two Fuji Xerox employees]
No. 1 In Color
Fuji Xerox continues to focus on networked color and multifunction products in
all global business areas. It achieved a No. 1 ranking in domestic market share
in terms of the number of shipped units of digital color copiers.
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Equipment Non-Equipment Total Xerox
Sales Growth Revenue Growth Revenue Growth
(Pre-currency) (Pre-currency) (Pre-currency)
-------------- -------------- --------------
<S> <C> <C> <C>
1994 10% 5% 7%
1995 6% 7% 7%
1996 10% 4% 6%
</TABLE>
30
<PAGE>
Revenues by Type
<TABLE>
<CAPTION>
Underlying Growth
-----------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues 6% 7% 7%
================================================================================
Equipment sales (excluding OEM) 10 6 10
Non-equipment revenues 4 7 5
Supplies 6 9 11
Paper (7) 39 4
Service -- 2 4
Rentals -- 1 (1)
Document outsourcing* 47 46 34
Finance income 1 (4) (4)
================================================================================
</TABLE>
* Excludes outsourcing contracts that are accounted for as equipment sales.
The improvement in equipment sales revenue growth (excluding OEM sales) in 1996
from 1995 was due to a significant acceleration in sales of production
publishing and color copying and printing products, particularly in the U.S. The
lower growth in equipment sales in 1995 principally reflected disruption in the
U.S. sales force. The growth in 1994 reflected excellent growth in production
publishing and a near doubling of color copier and printer equipment sales.
Non-equipment revenues from supplies, paper, service, rentals, document
outsourcing and income from customer financing represented 66 percent of total
revenues in 1996, and 67 percent in 1995 and 1994. Growth in these revenues is
primarily a function of the growth in our installed population of equipment,
usage and pricing.
Supplies: Good growth was maintained in 1996, although at a lower rate than
1995. The decline in growth is due principally to customer preference for
document outsourcing and weak economic environments in some countries in Europe
and Latin America.
Paper: The decline in 1996 is the result of lower wholesale prices which
were partially offset by volume increases. The significant improvement in the
growth rate in 1995 is primarily due to higher prices after several years of
declining prices. Our strategy is to charge a spread over mill wholesale prices
to cover our costs and value added as a distributor.
Service: The declining growth reflects the substitutive impact of customer
preference for document outsourcing as well as competitive price pressures.
[Pictured here is Xerox recycled paper and a Xerox employee]
Revenues from the sale of paper and related equipment supplies continue to
contribute to overall revenues and profit growth. Customers continue to look to
Xerox for their media needs and equipment supplies to insure maximum performance
and output quality with their equipment. Photographed here with Xerox recycled
paper is Lisa Miura, Printing Systems Operations.
31
<PAGE>
Rental: Outside the U.S., rental revenues have declined reflecting the
long-term trend to increasing equipment sales. This decline has been offset by
strong growth in the U.S. where there has been an increasing trend toward
cost-per-copy rental plans, which adversely affects up-front equipment sales, as
well as service revenues and finance income.
Document Outsourcing: The excellent growth reflects the trend of customers
to focus on their core businesses and outsource their document processing
requirements to Xerox. In part, this has the effect of diverting revenues from
up-front equipment sales as well as supplies, service and finance income. This
trend reduces current period total revenues but increases revenues in future
periods.
Finance income: In 1996, the strong growth in the financing of equipment
sales in Latin America offset the impact on financing contracts of the
continuing decline in interest rates and the increasing customer preference for
document outsourcing rather than purchase and finance. Approximately 80 percent
of customers finance purchases of equipment through Xerox in the U.S. and 75
percent in Western Europe. Our strategy for financing equipment sales 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.
Restructuring
The activities associated with the 1993 restructuring program have reduced
employment by 14,000. We have achieved our restructuring program objectives with
pre-tax cost reductions of approximately $350 million in 1994, $650 million in
1995 and $770 million in 1996. A portion of the savings is being reinvested to
reengineer business processes, to support the expansion in growth markets and to
mitigate pricing pressures.
Worldwide employment increased by 800 in 1996 to 86,700 as hiring to
increase the sales force and to support our fast-growing document outsourcing
business more than offset reductions in other areas.
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Selling, Administrative
and General Expenses
(Percent of Revenues)
---------------------
<S> <C>
1994 28.9%
1995 28.4%
1996 29.2%
</TABLE>
[Pictured here is a AAA Triptik(R) routing map]
AAA Triptik(R) routing map printed on
Xerox equipment
The American Automobile Association uses Xerox highlight color printers to
produce Triptiks or customized routing maps for millions of travelers who tour
the U.S. each year. The printers produce about 80 Triptiks per hour; the average
size is 30 pages per booklet.
32
<PAGE>
Costs and Expenses
Gross profit increased 6 percent in 1996 and 11 percent in 1995 as a result of
increased volume and an improvement in gross margins.
The gross margins by revenue stream were as follows:
<TABLE>
<CAPTION>
Gross Margins
----------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total 46.9% 46.1% 45.7%
================================================================================
Sales 44.7 43.0 40.3
Service and rentals 49.3 49.6 51.6
Finance income 49.5 49.7 50.1
================================================================================
</TABLE>
The improvement in sales gross margins has been principally due to productivity
driven cost reductions, favorable product and geographic mix, principally
Brazil, partially offset by pricing pressures. The erosion in service and
rentals gross margins has been largely due to pricing pressures, partially
offset by productivity improvements.
Research and development (R&D) expense increased 10 percent in 1996 and 6
percent in 1995 reflecting increased investment in future product introductions.
We will continue to invest in technological development to maintain our premier
position in the rapidly changing document processing market and we expect to
introduce a stream of new, technologically innovative products in the coming
months. Xerox R&D is strategically coordinated with that of Fuji Xerox, which
invested $537 million in R&D in 1996.
Selling, administrative and general expenses (SAG) increased 8 percent in
1996 on an underlying basis, 5 percent in 1995 and declined 1 percent in 1994.
SAG as a percent of revenues was 29.2 percent in 1996, 28.4 percent in 1995 and
28.9 percent in 1994. The increase in the ratio in 1996 was primarily due to
investments in sales coverage and marketing support. The improvement in 1995 was
due to productivity initiatives and expense controls partially offset by
investments to increase worldwide sales effectiveness. We expect the ratio to
decline in 1997 due to improved productivity resulting from prior year
investments and ongoing expense controls.
Gain on affiliates' sales of stock, net reflects our proportionate share of
the increase in equity of certain small affiliated companies as a result of
recent sales of additional equity by these affiliates.
Other expenses, net, were $91 million in 1996, $138 million in 1995 and
$114 million in 1994. The reduction of $47 million in 1996 reflects reduced
interest expense due to lower rates, higher interest income and the
non-recurrence of several one-time charges in 1995. The increase in Other
expenses, net, of $24 million in 1995 reflects higher interest expense and
[Pictured here is a computer laboratory]
University Network
Hokkaido University uses an information network system designed and constructed
by Fuji Xerox to connect numerous academic departments, research centers,
hospitals, libraries, offices and other facilities as well as community printing
centers.
33
<PAGE>
goodwill amortization, principally resulting from our increased financial
interest in Rank Xerox, and the non-recurrence of one-time gains in 1994,
partially offset by lower foreign currency losses from balance sheet translation
in our Brazilian operations.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates, and Minorities'
Interests in Earnings of Subsidiaries before Special Items
Income before special items and income taxes was $1,944 million in 1996, $1,849
million in 1995 and $1,514 million in 1994.
In 1995, we recognized a $98 million benefit from the favorable revaluation
of the deferred tax liability due to a change in the Brazilian statutory income
tax rate. Excluding this gain, the effective tax rates were 36 percent in 1996,
and 39 percent in 1995 and 1994. The decline in the 1996 tax rate was primarily
due to the lower Brazilian tax rate.
Equity in the Net Income of Unconsolidated Affiliates is principally the
Rank Xerox share of Fuji Xerox income as well as investments in several smaller
companies. Total equity in income in 1996 declined 6 percent to $123 million
principally due to one-time declines in income from smaller investments. The
Rank Xerox 50 percent share of Fuji Xerox income increased 4 percent to $116
million in 1996 from $112 in 1995. The excellent underlying growth in Fuji Xerox
income was largely offset by the weakening of the Japanese yen against the U.S.
dollar. Total equity in income grew 49 percent in 1995 to $131 million as Fuji
Xerox income increased 31 percent due to strong underlying growth and the
strengthening of the yen. The Rank Xerox 50 percent share of Fuji Xerox income
was $86 million in 1994.
Minorities' Interests in Earnings of Subsidiaries, principally The Rank
Group Plc share of Rank Xerox profits, were $161 million in 1996, $191 million
in 1995 and $213 million in 1994. In 1996, minorities' interests declined
primarily due to lower Rank Xerox profits.
[Pictured here are two Xerox employees who are included in the Guardian Angel
program]
Programa Anjo Da Guarda Coloca "Clientes Em Primeiro Lugar" no Brasil
Guardian Angels put "Customers First" in Brazil
Our Guardian Angel program was started by Xerox do Brasil. Employees are
assigned customers to call periodically to find out if the customers are
satisfied with our equipment. If they are not, that same Guardian Angel is
responsible for solving the problem from beginning to end. Jose Carlos and
Daniela Oliveira appeared in a Xerox videotape on the program.
34
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 (in millions) 1996 1995
=====================================
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------
Cash $ 104 $ 136
Accounts receivable, net 2,022 1,914
Finance receivables, net 4,386 4,069
Inventories 2,676 2,656
Deferred taxes and other current assets 964 1,095
-------------------------------------
Total Current Assets 10,152 9,870
Finance receivables due after one year, net 6,986 6,406
Land, buildings and equipment, net 2,256 2,105
Investments in affiliates, at equity 1,282 1,314
Goodwill 623 627
Other assets 1,121 876
Investment in discontinued operations 4,398 4,810
-------------------------------------
Total Assets $ 26,818 $ 26,008
=====================================
Liabilities and Equity
- ----------------------------------------------------------------------------------------
Short-term debt and current portion of long-term debt $ 3,536 $ 3,274
Accounts payable 577 578
Accrued compensation and benefits costs 761 731
Unearned income 208 228
Other current liabilities 2,122 2,216
-------------------------------------
Total Current Liabilities 7,204 7,027
Long-term debt 8,424 7,867
Postretirement medical benefits 1,050 1,018
Deferred taxes and other liabilities 2,429 2,437
Discontinued operations liabilities - policyholders' deposits and other 2,274 2,810
Deferred ESOP benefits (494) (547)
Minorities' interests in equity of subsidiaries 843 755
Preferred stock 721 763
Common shareholders' equity 4,367 3,878
-------------------------------------
Total Liabilities and Equity $ 26,818 $ 26,008
=====================================
</TABLE>
Shares of common stock issued and outstanding at December 31, 1996 were (in
thousands) 325,902 and 323,681, respectively. Shares of common stock issued and
outstanding at December 31, 1995 were (in thousands) 325,029.
- --------------------------------------------------------------------------------
The accompanying notes on pages 48 to 67 are an integral part of the
consolidated financial statements.
35
<PAGE>
The 1995 decrease was due to our increased financial interest in Rank Xerox,
partially offset by excellent growth in Rank Xerox income, reflecting good
revenue growth and productivity benefits.
Income
In 1996, Document Processing income of $1,206 million grew 12 percent compared
with $1,076 million of income in 1995 before the Brazilian tax gain. 1995 income
on the same basis grew 36 percent from $794 million in 1994.
[Pictured here is a map of Peru]
Impresion Electronica
Electronic Printing
Banco de Credito, Peru's largest bank, shipped half of the pages it printed to
branch offices, some of which were in remote locations. The bank faced rising
print-and-distribute shipping costs. A distributed printing solution connected
Xerox laser printers in the branch offices to the bank's network and reduced
costs and eliminated delivery problems.
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 the net income of unconsolidated affiliates divided
by average ROA assets. These assets are Document Processing assets less
investments in affiliates and Xerox equipment financing debt.
ROA, as defined above, was 17.8 percent in 1996, 18.5 percent in 1995 and
16.1 percent in 1994.
1994 Antitrust Lawsuit Settlement
In January 1994, we reached agreement to settle a 1992 antitrust lawsuit. Under
the settlement, we agreed to sell service parts to independent service
organizations, and $225 million of discount certificates were provided for use
over a three-year period as partial payment for Xerox products. Through 1996,
$180 million of certificates were applied against purchases.
Additional Financial Interest in Rank Xerox
On February 28, 1995, we paid The Rank Group Plc $972 million to increase our
financial interest in Rank Xerox to 80 percent from 67 percent. Minorities'
interests in earnings of subsidiaries have declined by approximately 40 percent
as a result of the transaction. These savings were partially offset by an
increase in interest expense related to the funding of the transaction and
annual goodwill amortization of $16 million.
Rank Xerox and Latin American Fiscal-Year Change in 1995
Effective January 1, 1995, we changed Rank Xerox and Latin American operations
to calendar-year financial reporting. The 1994 fiscal year ended on October 31
for Rank Xerox and on November 30 for Latin American operations. The results
that occurred between the 1994 and 1995 fiscal years (the stub period) were
accounted for as a direct charge to equity.
36
<PAGE>
Capital Resources and Liquidity
Total debt, including ESOP and discontinued operations debt not shown separately
in our consolidated balance sheets, increased to $12,448 million at December 31,
1996 from $11,794 million in 1995 and $10,955 million in 1994.
