<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: September 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 October 31, 1999
Common Stock 664,261,541 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 30 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 currency
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 business 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 - the 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 our 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 business process and systems
changes. In addition, the timing and effectiveness in overcoming issues in
centralizing its customer administration centers can impact the timing of
improvements in revenue, profit and cash flow.
Sales Force Realignment - the Registrant's ability to increase future revenue
and profits is in part dependent upon its ability to successfully implement
the substantial changes in the alignment of its sales force to sell products,
services and solutions by industry sectors.
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
September 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 25
Capital Resources and Liquidity 27
Risk Management 29
Part II - Other Information
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
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 Nine months ended
September 30, September 30,
(In millions, except per-share data) 1999 1998 1999 1998
Revenues
Sales $ 2,463 $ 2,438 $ 7,140 $ 7,209
Service and rentals 1,918 1,904 5,861 5,644
Finance income 247 265 789 800
Total Revenues 4,628 4,607 13,790 13,653
Costs and Expenses
Cost of sales 1,384 1,281 3,898 3,920
Cost of service and rentals 1,096 1,047 3,294 3,076
Inventory charges - - - 113
Equipment financing interest 143 147 416 426
Research and development expenses 230 273 737 770
Selling, administrative and general
expenses 1,208 1,277 3,631 3,767
Restructuring charge and asset
impairments - - - 1,531
Other, net 62 42 182 164
Total Costs and Expenses 4,123 4,067 12,158 13,767
Income (Loss) before Income Taxes
(Benefits), Equity Income and
Minorities' Interests 505 540 1,632 (114)
Income taxes (benefits) 157 173 506 (66)
Equity in net income of
unconsolidated affiliates (5) (28) (39) (54)
Minorities' interests in earnings of
subsidiaries 14 14 35 35
Income (Loss) from Continuing Operations 339 381 1,130 (29)
Discontinued Operations - - - (190)
Net Income (Loss) $ 339 $ 381 $ 1,130 $ (219)
Basic Earnings (Loss) per Share
Continuing Operations $ 0.50 $ 0.56 $ 1.66 $ (0.10)
Discontinued Operations - - - (0.29)
Basic Earnings per Share $ 0.50 $ 0.56 $ 1.66 $ (0.39)
Diluted Earnings (Loss) per Share
Continuing Operations $ 0.47 $ 0.53 $ 1.55 $ (0.10)
Discontinued Operations - - - (0.29)
Diluted Earnings per Share $ 0.47 $ 0.53 $ 1.55 $ (0.39)
See accompanying notes.
Xerox Corporation
Consolidated Balance Sheets
September 30, December 31,
(In millions, except share data in thousands) 1999 1998
Assets (Unaudited)
Cash $ 106 $ 79
Accounts receivable, net 3,081 2,671
Finance receivables, net 5,074 5,220
Inventories 3,048 3,269
Deferred taxes and other current assets 1,267 1,236
Total Current Assets 12,576 12,475
Finance receivables due after one year, net 7,909 9,093
Land, buildings and equipment, net 2,440 2,366
Investments in affiliates, at equity 1,522 1,456
Goodwill, net 1,751 1,731
Other assets 1,499 1,233
Investment in discontinued operations 1,255 1,670
Total Assets $ 28,952 $ 30,024
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 4,022 $ 4,104
Accounts payable 808 948
Accrued compensation and benefit costs 568 722
Unearned income 199 210
Other current liabilities 2,093 2,523
Total Current Liabilities 7,690 8,507
Long-term debt 11,616 10,867
Postretirement medical benefits 1,123 1,092
Deferred taxes and other liabilities 2,229 2,711
Discontinued operations liabilities -
policyholders' deposits and other 519 911
Deferred ESOP benefits (370) (370)
Minorities' interests in equity of subsidiaries 122 124
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures of
the Company 638 638
Preferred stock 674 687
Common shareholders' equity 4,711 4,857
Total Liabilities and Equity $ 28,952 $ 30,024
Shares of common stock issued 664,029 657,196
Shares of common stock outstanding 664,029 656,787
See accompanying notes.
