<PAGE> FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to___________
Commission File Number 1-4471
XEROX CORPORATION
(Exact Name of Registrant as
specified in its charter)
New York 16-0468020 _
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
P.O. Box 1600
Stamford, Connecticut 06904-1600
(Address of principal executive offices)
(Zip Code)
(203) 968-3000 _
(Registrant's telephone number, including area code)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1999
Common Stock 663,069,923 shares
This document consists of 35 pages
Forward-Looking Statements
From time to time Xerox Corporation (the Registrant or the Company) and its
representatives may provide information, whether orally or in writing,
including certain statements in this Form 10-Q under "Management's Discussion
and Analysis of Results of Operations and Financial Condition," which are
deemed to be "forward-looking" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("Litigation Reform Act"). These forward-
looking statements and other information relating to the Company are based on
the beliefs of management as well as assumptions made by and information
currently available to management.
The words "anticipate," "believe," "estimate," "expect," "intend," "will," and
similar expressions, as they relate to the Company or the Company's
management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Registrant with respect to future
events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated or expected.
The Registrant does not intend to update these forward-looking statements.
In accordance with the provisions of the Litigation Reform Act we are making
investors aware that such "forward-looking" statements, because they relate to
future events, are by their very nature subject to many important factors
which could cause actual results to differ materially from those contained in
the forward-looking statements. Such factors include but are not limited to
the following:
Competition - the Registrant operates in an environment of significant
competition, driven by rapid technological advances and the demands of
customers to become more efficient. There are a number of companies worldwide
with significant financial resources which compete with the Registrant to
provide document processing products and services in each of the markets
served by the Registrant, some of whom operate on a global basis. The
Registrant's success in its future performance is largely dependent upon its
ability to compete successfully in its currently-served markets and to expand
into additional market segments.
Transition to Digital - presently black and white light-lens copiers represent
approximately 31 percent of the Registrant's revenues. This segment of the
general office is mature with anticipated declining industry revenues as the
market transitions to digital technology. Some of the Registrant's new
digital products replace or compete with the Registrant's current light-lens
equipment. Changes in the mix of products from light-lens to digital, and the
pace of that change as well as competitive developments could cause actual
results to vary from those expected.
Pricing - the Registrant's ability to succeed is dependent upon its ability to
obtain adequate pricing for its products and services which provide a
reasonable return to shareholders. Depending on competitive market factors,
future prices the Registrant can obtain for its products and services may vary
from historical levels. In addition, pricing actions to offset devaluations
may not prove sufficient to offset further devaluations or may not hold in the
face of customer resistance and/or competition.
Financing Business - a significant portion of the Registrant's profits arise
from the financing of its customers' purchase of the Registrant's equipment.
On average, 75 to 80 percent of equipment sales are financed through the
Registrant. The Registrant's ability to provide such financing at competitive
rates and realize profitable spreads is highly dependent upon its own costs of
borrowing which, in turn, depend upon its credit ratings. Significant changes
in such ratings could reduce the profitability of such financing business
and/or make the Registrant's financing less attractive to customers thus
reducing the volume of financing business done. The Registrant's present
credit ratings permit ready access to the credit markets. There is no
assurance that these credit ratings can be maintained and/or ready access to
the credit markets can be assured.
Productivity - the Registrant's ability to sustain and improve its profit
margins is largely dependent on its ability to maintain an efficient, cost-
effective operation. Productivity improvements through process reengineering,
design efficiency and supplier cost improvements are required to offset labor
cost inflation and potential materials cost changes and competitive price
pressures.
International Operations - the Registrant derives approximately half its
revenue from operations outside of the United States. In addition, the
Registrant manufactures many of its products and/or their components outside
the United States. The Registrant's future revenue, cost and profit results
could be adversely affected by a number of factors, including changes in
foreign currency exchange rates, changes in economic conditions from country
to country, changes in a country's political conditions, trade protection
measures, licensing requirements and local tax issues.
New Products/Research and Development - the process of developing new high
technology products and solutions is inherently complex and uncertain. It
requires accurate anticipation of customers' changing needs and emerging
technological trends. The Registrant must then make long-term investments and
commit significant resources before knowing whether these investments will
eventually result in products that achieve customer acceptance and generate
the revenues required to provide anticipated returns from these investments.
Revenue Growth - Registrant's ability to attain a consistent trend of revenue
growth over the intermediate to longer term is largely dependent upon
expansion of its equipment sales worldwide. The ability to achieve equipment
sales growth is subject to the successful implementation of our initiatives to
provide industry-oriented global solutions for major customers and expansion
of its distribution channels in the face of global competition and pricing
pressures. Our inability to attain a consistent trend of revenue growth could
materially affect the trend of our actual results.
Restructuring - the Registrant's ability to ultimately reduce pre-tax annual
expenditures by approximately $1 billion is dependent upon its ability to
successfully implement the 1998 restructuring program including the
elimination of 9,000 jobs, net, worldwide, the closing and consolidation of
facilities, and the successful implementation of process and systems changes.
Year 2000 - the Registrant's ability to complete its Year 2000 plan is
dependent upon the availability of resources, the Registrant's ability to
discover and correct the potential Year 2000 sensitive problems which could
have a serious impact on the Registrant's information management systems,
facilities and products, and the ability of the Registrant's suppliers and
customers to bring their systems into Year 2000 compliance.
Xerox Corporation
Form 10-Q
June 30, 1999
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 5
Consolidated Balance Sheets 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Document Processing 15
Discontinued Operations 24
Capital Resources and Liquidity 26
Risk Management 28
Part II - Other Information
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Exhibit Index
Computation of Net Income per Common Share 34
Computation of Ratio of Earnings to Fixed Charges 35
Financial Data Schedule (filed in electronic form only)
For additional information about The Document Company Xerox,
please visit our World-Wide Web site at www.xerox.com/investor
PART I - FINANCIAL INFORMATION
Item 1 Xerox Corporation
Consolidated Statements of Income (Unaudited)
Three months ended Six months ended
June 30, June 30,
(In millions, except per-share data) 1999 1998 1999 1998
Revenues
Sales $ 2,561 $ 2,567 $ 4,677 $ 4,771
Service and rentals 2,021 1,906 3,943 3,740
Finance income 280 269 542 535
Total Revenues 4,862 4,742 9,162 9,046
Costs and Expenses
Cost of sales 1,400 1,411 2,514 2,639
Cost of service and rentals 1,118 1,028 2,198 2,029
Inventory charges - 113 - 113
Equipment financing interest 140 137 273 279
Research and development expenses 256 262 507 497
Selling, administrative and general
expenses 1,252 1,295 2,423 2,490
Restructuring charge and asset
impairments - 1,531 - 1,531
Other, net 63 64 120 122
Total Costs and Expenses 4,229 5,841 8,035 9,700
Income (Loss) before Income Taxes
(Benefits), Equity Income and
Minorities' Interests 633 (1,099) 1,127 (654)
Income taxes (benefits) 196 (385) 349 (239)
Equity in net income of
unconsolidated affiliates (24) (12) (34) (26)
Minorities' interests in earnings of
subsidiaries 13 10 21 21
Income (Loss) from Continuing Operations 448 (712) 791 (410)
Discontinued Operations - - - (190)
Net Income (Loss) $ 448 $ (712) $ 791 $ (600)
Basic Earnings (Loss) per Share
Continuing Operations $ 0.66 $ (1.10) $ 1.16 $ (0.66)
Discontinued Operations - - - (0.29)
Basic Earnings per Share $ 0.66 $ (1.10) $ 1.16 $ (0.95)
Diluted Earnings (Loss) per Share
Continuing Operations $ 0.62 $ (1.10) $ 1.09 $ (0.66)
Discontinued Operations - - - (0.29)
Diluted Earnings per Share $ 0.62 $ (1.10) $ 1.09 $ (0.95)
See accompanying notes.