The following table summarizes the changes in total equity during 1996,
1995 and 1994:
<TABLE>
<CAPTION>
Total Equity
----------------------------------
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance as of January 1 $ 5,396 $ 6,042 $ 5,882
Income from continuing operations 1,206 1,174 794
Loss from discontinued operations -- (1,646) --
Change in unrealized gains (losses)
on investment securities -- 432 (439)
Shareholder dividends paid (438) (389) (395)
Change in minorities' interests 88 (276) 177
Purchase of treasury stock (306) -- --
Exercise of stock options 84 109 76
All other, net (99) (50) (53)
- -------------------------------------------------------------------------------
Balance as of December 31 $ 5,931 $ 5,396 $ 6,042
================================================================================
</TABLE>
We manage the capital structure of our non-financing operations separately from
that of our more highly leveraged captive financing activities. The following
table summarizes the ratios of earnings to fixed charges and interest expense;
and debt, equity and total capital for our non-financing and financing
activities for the three-year period ended December 31, 1996:
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Financing:
Ratio of Earnings to
Fixed Charges 4.67x 3.79x 3.59x
================================================================================
Ratio of Earnings to
Interest Expense 6.65x 5.17x 5.75x
- --------------------------------------------------------------------------------
Debt $ 2,960 $ 3,012 $ 2,667
Equity 4,565 4,045 4,742
- --------------------------------------------------------------------------------
Total Capital $ 7,525 $ 7,057 $ 7,409
================================================================================
Debt-to-Capital Ratio 39.3% 42.7% 36.0%
================================================================================
Financing:
Debt $ 9,488 $ 8,782 $ 8,288
Equity 1,366 1,351 1,300
- --------------------------------------------------------------------------------
Total Capital $10,854 $10,133 $ 9,588
================================================================================
Debt-to-Equity Ratio 7.0x 6.5x 6.4x
================================================================================
Ratio of Earnings to
Fixed Charges 1.66x 1.71x 1.81x
================================================================================
</TABLE>
[Pictured here is a Xerox employee and a color laser printer]
The XPrint Plus family of color laser printers is the first of several Xerox
printers capable of printing resident Chinese fonts used in the People's
Republic of China. It uses Adobe's PostScript interpreter with simplified
Chinese fonts from Changzhou SinoType Technology Co. Inc. Pictured here is Xiao
Ping Sun, Desktop Printers Unit.
37
<PAGE>
As a result of retained earnings growth, the 1996 debt-to-capital ratio for
non-financing operations, including ESOP debt and discontinued operations debt,
was 39.3 percent or 3.4 points below its year-end 1995 level. Conversely, the
1995 ratio increased by 6.7 points versus year-end 1994 as proceeds from the
sales of Constitution Re Corporation, Viking Insurance Holdings, Inc. and the
Xerox Financial Services Life Insurance Company and related companies were more
than offset by the purchase of the increased financial interest in Rank Xerox
and non-cash charges in connection with the sales of remaining Talegen units.
With respect to our financing operations, we "match fund" by arranging
fixed-rate liabilities with maturities similar to the underlying customer
financing assets. Our guideline debt-to-equity ratio for the financing
operations is 7.0 to 1, up from 6.5 to 1 at year-end 1995, reflecting both the
high credit quality of the underlying assets and the excellent financial returns
from our captive financing businesses.
The following table summarizes the principal causes for changes in
consolidated indebtedness for the three-year period ended December 31, 1996:
<TABLE>
<CAPTION>
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Debt* as of January 1 $ 11,794 $ 10,955 $ 10,084
- --------------------------------------------------------------------------------
Non-Financing Businesses:
Document Processing operations (678) (543) (989)
Increased financial interest in
Rank Xerox -- 972 --
Yen financing repayment -- -- 116
ESOP (53) (49) (45)
Discontinued businesses 47 (399) 605
- --------------------------------------------------------------------------------
Non-Financing (684) (19) (313)
Financing Businesses, net 706 494 650
- --------------------------------------------------------------------------------
Shareholder dividends 438 389 395
- --------------------------------------------------------------------------------
Equity redemption
and other changes 194 (25) 139
- --------------------------------------------------------------------------------
Total Debt* as of December 31 $ 12,448 $ 11,794 $ 10,955
================================================================================
</TABLE>
* Including discontinued operations
[Pictured here is a Document Centre System 35]
London book publisher HarperCollinsPublishers finds that its 12 Document Centre
systems in the London office and five in Scotland help workers optimize their
productivity by managing document production from the desktop. Photographed here
are Jonathan Edwards, Amanda Abernethy and Simon McMurdy, Rank Xerox, with Mike
Naylor, group purchasing director, HarperCollinsPublishers.
38
<PAGE>
Non-Financing Operations
The following table summarizes 1996, 1995 and 1994 Document Processing
non-financing operations cash generation and borrowing:
<TABLE>
<CAPTION>
Cash Generated/(Borrowed)
====================================
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Document Processing
Non-Financing:
Income $ 1,004 $ 970 $ 565
Depreciation and amortization:
Buildings and equipment 372 376 446
Other 343 343 203
Capital expenditures (510) (438) (389)
Assets sold 40 90 220
Restructuring payments (197) (331) (423)
Working capital/other (374) (467) 367
- --------------------------------------------------------------------------------
Net Cash Generation $ 678 $ 543 $ 989
================================================================================
</TABLE>
1996 cash generation of $678 million was $135 million greater than in 1995 as
higher income, and lower restructuring payments and inventory growth more than
offset higher capital spending and tax payments. 1995 cash generation was $446
million below the 1994 level due to higher capital spending and lower fixed
asset sales, inventory growth and 1994 profit sharing paid in 1995 which
together more than offset 1995 net income growth and lower restructuring
payments.
Discontinued businesses used $47 million of cash in 1996 and generated $399
million of cash in 1995. This year-over-year change primarily reflects 1995 cash
proceeds relating to the sales of Constitution Re Corporation, Viking Insurance
Holdings, Inc. and the Xerox Financial Services Life Insurance Company and
related companies.
Financing Businesses
Financing business debt grew by $706 million in 1996 or $212 million more than
in 1995 due to higher growth in equipment sales revenue and the modest increase
to our leverage guideline. Financing debt growth of $494 million in 1995 was
$156 million less than in 1994 due to lower equipment sales revenue growth and
the effects of translating foreign currencies into U.S. dollars.
Debt related to discontinued third-party financing and real estate
investments, which is included in Financing Business debt, totaled $223 million
in 1996 and $231 million in 1995 and 1994. Sales of third-party financing assets
and portfolio run-off in 1996 more than offset growth in reported debt caused by
our
[Pictured here are four Xerox employees in front of the Senate building in
Brasilia]
Solucao de impressao Xerox
para o Senado Brasileiro
Xerox printing solution for Brazilian Senate
The information and data processing center for the Federal Senate of Brazil
relies on 150 Xerox printers to handle Senate printing. Photographed here in
front of the Senate building in Brasilia are the members of the Xerox team: Joao
Inacio, Renato Furtado, Flavio Peixoto Gomes and Francisco Rincon.
39
<PAGE>
decision to fund the retirement of certain debt of our discontinued real estate
business with lower cost Company borrowing. Portfolio run-off in 1995 was offset
by timing differences related to tax payments resulting in no net change when
compared with year-end 1994.
Funding Plans for 1997
Non-financing debt levels will be significantly reduced by expected sales of the
remaining Talegen insurance operating units including the announced sale of
Coregis to a subsidiary of GE Capital Corporation. However, the reduction will
be partially offset by borrowings related to repurchases of our common stock. In
January 1997, to provide future financial flexibility, a special purpose
subsidiary of the Company completed the sale to investors of 650,000 shares of 8
percent Capital Securities thereby generating net proceeds of $643 million.
Customer financing-related debt is planned to increase in line with 1997
sales growth while third-party financing-related debt is expected to continue to
decline.
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. Xerox and Xerox Credit
Corporation (XCC) have a $5.0 billion revolving credit agreement with a group of
banks, which expires in 2000. This facility is unused and available to provide
back-up to Xerox and XCC commercial paper borrowings, which amounted to $3.1
billion and $2.8 billion at December 31, 1996 and 1995, respectively. In
addition, our foreign subsidiaries have unused committed long-term lines of
credit aggregating $2.1 billion, in various currencies at prevailing interest
rates, that are used to provide back-up to short-term indebtedness.
At December 31, 1996, Xerox and XCC had domestic shelf capacity of $850
million and $450 million, respectively. In addition, a $2 billion Euro-debt
facility is available to both the Company and XCC of which $1.397 billion
remained unused at December 31, 1996.
[Pictured here is a Xerox employee and a pie chart depicting the investors in a
long-term financing]
Doug Mahoney, North American Capital Markets, discusses one of several
attractive long-term financings arranged in 1996.
40
<PAGE>
Decisions in 1997 regarding the size and timing of any new term debt
financing will be made based on cash flows, match funding needs, refinancing
requirements and capital market conditions.
Hedging Instruments
We have entered into certain financial instruments to manage interest rate and
foreign currency exposures. These instruments are held solely for hedging
purposes and include interest rate swap agreements, forward 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 suppliers, or a forward exchange contract to fix the
dollar value of a foreign currency-denominated loan. In addition, when
cost-effective, currency derivatives are also used to hedge balance sheet
exposures.
Revenues denominated in currencies where the local currency is the
functional currency are not hedged.
With regard to interest rate hedging, virtually all customer financing
assets earn fixed rates of interest and, therefore, we "lock in" an interest
rate spread by arranging fixed-rate liabilities with similar maturities as the
underlying assets. Additionally, customer financing assets in one currency are
consistently funded with liabilities in the same currency. We refer to the
effect of these conservative practices as "match funding" customer financing
assets. This practice effectively eliminates the risk of a major decline in
interest margins resulting from adverse changes in the interest rate
environment. Conversely, this practice 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 commercial paper or LIBOR 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
[Pictured here is a DocuTech 135 advertisement in Brazil]
Brazil printer Grafica Tullio Samorini features the DocuTech in its advertising.
We now have 350 DocuTechs installed in Brazil.
41
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1996 1995 1994
=============================================
<S> <C> <C> <C>
- ------------------------------------------------------------------------
Cash Flows from Operating Activities
Income from Continuing Operations $ 1,206 $1,174 $ 794
Adjustments required to reconcile income to cash flows
from operating activities:
Depreciation and amortization 715 719 649
Provision for doubtful accounts 259 235 202
Provision for postretirement medical benefits, net of payments 38 40 54
Charges against 1993 restructuring reserve (197) (331) (423)
Minorities' interests in earnings of subsidiaries 161 191 213
Undistributed equity in income of affiliated companies (84) (90) (54)
Increase in inventories (422) (663) (472)
Increase in finance receivables (1,220) (701) (887)
Increase in accounts receivable (180) (173) (266)
Increase in accounts payable and accrued
compensation and benefit costs 63 179 205
Net change in current and deferred income taxes 293 263 258
Other, net (308) (244) 206
---------------------------------------------
Total 324 599 479
---------------------------------------------
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (510) (438) (389)
Proceeds from sales of land, buildings and equipment 40 90 220
Net change in payables to Discontinued Operations (51) (57) (124)
Proceeds from sale of Constitution Re and Viking -- 526 --
Purchase of additional interest in Rank Xerox -- (972) --
---------------------------------------------
Total (521) (851) (293)
---------------------------------------------
Cash Flows from Financing Activities
Net change in debt 990 766 550
Yen financing repayment -- -- (116)
Dividends on common and preferred stock (438) (389) (395)
Proceeds from sale of common stock 95 111 74
Repurchase of preferred and common stock (316) (41) (229)
Dividends to minority shareholders (68) (86) (97)
Proceeds received from (returned to) minority shareholders 32 20 (32)
---------------------------------------------
Total 295 381 (245)
---------------------------------------------
Effect of Exchange Rate Changes on Cash (6) (5) (78)
---------------------------------------------
Cash Provided (Used) by Continuing Operations 92 124 (137)
Cash Provided (Used) by Discontinued Operations (124) (29) 106
---------------------------------------------
Increase (Decrease) in Cash (32) 95 (31)
Cash at Beginning of Year 136 41 72
---------------------------------------------
Cash at End of Year $ 104 $ 136 $ 41
=============================================
</TABLE>
The accompanying notes on pages 48 to 67 are an integral part of the
consolidated financial statements.
42
<PAGE>
address this risk by arranging swaps exclusively with a diverse group of
strong-credit counterparties, regularly monitoring their credit ratings, and
determining the replacement cost, if any, of existing transactions.
On an overall worldwide basis, and including the impact of our hedging
activities, weighted average interest rates for 1996, 1995 and 1994 approximated
6.9 percent, 7.7 percent and 7.5 percent, respectively.
Our currency and interest rate hedging are typically unaffected by changes
in market conditions as forward contracts, options and swaps are normally held
to maturity consistent with our objective to lock in currency rates and interest
rate spreads on the underlying transactions.
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, including growth in finance receivables, generated
positive cash flows in each of the past three years. Cash generation of $324
million in 1996 was below that of 1995 and 1994 due to higher finance
receivables associated with improved equipment sales performance.
Investing activities resulted in net cash usage in all three years. Net
usage in 1996 was $521 million, $330 million less than in 1995 but $228 more
than in 1994. Lower 1996 usage versus the prior year is mainly the result of the
1995 payment to the Rank Group Plc which increased our financial interest in
Rank Xerox and was only partially offset by proceeds from the sales of certain
Talegen units. The lower level of investing in 1994 was primarily due to asset
sales related to our information management outsourcing initiative.
Financing activities generated $295 million and $381 million of cash in
1996 and 1995, respectively, but used $245 million of cash in 1994. Included
within financing activities is borrowing related to the repurchase of common and
preferred stock.