Xerox Corporation
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30 (In millions) 1999 1998
Cash Flows from Operating Activities
Income (Loss)from Continuing Operations $ 1,130 $ (29)
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 659 589
Provisions for doubtful accounts 205 173
Restructuring and other charges - 1,644
Provision for postretirement medical
benefits, net of payments 31 26
Charges against 1998 restructuring reserve (327) (197)
Minorities' interests in earnings of subsidiaries 35 35
Undistributed equity in income of affiliated companies (39) (49)
Increase in inventories (57) (887)
Increase in on-lease equipment (249) (286)
Decrease (increase) in finance receivables 249 (892)
Increase in accounts receivable (480) (390)
Decrease in accounts payable and accrued
compensation and benefit costs (411) (256)
Net change in current and deferred income taxes 197 (551)
Change in other current and noncurrent liabilities (224) (17)
Other, net (428) (451)
Total 291 (1,538)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (393) (337)
Proceeds from sales of land, buildings and equipment 29 67
Acquisitions (107) (380)
Other, net (24) 6
Total (495) (644)
Cash Flows from Financing Activities
Net change in debt 565 2,499
Dividends on common and preferred stock (439) (398)
Proceeds from sale of common stock 120 99
Repurchase of common and preferred stock - (147)
Dividends to minority shareholders (29) (4)
Total 217 2,049
Effect of Exchange Rate Changes on Cash (9) 6
Cash Provided (used) by Continuing Operations 4 (127)
Cash Provided by Discontinued Operations 23 158
Increase in Cash 27 31
Cash at Beginning of Period 79 75
Cash at End of Period $ 106 $ 106
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):
September 30, December 31,
1999 1998
Finished goods $ 1,910 $ 1,923
Work in process 138 111
Raw materials 366 464
Equipment on operating leases, net 634 771
Total $ 3,048 $ 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 third 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 September 30,
Total Against 1999
Reserve Reserve Balance
Severance and related costs $1,017 $584 $ 433
Asset impairment 316 316 -
Lease cancellation and other costs 198 75 123
Inventory charges 113 113 -
Total $1,644 $1,088 $ 556
As of September 30 1999, approximately 9,100 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):
September 30, December 31,
1999 1998
Common stock $ 666 $ 660
Additional paid-in-capital 1,499 1,265
Retained earnings 4,358 3,712
Translation adjustments (1,812) (761)
Treasury stock - (19)
Total $ 4,711 $ 4,857
Comprehensive income is as follows (in millions):
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
Net income (loss) $ 339 $ 381 $1,130 $ (219)
Fuji Xerox stub period income(loss) - - - (6)
Translation adjustments (75) 77 (1,051) (153)
Comprehensive income (loss) $ 264 $ 458 $ 79 $ (378)
6. Interest expense totaled $606 million and $553 million for
the nine months ended September 30, 1999 and 1998, respectively.
7. Operating segment profit or loss information for the three
months ended September 30, 1999 and 1998 is as follows (in
millions):
Core Paper and
Business Media Other Total
1999
Revenue from external
customers $ 3,760 $ 277 $ 344 $ 4,381
Finance income 247 - - 247
Intercompany revenues (47) - 47 -
Total segment revenues $ 3,960 $ 277 $ 391 $ 4,628
Segment profit $ 495 $ 8 $ 2 $ 505
1998
Revenue from external
customers $ 3,759 $ 272 $ 311 $ 4,342
Finance income 264 - 1 265
Intercompany revenues (103) - 103 -
Total segment revenues $ 3,920 $ 272 $ 415 $ 4,607
Segment profit (loss) $ 546 $ 12 $ (18) $ 540
Operating segment profit or loss information for the nine months
ended September 30, 1999 and 1998 is as follows (in millions):
Core Paper and
Business Media Other Total
1999
Revenue from external
customers $11,181 $ 839 $ 981 $13,001
Finance income 787 - 2 789
Intercompany revenues (123) - 123 -
Total segment revenues $11,845 $ 839 $1,106 $13,790
Segment profit $ 1,581 $ 42 $ 9 $ 1,632
1998
Revenue from external
customers $11,109 $ 861 $ 883 $12,853
Finance income 798 - 2 800
Intercompany revenues (262) - 262 -
Total segment revenues $11,645 $ 861 $1,147 $13,653
Segment profit (loss)
before restructuring $ 1,548 $ 41 $ (59) $ 1,530
Segment profit (loss)
after restructuring $ 43 $ 38 $ (195) $ (114)
8. Securitization of Receivables
In the third quarter of 1999, Xerox Credit Corporation, a wholly
owned subsidiary, sold approximately $400 million of finance
receivables which resulted in a pre-tax gain of approximately $11
million. This gain was recorded in Finance income. A 1999
second quarter sale of $750 million resulted in a pre-tax gain of
$28 million.