Xerox Corporation
Consolidated Balance Sheets
June 30, December 31,
(In millions, except share data in thousands) 1999 1998
Assets (Unaudited)
Cash $ 103 $ 79
Accounts receivable, net 2,897 2,671
Finance receivables, net 4,945 5,220
Inventories 3,091 3,269
Deferred taxes and other current assets 1,446 1,236
Total Current Assets 12,482 12,475
Finance receivables due after one year, net 8,065 9,093
Land, buildings and equipment, net 2,367 2,366
Investments in affiliates, at equity 1,400 1,456
Goodwill, net 1,688 1,731
Other assets 1,182 1,233
Investment in discontinued operations 1,447 1,670
Total Assets $ 28,631 $ 30,024
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 3,857 $ 4,104
Accounts payable 759 948
Accrued compensation and benefit costs 582 722
Unearned income 205 210
Other current liabilities 1,815 2,523
Total Current Liabilities 7,218 8,507
Long-term debt 11,567 10,867
Postretirement medical benefits 1,114 1,092
Deferred taxes and other liabilities 2,395 2,711
Discontinued operations liabilities -
policyholders' deposits and other 694 911
Deferred ESOP benefits (370) (370)
Minorities' interests in equity of subsidiaries 118 124
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures of
the Company 638 638
Preferred stock 678 687
Common shareholders' equity 4,579 4,857
Total Liabilities and Equity $ 28,631 $ 30,024
Shares of common stock issued 662,661 657,196
Shares of common stock outstanding 662,661 656,787
See accompanying notes.
Xerox Corporation
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30 (In millions) 1999 1998
Cash Flows from Operating Activities
Income (Loss)from Continuing Operations $ 791 $ (410)
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 457 393
Provisions for doubtful accounts 123 111
Restructuring and other charges - 1,644
Provision for postretirement medical
benefits, net of payments 22 21
Charges against 1998 restructuring reserve (221) (133)
Minorities' interests in earnings of subsidiaries 21 21
Undistributed equity in income of affiliated companies (33) (21)
Increase in inventories (100) (577)
Increase in on-lease equipment (125) (149)
Decrease (Increase) in finance receivables 101 (476)
Increase in accounts receivable (281) (224)
Decrease in accounts payable and accrued
compensation and benefit costs (319) (224)
Net change in current and deferred income taxes 124 (561)
Change in other current and noncurrent liabilities (414) (246)
Other, net (217) (295)
Total (71) (1,126)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (310) (169)
Proceeds from sales of land, buildings and equipment 26 25
Acquisition of XLConnect, net of cash acquired - (380)
Other, net (26) 4
Total (310) (520)
Cash Flows from Financing Activities
Net change in debt 609 1,904
Dividends on common and preferred stock (293) (265)
Proceeds from sale of common stock 117 82
Repurchase of common and preferred stock - (47)
Dividends to minority shareholders (28) (4)
Total 405 1,670
Effect of Exchange Rate Changes on Cash (6) 15
Cash Provided by Continuing Operations 18 39
Cash Provided by Discontinued Operations 6 28
Increase in Cash 24 67
Cash at Beginning of Period 79 75
Cash at End of Period $ 103 $ 142
See accompanying notes.
1. The unaudited consolidated interim financial statements
presented herein have been prepared by Xerox Corporation ("the
Company") in accordance with the accounting policies described in
its 1998 Annual Report to Shareholders and should be read in
conjunction with the notes thereto.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair
statement of operating results for the interim periods presented
have been made.
Certain historical amounts have been restated to reflect
reclassifications to conform to the current presentation. The
impact of these changes is not material and did not affect net
income.
References herein to we or our refer to Xerox and
consolidated subsidiaries unless the context specifically
requires otherwise.
2. Inventories consist of (in millions):
June 30, December 31,
1999 1998
Finished goods $ 1,901 $ 1,923
Work in process 133 111
Raw materials 433 464
Equipment on operating leases, net 624 771
Total $ 3,091 $ 3,269
3. On January 25, 1999, the Board of Directors approved a two-
for-one split of the Company's common stock. The effective date
of the stock split was February 23 for shareholders of record as
of February 4. 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.
4. On April 7, 1998, we announced a worldwide restructuring
program associated with enhancing our competitive position and
lowering our overall cost structure. In connection with this
program, in the second quarter of 1998 we recorded a pre-tax
provision of $1,644 million ($1,107 million after taxes and
including our $18 million share of a restructuring charge
recorded by Fuji Xerox). The program includes the elimination of
approximately 9,000 jobs, net, worldwide, the closing and
consolidation of facilities, and the write-down of certain
assets. The charges associated with this restructuring program
include $113 million of inventory charges recorded as cost of
revenues and $316 million of asset impairments. Included in the
asset impairment charge are facility fixed assets write-downs of
$156 million and other asset write-downs of $160 million. For
facility fixed assets classified as assets to be disposed of, the
impairment loss recognized is based on fair value less cost to
sell, with fair value based on third-party valuations as well as
our internal estimates of existing market prices for similar
assets. The effect of suspending depreciation on assets no
longer in use for the second quarter of 1999 is not material.
The remaining $160 million of asset impairments includes the
write-down of certain technology assets and other items impacted
by the consolidation activities.
The headcount reductions are occurring primarily in
administrative functions, but also impact service, research and
manufacturing.
The following table summarizes the status of the restructuring
reserve (in millions):
Charges June 30,
Total Against 1999
Reserve Reserve Balance
Severance and related costs $1,017 $486 $531
Asset impairment 316 316 -
Lease cancellation and other costs 198 67 131
Inventory charges 113 113 -
Total $1,644 $982 $662
As of June 30 1999, approximately 8,200 employees have left the
Company under the restructuring program.
There have been no material changes to the program since its
announcement in April 1998, and the majority of the remaining
reserve will be utilized throughout the remainder of 1999 and
2000.
5. Common shareholders' equity consists of (in millions):
June 30, December 31,
1998 1998
Common stock $ 665 $ 660
Additional paid-in-capital 1,475 1,265
Retained earnings 4,175 3,712
Translation adjustments (1,736) (761)
Treasury stock - (19)
Total $ 4,579 $ 4,857
Comprehensive income is as follows (in millions):
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
Net income (loss) $ 448 $ (712) $ 791 $ (600)
Fuji Xerox stub period income(loss) - - - (6)
Translation adjustments (121) (159) (975) (230)
Comprehensive income (loss) $ 327 $ (871) $ (184) $ (836)
6. Interest expense totaled $405 million and $334 million for
the six months ended June 30, 1999 and 1998, respectively.