Overall, continuing operations provided $92 million and $124 million of
cash in 1996 and 1995, respectively, and used $137 million in 1994.
Discontinued operations used $124 million and $29 million of cash in 1996
and 1995, respectively, and generated $106 million in 1994.
On a combined basis, continuing and discontinued operations produced $32
million of growth in cash balances during the three years ended December 31,
1996.
Discontinued Operations - Insurance and Other Financial Services
In January 1993, we announced our decision to sell or otherwise disengage from
the Insurance and Other Financial Services (IOFS) businesses. IOFS consists of
our Insurance, Other Financial Services, and Third-Party Financing and
Real-Estate segments. In connection with this decision, during 1995 we sold
Xerox Financial Services Life Insurance Company, Constitution Re Corporation
(CRC) and Viking Insurance Holdings, Inc. (Viking) and in 1996 we sold the
remaining portion of First Quadrant Corp.
In January 1996, we announced agreements to sell all of our "Remaining"
insurance companies, which includes Coregis Group, Inc. (Coregis), Crum &
Forster Holdings, Inc. (CFI), Industrial Indemnity Holdings, Inc. (II),
Westchester Specialty Group, Inc. (WSG), The Resolution Group, Inc. (TRG) and
three insurance-related service companies, to investor groups led by Kohlberg
Kravis Roberts & Co. (KKR) and Talegen/TRG management. In connection with the
transactions, we recorded a $1,546 million after-tax charge in 1995.
On September 11, 1996, Xerox and KKR announced that they had mutually
agreed to terminate the transactions. No additional charges are considered
necessary as a result of the termination of the KKR transactions. In September
1996, the Board of Directors of Xerox formally approved a plan of disposal under
which we have retained investment bankers to assist us in the
43
<PAGE>
simultaneous marketing of each of the remaining insurance and service companies.
During the disposal process, we will continue to be subject to all business
risks and rewards of the insurance businesses. Although we believe that the
disposal of the Remaining insurance companies will be either fully or
substantially completed by the end of 1997, and that the proceeds received from
such disposals will be consistent with our net carrying value of these
businesses, until such Remaining insurance companies are actually sold, no
assurances can be given as to the ultimate impact the Remaining insurance
companies will have on our total results from operations.
Our objective is to continue to maximize value from our Insurance
investments. The ultimate value will depend on the success of operational
improvements, timing, the level of interest rates and the relative value of
insurance properties.
In January 1997, we announced an agreement to sell the Coregis insurance
unit to a subsidiary of GE Capital Corporation for $375 million in cash and the
assumption of $75 million in debt. The selling price is in excess of book value
and is consistent with the estimated value for the unit when we discontinued the
insurance operations in 1995. The transaction is subject to customary closing
conditions and regulatory approvals. In 1996, Coregis had gross written premiums
of $423 million and at December 31, 1996, policyholders surplus of $271 million.
Also in January 1997, in an unrelated transaction, Andersen Consulting
agreed to acquire certain assets of Apprise Corp., one of Talegen's
insurance-related service companies, and enter into separate multi-year
information technology service agreements with each of the Remaining insurance
companies. The financial terms of this transaction were not material.
The net investment in the discontinued IOFS businesses totaled $2,124
million at December 31, 1996, compared with $2,000 million and $3,710 million at
December 31, 1995 and 1994, respectively. The increase in 1996 over 1995
primarily includes scheduled funding of reinsurance coverage for the Talegen
companies by Ridge Reinsurance Limited (Ridge Re) and interest for the period on
the assigned debt, partially offset by asset sales and run-off activity
associated with the Third-Party Financing and Real-Estate segment. A discussion
of the discontinued businesses follows.
Status of Insurance
In 1993, Talegen completed a restructuring that established and capitalized the
following seven insurance operating groups as independent legal entities: CRC,
Coregis, CFI, II, Viking, WSG and TRG. The insurance segment now includes
Talegen, which is the holding company of Coregis, CFI, II and WSG and three
insurance-related service companies; TRG, a former Talegen company, primarily
involved in run-off activities, collection of reinsurance and management of
latent exposure claims; Ridge Re; and that portion of the Xerox Financial
Services, Inc. (XFSI) headquarters costs and interest expense associated with
the insurance business activities.
In connection with the restructuring of Talegen, XFSI agreed that support
would be provided to the seven insurance operating groups in the form of
aggregate excess of loss reinsurance. This reinsurance protection is provided
through XFSI's single purpose, wholly-owned reinsurance company Ridge Re, which
was established in 1992.
XFSI is obligated to pay annual premium installments of $49 million, plus
finance charges, for 10 years, for coverage totaling $1,245 million, which is
net of 15 percent coinsurance. A total of six annual premium installments remain
to be paid as of December 31, 1996 and Xerox has guaranteed the payment by XFSI
of all such premiums. Xerox has also guaranteed Ridge Re's performance under a
$400 million letter of credit facility required to provide security with respect
to aggregate excess of loss reinsurance obligations under contracts with the
Remaining insurance companies.
44
<PAGE>
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. In addition, XFSI has guaranteed to the Remaining insurance
companies that Ridge Re will meet all of its financial obligations under the
foregoing excess of loss reinsurance issued to them.
Sale of Talegen Insurance Companies
In April 1995, CRC was sold to EXOR America Inc. for a purchase price of $421
million in cash. In July 1995, Viking was sold to Guaranty National Corporation
for approximately $103 million in cash plus future upward price adjustments
based on loss reserve development. The purchase price of both transactions
approximated book value. The proceeds of both transactions were primarily used
to retire debt.
Insurance Operating Results
Operating results for the discontinued Insurance segment are summarized below:
<TABLE>
<CAPTION>
Year-ended December 31,
----------------------------------
(In millions) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Insurance Revenue1 $ 2,143 $ 2,106 $ 2,069
================================================================================
Insurance Pre-Tax Income (Loss):
Underwriting $ (515) $ (751) $ (229)
Investment income 438 405 353
Net realized capital gains 4 60 12
Interest expense (203) (228) (218)
Ridge Re related and other 44 (501) (23)
- --------------------------------------------------------------------------------
Pre-Tax Loss From Operations (232) (1,015) (105)
Loss on disposal -- (978) --
- --------------------------------------------------------------------------------
Total Insurance Pre-Tax Loss1 $ (232) $(1,993) $ (105)
================================================================================
After-Tax Income (Loss):
Insurance $ (135) $(1,641) $ (48)
Dispositioned companies -- (5) 48
- --------------------------------------------------------------------------------
Total After-Tax Income (Loss)2 $ (135) $(1,646) $ --
================================================================================
</TABLE>
1 Revenue and pre-tax income excludes the results of CRC and Viking, which were
sold in 1995. The results of those units are shown on an after-tax basis under
the caption "Dispositioned companies."
2 The 1996 total Insurance after-tax loss of $135 million was charged against
reserves established for this purpose and, therefore, does not impact our
earnings.
Revenues for 1996 totaled $2,143 million, a growth of 2 percent from 1995 due to
improvements in both earned premiums and investment income.
The 1996 Insurance pre-tax loss of $232 million declined by $1,761 million
compared with 1995, primarily due to the provision in the fourth quarter of 1995
as a result of the discontinuance of the Insurance segment. The 1995 after-tax
provision consisted of a non-cash loss of $978 million (including a goodwill
write-off of $245 million), reserve strengthening at the Remaining insurance
companies of $176 million, and Ridge Re related and other accruals of $392
million to cover all estimated future expenses associated with the excess of
loss reinsurance coverage to Talegen and TRG. Other items impacting the
year-over-year results include improvements in investment income, lower interest
expense and lower Ridge Re related and other expenses, partially offset by lower
net realized capital gains due to the portfolio repositioning in the third
quarter of 1995 and strengthening of TRG's latent exposure reserves in 1996.
The net investment in the discontinued Insurance segment at December 31,
1996 totaled $1,846 million compared with $1,678 million and $3,212 million at
December 31, 1995 and 1994, respectively. The increase in 1996 over 1995 is
primarily due to contractual payments to Ridge Re for annual premium
installments and associated finance charges and interest on the assigned
insurance debt that will continue until the Remaining insurance companies are
sold.
Property and Casualty Operating Trends
The industry's profitability can be significantly affected by cyclical
competitive conditions, judicial decisions affecting insurers' liabilities, and
by volatile and unpredictable developments, including changes in the propensity
of courts to grant large awards, fluctuations in interest rates and other
changes in the investment environment (which affect market prices of insurance
companies' investments, the income from those investments and inflationary
pressures that may tend
45
<PAGE>
to affect the size of losses). Talegen's and TRG's operating results have
historically been influenced by these industry trends, as well as by their
exposure to uncollectible reinsurance, which had been greater than most other
insurers.
Latent Exposures
Claims resulting from asbestos, environmental and other latent exposures have
provided unique and difficult challenges to the insurance industry and to
certain of the Remaining insurance companies due to their historical writings.
The possibility that these claims would emerge was often not contemplated at the
time the policies were written and traditional actuarial reserving methodologies
have not been useful in accurately estimating ultimate losses.
Prior to 1995, the Remaining insurance companies established case and
incurred but not reported (IBNR) reserves for latent exposure claims that had
been reported. The IBNR reserves were established primarily to cover adverse
development on known claims. Case reserves have been and continue to be
determined by a specialized claim and legal staff. Building on methodologies
first published in the third quarter of 1994 by the Casualty Actuarial Society
and utilizing data from policyholders and third parties such as the
Environmental Protection Agency, Talegen initiated a project in 1995 to create
and implement comprehensive, sophisticated costing methodologies to provide
estimates of aggregate ultimate losses for asbestos and environmental exposures.
During 1996 and 1995, results of the costing methodologies led the Remaining
insurance companies to strengthen their gross asbestos reserves by $525 million
and gross environmental reserves by $549 million. Additionally, case development
and IBNR reserve strengthening led to an increase in gross other latent exposure
reserves of $223 million during 1996 and 1995.
The development of costing methodologies for asbestos, environmental and
other latent exposures is considered by management to be substantially complete.
However, additional liabilities and reinsurance recoverables could arise as
judicial patterns emerge through the appellate process and remove or add to
uncertainties surrounding these latent exposure areas, as new claim information
is received and assessed, and as refinements to the costing methodologies are
made. The Remaining insurance companies do not believe that liabilities
associated with incurred latent exposure claims will have a material adverse
effect on their future liquidity or financial position. However, given the
complexity of coverage and other legal issues, and the significant assumptions
necessarily used in estimating such exposures, actual results could
significantly differ from current estimates.
Reserves for the Remaining Insurance Companies
Gross and net unpaid losses and loss expenses for the Remaining insurance
companies as of December 31, 1996 and 1995, in total and for each latent
exposure area are summarized in the following table:
Unpaid Losses and Loss Expenses
<TABLE>
<CAPTION>
Gross Net
(In millions) Reserves Reserves
- --------------------------------------------------------------------------------
<S> <C> <C>
December 31, 1996 in total: $8,496 $5,619
================================================================================
Latent exposure areas1
Asbestos $ 710 $ 235
Environmental 690 381
Other latent exposures 296 106
- --------------------------------------------------------------------------------
Total $1,696 $ 722
================================================================================
December 31, 1995 in total: $8,478 $5,650
================================================================================
Latent exposure areas1
Asbestos $ 498 $ 224
Environmental 530 253
Other latent exposures 211 48
- --------------------------------------------------------------------------------
Total $1,239 $ 525
================================================================================
</TABLE>
1 Net latent exposure reserves have not been reduced for recoverables from Ridge
Re because the Ridge Re contract is an aggregate excess of loss contract
covering all lines of business for the Remaining insurance companies.
Additionally, the net latent exposure reserves presented do not include reserves
for uncollectible reinsurance.
46
<PAGE>
Gross loss and loss expense reserves attributable to prior accident year
losses for the Remaining insurance companies were strengthened by $421 million
and $913 million in 1996 and 1995, respectively. After consideration of losses
ceded to reinsurers, other than Ridge Re, and uncollectible reinsurance, net
unpaid loss and loss expense reserves were strengthened by $334 million and $769
million in 1996 and 1995, respectively. The aggregate 1996 and 1995 net
strengthening was comprised of additions to latent exposure reserves, non-latent
exposure reserves and the reserve for uncollectible reinsurance of $647 million,
$113 million and $343 million, respectively. The strengthening of net reserves
excludes pre-tax cessions to Ridge Re of $103 million and $476 million in 1996
and 1995, respectively, which, while beneficial to Talegen and TRG, cessions to
Ridge Re do not result in a benefit to the consolidated Xerox accounts.
Other Financial Services
Other Financial Services (OFS), which were discontinued in 1993, had no
after-tax income in the full year 1996, 1995 and 1994. The net investment in OFS
at December 31, 1996 was $101 million compared to $114 million and $232 million
at December 31, 1995 and 1994, respectively. The decrease in 1996 over 1995
primarily reflects the sale of the remaining portion of First Quadrant Corp.
On June 1, 1995, XFSI completed the sale of Xerox Financial Services Life
Insurance Company and related companies (Xerox Life Companies) to a subsidiary
of General American Life Insurance Company. After the sale, the Xerox Life
Companies names were changed to replace the name "Xerox" in the corporate titles
with the name "Cova" (Cova Companies). OakRe Life Insurance Company (OakRe), an
XFSI subsidiary formed in 1994, has assumed responsibility for existing Single
Premium Deferred Annuity (SPDA) policies issued by Xerox Life via coinsurance
agreements (Coinsurance Agreements). The Coinsurance Agreements include a
provision for the assumption (at their election) by the Cova Companies, of all
of the SPDA policies at the end of their current rate reset periods. A Novation
Agreement with an affiliate of the new owner provides for the assumption of the
liability under the Coinsurance Agreements for any SPDA policies not so assumed
by the Cova Companies. Other 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 Cova Companies.