9. 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. 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.
We do not expect this Statement to have a material impact on our
consolidated financial statements.
10. Acquisitions
In August, 1999 we purchased OmniFax from Danka Business Systems
for $45 million in cash. OmniFax is a supplier of business laser
multifunction fax systems. The acquisition resulted in goodwill
of approximately $16 million. Also during the third quarter, we
paid $62 million to increase our ownership in our joint venture
in India from approximately 40 percent to 68 percent. This
transaction resulted in goodwill of $48 million. The operating
results of these companies, which are immaterial, have been
included in our consolidated statement of income from the date of
acquisition.
On September 22, 1999 we announced an agreement to purchase the
Color Printing and Imaging Division of Tektronix, Inc. for $950
million. The transaction, subject to regulatory reviews, is
expected to close in the fourth quarter of 1999.
11. Litigation
On March 10, 1994, a lawsuit was filed in the United States
District Court for the District of Kansas by two independent
service organizations (ISOs) in Kansas City and St. Louis and
their parent company. 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. The trial ended on October 25, 1999 with a
jury verdict of $9,716,379. We intend to file a motion to have
the judge dismiss or modify the verdict.
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.
Item 2 Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Document Processing
Summary
Pre-currency revenues, excluding Brazil, grew 6 percent, reflecting
revenue growth of 6 percent in the United States, 3 percent in
Europe, and 13 percent in the rest of the world. Including Brazil
where revenues declined substantially due to the continuing effects
of the January currency devaluation and the subsequent economic
weakness, pre-currency revenues grew 2 percent. Including the
effect of adverse European currency translation, total 1999 third
quarter revenues of $4.6 billion were equal to the 1998 third
quarter.
Income declined 11 percent to $339 million in the 1999 third
quarter from $381 million in the 1998 third quarter. The income
decline reflects significant gross margin deterioration almost
offset by lower selling, administrative and general expenses and
lower research and development spending. The 1999 third quarter
income decline also reflects deterioration in equity income,
predominantly Fuji Xerox and increased non-financing interest
expense. Operating income benefited from significantly lower
provisions for overall incentive compensation expense.
Third quarter 1999 revenue and income reflect unfavorable product
mix, increased competition and pricing pressures. In addition,
sales activity was significantly impacted by the ongoing disruptive
effects of the U.S. customer administration reorganization and, to
a much lesser extent, the realignment of the sales organization to
an industry approach.
Diluted earnings per share declined 11 percent to $0.47 in the 1999
third quarter from $0.53 in the 1998 third quarter.
For the first nine months of the year, diluted earnings per share
from continuing operations, before the 1998 restructuring charge,
increased 4 percent to $1.55 and income from continuing operations
increased 5 percent to $1,130 million.
We believe that implementing the substantial changes to align our
sales force to sell products, services and solutions by industry
sector; overcoming issues in centralizing our customer
administration centers; and the economic weakness in Brazil and
Japan will continue to adversely impact our results for the next
several quarters.
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 5 percent stronger in the 1999 third
quarter than in the 1998 third quarter. As a result, European
currency translation had an unfavorable impact of less than two
percentage points on revenue growth.
The unfavorable impact of our Brazilian operation on our total
revenue growth was approximately 4 percentage points. This included
the continued impact of the very significant currency devaluation
and a weaker economic environment. The average Real exchange rate
declined 37 percent to 1.86 in the 1999 third quarter from 1.17 in
the 1998 third 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 2 percent in the 1999 third
quarter and grew 6 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 Q3 Brazil)
Q1 Q2 Q3
Total Revenues 10% 10% 6% 7% 8% (1)% 4% 2% 3% 7% 6%
Digital Products 34 41 38 33 36 28 26 19 33 32 24
Light Lens Copiers (4) (8) (15)(16)(11) (24)(20)(19) (20)(18)(14)
Digital product revenues grew 19 percent in the 1999 third quarter
and reached 53 percent of revenues compared with 45 percent of
total revenues in the 1998 third 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 and
the recently introduced 32 and 40 page-per-minute products.