7. Operating segment profit or loss information for the three
months ended June 30, 1999 and 1998 is as follows (in millions):
Core Paper and
Business Media Other Total
1999
Revenue from external
customers $3,992 $280 $ 310 $ 4,582
Finance income 279 - 1 280
Intercompany revenues (41) - 41 -
Total segment revenues $4,230 $280 $ 352 $ 4,862
Segment profit $ 599 $ 16 $ 18 $ 633
1998
Revenue from external
customers $3,888 $289 $ 296 $ 4,473
Finance income 268 - 1 269
Intercompany revenues (100) - 100 -
Total segment Revenues $4,056 $289 $ 397 $ 4,742
Segment profit (loss)
before restructuring $ 541 $ 14 $ (10) $ 545
Segment profit (loss)
after restructuring $ (964) $ 11 $(146) $(1,099)
Operating segment profit or loss information for the six months
ended June 30, 1999 and 1998 is as follows (in millions):
Core Paper and
Business Media Other Total
1999
Revenue from external
customers $7,470 $563 $ 587 $ 8,620
Finance income 541 - 1 542
Intercompany revenues (76) - 76 -
Total segment revenues $7,935 $563 $ 664 $ 9,162
Segment profit $1,083 $ 34 $ 10 $ 1,127
1998
Revenue from external
customers $7,346 $588 $ 577 $ 8,511
Finance income 534 - 1 535
Intercompany revenues (158) - 158 -
Total segment Revenues $7,722 $588 $ 736 $ 9,046
Segment profit (loss)
before restructuring $ 995 $ 30 $ (35) $ 990
Segment profit (loss)
after restructuring $ (510) $ 27 $(171) $ (654)
8. Securitization of Receivables
In the second quarter of 1999, Xerox Credit Corporation, a wholly
owned subsidiary, securitized approximately $750 million of
finance receivables. The gain from this transaction was not
material.
9. 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. Subsequently, a single corporate entity,
CSU, L.L.C.("CSU") was substituted for the three affiliated
companies. CSU claimed damages predominately resulting from the
Company's alleged refusal to sell parts for high volume copiers
and printers to CSU 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 CSU, were not included in
that class action. The Company asserted counterclaims against
CSU alleging patent and copyright infringement relating to the
copying of diagnostic software and service manuals. On April 8,
1997, the District Court granted partial summary judgment in
favor of the Company on CSU's antitrust claims, ruling that the
Company's unilateral refusal to sell or license its patented
parts cannot give rise to antitrust liability. On January 8,
1999, the Court dismissed with prejudice all of CSU's
antitrust claims. CSU has preserved for appeal only its claims
that Xerox unlawfully refused to sell critical parts
(including patented parts), to sell manuals and to license
patented and copyrighted software and its claim that the
Company's refusal to sell non-critical parts was unlawful
because it was in conjunction with an allegedly unlawful refusal
to sell critical parts. The District Court also granted summary
judgment in favor of the Company on its patent infringement
claim, leaving open with respect to patent infringement only the
issues of willfulness and the amount of damages, and granted
partial summary judgment in favor of the Company with respect to
some of its claims of copyright infringement. A judgment in
the amount of $1,039,282 was entered in favor of the Company
and against CSU on the copyright infringement counterclaim.
CSU has appealed to the United States Court of Appeals for the
Federal Circuit.
On April 11, 1996, an action was commenced by Accuscan Corp.
(Accuscan), in the United States District Court for the Southern
District of New York, against the Company seeking unspecified
damages for infringement of a patent of Accuscan which expired in
1993. The suit, as amended, was directed to facsimile and certain
other products containing scanning functions and sought damages
for sales between 1990 and 1993. On April 1, 1998, the jury
entered a verdict in favor of Accuscan for $40 million. However,
on September 14, 1998, the Court granted the Company's motion for
a new trial on damages. The Company is also seeking to appeal
the issue of liability and believes that the liability verdict
should be set aside. A new trial on damages is set for August,
1999.
On December 18, 1998, three former employees of Crum & Forster
Holdings, Inc. (a former subsidiary of ours) ("C&F") filed a
lawsuit in the United States District Court for the District of
New Jersey claiming wrongful termination of their participation
in the Xerox Corporation Employee Stock Ownership Plan ("ESOP").
Xerox, the ESOP, C&F and the company that acquired C&F are named
defendants. Plaintiffs purport to bring this action on behalf of
themselves and a class of approximately 10,000 persons who were
employed by C&F (or one of its insurance subsidiaries which also
participated in the ESOP) from July 1, 1989 through December 31,
1993. Plaintiffs assert violations of the Employee Retirement
Income Security Act, breach of contract, conversion, unjust
enrichment and fraudulent misrepresentation. They are seeking
approximately $250 million in damages.
The foregoing action is related to an action previously filed
in the United States District Court for the Western District of
Texas. The Texas plaintiffs did not specify their damages, but
they sought certification of a similar class of former ESOP
participants. Plaintiffs' motion for class certification was
denied by the Court on March 26, 1999. The plaintiffs have asked
the Court to reconsider its decision.
On May 26, 1999, the District Court of New Jersey granted
Xerox' motion to transfer the New Jersey case to the Western
District of Texas, where it has been consolidated with the
previously filed action.
We deny any wrongdoing and we intend to vigorously defend the
consolidated action.
On June 24, 1999 Xerox Corporation was served with a summons
and complaint filed in the Superior Court of the State of
California for the County of Los Angeles. The complaint was
filed on behalf of 681 individual plaintiffs claiming damages as
a result of Xerox' alleged disposal and/or release of hazardous
substances into the soil, air and groundwater. On July 22, 1999 a
complaint was filed in the same Court, which has not yet been
served on Xerox, in a separate action on behalf of an additional
80 plaintiffs with the same claims for damages as the earlier
action. Plaintiffs in both cases further allege that they have
been exposed to such hazardous substances by inhalation,
ingestion and dermal contact, including but not limited to,
hazardous substances contained within the municipal drinking
water supplied by the City of Pomona and the Southern California
Water Company. Plaintiffs' claims against Xerox include personal
injury, wrongful death, property damage, negligence, trespass,
nuisance, fraudulent concealment, absolute liability for ultra-
hazardous activities, civil conspiracy, battery, and violation of
California Unfair Trade Practices Act. Damages are unspecified.
We deny any liability for the plaintiffs' alleged damages and
intend to vigorously defend these actions.
10. In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires companies to recognize all
derivatives as assets or liabilities measured at their fair
value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. We
do not expect this Statement to have a material impact on our
consolidated financial statements. In July 1999, the FASB issued
SFAS 137 which defers the effective date of SFAS 133 until the
start of fiscal years beginning after June 15, 2000. We will
adopt SFAS 133 beginning January 1, 2001.
Item 2 Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Document Processing
Summary
Income increased 13 percent to $448 million in the 1999 second
quarter from $395 million in the 1998 second quarter, before the
1998 worldwide restructuring program charge of $1,107 million. The
increase reflects improved revenue growth, particularly in the
United States and Europe, and ongoing benefits from the company's
worldwide restructuring program and the continuing focus on
productivity and expense controls.
Pre-currency revenues, excluding Brazil, grew 7 percent, reflecting
revenue growth of 9 percent in the United States and 6 percent in
Europe. Including Brazil where revenues declined substantially due
to the January currency devaluation and economic weakness, pre-
currency revenues grew 4 percent. Total 1999 second quarter
revenues, including the effect of adverse European currency
translation, grew 3 percent to $4.9 billion compared with $4.7
billion in the 1998 second quarter. Revenues in the 1999 first
half were $9.2 billion compared with $9.0 billion a year ago.