As a result of the Coinsurance Agreements, at December 31, 1996, OakRe
retained approximately $2.0 billion of investment portfolio assets ($3.2 billion
transferred from the Xerox Life Companies at June 1, 1995) 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. The
Xerox Life Companies' 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, 1996. 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, 1996, 1995 and 1994
totaled $450 million, $489 million and $547 million, respectively. The proceeds
from the asset sales and run-off activity were consistent with the amounts
contemplated in the formal disposal plan.
47
<PAGE>
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.
Rank Xerox Limited, Rank Xerox Holding BV, Rank Xerox Investment Limited, R-X
Holdings Limited and their respective subsidiaries, and the other subsidiaries
owned by the Company and The Rank Group Plc are referred to as Rank Xerox.
Investments in which we have a 20 to 50 percent ownership interest are
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 January 1, 1995, we changed the reporting periods of Rank Xerox
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. As a result of our decision to sell our Insurance
operations, see Note 10 on Page 52, we now 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. Primary earnings per share are based on net income less
preferred stock dividend requirements divided by the average common shares
outstanding during the period and common equivalent shares related to dilutive
stock options and Xerox Canada Inc. exchangeable Class B stock. Fully diluted
earnings per share assume full conversion of convertible debt and convertible
preferred stock into common stock at the beginning of the year or date of
issuance, unless they are antidilutive.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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.
Accumulated amortization at December 31, 1996 and 1995 was $41 and $25,
respectively.
Accounting Changes. Effective January 1, 1996, we adopted Statement of Financial
Accounting Standards (SFAS) No. 121 - "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires companies to review assets for possible impairment and provides
guidelines for recognition of impairment losses related to long-lived assets,
certain intangibles and assets to be disposed of. The impact of the adoption of
SFAS No. 121 was immaterial.
Effective January 1, 1996, we adopted SFAS No. 123 - "Accounting for
Stock-Based Compensation." SFAS No. 123 allows companies to elect to recognize
compensation cost for stock-based employee compensation arrangements or to
disclose in the notes to the consolidated financial statements the impact on net
income and earnings per share as if the fair value based compensation cost had
been recognized. See Note 17 on Page 66 for such disclosures.
48
<PAGE>
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 7 on Page 51.
Classification of Commercial Paper and Bank Notes Payable. It is our policy to
classify as long-term debt that portion of commercial paper and bank notes
payable that is intended to match fund finance receivables due after one year to
the extent that we have the ability under our revolving credit agreement to
refinance such commercial paper and notes payable on a long-term basis. See Note
11 on Page 56.
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 our subsidiaries, primarily those in Latin America,
which conduct their business in U.S. dollars or operate in hyperinfla-tionary
economies. A combination of current and historical exchange rates are used in
remeasuring the local currency transactions of these subsidiaries and the
resulting exchange adjustments are included in income. Aggregate foreign
currency losses were $27, $18, and $136 in 1996, 1995, and 1994, respectively,
and are included in Other, net in the consolidated statements of income. The
decline in currency losses in 1996 and 1995 from prior years is primarily due to
the relative stabilization of exchange rates in Brazil commencing after July 1,
1994.
Reclassifications. Effective with 1996 reporting, our China operations are fully
consolidated. Prior years' financial statements have been restated to reflect
this change and several other accounting reclassifications were made to conform
with the 1996 presentation. The impact of these changes is not material and did
not affect net income.
2 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.
3 Acquisition
On February 28, 1995, we paid The Rank Group Plc (RO) (pound)620 million, or
approximately $972, for 40 percent of RO's financial interest in Rank Xerox. The
transaction increased our financial interest in Rank Xerox to 80 percent from 67
percent. Our additional interest in the operating results of Rank Xerox 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.
49
<PAGE>
4 1993 Restructuring Charge
In 1993, we recorded a restructuring charge which aggregated $1,195 relating to
a restructuring program aimed at significantly reducing our cost base and at
improving productivity. Our objectives were to reduce our worldwide work force
by more than 10,000 employees and to close or consolidate a number of
facilities.
Charges to the reserve for the three years ending December 31, 1996 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net charges to
restructuring reserve $222 $370* $430
================================================================================
Reserve balance:
Current $131 $298 $429
Non-current 42 97 336
- --------------------------------------------------------------------------------
Total reserve balance $173 $395 $765
================================================================================
</TABLE>
* Includes $30 charged to the reserve during the stub period.
Management believes that the aggregate reserve balance of $173 at December 31,
1996 is adequate for completion of the restructuring program.
5 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, 1996, 1995 and 1994 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross receivables $ 13,916 $ 12,721 $ 12,135
Unearned income (2,551) (2,207) (2,074)
Unguaranteed residual values 354 283 206
Allowance for doubtful accounts (347) (322) (319)
- -------------------------------------------------------------------------------
Finance receivables, net 11,372 10,475 9,948
Less current portion 4,386 4,069 3,910
- -------------------------------------------------------------------------------
Amounts due after one year, net $ 6,986 $ 6,406 $ 6,038
===============================================================================
</TABLE>
Contractual maturities of our gross finance receivables subsequent to
December 31, 1996 follow:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5,492 $3,708 $2,626 $1,493 $507 $90
================================================================================
</TABLE>
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.
6 Inventories
The components of inventories at December 31, 1996, 1995 and 1994 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Finished goods $1,570 $1,646 $1,458
Work in process 80 88 88
Raw materials 322 295 268
Equipment on operating leases, net 704 627 480
- --------------------------------------------------------------------------------
Inventories $2,676 $2,656 $2,294
================================================================================
</TABLE>
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,
1996, 1995 and 1994 amounted to $1,259, $1,065 and $824, respectively. Scheduled
minimum future rental revenues on operating leases with original terms of one
year or longer are:
<TABLE>
<CAPTION>
1997 1998 1999 Thereafter
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$446 $202 $101 $48
================================================================================
</TABLE>
Total contingent rentals, principally usage charges in excess of minimum
allowances relating to operating leases, for the years ended December 31, 1996,
1995 and 1994 amounted to $199, $190 and $197, respectively.
50
<PAGE>
7 Land, Buildings and Equipment, net
The components of land, buildings and equipment, net at December 31, 1996, 1995
and 1994 follow:
<TABLE>
<CAPTION>
Estimated
Useful Lives
(Years) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Land $ 89 $ 85 $ 87
Buildings and building
equipment 20 to 40 991 941 876
Leasehold improvements Lease term 378 347 339
Plant machinery 4 to 12 1,862 1,907 1,843
Office furniture and
equipment 3 to 10 1,231 1,161 1,245
Other 3 to 20 218 201 139
Construction in progress 250 231 227
- --------------------------------------------------------------------------------
Subtotal 5,019 4,873 4,756
Less accumulated depreciation 2,763 2,768 2,648
- --------------------------------------------------------------------------------
Land, buildings and equipment, net $2,256 $2,105 $2,108
================================================================================
</TABLE>
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, 1996, 1995 and 1994 amounted to $421, $425 and
$502, respectively. Future minimum operating lease commitments that have
remaining non-cancelable lease terms in excess of one year at December 31, 1996
follow:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$311 $241 $179 $144 $119 $406
================================================================================
</TABLE>
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 $27 at December 31, 1996.
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:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$336 $300 $261 $233 $222 $485
================================================================================
</TABLE>
8 Investments in Affiliates, at Equity
Investments in corporate joint ventures and other companies in which we have a
20 to 50 percent ownership interest at December 31, 1996, 1995 and 1994 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fuji Xerox $1,173 $1,223 $1,183
Other investments 109 91 95
- --------------------------------------------------------------------------------
Investments in affiliates, at equity $1,282 $1,314 $1,278
================================================================================
</TABLE>
Rank Xerox, 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. Condensed financial
data of Fuji Xerox for its last three fiscal years ended October 20, follow:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Summary of Operations
Revenues $8,091 $8,500 $7,235
Costs and expenses 7,546 7,989 6,829
- --------------------------------------------------------------------------------
Income before income taxes 545 511 406
Income taxes 313 287 235
- --------------------------------------------------------------------------------
Net income $ 232 $ 224 $ 171
================================================================================
Rank Xerox' equity in net income $ 116 $ 112 $ 86
================================================================================
Xerox' equity in net income $ 93 $ 88 $ 57
================================================================================
Balance Sheet Data
Assets
Current assets $3,008 $3,518 $3,428
Non-current assets 3,168 3,085 3,038
- --------------------------------------------------------------------------------
Total assets $6,176 $6,603 $6,466
================================================================================
Liabilities and Shareholders' Equity
Current liabilities $2,546 $2,675 $2,567
Long-term debt 427 594 658
Other non-current liabilities 850 884 871
Shareholders' equity 2,353 2,450 2,370
- --------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $6,176 $6,603 $6,466
================================================================================
</TABLE>
51
<PAGE>
9 Geographic Area Data
Revenues and assets of Rank Xerox are substantially attributable to European
operations; their consolidated operations in Africa, Asia and the Middle East
together comprise less than two percent of our consolidated amounts. The Other
Areas classification includes operations principally in Latin America and
Canada.
Intercompany revenues are generally based on manufacturing cost plus a
markup to recover other operating costs and to provide a profit margin to the
selling company.
Geographic area data for our continuing operations follow:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from Unrelated Entities:
United States $ 8,583 $ 8,068 $ 7,822
Rank Xerox 5,501 5,495 4,566
Other Areas 3,294 3,025 2,696
- -------------------------------------------------------------------------------
Total $ 17,378 $ 16,588 $ 15,084
===============================================================================
Intercompany Revenues:
United States $ 1,377 $ 1,376 $ 1,291
Rank Xerox 230 226 262
Other Areas 425 463 362
- -------------------------------------------------------------------------------
Total $ 2,032 $ 2,065 $ 1,915
===============================================================================
Total Revenues:
United States $ 9,960 $ 9,444 $ 9,113
Rank Xerox 5,731 5,721 4,828
Other Areas 3,719 3,488 3,058
Less intercompany revenues (2,032) (2,065) (1,915)
- -------------------------------------------------------------------------------
Total $ 17,378 $ 16,588 $ 15,084
===============================================================================
Net Income (Before
Intercompany Eliminations):
United States $ 444 $ 370 $ 436
Rank Xerox 432 409 218
Other Areas 375 364 193
- -------------------------------------------------------------------------------
Total $ 1,251 $ 1,143 $ 847
===============================================================================
Net Income (After
Intercompany Eliminations):
United States $ 414 $ 418 $ 386
Rank Xerox 431 408 215
Other Areas 361 348 193
- -------------------------------------------------------------------------------
Total $ 1,206 $ 1,174 $ 794
===============================================================================
Assets:
United States $ 10,354 $ 9,876 $ 9,133
Rank Xerox 7,844 7,566 7,171
Other Areas 4,222 3,756 3,070
- -------------------------------------------------------------------------------
Subtotal 22,420 21,198 19,374
Investment in
discontinued operations 4,398 4,810 7,904
- -------------------------------------------------------------------------------
Total $ 26,818 $ 26,008 $ 27,278
===============================================================================
</TABLE>
10 Discontinued Operations
In January 1993, we announced our intent to sell or otherwise disengage from our
Insurance and Other Financial Services businesses. Since that time, we have
disposed of a number of these businesses through sale and run-off collection
activities. At December 31, 1996, 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. The Insurance business
consists of Talegen Holdings, Inc. (Talegen), The Resolution Group, Inc. (TRG),
Ridge Reinsurance Limited (Ridge Re) and headquarters costs and interest expense
associated with the insurance activities of Xerox Financial Services, Inc.
(XFSI).
In January 1996, we announced agreements to sell all of the remaining
insurance and insurance-related service companies of Talegen and TRG (the
Remaining companies), for approximately $2.7 billion, to investor groups led by
Kohlberg Kravis Roberts & Co. (KKR) and Talegen/TRG management. However, in
September 1996, KKR and the Company mutually agreed to terminate these
agreements. As a result, the Board of Directors formally approved a plan of
disposal under which we have retained investment bankers to assist us in
simultaneously marketing each of the Remaining companies. We expect our strategy
of exiting the Insurance business to be either fully or substantially completed
by the end of 1997.
In connection with the announced sale of the Remaining companies to KKR, we
recorded a $1,546 loss on disposal in the fourth quarter of 1995. Based on
current estimates of the value of the Remaining companies, no additional charges
are required as a result of the terminated agreements.
Insurance. In 1993, 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., Industrial Indemnity Insurance Holdings, Inc., TRG, Viking
Insurance Holdings, Inc. (Viking) and Westchester Specialty Group, Inc.
In connection with the restructuring of Talegen, XFSI agreed that support
would be provided in the form of aggregate excess of loss reinsurance. This
reinsurance protection
52
<PAGE>
is provided through XFSI's single purpose, wholly owned reinsurance company
Ridge Re, which was established in 1992. Commencing in 1993, XFSI became
obligated to pay Ridge Re annual premium installments of $49, plus finance
charges, for 10 years, for coverage totaling $1,245, which is net of 15 percent
coinsurance. The XFSI premium payments have been guaranteed by us. We have also
guaranteed Ridge Re's performance under a $400 letter of credit facility
required to provide security with respect to aggregate excess of loss
reinsurance obligations under contracts with the Remaining companies. At
December 31, 1996, Ridge Re recognized approximately $650 of the $1,245 excess
of loss reinsurance coverage estimated to be required based on actuarial
projections.