Production publishing revenues grew 12 percent in the 1999 third
quarter reflecting strong activity partially offset by unfavorable
product mix, and production printing revenues declined 4 percent
due to unfavorable product mix and pricing incentives related to
year 2000 transition which more than offset higher activity. Color
copying and printing revenue growth improved to 13 percent in the
1999 third quarter, compared with 8 percent and 11 percent in the
first two quarters of 1999, respectively, reflecting accelerating
revenue from DocuColor 100 and indirect channels color laser and
inkjet products, the initial strong market reception for the
DocuColor 12 introduced in August, as well as continued strong
growth in DocuColor 30 and 40 revenues with a clear mix shift to
DocuColor 30. Office color copier revenue declined, as unit volume
increases were more than offset by pricing pressure and a continued
shift to less-featured models. Revenue growth from our DocuPrint N
series of monochrome laser printers and new and expanding line of
monochrome digital copiers sold through indirect sales channels was
excellent, but the growth was concentrated in lower-end products.
For the first nine months of 1999, digital product revenues grew 24
percent, driven by outstanding growth from the Document Centre
digital copier family, the DocuPrint N series of black and white
laser printers and digital copiers sold through indirect sales
channels as well as 11 percent growth in production publishing
revenues and 11 percent growth in color copying and printing
revenues. Black-and-white light-lens copier revenues declined 19
percent in the 1999 third quarter and 21 percent in the first nine
months as a result of increased pricing pressures, customer
transition to digital devices and weakness in Brazil.
Geographically, the pre-currency revenue growth rates are as
follows:
1998 1999
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3
Total Revenues 10% 10% 6% 7% 8% (1)% 4% 2%
United States 7 13 10 11 10 4 9 6
Europe 13 10 5 8 9 2 6 3
Other Areas 11 6 (4) (4) 1 (16) (12) (10)
Memo: Fuji Xerox 2 (4) (6) (4) (3) (1) (3) -
U.S. revenue growth slowed to 6 percent in the 1999 third quarter
as sales activity was significantly affected by the ongoing
disruptive impacts of the customer administration reorganization
and to a much lesser extent, the continued realignment of the sales
organization to an industry approach. In addition, the competitive
environment intensified, and unfavorable production publishing,
production printing and color product mix and pricing incentives to
accelerate production printing placements, adversely impacted third
quarter 1999 revenues. U.S. revenue growth in the first nine
months of 1999 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 partially
offset by the factors mentioned above.
European revenue growth slowed to 3 percent in the 1999 third
quarter, reflecting increased competitive and pricing pressures,
particularly in large bid and tender transactions, unfavorable
product mix, as well as lower sales productivity in some countries
as a result of the realignment of the sales organization to an
industry approach. Italy had strong revenue growth in the 1999
third quarter, France and Germany had modest revenue growth, while
revenues in the U.K. and Holland declined. European revenue growth
of 4 percent in the first nine months of 1999 reflected good
equipment sales growth and outstanding document outsourcing growth
partially offset by the factors mentioned above.
Other Areas include operations principally in Latin America,
Canada, China, Russia, India, the Middle East and Africa. Revenue
in Brazil declined by 41 percent in the 1999 third quarter and 39
percent in the first nine months of 1999, primarily reflecting the
very significant currency devaluation as well as the economic
weakness. Brazilian revenues represented approximately 5 percent
of Xerox revenues in the 1999 third quarter compared with 9 percent
in the 1998 third quarter. Excluding Brazil, revenue in Other
Areas grew 13 percent in the third quarter, including excellent
growth in Mexico, good growth in Canada and a resumption of growth
in developing markets.
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 in the 1999 third quarter was equal to the 1998 third
quarter, reflecting flat revenue in Japan and modest revenue growth
in Fuji Xerox' other Asia Pacific territories. Fuji Xerox revenue
for the first nine months of 1999 declined 1 percent 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 Q3 Brazil)
Q1 Q2 Q3
Equipment Sales 17% 19% 7% 10% 12% (3)% 2% 5% 4% 12% 13%
Recurring Revenues 6 6 5 4 5 1 4 - 3 4 3
Total Revenues 10% 10% 6% 7% 8% (1)% 4% 2% 3% 7% 6%
Memo:
Document Outsourcing* 29 39 36 44 38 31 34 32 34 35 34
*Includes equipment accounted for as equipment sales.