Diluted earnings per share increased 15 percent to $0.62 in the
1999 second quarter from $0.54 in the 1998 second quarter, before
the 1998 restructuring charge.
For the first six months of the year, diluted earnings per share
from continuing operations, before the 1998 restructuring charge,
increased 14 percent to $1.09 and income from continuing operations
increased 13 percent to $791 million.
Pre-Currency Growth
To understand the trends in the business, we believe that it is
helpful to adjust revenue and expense growth (except for ratios) to
exclude the impact of changes in the translation of foreign
currencies into U.S. dollars. We refer to this adjusted growth as
pre-currency growth. Latin American currencies are shown at
actual exchange rates for both pre-currency and post-currency
reporting, since these countries generally have volatile currency
and inflationary environments, and our operations in these
countries traditionally implement pricing actions to recover the
impact of inflation and devaluation.
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. When compared with the average of the
major European currencies on a revenue-weighted basis, the U.S.
dollar was approximately 3 percent stronger in the 1999 second
quarter than in the 1998 second quarter. As a result, European
currency translation had an unfavorable impact of one percentage
point on revenue growth in both the second quarter and first half
of 1999.
The unfavorable impact of our Brazilian operation on our total
revenue growth was approximately 3 percentage points. This included
the continued impact of the very significant January currency
devaluation and a weaker economic environment. The average Real
exchange rate declined 33 percent to 1.71 in the 1999 second
quarter from 1.15 in the 1998 second quarter.
Revenues denominated in currencies where the local currency is the
functional currency, including the Brazilian Real, are not hedged
for purposes of translation into U.S. dollars.
Revenues
Total pre-currency revenues grew 4 percent in the 1999 second
quarter and grew 7 percent excluding Brazil. For the major product
categories, the pre-currency revenue growth rates are as follows:
1999
1998 (Excluding
Q1 Q2 Q3 Q4 FY Q1 Q2 Brazil)
Q1 Q2
Total Revenues 10% 10% 6% 7% 8% (1)% 4% 3% 7%
Digital Products 34 41 38 33 36 28 26 33 32
Light Lens Copiers (4) (8) (15) (16) (11) (24) (20) (20) (18)
Digital product revenues grew 26 percent in the 1999 second quarter
and reached 52 percent of revenues compared with 42 percent of
total revenues in the 1998 second quarter. This growth was driven
by the continued outstanding revenue growth from our expanding
family of black-and-white Document Centre digital multi-function
products, particularly the 55 and 65 page-per-minute products.
Production publishing revenues grew 8 percent in the 1999 second
quarter and production printing revenues grew 5 percent. Color
copying and printing revenue growth improved to 11 percent in the
1999 second quarter, compared with 8 percent in the 1999 first
quarter, reflecting initial placements of the DocuColor 30 and
DocuColor 100 product lines and excellent growth in DocuColor 40
and indirect channels color laser revenues. Office color copier
revenues declined as unit volumes declined, and pricing pressure
and some shift to less-featured models was partially offset by
growth in recurring revenues. Our DocuPrint N series of monochrome
laser printers and new and expanding line of monochrome digital
copiers sold through indirect sales channels continued their
excellent growth. For the 1999 first half, digital product
revenues grew 27 percent, driven by outstanding growth from the
Document Centre digital copier family, the DocuPrint N series and
digital copiers sold through indirect sales channels as well as 10
percent growth in production publishing revenues and 10 percent
growth in color copying and printing revenues. Black-and-white
light-lens copier revenues declined 20 percent in the 1999 second
quarter and 22 percent in the 1999 first half as a result of the
weakness in Brazil, increased pricing pressures and customer
transition to digital copiers.
Geographically, the pre-currency revenue growth rates are as
follows:
1998 1999
Q1 Q2 Q3 Q4 FY Q1 Q2
Total Revenues 10% 10% 6% 7% 8% (1)% 4%
United States 7 13 10 11 10 4 9
Europe 13 10 5 8 9 2 6
Other Areas 11 6 (4) (4) 1 (16) (12)
Memo: Fuji Xerox 2 (4) (6) (4) (3) (1) (3)
U.S. revenue growth in the 1999 second quarter was driven by a
rebound in equipment sales through both direct and indirect
channels, as well as continued excellent growth in document
outsourcing. U.S. revenue growth in the 1999 first half of 6
percent was driven by strong growth in equipment sales through both
direct and indirect channels, as well as continued excellent growth
in document outsourcing.
European revenue growth rebounded to 6 percent in the 1999 second
quarter, reflecting strong equipment sales growth and outstanding
document outsourcing growth. Spain, Italy and Eastern Europe had
strong revenue growth in the 1999 second quarter, France and the
U.K. had good growth, while revenues declined in Germany and
Holland. European revenue growth of 4 percent in the 1999 first
half reflected good equipment sales growth and outstanding document
outsourcing growth.
Other Areas include operations principally in Latin America,
Canada, China, Russia, India, the Middle East and Africa. Revenue
in Brazil declined by 32 percent in the 1999 second quarter and 38
percent in the 1999 first half reflecting primarily the very
significant currency devaluation as well as the Brazilian
recession. Brazilian revenues represented approximately 6 percent
of Xerox revenues in the 1999 second quarter compared with 9
percent in the 1998 second quarter. Excluding Brazil, revenue
growth in Other Areas was modest, including strong growth in Mexico
and flat revenues in Canada.
Fuji Xerox Co., Ltd., an unconsolidated entity jointly owned by
Xerox Limited and Fuji Photo Film Company Limited, develops,
manufactures and distributes document processing products in Japan,
Australia, New Zealand, and other areas of the Pacific Rim. Fuji
Xerox revenue declined by 3 percent in the 1999 second quarter and
2 percent in the 1999 first half reflecting a modest revenue
decline in Japan partially offset by modest revenue growth in Fuji
Xerox' other Asia Pacific territories.
The pre-currency growth rates by type of revenue are as follows:
1999
1998 (Excluding
Q1 Q2 Q3 Q4 FY Q1 Q2 Brazil)
Q1 Q2
Equipment Sales 17% 19% 7% 10% 12% (3)% 2% 4% 12%
Recurring Revenues 6 6 5 4 5 1 4 3 4
Total Revenues 10% 10% 6% 7% 8% (1)% 4% 3% 7%
Memo:
Document Outsourcing* 29 39 36 44 38 31 34 34 35
*Includes equipment accounted for as equipment sales.
Equipment sales, which grew 2 percent in the 1999 second quarter
and were flat for the 1999 first half, were impacted significantly
by the currency devaluation and recession in Brazil. Excluding
Brazil, equipment sales grew 12 percent in the second quarter and 8
percent in the first half as U.S. and European sales productivity
and indirect channels equipment sales rebounded. Approximately 50
percent of 1999 second quarter equipment sales was derived from
products introduced since 1997, including the company's expanding
line of black-and-white Document Centre digital multi-function
equipment, the DocuColor 30, the DocuColor 70, the DocuColor 100,
the DocuTech 65, 96 and 180 page-per-minute Production Publishers,
and the expanding monochrome and color laser and inkjet product
families sold through indirect channels.