XFSI may also be required, under certain circumstances, to purchase up to
$301 in redeemable preferred stock of Ridge Re. In addition, XFSI has guaranteed
to the Remaining companies that Ridge Re will meet all of its financial
obligations under all of the foregoing excess of loss reinsurance issued to
them.
Sales of Talegen Insurance Operating Groups. In April 1995, CRC was sold for a
purchase price of $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 transaction approximated book
value. The proceeds of both transactions were used to retire debt.
In January 1997, we announced the sale of the Coregis insurance unit to a
subsidiary of GE Capital Corporation for $450. The consideration, which is
comprised of $375 in cash and $75 assumed debt, is in excess of book value and
is consistent with the estimated value for the unit when we discontinued the
Insurance operations in 1995. The transaction is subject to regulatory approvals
and customary closing conditions and is expected to close in the second quarter
of 1997. In 1996, Coregis had gross written premiums of $423 and a year-end
policyholders surplus of $271.
Insurance Financial Information. Summarized operating results of Insurance for
the three years ended December 31, 1996 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Insurance premiums earned $ 1,708 $ 1,888 $ 2,312
Investment and other income 435 464 437
- -------------------------------------------------------------------------------
Total Revenues 2,143 2,352 2,749
- --------------------------------------------------------------------------------
Costs and Expenses
Insurance losses and loss expenses 1,667 2,031 1,769
Insurance acquisition costs and
other operating expenses 557 619 777
Interest expense 203 231 212
Administrative and
general expenses (48) 556 47
- -------------------------------------------------------------------------------
Total costs and expenses 2,379 3,437 2,805
Realized capital gains 4 60 12
- -------------------------------------------------------------------------------
Income (loss) before income taxes (232) (1,025) (44)
Income tax benefits 97 357 44
- -------------------------------------------------------------------------------
Net income (loss) from
operations* (135) (668) --
Loss on disposal -- (978) --
- -------------------------------------------------------------------------------
Income (loss) from Insurance $ (135) $(1,646) $ --
===============================================================================
</TABLE>
* The 1995 amount includes $568 of after-tax reserves.
The 1996 total insurance after-tax loss of $135 was charged to reserves
established for this purpose and, therefore, did not impact our earnings.
The net assets at December 31, 1996, 1995 and 1994 of the Insurance
businesses included in our consolidated balance sheets as discontinued
operations are summarized as follow:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Insurance Assets
Investments $ 7,889 $ 7,871 $ 8,384
Reinsurance recoverable 2,458 2,616 3,063
Premiums and other receivables 1,082 1,191 1,276
Deferred taxes and other assets 1,201 1,450 1,743
- --------------------------------------------------------------------------------
Total Insurance assets $12,630 $13,128 $14,466
- --------------------------------------------------------------------------------
Insurance Liabilities
Unpaid losses and loss expenses $ 8,572 $ 8,761 $ 8,809
Unearned income 812 859 1,066
Notes payable 215 372 425
Other liabilities 1,185 1,458 954
- --------------------------------------------------------------------------------
Total Insurance liabilities 10,784 11,450 11,254
- --------------------------------------------------------------------------------
Investment in Insurance, net $ 1,846 $ 1,678 $ 3,212
================================================================================
</TABLE>
53
<PAGE>
At December 31,1996 and 1995, intercompany receivables aggregating
approximately $414 and $465, 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 remaining Talegen and TRG sales are completed.
The Investments caption consists mainly of short-term investments as shown
below. At December 31, 1996, approximately 96 percent of the fixed maturity
investments are investment grade securities. The amortized cost and fair value
of the investment portfolio at December 31, 1996 follow:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities $3,097 $3,121
Equity securities 2 3
Short-term investments 4,765 4,765
- --------------------------------------------------------------------------------
Total investments $7,864 $7,889
================================================================================
</TABLE>
Activity related to unpaid losses and loss expenses for the three years ended
December 31, 1996 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Unpaid Losses and Loss Expenses
Gross unpaid losses and loss
expenses, January 1 $ 8,761 $ 8,809 $ 9,684
Reinsurance recoverable 2,290 2,391 2,935
- -------------------------------------------------------------------------------
Net unpaid losses and loss
expenses, January 1 6,471 6,418 6,749
- -------------------------------------------------------------------------------
Incurred related to:
Current year accident losses 1,364 1,461 1,748
Prior year accident losses 303 570 21
- -------------------------------------------------------------------------------
Total incurred 1,667 2,031 1,769
- -------------------------------------------------------------------------------
Paid related to:
Current year accident losses 407 427 486
Prior year accident losses 1,215 1,203 1,577
- -------------------------------------------------------------------------------
Total paid 1,622 1,630 2,063
- -------------------------------------------------------------------------------
Sale of CRC and Viking -- (769) --
- -------------------------------------------------------------------------------
Other adjustments (189) 421 (37)
- -------------------------------------------------------------------------------
Net unpaid losses and loss
expenses, December 31 6,327 6,471 6,418
Reinsurance recoverable 2,245 2,290 2,391
- -------------------------------------------------------------------------------
Gross unpaid losses and loss
expenses, December 31 $ 8,572 $ 8,761 $ 8,809
===============================================================================
</TABLE>
The increase in 1995 incurred prior year accident losses compared to prior years
relates to reserve strengthening including the recording of Ridge Re aggregate
excess loss reserves.
Other Financial Services. In 1995, we completed the sale of Xerox Financial
Services Life Insurance Company (Xerox Life) for approximately $104 before
settlement costs and capital funding of OakRe Life Insurance Company (OakRe), a
single-purpose XFSI subsidiary formed in 1994. OakRe assumed responsibility for
the Single Premium Deferred Annuity (SPDA) policies issued by Xerox Life's
Missouri and California companies via coinsurance agreements. As a result of
these coinsurance agreements, at December 31, 1996 and 1995, we have retained on
our consolidated balance sheet approximately $2.0 and $2.5 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, 1996. 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.
54
<PAGE>
Third-Party Financing and Real-Estate. During the last six 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, 1996, we received net cash proceeds of $359 ($36 in 1996, $64
in 1995 and $259 in 1994) 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. Accordingly, we
expect that the wind-down of the portfolio will be slower during 1997 and in
future years, as it was in 1995 and 1996, compared with prior years.
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 primarily determined based on our annual average domestic borrowing costs.
Assigned interest expense for the discontinued businesses for the years ended
December 31, 1996, 1995 and 1994 was $226, $255 and $246, respectively.
Summarized information of discontinued operations for the three years ended
December 31, 1996 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Summary of Operations
Income (loss) before income taxes $ -- $(1,025) $ (44)
Income tax benefits -- 357 44
(Loss) on disposal -- (978) --
- -------------------------------------------------------------------------------
Net income (loss) $ -- $(1,646) $ --
===============================================================================
Balance Sheet Data
Assets
- ------
Insurance
Investment, net $ 1,846 $ 1,678 $ 3,212
- -------------------------------------------------------------------------------
Other Financial Services
Investments 1,991 2,508 3,604
Other assets, net 111 135 541
- -------------------------------------------------------------------------------
OFS assets 2,102 2,643 4,145
- -------------------------------------------------------------------------------
Third-Party Financing and
Real-Estate
Gross finance receivables 401 472 538
Unearned income and other 49 17 9
- -------------------------------------------------------------------------------
Investment, net 450 489 547
- --------------------------------------------------------------------------------
Investment in
discontinued operations $ 4,398 $ 4,810 $ 7,904
- -------------------------------------------------------------------------------
Liabilities
- -----------
OFS policyholders' deposits $ 1,998 $ 2,528 $ 3,576
Other OFS liabilities 3 1 337
Assigned debt 273 281 281
- -------------------------------------------------------------------------------
Discontinued operations liabilities $ 2,274 $ 2,810 $ 4,194
===============================================================================
</TABLE>
At December 31, 1996 and 1995, approximately $2.5 billion and $2.3 billion,
respectively, of third-party indebtedness assigned to the Insurance operations
is included in the consolidated balance sheet caption Long-term debt.
Our net investment in discontinued operations is approximately $2,124 and
$2,000 at December 31, 1996 and 1995, respectively. 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.
55
<PAGE>
11 Debt
Short-Term Debt. Short-term borrowings data at December 31, 1996 and 1995
follow:
<TABLE>
<CAPTION>
Weighted average
interest rates at
December 31, 1996 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank notes payable 6.92% $ 762 $ 893
Foreign commercial paper 4.88 864 --
- --------------------------------------------------------------------------------
Total short-term debt 1,626 893
Current maturities of
long-term debt 1,910 2,381
- --------------------------------------------------------------------------------
Total $3,536 $3,274
================================================================================
</TABLE>
Bank notes payable generally represent foreign currency denominated borrowings
of non-U.S. subsidiaries.
Long-Term Debt. A summary of long-term debt, by final maturity date, at December
31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
Weighted average
interest rates at
December 31, 1996 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Operations:
Xerox Corporation (parent company)
Guaranteed ESOP notes
due 1999-2004 7.63% $ 494 $ 547
Notes due 1996 -- -- 420
Notes due 1997 8.97 275 200
Notes due 1999 5.35 454 484
Notes due 2000 7.33 600 600
Notes due 2001 6.85 212 62
Notes due 2002 8.00 225 200
Notes due 2004 7.15 200 200
Notes due 2005 -- -- 50
Notes due 2006 7.13 50 --
Notes due 2007 7.38 25 25
Notes due 2011 7.94 205 --
Notes due 2016 7.20 250 --
Notes due 2026 6.25 350 --
Other debt due 1996-2014 7.05 128 97
Capital lease obligations 6.85 4 5
- --------------------------------------------------------------------------------
Subtotal 3,472 2,890
- --------------------------------------------------------------------------------
Xerox Credit Corporation
Notes due 1996 -- -- 850
Notes due 1997 6.48 877 677
Notes due 1998 5.93 420 220
Notes due 1999 8.25 300 150
Notes due 2000 6.40 153 303
Notes due 2001 6.78 100 --
Notes due 2011 7.68 200 --
Floating rate notes due 2048 5.80 65 61
Other debt due 1997 10.00 9 18
- --------------------------------------------------------------------------------
Subtotal 2,124 2,279
- --------------------------------------------------------------------------------
XFSI Notes due 1996 -- -- 135
- --------------------------------------------------------------------------------
Total U.S. operations $5,596 $5,304
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Weighted average
interest rates at
December 31, 1996 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
International Operations:
Various obligations, payable in:
Canadian dollars due 1996-2007 10.83% $ 192 $ 263
Dutch guilders due 1996-2000 5.33 108 216
French francs due 1996-1999 5.73 47 76
German marks due 1996-1999 6.47 146 280
Pounds sterling due 1996-2003 8.31 257 283
Swiss francs due 1996-2000 3.80 57 81
Italian lira due 1996-1998 8.70 113 99
U.S. dollars due 1996-1999 6.09 133 268
Other currencies due 1996-2001 6.70 274 363
Capital lease obligations -- -- 9
- --------------------------------------------------------------------------------
Total international operations 1,327 1,938
- --------------------------------------------------------------------------------
Other borrowings deemed
long-term 3,684 3,287
- --------------------------------------------------------------------------------
Subtotal 10,607 10,529
Less current maturities 1,910 2,381
- --------------------------------------------------------------------------------
Total long-term debt $ 8,697 $ 8,148
================================================================================
</TABLE>
Consolidated Long-Term Debt Maturities. Payments due on long-term debt for the
next five years follow:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1,910 $803 $924 $873 $416 $1,997
================================================================================
</TABLE>
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. Our domestic operations have a revolving credit agreement
totaling $5.0 billion with a group of banks, which expires in 2000. This
agreement is unused and is available to back commercial paper borrowings of our
domestic operations, which amounted to $3.1 billion and $2.8 billion at December
31, 1996 and 1995, respectively. In addition, our foreign subsidiaries had
unused committed long-term lines of credit used to back short-term indebtedness
that aggregate $2.1 billion in various currencies at prevailing interest rates.
56
<PAGE>
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, 1996, these operations had approximately $11.6
billion of net finance receivables, which will service approximately $9.5
billion of assigned short- and long-term debt, including $0.2 billion of debt
assigned to discontinued third-party financing businesses.
Guarantees. At December 31, 1996, we have guaranteed the borrowings of our ESOP
and $1,309 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 $871,
$817 and $751, respectively, for the years ended December 31, 1996, 1995 and
1994.
Total Short- and Long-Term Debt. Our total indebtedness, excluding the direct
indebtedness of Talegen, at December 31, 1996 and 1995 is reflected in the
consolidated balance sheet captions as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Short-term debt and current portion
of long-term debt $ 3,536 $ 3,274
Long-term debt 8,424 7,867
Discontinued operations liabilities-
policyholders' deposits and other 273 281
- --------------------------------------------------------------------------------
Total debt $12,233 $11,422
================================================================================
</TABLE>
A summary of changes in consolidated indebtedness for the three years ended
December 31, 1996 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in short-term
debt, net $ 989 $ 94 $ (146)
Proceeds from long-term debt 2,998 3,169 2,058
Principal payments on
long-term debt (2,989) (2,497) (1,555)
- -------------------------------------------------------------------------------
Subtotal 998 766 357
Less discontinued operations 8 -- (193)
- -------------------------------------------------------------------------------
Total change in debt of
continuing operations $ 990 $ 766 $ 550
===============================================================================
</TABLE>
12 Financial Instruments
Derivative Financial Instruments. Certain financial instruments with
off-balance-sheet risk have been entered into by us to manage our interest rate
and foreign currency exposures. These instruments are held solely for hedging
purposes and include interest rate swap agreements, forward exchange contracts
and foreign currency swap agreements. We do not enter into derivative instrument
transactions for trading or other speculative purposes.