Equipment sales, which grew 5 percent in the 1999 third quarter and
1 percent for the first nine months of 1999, were impacted by the
currency devaluation and recession in Brazil. While equipment sales
excluding Brazil grew 13 percent in the third quarter and 10
percent in the first nine months of 1999, U. S. sales activity was
significantly impacted by the ongoing disruptive impacts of the
customer administration reorganization. Indirect channels equipment
sales revenue growth also slowed with unit placements increasing
substantially, offset by equipment price declines and product mix.
The substantial increase in equipment placements should result in
higher future supplies revenue. Over 50 percent of 1999 third
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 12,
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. These revenues
are primarily a function of our installed population of equipment,
usage levels, pricing and interest rates. Recurring revenues in the
1999 third quarter were equal to the 1998 third quarter and grew 2
percent in the first nine months of 1999. Excellent growth in
Document Outsourcing continued as customers focus on their core
business and outsource their document processing requirements to
Xerox. Recurring revenues were adversely impacted by the
devaluation and weakness in Brazil, lower service revenues and
lower copy volume growth reflecting diversion of pages from light
lens copiers to printers not yet offset by page increases on
network-connected Document Centre multifunction products. In
addition, recurring revenues were also adversely impacted by
competitive price pressures and reduced product sales to Fuji
Xerox, which are classified in recurring revenue. In the 1999
third quarter, finance income included an $11 million gain from the
securitization of $400 million of finance receivables partially
offset by the unfavorable flow-through impact of the $28 million
gain on the 1999 second quarter securitization of $750 million.
Key Ratios and Expenses
The trend in key ratios was as follows:
1998 1999 _
Q1 Q2 Q3 Q4 FY Q1 Q2 Q3
Gross Margin 44.9% 45.6% 46.3% 48.0% 46.3% 45.9% 45.3% 43.3%
SAG % Revenue 27.8 27.3 27.7 26.8 27.3 27.2 25.8 26.1
The gross margin declined by 3.0 percentage points in the 1999
third quarter from the 1998 third quarter as unfavorable product
mix, higher revenue growth in the lower-margin document outsourcing
and indirect channels businesses, some decline in service margin
and accelerating competitive price pressures were only partially
offset by significantly lower provisions for overall incentive
compensation expense and manufacturing and other productivity
improvements. The gross margin decreased 0.8 percentage points in
the first nine months of 1999 versus the first nine months of 1998
before the 1998 restructuring charge because of continued
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 4
percent in the 1999 third quarter from the 1998 third quarter and 3
percent in the first nine months of 1999 driven by a decline in
general and administrative expenses reflecting the benefits of our
1998 restructuring program, significantly lower provisions for
overall incentive compensation expense, our continued focus on
productivity and expense controls and the beneficial currency
translation impact of the devaluation of the Brazilian currency
which were partially offset by the impact of U.S. customer
administration issues. In the 1999 third quarter and the first
nine months of 1999, SAG represented 26.1 percent and 26.3 percent
of revenue, an improvement of 1.6 and 1.3 percentage points,
respectively, from the corresponding 1998 periods.
Research and development (R&D) expense in the 1999 third quarter
declined 16 percent from the 1998 third quarter and 4 percent for
the first nine months of 1999, largely due to lower provisions for
overall incentive compensation expense. We continue to invest in
technological development to maintain our position in the rapidly
changing document processing market with an added focus on
increasing the effectiveness of that investment. 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 increased by 1,000 in the 1999 third quarter
to 93,500 as a result of the acquisition of the Omnifax business
with 600 employees and the net hiring of 1,300 employees for the
company's fast-growing document outsourcing business, direct sales
representatives, and staffing for the centralized European customer
care and shared services operations in Ireland, partially offset by
900 employees leaving the company under the worldwide restructuring
program.
The $20 million increase in other expenses, net, in the 1999 third
quarter and the $18 million increase in the first nine months of
1999, reflects increased non-financing interest expense resulting
from higher debt balances and the net impact of several non-
recurring items which included a gain from the sale of our
remaining minority interest in Documentum, Inc.
Income Taxes (Benefits), Equity in Net Income of Unconsolidated
Affiliates and Minorities' Interests in Earnings of Subsidiaries
Income before income taxes declined 6 percent to $505 million in
the 1999 third quarter from $540 million in the 1998 third quarter.
The effective tax rate was 31.0 percent in the 1999 third quarter,
which is the same as the 1999 first half and consistent with the
full year expectation.