Recurring revenues, including revenues from service, document
outsourcing, rentals, supplies, paper and finance income, represent
the revenue stream that follows equipment placement. Growth in
these revenues is primarily a function of the growth in our
installed population of equipment, usage levels, pricing and
interest rates. The recurring revenue growth of 4 percent in the
1999 second quarter and 1999 first half is consistent with the
trend throughout 1998, reflecting continued excellent growth in
Document Outsourcing as customers focus on their core business and
outsource their document processing requirements to Xerox, and the
favorable revenue impact of higher machine populations resulting
from higher equipment sales last year. This was partially offset
by some diversion from service, rentals, supplies, paper and
finance income to document outsourcing as well as competitive price
pressures.
Key Ratios and Expenses
The trend in key ratios was as follows:
1998 1999
Q1 Q2 Q3 Q4 FY Q1 Q2
Gross Margin 44.9% 45.6% 46.3% 48.0% 46.3% 45.9% 45.3%
SAG % Revenue 27.8 27.3 27.7 26.8 27.3 27.2 25.8
The gross margin declined by 0.3 percentage points in the 1999
second quarter from the 1998 second quarter before the 1998
restructuring charge as continuing competitive price pressures and
changing business mix due primarily to higher revenue growth in
both the document outsourcing and the indirect channels businesses
were partially offset by manufacturing and other productivity
improvements. The gross margin increased 0.3 percentage points in
the 1999 first half from the 1998 first half before the 1998
restructuring charge as manufacturing and other productivity
improvements were partially offset by continuing competitive price
pressures and changing business mix due primarily to higher revenue
growth in both the document outsourcing and the indirect channels
businesses.
Selling, administrative and general expenses (SAG) declined 2
percent in the 1999 second quarter from the 1998 second quarter and
2 percent in the 1999 first half from the 1998 first half driven by
a substantial decline in general and administrative expenses
reflecting the benefits of our 1998 restructuring program, our
continued focus on productivity and expense controls to mitigate
the impact of the economic turmoil in Brazil, and significant cost
reductions in Brazil as well as the beneficial currency translation
impact of the devaluation of the Brazilian currency. In the 1999
second quarter and 1999 first half, SAG represented 25.8 percent
and 26.5 percent of revenue, an improvement of 1.5 and 1.1
percentage points, respectively from the corresponding 1998
periods.
Research and development (R&D) expense in the 1999 second quarter
declined 2 percent from the 1998 second quarter, as increased R&D
product program spending was more than offset by lower overhead
expenses. R&D expense for the first half of 1999 increased 2
percent. We continue to invest in technological development to
maintain our premier position in the rapidly changing document
processing market with an added focus on increasing the
effectiveness of that investment and time to market. Xerox R&D is
strategically coordinated with that of Fuji Xerox which invested
$636 million in R&D in the 1998 full year, for a combined total of
$1.7 billion.
Worldwide employment declined by 300 in the 1999 second quarter to
92,500 as a result of 1,800 employees leaving the company under the
worldwide restructuring program, partially offset by the net hiring
of 1,500 employees for the company's fast-growing document
outsourcing business, direct sales representatives, staffing for
the centralized European customer care and shared services
operations in Ireland and research and development skills
enhancement.
The small decreases in other expenses, net, from the 1998 second
quarter and 1998 first half were primarily due to planned lower
year 2000 remediation spending and several small one-time gains
which were essentially offset by increased non-financing interest
expense. The increased non-financing interest expense was the
result of higher debt balances partially offset by lower interest
rates.
Income Taxes (Benefits), Equity in Net Income of Unconsolidated
Affiliates and Minorities' Interests in Earnings of Subsidiaries
Income before income taxes increased 16 percent to $633 million in
the 1999 second quarter from $545 million in the 1998 second
quarter before the 1998 worldwide restructuring program charge.
The effective tax rate was 31.0 percent in the 1999 second quarter,
which is consistent with the 1999 first quarter and the full year
expectation.
Equity in net income of unconsolidated affiliates is principally
our 50 percent share of Fuji Xerox income. Excluding our $18
million share of a 1998 second quarter Fuji Xerox restructuring
charge, total equity in net income decreased in the 1999 second
quarter and the 1999 first half. Difficult economic conditions in
Japan and other Asia Pacific countries impacted Fuji Xerox income
again in the 1999 second quarter. We expect the difficult economic
conditions in Japan and the Pacific Rim to continue to adversely
affect Fuji Xerox' operations and it is unlikely that their
earnings, before currency translation, will contribute to Xerox
earnings growth in 1999.
On April 7, 1998, we announced a worldwide restructuring program
associated with enhancing our competitive position and lowering our
overall cost structure. In connection with this program, we
recorded a second quarter 1998 pre-tax provision of $1,644 million
($1,107 million after taxes and including our $18 million share of
a restructuring charge recorded by Fuji Xerox). The program
includes employment reductions, the closing and consolidation of
facilities, and the write-down of certain assets.
As of June 30, 1999, approximately 8,200 employees had left the
company under the restructuring program. The reserve balance of
$662 million at June 30, 1999 relates to cash expenditures to be
incurred primarily during the remainder of 1999 and 2000.
The Year 2000 (Y2K) problem is the result of computer programs
written in two digits, rather than four, to define the applicable
year. As a result, many information systems are unable to properly
recognize and process date-sensitive information beyond December
31, 1999. As with all major companies, certain of our information
systems and products require remediation or replacement in order to
render these systems Year 2000 compliant. Though a majority of our
remediation and replacement work has been completed, 1999 will be
used to finish any remaining mission-critical areas and develop and
deploy business contingency plans.
We have divided the Year 2000 project into five major sections:
Information Technology; and the non-Information Technology areas of
Facilities, Vendor Compliance, Product Compliance and Facilities
Management products and services. The general phases common to all
sections are: 1) Awareness - a strategic approach was developed to
address the Year 2000 problem. 2) Assessment - detailed plans and
target dates were developed. 3) Programming - includes hardware and
software upgrades, systems replacements, vendor certification and
other associated changes. 4) Testing - includes testing and
conversion of system applications. 5) Implementation - includes
compliance achievement and user acceptance.
The Information Technology section includes applications
(software), compute (mainframe/smaller computer environments),
infrastructure (networks, servers, and workstations), and
telecommunications. The status of each section as of June 30, 1999
is as follows:
Applications - 99 percent of the mission-critical applications
are Y2K Compliant and tested. The remaining work is planned for
completion by the third quarter of 1999.
Compute - 94 percent of our mainframe/smaller computer
environments have been upgraded to be Y2K compliant with the
remainder scheduled to be completed by September 1999.
Infrastructure - 96 percent of networks, servers, and
workstations have been upgraded to be Y2K compliant with the
remainder to be completed by the third quarter of 1999.
Telecommunications - 79 percent of internal mission-critical
components requiring upgrades are Y2K compliant with the remainder
planned for compliance by October 1999. We continue to assess
external public utility provider readiness and pursue status on
those providers who do not respond.
The Facilities section, which includes building electrical
systems, elevators, access control, security systems, etc., is
primarily in the remediation phase. We are on track for achieving
compliance of critical owned sites by October 31, 1999. Leased
sites are on track and planned for compliance by December 31, 1999.
We began our efforts in the Vendor Compliance area in 1997. A
general awareness letter was sent to all external suppliers, and an
assessment survey was sent to all business critical suppliers.