We typically enter into simple, unleveraged derivative transactions which,
by their nature, have low credit and market risk. Our policies on the use of
derivative instruments prescribe an investment grade counterparty credit floor
and at least quarterly monitoring of market risk on a counterparty-by-
counterparty basis. We utilize numerous counterparties to ensure that there are
no significant concentrations of credit risk with any individual counterparty or
groups of counterparties. Based upon our ongoing evaluation of the replacement
cost of our derivative transactions and counterparty creditworthiness, we
consider the risk of 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 involve 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
57
<PAGE>
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 1996, two such agreements were cancelled in
connection with the early retirement of two medium-term notes. The transactions
performed within each of these three categories enable the cost-effective
management of interest rate exposures. During 1996, the average notional amount
of an interest rate swap agreement was $32.
At December 31, 1996 and 1995, the total notional amounts of these
transactions, based on contract maturity, follow:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper/bank borrowings $1,822 $1,784
Medium-term debt 4,000 3,906
Long-term debt 3,444 1,394
- --------------------------------------------------------------------------------
Total $9,266 $7,084
================================================================================
</TABLE>
For the three years ended December 31, 1996, 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, 1996 and 1995 follow:
<TABLE>
<CAPTION>
1996 1997 1998-2000 2001-2016 Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 Pay fixed/receive variable $ -- $1,224 $3,117 $1,750 $6,091
Pay variable/receive variable -- 455 373 37 865
Pay variable/receive fixed -- 143 510 1,657 2,310
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ -- $1,822 $4,000 $3,444 $9,266
- ------------------------------------------------------------------------------------------------------------------------------------
Memo:
Interest rate paid -- 6.21% 6.73% 5.98% 6.35%
Interest rate received -- 5.90% 5.72% 6.49% 6.04%
====================================================================================================================================
1995 Pay fixed/receive variable $1,466 $1,339 $2,196 $ -- $5,001
Pay variable/receive variable 150 505 323 70 1,048
Pay variable/receive fixed 168 37 150 680 1,035
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,784 $1,881 $2,669 $ 750 $7,084
- ------------------------------------------------------------------------------------------------------------------------------------
Memo:
Interest rate paid 6.61% 6.39% 7.19% 6.44% 6.75%
Interest rate received 6.69% 6.00% 5.99% 7.74% 6.35%
====================================================================================================================================
</TABLE>
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, 1996 and 1995, we had outstanding forward exchange contracts of $2,259 and
$1,474, respectively. Of the outstanding contracts at December 31, 1996, the
largest single currency represented was the Japanese yen. Contracts denominated
in Japanese yen, Brazilian reais, U.S.
58
<PAGE>
dollars, French francs, Italian lira and Swiss francs 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, 1996, we had a net deferred loss of $26. 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 1996, the average notional amount of a
forward exchange contract amounted to $8.
Foreign Currency Swap Agreements. During 1996, we entered into cross currency
interest rate swap agreements, whereby we issued foreign currency denominated
debt and swapped the proceeds with a counterparty. In return, we received and
effectively denominated 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, 1996, cross currency interest rate swap
agreements with an aggregate notional amount of $511 remained outstanding.
Fair Value of Financial Instruments. The estimated fair values of our financial
instruments at December 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
1996 1995
------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash $ 104 $ 104 $ 136 $ 136
Accounts receivable, net 2,022 2,022 1,914 1,914
Short-term debt 1,626 1,626 893 893
Long-term debt 10,607 10,766 10,529 10,864
Interest rate and currency
swap agreements -- (61) -- (73)
Forward exchange
contracts -- 19 -- (29)
===============================================================================
</TABLE>
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.
13 Employee Benefit Plans
Retirement Income Guarantee Plan (RIGP). Approximately 51,000 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, 1996, these domestic plans accounted for approximately 64
percent of our total pension assets and were invested as follows: domestic and
international equity securities - 71 percent; fixed-income investments - 27
percent; and real estate - 2 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).
The transition asset and prior service cost are amortized over 15 years.
Pension costs are determined using assumptions as of the beginning of the year
while the funded status
59
<PAGE>
is determined using assumptions as of the end of the year. The assumptions used
in the accounting for the U.S. defined benefit plans follow:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumed discount rates 7.75% 7.25% 8.75%
Assumed rates for compensation
increases 4.50 4.25 5.75
Expected return on plan assets 9.50 9.50 9.50
===============================================================================
</TABLE>
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 Rank Xerox pension
plan in the United Kingdom is the largest international plan and accounted for
approximately 24 percent of our total pension assets at December 31, 1996. It is
primarily invested in marketable equity securities.
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 and the Rank Xerox pension plans in
Germany and Austria. For tax reasons, these plans are most efficiently and
customarily funded on a pay-as-you-go basis.
A reconciliation of the funded status of our retirement plans to the amounts
accrued in our consolidated balance sheets at December 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ---------------------------------------
Over- Under- Non- Over- Under- Non-
funded funded funded Total funded funded funded Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulated benefit obligation $5,549 $ 70 $ 252 $5,871 $5,066 $ 41 $ 240 $ 5,347
Effect of projected compensation increases 471 51 48 570 440 37 53 530
- ------------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (PBO) 6,020 121 300 6,441 5,506 78 293 5,877
Plan assets at fair value 6,706 65 -- 6,771 5,830 38 -- 5,868
- ------------------------------------------------------------------------------------------------------------------------------------
Excess (deficit) of plan assets over PBO 686 (56) (300) 330 324 (40) (293) (9)
Items not yet reflected in the financial statements:
Unamortized transition obligations (assets) (116) 17 10 (89) (137) 19 12 (106)
Unrecognized prior service cost 40 -- (9) 31 48 -- (12) 36
Unrecognized net (gain) loss (268) 30 29 (209) 49 (14) 31 66
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost recognized
in the consolidated balance sheets at
December 31 $ 342 $ (9) $(270) $ 63 $ 284 $ (35) $ (262) $ (13)
====================================================================================================================================
</TABLE>
60
<PAGE>
The components of pension cost for the three years ended December 31, 1996
follow:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Defined benefit plans
Service cost $ 164 $ 143 $ 150
- -------------------------------------------------------------------------------
Interest cost - change in PBO due to:
Passage of time 201 186 171
Net investment income (loss)
allocated to TRA accounts 586 624 (45)
- -------------------------------------------------------------------------------
Subtotal 787 810 126
- -------------------------------------------------------------------------------
Net investment (income) loss on:
TRA assets (586) (624) 45
Other plan assets (417) (372) (96)
- -------------------------------------------------------------------------------
Subtotal (1,003) (996) (51)
- -------------------------------------------------------------------------------
Net amortization and deferrals 150 120 (144)
- -------------------------------------------------------------------------------
Settlement ad curtailment gains (7) (32) (12)
- -------------------------------------------------------------------------------
Defined benefit plans
- net pension cost 91 45 69
Defined contribution plans
- pension cost 17 13 13
- -------------------------------------------------------------------------------
Total pension cost $ 108 $ 58 $ 82
===============================================================================
</TABLE>
Plan assets consist of both defined benefit plan assets and assets legally
allocated to the TRA accounts. The combined investment results of the assets are
shown above in the Net investment income caption. To the extent investment
results relate to TRA, such results are credited to these accounts as a
component of interest cost. The TRA account assets were $4.0 billion and $3.4
billion at December 31, 1996 and 1995, 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 annual rate of 7.5 percent
until it reaches the plan's annual maximum coverage of approximately 2 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 8.0
percent in 1996 and declines to 5.25 percent in 2002 and thereafter. A one
percentage point increase in the medical inflation assumptions would increase
the service and interest cost for these plans by $4 and the accumulated
postretirement benefit obligation by $53.
The discount rate used to determine the funded status was 7.75 percent,
7.25 percent and 8.75 percent at December 31, 1996, 1995 and 1994, respectively.
A reconciliation of the financial status of the plans as of December 31
follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated Postretirement
Benefit Obligation:
Retirees $ 501 $ 506 $ 470
Fully eligible employees 183 251 205
Other employees 208 219 247
- --------------------------------------------------------------------------------
Total 892 976 922
Unrecognized net gain 158 42 84
- --------------------------------------------------------------------------------
Accrued cost recognized in the
consolidated balance sheets $1,050 $1,018 $1,006
================================================================================
</TABLE>
The components of postretirement benefit cost for the three years ended December
31, 1996 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 26 $ 19 $ 27
Interest cost 63 70 66
Net amortization (1) (4) --
Settlement gain -- (8) (25)
- -------------------------------------------------------------------------------
Total $ 88 $ 77 $ 68
===============================================================================
</TABLE>
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.
61
<PAGE>
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,
1996 follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on ESOP Borrowings $42 $45 $49
================================================================================
Dividends declared on Convertible
Preferred Stock $58 $59 $61
================================================================================
Cash contribution to the ESOP $36 $34 $32
================================================================================
Compensation expense $37 $35 $32
================================================================================
</TABLE>
We recognize ESOP costs based on the amount committed to be contributed to the
ESOP plus related trustee, finance and other charges.
14 Income Taxes
The parent company and its domestic subsidiaries file consolidated U.S. income
tax returns. Generally, pursuant to tax allocation arrangements, domestic
subsidiaries record their tax provisions and make payments to the parent company
for taxes due or receive payments from the parent company for tax benefits
utilized.
Income before income taxes from continuing operations for the three years
ended December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic income $ 781 $ 747 $ 713
Foreign income 1,163 1,102 801
- --------------------------------------------------------------------------------
Income before income taxes $1,944 $1,849 $1,514
================================================================================
</TABLE>
Provisions for income taxes from continuing operations for the three years
ended December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes
Current $ 210 $ 285 $ 160
Deferred 50 (21) 100
Foreign income taxes
Current 205 178 88
Deferred 166 110 182
State income taxes
Current 62 57 46
Deferred 7 6 19
- --------------------------------------------------------------------------------
Income taxes $ 700 $ 615 $ 595
================================================================================
</TABLE>
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,
1996 follow:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal statutory income
tax rate 35.0% 35.0% 35.0%
Foreign earnings and dividends
taxed at different rates .5 2.2 2.1
Goodwill amortization .3 .3 --
Tax-exempt income (.5) (.6) (.7)
Effect of tax rate changes on
deferred tax assets and liabilities -- (5.3) --
State taxes 2.3 2.2 2.7
Change in valuation allowance
for deferred tax assets (1.0) (.8) --
Other (.6) .3 .2
- ------------------------------------------------------------------------------
Effective income tax rate 36.0% 33.3% 39.3%
==============================================================================
</TABLE>
The 1996 effective tax rate of 36.0 percent is 2.7 percentage points higher than
1995. After excluding the 1995 Brazilian deferred tax benefit, the 1996
effective tax rate is 2.6 percentage points lower than 1995. This lower
effective tax rate is primarily due to the lower statutory tax rate in Brazil
and the mix of profits from our worldwide operations.
The 1995 effective tax rate of 33.3 percent is 6 percentage points lower
than the 1994 rate. This lower 1995 rate is primarily caused by a decrease in
Brazilian corporate tax rates, which created a deferred tax benefit. This
benefit increased 1995 fourth quarter and full year net income by $98. Excluding
the Brazilian tax benefit, the 1995 effective tax rate was 38.6 percent.
On a consolidated basis, including the effects of discontinued operations,
we paid a total of $252, $182 and $163 in income taxes to federal, foreign and
state income-taxing authorities in 1996, 1995 and 1994, respectively.
62
<PAGE>
Total income tax expense (benefit) for the three years ended December 31,
1996 was allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations $ 700 $ 615 $ 595
Discontinued operations (84) (374) (135)
Common shareholders' equity* (15) (15) (19)
- -------------------------------------------------------------------------------
Total $ 601 $ 226 $ 441
===============================================================================
</TABLE>
* For dividends paid on shares held by the ESOP; cumulative translation adjust-
ments; tax benefit on non-qualified 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, 1996
was approximately $3.9 billion. These earnings have been substantially
reinvested and we do not plan to initiate any action that would precipitate the
payment of income taxes thereon. It is not practicable to estimate the amount of
additional tax that might be payable on the foreign earnings.
The tax effects of temporary differences that give rise to significant
portions of the eferred taxes at December 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Tax effect of future tax deductions:
Depreciation $ 397 $ 537
Postretirement medical benefits 405 393
Restructuring reserves 70 194
Other operating reserves 296 337
Deferred intercompany profit 83 109
Allowance for doubtful accounts 69 73
Deferred compensation 138 132
Tax credit carryforwards 122 101
Research and development 158 87
Other 108 75
- -------------------------------------------------------------------------------
Subtotal 1,846 2,038
Less valuation allowance -- 20
- -------------------------------------------------------------------------------
Total $ 1,846 $ 2,018
===============================================================================
Tax effect of future taxable income:
Installment sales and leases $(1,287) $(1,309)
Leverage leases (31) (35)
Deferred income (205) (146)
Other (163) (189)
- -------------------------------------------------------------------------------
Total $(1,686) $(1,679)
===============================================================================
</TABLE>
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, 1996, 1995 and 1994 amounted to
$473, $608 and $709, respectively.
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, 1996, we have tax credit carryforwards for federal income
tax purposes of $29 available to offset future federal income taxes through 2000
and $93 available to offset future federal income taxes indefinitely.
15 Litigation
Continuing Operations. On March 10, 1994, a lawsuit was filed in the United
States District Court for the District of Kansas by two independent service
organizations (ISOs) in Kansas City and St. Louis and their parent company.
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 $137 million.
The Company has asserted counterclaims against the plaintiffs alleging patent
and copyright infringement, misappropriation of Xerox trade secrets, conversion
and unfair competition and/or false advertising. On December 11, 1995, the
District Court issued a preliminary injunction against the parent company for
copyright infringement. A trial date of March 31, 1997 has been set. The Company
denies any wrongdoing and intends to vigorously defend these actions and pursue
its counterclaims.
On August 5, 1996, the District Court dismissed the complaint of 20
different ISOs and the cross complaint of the Company against those 20 ISOs as a
result of a settlement between the parties. The terms of the settlement had no
material effect on the Company.
63
<PAGE>
Discontinued Operations. Farm & Home Savings Association, now known as Roosevelt
Bank, (Farm & Home) and certain Talegen insurance companies (Insurance
Companies) entered into an agreement (Indemnification Agreement) under which the
Insurance Companies are required to defend and indemnify Farm & Home from
certain actual and punitive damage claims being made against Farm & Home
relating to the Brio superfund site (Brio). In a number of lawsuits pending
against Farm & Home in the District Courts of Harris County, Texas, several
hundred plaintiffs seek both actual and punitive damages allegedly relating to
injuries arising out of the hazardous substances at Brio. The Insurance
Companies have been defending these cases under a reservation of rights because
it is unclear whether certain of the claims fall under the coverage of either
the policies or the Indemnification Agreement. The Insurance Companies have been
successful in having some claims dismissed which were brought by plaintiffs who
were unable to demonstrate a pertinent nexus to the Southbend subdivision.
However, there are numerous plaintiffs who do have a nexus to the Southbend
subdivision. The Insurance Companies have been in settlement discussions with
respect to claims brought by plaintiffs who have or had a pertinent nexus to the
Southbend subdivision. In addition, Farm & Home presently has pending motions
for summary judgment which would dispose of many of the claims asserted. If not
settled or resolved by summary judgment, one or more of these cases can be
expected to be tried in 1997.
16 Preferred Stock
We have 22 million authorized shares of cumulative preferred stock, $1 par
value. Outstanding preferred stock at December 31, 1996 and 1995 follow (shares
in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Redeemable
Preferred Stock -- -- 500 $ 25
Convertible
Preferred Stock 9,212 $ 721 9,435 738
- --------------------------------------------------------------------------------
Total 9,212 $ 721 9,935 $ 763
================================================================================
</TABLE>
Redeemable Preferred Stock. During 1996, we redeemed the remaining 500,000
outstanding shares of our series of Ten-Year Preferred Stock at the sinking fund
redemption price of $50 per share. Dividends amounted to $0, $3 and $7 in 1996,
1995 and 1994, respectively.
Our former series of Twenty-Year Preferred Stock was redeemed in 1994 for
$184, including a premium of $11. Dividends amounted to $5 in 1994.
Convertible Preferred Stock. As more fully described in Note 13 on Page 61, 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.
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-third of a preferred stock purchase right
(Right) accompanies each share of outstanding common stock. Each Right entitles
the holder to purchase from us one one-hundredth of a new series of preferred
stock at an exercise price of $225.
Within the time limits and under the circumstances specified in the plan,
the Rights entitle the holder to acquire 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 $.05 per Right. The rights expire in
April 1997.
The rights are non-voting and, until they become exercisable, have no
dilutive effect on the earnings per share or book value per share of 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 million 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 statement of income. We have guaranteed the redemption value.
64
<PAGE>
17 Common Shareholders' Equity
The components of common shareholders' equity and the changes therein for the
three years ended December 31, 1996 follow:
<TABLE>
<CAPTION>
Net
Unrealized
Gain
Common Stock Additional (Loss) on Treasury Stock
----------------- Paid-In Retained Investment Translation ---------------
(Shares in thousands) Shares Amount Capital Earnings Securities Adjustments Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 312,366 $ 318 $ 1,100 $ 2,793 $ 6 $ (245) -- $ -- $3,972
Stock option and incentive plans 3,168 3 76 (3) 76
Xerox Canada Inc.
exchangeable stock 1,959
Convertible securities 486 16 16
Net income 794 794
Cash dividends declared
Common stock
($1.00 per share) (322) (322)
Preferred stock
(See Note 16 on Page 64) (73) (73)
Tax benefits on ESOP dividends 19 19
Call premium on preferred stock
(See Note 16 on Page 64) (11) (11)
Net unrealized loss on
investment securities (439) (439)
Translation adjustments -
net of minority
shareholders' interests of $93 145 145
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 317,979 321 1,192 3,197 (433) (100) -- -- 4,177
Stock option and incentive plans 4,962 6 114 (11) 109
Xerox Canada Inc.
exchangeable stock 1,365
Convertible securities 723 28 28
Net loss (472) (472)
Net loss during stub period (21) (21)
Cash dividends declared
Common stock
($1.00 per share) (327) (327)
Preferred stock
(See Note 16 on Page 64) (62) (62)
Tax benefits on ESOP dividends 17 17
Net unrealized gain on
investment securities 432 432
Translation adjustments -
net of minority
shareholders' interests of $17 (3) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 325,029 327 1,334 2,321 (1) (103) -- -- 3,878
Purchase of treasury stock (6,493) (306) (306)
Stock option and incentive plans 596 (23) (15) 2,428 122 84
Xerox Canada Inc.
exchangeable stock 103 1,347
Convertible securities 174 10 497 23 33
Net Income 1,206 1,206
Cash dividends declared
Common stock
($1.12 per share) (379) (379)
Preferred stock
(See Note 16 on Page 64) (59) (59)
Tax benefits on ESOP dividends 16 16
Translation adjustments -
net of minority
shareholders' interests of $(24) (138) (138)
Premiums from sale of put options 11 11
Tax benefits on stock options 21 21
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 325,902 $ 327 $ 1,353 $ 3,090 $ (1) $ (241) (2,221) $ (161) $4,367
====================================================================================================================================
</TABLE>
65
<PAGE>
Common Stock. We have 1.05 billion authorized shares of common stock, $1 par
value. At December 31, 1996 and 1995, 20.9 and 7.8 million shares, respectively,
were reserved for issuance under our incentive compensation plans. In addition,
at December 31, 1996, 2.6 million common shares were reserved for the conversion
of $53 of convertible debt and 27.6 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. As of December 31, 1996, we have
repurchased 6.5 million shares for $306. Common shares issued for stock option
exercises, conversion of convertible securities, and other exchanges are
satisfied by reissuances of treasury shares.
Put Options. In connection with the share repurchase program, during 1996, we
sold 2.8 million put options 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 have
maturities ranging from six months to two years.
At December 31, 1996, 2.4 million put options remain outstanding with a
weighted average strike price of $49.90 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.
During 1995, Xerox Canada Inc. established an executive rights plan, which
grants participants at the executive level rights to acquire our common stock at
the participants' option. The vesting, expiration, and exercise price of each
right are the same as stock options in our long-term incentive plan.
At December 31, 1996 and 1995, 7.7 and 11.0 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:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Average Average
Stock Option Stock Option
(Options in thousands) Options Price Options Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at January 1 10,794 $ 33 9,726 $ 28
Granted 3,688 43 5,508 37
Canceled (365) 38 (228) 34
Exercised (2,939) 31 (4,092) 26
Surrendered for SARs (75) 15 (120) 16
------ ------
Outstanding at December 31 11,103 37 10,794 33
====== ======
Exercisable at
December 31, 1996 4,444
================================================
Becoming exercisable in 1997 3,446
================================================
</TABLE>
The weighted average remaining life of outstanding options at December 31, 1996
is 4.2 years.
66
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) - as reported $ 1,206 $ (472)
Net income (loss) - pro forma 1,189 (482)
Primary Earnings (loss) per share -
as reported 3.49 (1.56)
Primary Earnings (loss) per share -
pro forma 3.44 (1.59)
Fully Diluted Earnings (loss) per share -
as reported 3.31 (1.75)
Fully Diluted Earnings (loss) per share -
pro forma 3.26 (1.78)
================================================================================
</TABLE>
The pro forma effect on net income for 1996 and 1995 is not representative of
the pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995, nor does it consider the effect of the change in the vesting schedule for
the Company's nonqualified stock options.
As reflected in the table above, the fair value of each option granted in
1996 and 1995 was $10.50 and $7.18, 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:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.7% 6.9%
Expected life in years 5.5 3.7
Expected volatility 22.0% 18.5%
Expected dividend yield 2.6% 2.7%
===============================================================================
</TABLE>
18 Subsequent Event
In January 1997, a subsidiary of ours issued 650,000 shares of 8% Capital
Securities for net proceeds of $643. The proceeds were used to reduce parent
company commercial paper. The principal will be included in minorities' interest
in equity of subsidiaries and the dividends will be included in minorities'
interests in earnings of subsidiaries in the consolidated financial statements.
This stock is mandatorily redeemable on February 1, 2027 for $650 and pays
dividends semiannually at the rate of 8% per annum. The redemption value is
guaranteed by us.
67
<PAGE>
Quarterly Results of Operations
(Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(In millions, except per-share data) Quarter Quarter Quarter Quarter Full Year
================================================================
<S> <C> <C> <C> <C> <C>
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 Net Income of Unconsolidated Affiliates 20 42 30 31 123
Minorities' Interests in Earnings of Subsidiaries 28 44 25 64 161
----------------------------------------------------------------
Income from Continuing Operations 237 293 250 426 1,206
Discontinued Operations -- -- -- -- --
----------------------------------------------------------------
Net Income $ 237 $ 293 $ 250 $ 426 $ 1,206
================================================================
Primary Earnings per Share
Continuing Operations $ 0.68 $ 0.85 $ 0.71 $ 1.25 $ 3.49
Discontinued Operations -- -- -- -- --
----------------------------------------------------------------
Primary Earnings per Share $ 0.68 $ 0.85 $ 0.71 $ 1.25 $ 3.49
================================================================
Fully Diluted Earnings per Share
Continuing Operations $ 0.65 $ 0.81 $ 0.68 $ 1.17 $ 3.31
Discontinued Operations -- -- -- -- --
----------------------------------------------------------------
Fully Diluted Earnings per Share $ 0.65 $ 0.81 $ 0.68 $ 1.17 $ 3.31
----------------------------------------------------------------
================================================================
1995
Revenues $ 3,767 $ 4,054 $ 4,012 $ 4,755 $ 16,588
Costs and Expenses 3,400 3,642 3,597 4,100 14,739
-------- -------- -------- -------- --------
Income before Income Taxes,
Equity Income and Minorities' Interests 367 412 415 655 1,849
Income Taxes 142 160 160 153 615
Equity in Net Income of Unconsolidated Affiliates 13 51 38 29 131
Minorities' Interests in Earnings of Subsidiaries 51 49 37 54 191
-------- -------- -------- -------- --------
Income from Continuing Operations 187 254 256 477 1,174
Discontinued Operations (40) (16) (20) (1,570) (1,646)
-------- -------- -------- -------- --------
Net Income (Loss) $ 147 $ 238 $ 236 $ (1,093) $ (472)
======== ======== ======== ======== ========
Primary Earnings (Loss) per Share
Continuing Operations $ 0.53 $ 0.74 $ 0.74 $ 1.39 $ 3.40
Discontinued Operations (.12) (.05) (.06) (4.73) (4.96)
-------- -------- -------- -------- --------
Primary Earnings per Share $ 0.41 $ 0.69 $ 0.68 $ (3.34) $ (1.56)
======== ======== ======== ======== ========
Fully Diluted Earnings (Loss) per Share1
Continuing Operations $ 0.51 $ 0.70 $ 0.70 $ 1.30 $ 3.21
Discontinued Operations (.11) (.05) (.05) (4.73) (4.96)
-------- -------- -------- -------- --------
Fully Diluted Earnings per Share $ 0.40 $ 0.65 $ 0.65 $ (3.43) $ (1.75)
======== ======== ======== ======== ========
================================================================
</TABLE>
1 The fully diluted earnings per share differs from full year amounts because of
changes in the number of shares outstanding during the year.
68
<PAGE>
Notes
Reports of Management and Independent Auditors
Report of Management
Xerox Corporation management is responsible for the integrity and objectivity of
the financial data presented in this annual report. The consolidated financial
statements were prepared in conformity with generally accepted accounting
principles and include amounts based on management's best estimates and
judgments.
The Company maintains an internal control structure designed to provide
reasonable assurance that assets are safeguarded against loss or unauthorized
use and that financial records are adequate and can be relied upon to produce
financial statements in accordance with generally accepted accounting
principles. This structure includes the hiring and training of qualified people,
written accounting and control policies and procedures, clearly drawn lines of
accountability and delegations of authority. In a business ethics policy that is
communicated annually to all employees, the Company has established its intent
to adhere to the highest standards of ethical conduct in all of its business
activities.
The Company monitors its internal control structure with direct management
reviews and a comprehensive program of internal audits. In addition, KPMG Peat
Marwick LLP, independent auditors, have audited the consolidated financial
statements and have reviewed the internal control structure to the extent they
considered necessary to support their report, which follows.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, meets regularly with the independent auditors, the internal
auditors and representatives of management to review audits, financial reporting
and internal control matters, as well as the nature and extent of the audit
effort. The Audit Committee also recommends the engagement of independent
auditors, subject to shareholder approval. The independent auditors and internal
auditors have free access to the Audit Committee.