Follow-up was then initiated to validate survey responses and
provide a risk profile for each supplier.
To date, 93 percent of mission critical suppliers have been
assessed. New suppliers have been added to the list and
assessments are underway. Of the suppliers assessed, 87 percent
are rated high confidence as of July 1999. We will continue to
work with the 13 percent of suppliers rated low confidence to
ensure supply continuity through 2000. Assessments for the
remaining 7 percent of mission critical suppliers should be
completed by August 1999.
The Y2K vendor compliance process as it relates to our
manufacturing operations has primarily focused on our first tier
suppliers, and concerns about the adequacy of a single strategy
approach. In response to these concerns, we will to the extent
necessary, build an inventory hedge on selected key products and
critical sole source parts. This inventory coupled with our normal
inventory levels will provide us with a resolution window to
resolve any Y2K issues. We expect the additional inventory to be
less than the $100 million originally anticipated. In summary, we
believe the resolution period incorporated in the Y2K vendor
strategy is adequate to provide supplier continuity coverage. This
procedure is intended to provide a means of managing risk; however,
no assurance can be given that it will eliminate the potential
disruption caused by third party failure.
Our 1999 efforts include on-site inspection of 20 key suppliers
to be completed by the end of the third quarter of 1999 and
contingency planning.
Regarding Product Compliance, 99 percent of our products,
excluding end-of-life products, are Y2K compliant, or we have
developed a software/hardware patch or have another solution
available. We are implementing these Y2K solutions for all in-
field Xerox products worldwide, with expected completion during the
third quarter of 1999.
In Facilities Management, we have completed inventory,
compliance assessment, and action plans. Remediation activities
are underway for all customers; 97 percent of required remediation
of third party components has been accomplished. Completion of
remediation, on-site integrated testing of components and full
deployment is planned for the third quarter of 1999. Remediation
of Xerox products at these sites is being coordinated with the
product compliance area.
Contingency Planning--Certain of our processes have in place
business resumption plans. In addition, we have established a
contingency program which requires our critical business process
managers to develop alternative plans should our, or third party
remediation efforts experience unforeseen difficulty.
We are also dependent upon our customers for sales and cash
flows. Y2K interruptions in our customers' operations could result
in reduced sales, increased inventory or receivable levels and cash
flow reductions. While these events are possible, our customer base
is sufficiently broad to minimize those risks.
In 1993, Xerox began a project to replace the majority of its
legacy systems, which in many cases date back to the 1960s. These
efforts continue today. As to remediation, we currently estimate
that costs, exclusive of software and systems that are being
replaced or upgraded in the normal course of business, and
including our products and facilities, as well as legacy systems,
will be $183 million, of which $28 million was spent in 1997, $92
million in 1998 and $30 million in the first half of 1999. We
estimate $33 million will be spent in the remainder of 1999.
We believe that the remediation of our information systems and
products will occur in a timely fashion so that the Y2K problem
will not result in significant operating problems with our
operating systems, facilities and products. However, if such
remediations are not completed in a timely manner or if third party
suppliers of products or services have not completed their
remediation efforts, the Y2K problem could potentially have a
material adverse impact on our operations. Possible worst case
consequences could include an interruption in our ability to: bill
and apply collections from our customers; manufacture and deliver
products to our customers; or meet our cash requirement needs.
New Accounting Standards. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 requires companies to
recognize all derivatives as assets or liabilities measured at
their fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge
accounting. We do not expect this Statement to have a material
impact on our consolidated financial statements. In July 1999, the
FASB issued SFAS 137 which defers the effective date of SFAS 133
until the start of fiscal years beginning after June 15, 2000. We
will adopt SFAS 133 beginning January 1, 2001.
Discontinued Operations - Insurance and Other Financial Services
The net investment in the discontinued financial services
businesses which includes Insurance, Other Financial Services and
Third Party Financing and Real Estate totaled $753 million at June
30, 1999 compared with $759 million at December 31, 1998. The
change in 1999 was primarily caused by the funding of reinsurance
coverage for the former Talegen Holdings, Inc. (Talegen) companies
to Ridge Reinsurance Limited (Ridge Re) and interest for the period
on the assigned debt, both of which were more than offset by the
sale of six of our remaining eight financing leases, the sale of
other Real Estate investments and other run-off activity. A
discussion of the discontinued businesses follows.
Status of Insurance
In 1995, we recorded a $1,546 million after tax charge in
connection with the disengagement activities for our five then
remaining Talegen insurance companies and three related service
companies.
In 1997 and 1998, all of the insurance companies and service
companies were sold. As part of the consideration for one of the
companies, The Resolution Group, Inc. (TRG), which closed in the
fourth quarter of 1997, we received a $462 million performance-
based instrument. We will participate in the future cash flows of
TRG via the performance-based instrument. The recovery of this
instrument is dependent upon the sufficiency of TRG's available
cash flows. Based on current forecasts at June 30, 1999, we expect
to realize $462 million for this instrument. However, the ultimate
realization may be greater or less than this amount.
Xerox Financial Services, Inc. (XFSI) continues to provide
aggregate excess of loss reinsurance coverage to certain of the
former Talegen units and TRG through Ridge Re, a wholly owned
subsidiary. The coverage limits remaining at June 30, 1999 total
$620 million, which is net of 15 percent coinsurance and exclusive
of $234 million in coverage which was reinsured under a
retrocessional arrangement during the fourth quarter of 1998 for a
total cost to Ridge Re of $158 million. At June 30, 1999, Ridge Re
had recognized the discounted value of approximately $327 million
of the available coverage and it is possible that some additional
reserves could ultimately be needed, although this is not currently
anticipated. In April 1999, Ridge Re entered into a novation
agreement with another insurer to eliminate its obligations for the
reinsurance coverage for Westchester Specialty Group (WSG), a
former Talegen unit. The coverage limit under WSG's policy was
$128 million. In connection with the agreement, Ridge Re paid the
insurer $95 million.
XFSI has guaranteed to certain of the former Talegen units and TRG
that Ridge Re will meet all of its financial obligations under the
Reinsurance Agreements. Related premium payments to Ridge Re are
made by XFSI and guaranteed by us. As of June 30, 1999, there were
three remaining annual premium installments of $38 million, plus
finance charges. We have also guaranteed that Ridge Re will meet
its financial obligations on $578 million of the Reinsurance
Agreements and have provided a $400 million partial guaranty of
Ridge Re's $600 million letter of credit facility. This facility
is required to provide security with respect to aggregate excess of
loss reinsurance obligations under contracts with certain of the
former Talegen units and TRG.
XFSI may also be required, under certain circumstances, to purchase
over time additional redeemable preferred shares of Ridge Re, up to
a maximum of $301 million.
Net Investment in Insurance
The net investment in Insurance at June 30, 1999 totaled $602
million compared with a balance of $513 million at December 31,
1998. The increase in 1999 is due to contractual payments to Ridge
Re for annual premium installments and associated finance charges,
an anticipated settlement payment related to the sale of one of the
former Talegen units and interest on the assigned insurance debt.
Other Financial Services
The net investment in Other Financial Services at June 30, 1999 was
$138 million compared with $132 million at December 31, 1998. Debt
associated with these assets totaled $50 million at June 30, 1999
and December 31, 1998. The increase in the investment is primarily
due to interest on the assigned debt and settlement of litigation,
partially offset by the disposition of other investments.