/s/ Paul A. Allaire
Paul A. Allaire
Chairman of the Board and
Chief Executive Officer
/s/Barry D. Romeril
Barry D. Romeril
Executive Vice President and
Chief Financial Officer
Report of Independent Auditors
To the Board of Directors and Shareholders of
Xerox Corporation
We have audited the consolidated balance sheets of Xerox Corporation and
consolidated subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income and cash flows for each of the years in the
three-year period ended December 31, 1996. 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
26, 35, 42 and 48-67 present fairly, in all material respects, the financial
position of Xerox Corporation and consolidated subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Stamford, Connecticut
January 23, 1997
69
<PAGE>
Eleven Years In Review
<TABLE>
<CAPTION>
(Dollars in millions, except per-share data) 1996 1995 1994 1993 1992 1991
==========================================================================
<S> <C> <C> <C> <C> <C> <C>
Per-Share Data
- ------------------------------------------------------------------
Earnings (loss) from continuing operations
Primary $ 3.49 $ 3.40 $ 2.24 $ (0.83) $ 1.72 $ 1.24
Fully diluted 3.31 3.21 2.15 (0.83) 1.53 1.23
Dividends declared 1.12 1.00 1.00 1.00 1.00 1.00
==========================================================================
Operations
- ------------------------------------------------------------------
Revenues $ 17,378 $ 16,588 $ 15,084 $ 14,229 $ 14,298 $ 13,438
Research and development expenses 1,044 949 895 883 922 890
Income (loss) from continuing operations 1,206 1,174 794 (193) 562 436
Net income (loss) 1,206 (472) 794 (126) (1,020) 454
==========================================================================
Financial Position
- ------------------------------------------------------------------
Accounts and finance receivables, net $ 13,394 $ 12,389 $ 11,759 $ 10,565 $ 10,250 $ 8,952
Inventories 2,676 2,656 2,294 2,162 2,257 2,091
Land, buildings and equipment, net 2,256 2,105 2,108 2,219 2,150 1,950
Investment in discontinued operations 4,398 4,810 7,904 8,841 8,652 9,164
Total assets 26,818 26,008 27,278 26,999 25,792 24,342
Consolidated capitalization
Short-term debt 3,536 3,274 3,159 2,698 2,533 2,038
Long-term debt 8,697 8,148 7,355 7,386 8,105 7,825
Total debt 12,233 11,422 10,514 10,084 10,638 9,863
Deferred ESOP benefits (494) (547) (596) (641) (681) (720)
Minorities' interests in equity of subsidiaries 843 755 1,021 844 885 818
Preferred stock 721 763 832 1,066 1,072 1,078
Common shareholders' equity 4,367 3,878 4,177 3,972 3,875 5,140
Total capitalization 17,670 16,271 15,948 15,325 15,789 16,179
==========================================================================
Selected Data and Ratios
- ------------------------------------------------------------------
Common shareholders of record at year-end 55,908 54,262 56,414 65,820 68,877 71,213
Book value per common share1 $ 13.42 $ 11.83 $ 12.95 $ 12.56 $ 13.40 $ 18.14
Year-end common share market price $ 52.63 $ 45.67 $ 33.00 $ 29.38 $ 26.42 $ 22.83
Employees at year-end 86,700 85,900 87,600 97,000 99,300 100,900
Working capital $ 2,948 $ 2,843 $ 2,411 $ 2,357 $ 2,578 $ 2,282
Current ratio 1.4 1.4 1.4 1.4 1.5 1.5
Additions to land, buildings and equipment $ 510 $ 438 $ 389 $ 470 $ 582 $ 467
Depreciation on land, buildings and equipment $ 372 $ 376 $ 446 $ 437 $ 418 $ 397
==========================================================================
</TABLE>
* Data that conforms with the 1996 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.
70
<PAGE>
Notes
<TABLE>
<CAPTION>
1990 1989 1988 1987 1986
================================================================================
<S> <C> <C> <C> <C> <C>
$ 1.81 $ 1.46 $ 0.38 $ 1.02 $ 0.91
1.74 1.45 0.38 1.02 0.91
1.00 1.00 1.00 1.00 1.00
================================================================================
$ 13,210 $ 12,095 $ 11,354 $ 10,537 $ 9,493
848 809 794 722 650
599 488 148 353 316
243 704 388 578 465
================================================================================
$ 8,016 $ 7,272 $ 6,109 $ 4,948 $ 3,887
2,148 2,413 2,558 2,286 2,459
1,851 1,781 1,803 1,639 1,491
9,695 * * * *
24,116 * * * *
1,828 1,482 1,174 * *
8,726 9,247 6,675 * *
10,554 10,729 7,849 5,771 4,343
(756) (785) -- -- --
832 715 806 655 565
1,081 1,081 296 442 442
5,051 5,035 5,371 5,105 4,687
16,762 16,775 14,322 11,973 10,037
================================================================================
74,994 78,876 84,864 86,388 90,437
$ 17.91 $ 17.86 $ 17.41 $ 17.00 $ 16.00
$ 11.83 $ 19.08 $ 19.46 $ 18.88 $ 20.00
99,000 99,000 100,000 99,200 100,400
$ 2,537 * * * *
1.6 * * * *
$ 405 $ 390 $ 418 $ 347 $ 328
$ 372 $ 370 $ 369 $ 320 $ 283
================================================================================
</TABLE>
Dividends and Stock Prices
Consecutive Dividends Paid to Shareholders
The Company's Board of Directors, at a special meeting held January 22, 1997,
declared a 10 percent increase in the Xerox common stock quarterly dividend to
$.32 per share effective April 1, 1997. Xerox has declared dividends to its
shareholders for 67 consecutive years and has paid consecutive quarterly
dividends since 1948.
At its February 3, 1997 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 7.
On April 1, 1996, the Company redeemed all outstanding shares of the
$3.6875 Ten-Year Sinking Fund Preferred stock at a price of $50. Dividends on
the stock ceased to accrue on April 1, 1996. Notices of redemption were mailed
to holders of the stock on February 26, 1996.
Xerox Common Stock Prices and Dividends
<TABLE>
<CAPTION>
New York Stock Exchange First Second Third Fourth
Composite Prices Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
1995 High $ 40.17 $ 41.96 $ 44.92 $ 48.21
Low 32.17 36.58 36.46 42.00
Dividends Paid .25 .25 .25 .25
================================================================================
</TABLE>
Note: A three-for-one split of the Company's common stock became effective on
June 6, 1996. Stock prices and dividends prior to that date have been adjusted
to reflect the split.
Stock Listed and Traded
Xerox common stock (XRX) is listed on the New York Stock Exchange and the
Chicago Stock Exchange. It is also traded on the Boston, Cincinnati, Pacific
Coast and Philadelphia exchanges and in London, Basel, Berne, Geneva, Lausanne
and Zurich.
71
EXHIBIT 21
Subsidiaries of Xerox Corporation
A. Xerox Corporation
The following companies are subsidiaries of Xerox Corporation as of February
1, 1997. The names of a number of other subsidiaries have been omitted as
they would not, if considered in the aggregate as a single subsidiary,
constitute a significant subsidiary:
Name of Subsidiary Incorporated In Ownership %
Xerox Canada Inc. Ontario, Canada 94
Xerox Canada Finance Inc. Ontario, Canada 100
Xerox Canada Ltd. Ontario, Canada 65
Lyell Holdings Limited Delaware 100
Xerox Business Equipment Limited United Kingdom 100
Xerox Research (UK) Limited United Kingdom 100
Xerox Business Equipment, Inc. Delaware 100
Xerox Financial Services, Inc. Delaware 100
OakRe Life Insurance Company Missouri 100
Xerox Credit Corporation Delaware 100
XCC Investment Corporation Delaware 100
Talegen Holdings, Inc. (See Part B) Delaware 100
Ridge Reinsurance Limited Bermuda 100
The Resolution Group, Inc. (See Part C) Delaware 100
Xerox do Brasil, Ltda. Brazil 100
Xerox Mexicana, S.A. de C.V. Mexico 100
Rank Xerox Investments Limited Bermuda 66.7
Rank Xerox Limited United Kingdom 51.2
Fuji Xerox Co., Ltd. Japan 50
Rank Xerox (U.K.) Limited United Kingdom 100
Rank Xerox (Ireland) Limited United Kingdom 100
Bessemer Trust Limited United Kingdom 100
Rank Xerox Espanola S.A. Spain 100
Rank Xerox de
Financiacion S.A.U., E.F.C. Spain 100
Rank Xerox Finance (Nederland) BV Netherlands 100
Rank Xerox Leasing International
Finance BV Netherlands 100
Rank Xerox Greece S.A. Greece 100
NV Rank Xerox Credit S.A. Belgium 100
Rank Xerox Finance AG Switzerland 100
Rank Xerox Finance Limited United Kingdom 100
Rank Xerox Leasing GmbH Germany 100
Rank Xerox - The Document Company S.A. France 100
Burofinance S.A. France 66
Rank Xerox Exports Limited United Kingdom 100
N.V. Rank Xerox S.A. Belgium 100
Rank Xerox Austria GmbH Austria 100
Rank Xerox Finans A/S Denmark 100
Rank Xerox Oy Finland 100
Name of Subsidiary Incorporated In Ownership %
Rank Xerox GmbH Germany 100
Rank Xerox S.p.A. Italy 100
Rank Xerox AG Switzerland 100
Rank Xerox AS Norway 100
Rank Xerox Management Services S.A. Belgium 100
Rank Xerox Pensions Limited United Kingdom 100
Rank Xerox A.B. Sweden 100
Rank Xerox (Nederland) B.V. Netherlands 100
Rank Xerox Holding B.V. Netherlands 51.2
Rank Xerox Manufacturing
(Nederland) B.V. Netherlands 100
R-X Holdings Limited Bermuda 66.7
Xerox Limited Bermuda 100
B. Talegen Holdings, Inc.
The following entities are directly or indirectly owned by Talegen Holdings,
Inc. in the percentages indicated:
Name of Subsidiary Incorporated In Ownership %
Coregis Group, Inc. Delaware 100
Coregis Insurance Company Indiana 100
Coregis Indemnity Company Illinois 100
California Insurance Company California 100
Coregis Managers Corporation (IL) Illinois 100
Crum & Forster Holdings, Inc. Delaware 100
United States Fire Insurance Company New York 100
Southbend Properties, Inc. Texas 100
The North River Insurance Company New Jersey 100
Crum and Forster Insurance Company New Jersey 100
Crum & Forster Underwriters Co. of Ohio Ohio 100
Crum & Forster Indemnity Company New York 100
Crum & Forster Custom Securities, Inc. California 100
Industrial Indemnity Holdings, Inc. Delaware 100
Industrial Indemnity Company California 100
Industrial Indemnity Kihei
Bay Surf Corporation California 100
Claremont Holdings Limited Bermuda 9.2
Claremont Insurance Limited Bermuda 100
Industrial Indemnity Company of Alaska Alaska 100
Industrial Indemnity Company of Idaho Idaho 100 (1)
Industrial Indemnity Company
of the Northwest Washington 100
Industrial Insurance Company California 100
Employers First Insurance Company California 100
255 California Corporation California 100
Industrial Indemnity Insurance
Services, Inc. California 100
American All Risk Group California 40
Westchester Specialty Group, Inc. Delaware 100
Westchester Fire Insurance Company New York 100
Westchester Surplus Lines Insurance
Company Georgia 100
Industrial Underwriters Insurance
Company Texas 100
Westchester Specialty Insurance
Services, Inc. Nevada 100
Industrial Excess & Surplus Insurance
Brokers California 100
Talegen Properties, Inc. Delaware 100
Infocus Employee Services, Inc. Delaware 92.5
Filoli Information Systems Company Delaware 78 (2)
Apprise Corp. New Jersey 100
Crum & Forster of Canada Ltd. Canada 100
(1) Includes qualifying shares held by directors.
(2) Preferred stock investment. Percentage represents approximate percentage
owned on fully-diluted basis.
C. The Resolution Group, Inc.
The following entities are directly or indirectly owned by The Resolution
Group, Inc. in the percentages indicated:
Name of Subsidiary Incorporated In Ownership %
International Insurance Company Illinois 100
Resolution Credit Services Corp. California 100
Resolution Reinsurance Services Corporation Delaware 100
Envision Claims Management Corporation New Jersey 100
EXHIBIT 23
Consent of Independent Auditors
To the Board of Directors and Shareholders of Xerox Corporation
We consent to the incorporation by reference in the Registration Statements of
Xerox Corporation on Forms S-8 (Nos. 2-81528, 2-86274, 2-86275, 33-18126, 33-
44313, 33-44314, 33-65269 and 333-09821) and Forms S-3 (Nos. 2-82363, 33-9486,
33-32215, 33-49177, 33-54629 and 333-13179) of our reports dated January 23,
1997 relating to the consolidated balance sheets of Xerox Corporation and
consolidated subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income and cash flows and related schedule for each
of the years in the three-year period ended December 31, 1996 which reports
appear in or are incorporated by reference in the 1996 Annual Report on Form
10-K.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CORPORATION'S DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 104
<SECURITIES> 0
<RECEIVABLES> 13,833
<ALLOWANCES> 439
<INVENTORY> 2,676
<CURRENT-ASSETS> 10,152
<PP&E> 5,019
<DEPRECIATION> 2,763
<TOTAL-ASSETS> 26,818
<CURRENT-LIABILITIES> 7,204
<BONDS> 12,233
0
721
<COMMON> 327
<OTHER-SE> 4,040
<TOTAL-LIABILITY-AND-EQUITY> 26,818
<SALES> 9,285
<TOTAL-REVENUES> 17,378
<CGS> 5,132
<TOTAL-COSTS> 9,236
<OTHER-EXPENSES> 6,198
<LOSS-PROVISION> 242
<INTEREST-EXPENSE> 592
<INCOME-PRETAX> 1,944
<INCOME-TAX> 700
<INCOME-CONTINUING> 1,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,206
<EPS-PRIMARY> 3.49
<EPS-DILUTED> 3.31
</TABLE>