Third Party Financing and Real Estate
Third Party Financing and Real Estate assets at June 30, 1999 and
December 31, 1998 totaled $101 million and $250 million,
respectively. The reduction primarily relates to the sale of six
of our remaining eight financing leases as well as other asset
sales and runoff activity that were consistent with the amounts
contemplated in the formal disposal plan. Debt associated with
these assets totaled $38 million and $86 million at June 30, 1999
and December 31, 1998, respectively.
Capital Resources and Liquidity
Total debt, including ESOP and Discontinued Operations debt not
shown separately in our consolidated balance sheets, increased to
$15,513 million at June 30, 1999 or $406 million more than at
December 31, 1998. The changes in consolidated indebtedness during
the first six months of 1999 and 1998 are summarized as follows (in
millions):
1999 1998
Total debt* as of January 1 $15,107 $12,903
Non-Financing Businesses:
Document Processing operations
cash usage 889 899
Brazil dollar debt reallocation 446 -
Discontinued businesses (6) (28)
Non-Financing Businesses 1,329 871
Financing Businesses (1,050) 220
Shareholder dividends 293 265
Purchase of XLConnect, net of
cash acquired - 380
Common stock and cash balance
changes (166) 32
Total Debt as of June 30 $15,513 $14,671
* Includes discontinued operations.
For analytical purposes, total equity includes common equity, ESOP
preferred stock, mandatorily redeemable preferred securities and
minorities' interests.
The following table summarizes the changes in total equity during
the first six months of 1999 and 1998 (in millions):
1999 1998
Total equity as of January 1 $6,306 $6,454
Income from Continuing Operations 791 (410)
Loss from Discontinued Operations - (190)
Shareholder dividends (293) (265)
Exercise of stock options 117 82
Repurchase of common stock - (47)
Change in minorities' interests (6) (3)
Translation adjustments (976) (230)
All other, net 74 39
Total equity as of June 30 $6,013 $5,430
Non-Financing Operations
The following table summarizes document processing non-financing
operations cash generation and usage for the six months ended June
30, 1999 and 1998 (in millions):
1999 1998
Document Processing Non-Financing:
Income from continuing operations $ 624 $ 537*
Depreciation** and amortization 457 393
Subtotal 1,081 930
Additions to land, buildings and
equipment (310) (169)
Increase in inventories (100) (764)
(Increase) decrease in on-lease
equipment (125) 38
Increase in accounts receivable (281) (224)
Net change in other assets and
liabilities (933) (577)
Subtotal (1,749) (1,696)
Cash charges against 1998
restructuring reserve (221) (133)
Net Cash Usage $ (889) $ (899)
* Before restructuring charge
** Includes rental equipment depreciation of $216 million and $200
million in six months ended June 30, 1999 and 1998, respectively
Non-financing operations' cash usage during the first six months of
1999 totaled $889 million or $10 million less than in the first six
months of 1998. The positive effects of higher net income and
non-cash charges and improved inventory turnover were largely
offset by capital spending related to our pan European initiatives,
net changes in other assets and liabilities such as prepaid
expenses, accounts payable and accrued compensation, and higher
payments related to the 1998 restructuring reserve.
Financing Businesses
Customer financing-related debt declined by $1,050 million and
increased by $220 million during the first six months of 1999 and
1998, respectively. This significant period-over-period reduction
reflects: i. an allocation to non financing operations, based on
our 8:1 debt to equity guideline, of a portion of Xerox do Brasil's
U.S. dollar denominated debt used to fund local currency
denominated customer finance receivables and, ii. The
securitization in second quarter 1999 of $750 million of Xerox
Credit Corporation financing contracts.
Debt related to discontinued third party financing and real estate
activities, which is included in financing business debt, totaled
$38 million at June 30, 1999 or $52 million less than at year end
1998. Asset sales and portfolio run-off account for the year to
date reduction. Third party financing and real estate debt was
$108 at June 30, 1998 or $11 million less than at year-end 1997.
Risk Management
Xerox is typical of multinational corporations in that it is
exposed to market risk from changes in foreign currency exchange
rates and interest rates that could affect our results of
operations and financial condition.
We have entered into certain financial instruments to manage
interest rate and foreign currency exposures. These instruments are
held solely for hedging purposes and include interest rate swap
agreements, forward exchange contracts and foreign currency swap
agreements. We do not enter into derivative instrument transactions
for trading purposes and employ long-standing policies prescribing
that derivative instruments are only to be used to achieve a set of
very limited objectives.
Currency derivatives are primarily arranged in conjunction with
underlying transactions that give rise to foreign currency-
denominated payables and receivables. For example, an option to buy
foreign currency to settle the importation of goods from foreign
suppliers, or a forward exchange contract to fix the dollar value
of a foreign currency-denominated loan.
With regard to interest rate hedging, virtually all customer-
financing assets earn fixed rates of interest. Therefore, we "lock
in" an interest rate spread by arranging fixed-rate liabilities
with similar maturities as the underlying assets, and fund the
assets with liabilities in the same currency, except in developing
economies where capital market access to these financial
instruments is impracticable. We refer to the effect of these
conservative practices as "match funding" customer financing
assets. This practice effectively eliminates the risk of a major
decline in interest margins during a period of rising interest
rates. Conversely, this practice effectively eliminates the
opportunity to materially increase margins when interest rates are
declining.
Pay fixed-rate and receive variable-rate swaps are typically used
in place of more expensive fixed-rate debt. Additionally, pay
variable-rate and receive fixed-rate swaps are used from time to
time to transform longer-term fixed-rate debt into variable rate
obligations. The transactions performed within each of these
categories enable more cost-effective management of interest rate
exposures. The potential risk attendant to this strategy is the
non-performance of the swap counterparty. We address this risk by
arranging swaps with a diverse group of strong-credit
counterparties, regularly monitoring their credit ratings and
determining the replacement cost, if any, of existing transactions.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Note 9 contained in the "Notes to
Consolidated Financial Statements" on pages 11-13 of this Quarterly
Report on Form 10-Q is incorporated by reference in answer to this
item.
Item 2. Changes in Securities
During the quarter ended June 30, 1999, Registrant issued the
following securities in transactions which were not registered
under the Securities Act of 1933, as amended (the Act):
(a) Securities Sold: On April 1, 1999, Registrant issued
1943 shares of Common stock, par value $1 per share.
(b) No underwriters participated. The shares were issued to each
of the non-employee Directors of Registrant: B.R. Inman,
A.A.Johnson, V.E. Jordan, Jr., Y. Kobayashi, H. Kopper, R.S.
Larsen, G.J. Mitchell, N.J. Nicholas, Jr., J.E. Pepper, P. F.
Russo, M.R. Seger and T.C.Theobald.
(c) The shares were issued at a deemed purchase price of
$52.125 per share (aggregate price $101,125), based upon
the market value on the date of issuance, in payment of the
quarterly Directors' fees pursuant to Registrant's Restricted
Stock Plan for Directors.
(d) Exemption from registration under the Act was claimed based
upon Section 4(2) as a sale by an issuer not involving a
public offering.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Xerox Corporation was duly
called and held on May 20, 1999 at The Ritz-Carlton San Francisco,
600 Stockton at California Street, San Francisco, California.
Proxies for the meeting were solicited on behalf of the Board of
Directors of the Registrant pursuant to Regulation 14A of the
General Rules and Regulations of the Commission. There was no
solicitation in opposition to the Board of Directors' nominees for
election as directors as listed in the Proxy Statement, and all
nominees were elected.
At the meeting, votes were cast upon the Proposals described in the
Proxy Statement for the meeting (filed with the Commission pursuant
to Regulation 14A and incorporated herein by reference) as follows:
Proposal 1 - Election of directors for the ensuing year.
Name For Withheld Vote
Paul A. Allaire 566,878,320 11,359,049
W. F. Buehler 566,805,213 11,432,156
B. R. Inman 571,677,147 6,560,222
Antonia Ax:son Johnson 566,740,492 11,496,877
Vernon E. Jordan, Jr. 565,902,128 12,335,241
Yotaro Kobayashi 566,719,405 11,517,964
Hilmar Kopper 550,928,031 27,309,338
Ralph S. Larsen 566,809,883 11,427,486
George J. Mitchell 566,470,850 11,766,519
N. J. Nicholas, Jr. 566,795,655 11,441,714
John E. Pepper 566,831,918 11,405,451
Barry D. Romeril 566,817,435 11,419,934
Patricia F. Russo 566,725,607 11,511,762
Martha R. Seger 566,692,084 11,545,285
Thomas C. Theobald 566,749,780 11,487,589
G. Richard Thoman 566,845,853 11,391,516
Proposal 2 - To elect KPMG LLP as independent auditors for the year
1999.
For - 575,956,548
Against - 633,843
Abstain - 1,646,978
Proposal 3 - To approve the amendments to the 1991 Long-Term
Incentive Plan
For - 442,602,711
Against - 64,831,939
Abstain - 3,314,621
Broker Non-vote 66,794,198
Proposal 4 - To approve amendments to the 1996 Non-Employee
Director Stock Option Plan
For - 519,355,487
Against - 55,334,579
Abstain - 3,547,303
Proposal 5 - To approve an amendment to the Certificate of
Incorporation regarding Preferred Stock voting rights
For - 557,693,685
Against - 17,060,661
Abstain - 3,483,023
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3 (a) (1) Restated Certificate of Incorporation of
Registrant filed by the Department of State of the 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.
Exhibit 3 (b) By-Laws of Registrant, as amended through
April 6, 1999. Incorporated by reference to Exhibit 3
(b)to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
Exhibit 11 Computation of Net Income per Common Share.
Exhibit 12 Computation of Ratio of Earnings to Fixed
Charges.
Exhibit 27 Financial Data Schedule (in electronic form
only).
(b) Current reports on Form 8-K dated March 26, 1999 reporting
Item 5 Other Events and filing exhibits under Item 7 and on May
13, 1999 filing exhibits under Item 7 were filed during the quarter
for which this Quarterly Report is filed.
SIGNATURES
Pursuant to the requirements 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
(Registrant)
/s/ Philip D. Fishbach
_____________________________
Date: August 11, 1999 By Philip D. Fishbach
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
Exhibit 11
Xerox Corporation
Computation of Net Income Per Common Share
(Dollars in millions, except per-share data; shares in thousands)
Three months Six Months
ended June 30, ended June 30,
1999 1998 1999 1998
I. Basic Net Income (Loss) Per Common Share
Income (loss) from
continuing operations $ 448 $ (712) $ 791 $ (410)
Accrued dividends on ESOP preferred
stock, net (10) (11) (20) (23)
Adjusted income (loss)from
continuing operations 438 (723) 771 (433)
Discontinued operations - - - (190)
Adjusted net income (loss) $ 438 $ (723) $ 771 $ (623)
Average common shares outstanding
during the period 659,234 656,418 659,994 655,006
Common shares issuable with respect
to exchangeable shares 2,206 3,330 2,012 3,330
Adjusted average shares outstanding
for the period 661,440 659,748 662,006 658,336
Basic earnings (loss) per share:
Continuing operations $ 0.66 $ (1.10) $ 1.16 $ (0.66)
Discontinued operations - - - (0.29)
Basic earnings per share $ 0.66 $ (1.10) $ 1.16 $ (0.95)
II. Diluted Net Income (Loss) Per Common Share
Income (loss) from
continuing operations $ 448 $ (712) $ 791 $ (410)
ESOP expense adjustment, net of tax 2 - 4 -
Accrued dividends on ESOP preferred
stock, net - (11) - (23)
Interest on convertible debt,
net of tax 4 - 8 -
Adjusted income (loss) from
continuing operations 454 (723) 803 (433)
Discontinued operations - - - (190)
Adjusted net income (loss) $ 454 $ (723) $ 803 $ (623)
Average common shares outstanding
during the period 659,234 656,418 659,994 655,006
Stock options, incentive and
exchangeable shares 11,837 3,330 11,202 3,330
Convertible debt 13,190 - 13,190 -
ESOP preferred stock 52,433 - 52,337 -
Adjusted average shares outstanding
for the period 736,694 659,748 736,723 658,336
Diluted earnings (loss) per share:
Continuing operations $ 0.62 $ (1.10) $ 1.09 $ (0.66)
Discontinued operations - - - (0.29)
Diluted earnings per share $ 0.62 $ (1.10) $ 1.09 $ (0.95)
<PAGE>
Exhibit 12 Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Six months ended Year ended
June 30, December 31,
(In millions) 1999 1998 1998* 1997 1996 1995 1994
Fixed charges:
Interest expense $ 405 $ 334 $ 748 $ 617 $ 592 $ 603 $ 520
Rental expense 61 69 145 140 140 142 170
Total fixed charges
before capitalized
interest and preferred
stock dividends of
subsidiaries 466 403 893 757 732 745 690
Preferred stock dividends
of subsidiaries 27 27 55 50 - - -
Capitalized interest 2 - - - - - 2
Total fixed charges $ 495 $ 430 $ 948 $ 807 $ 732 $ 745 $ 692
Earnings available for
fixed charges:
Earnings** $1,161 $ (628) $ 837 $2,268 $2,067 $1,980 $1,602
Less undistributed
income in minority
owned companies (33) (21) (27) (84) (84) (90) (54)
Add fixed charges before
capitalized interest
and preferred stock
dividends of
subsidiaries 466 403 893 757 732 745 690
Total earnings
available for
fixed charges $1,594 $ (246) $1,703 $2,941 $2,715 $2,635 $2,238
Ratio of earnings to
fixed charges (1)(2) 3.22 * 1.80 3.64 3.71 3.54 3.23
(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 and preferred stock
dividends of subsidiaries, by total fixed charges. Fixed charges consist
of interest, including capitalized interest and preferred stock dividends
of subsidiaries, 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, Other
Financial Services, and Third Party Financing and Real Estate 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-financing businesses.
* Earnings for the six months of 1998 were inadequate to cover fixed charges.
The coverage deficiency was $676 million. Excluding the restructuring
charge, the ratio of earnings to fixed charges would have been 3.25 and 3.55
for the six months ended June 30, 1998 and the year ended December 31, 1998,
respectively.
** Sum of Income before Income Taxes, Equity Income and Minorities'
Interests and Equity in Net Income of Unconsolidated Affiliates.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM XEROX CORPORATION'S 6-30-99 FINANCIAL STATEMENTS AND IS
QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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