Equity in net income of unconsolidated affiliates is principally
our 50 percent share of Fuji Xerox income. Total equity in net
income decreased significantly in the 1999 third quarter and the
first nine months of 1999. Fuji Xerox business in its territories
was essentially consistent with first half trends but third quarter
income in the Xerox consolidated accounts was significantly lower
because of the deferral of profits from intercompany product
shipments.
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 September 30, 1999, approximately 9,100 employees had left
the company under the restructuring program. The reserve balance of
$556 million at September 30, 1999 relates to cash expenditures to
be incurred primarily during the remainder of 1999 and 2000.
On September 22, 1999 we announced an agreement to purchase the
Tektronix, Inc. Color Printing and Imaging Division for $950
million in cash. The purchase agreement is subject to regulatory
reviews and is expected to close in the fourth quarter of 1999.
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. Virtually all of our
remediation and replacement work has been completed.
We have divided the Year 2000 project into five major sections:
Information Technology; and the non-Information Technology areas of
Facilities, External supplier Readiness, 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 September 30,
1999 is as follows:
Applications - 100 percent of the mission-critical applications
are Y2K Compliant and tested.
Compute - 98 percent of our mainframe/smaller computer
environments have been upgraded to be Y2K compliant with the
remainder scheduled to be completed in the fourth quarter of 1999.
Infrastructure - 99.9 percent of networks, servers, and
workstations have been upgraded to be Y2K compliant with the
remainder to be completed in the fourth quarter of 1999.
Telecommunications - 98 percent of internal mission-critical
components requiring upgrades are Y2K compliant with the remainder
planned for compliance in the fourth quarter of 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 and leased sites in the fourth quarter
of 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.
From a global purchasing perspective, 100 percent of all business
critical suppliers have been assessed for Y2K readiness, with 90
percent rated "high confidence". The Y2K Assessment Team will
continue to work with the commodity managers, and their appointed
Y2K leads, to determine next steps for all "low confidence"
suppliers. Our current focus is on assessing the balance of the
key product suppliers.
In addition to assessing supplier readiness, an extra measure of
safety in the form of a Y2K inventory hedge will ensure continuity
of supply through the rollover. This approved strategy will
protect Xerox revenue by assuring the availability of selected key
parts and products and delivery dates.
In summary, we believe the inventory hedge 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.
Regarding Product Compliance, 99 percent of our products,
excluding end-of-life products, are Y2K compliant, can be made
compliant with a software patch or upgrade, or have another
solution available. We are implementing these Y2K solutions for
all in-field Xerox products worldwide. Product remediation is 93
percent complete worldwide through the end of September. The
remainder of the remediation is aggressively underway, and will be
complete before year-end.
In Facilities Management, required remediation of third party
components is 98 percent complete worldwide. In addition, 78
percent of on-site integrated tests have been accomplished.
Remediation of Xerox products at these sites is being coordinated
with the product compliance area and is nearing completion.
Contingency plans are developed for 72 percent of the high priority
sites.
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 $45 million in the first nine months of 1999.
We estimate $18 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 $736 million at
September 30, 1999 compared with $759 million at December 31, 1998.
The decrease in 1999 was primarily caused by the sale of six of our
remaining eight financing leases, the sale of other Real Estate
investments and other run-off activity which were partially offset
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. 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 September 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 one of the former
Talegen units and TRG through Ridge Re, a wholly owned subsidiary.
The coverage limits remaining at September 30, 1999 total $578
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. At September 30,
1999, Ridge Re had recognized the discounted value of approximately
$331 million of the available coverage and it is possible that some
additional reserves could ultimately be needed, although this is
not currently anticipated. In August 1999, Ridge Re entered into a
commutation agreement to eliminate its obligations for the
reinsurance coverage relating to one of the Talegen units. The
coverage limit under the policy that was commuted was $42 million.
XFSI has guaranteed to one 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 September 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 one 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 September 30, 1999 totaled $609
million compared with a balance of $513 million at December 31,
1998. The increase in 1999 is primarily 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 September 30,
1999 was $139 million compared with $132 million at December 31,
1998. Debt associated with these assets totaled $50 million at
September 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 September 30, 1999
and December 31, 1998 totaled $38 million and $250 million,
respectively. The reduction primarily relates to the sale of six
of our remaining eight financing leases, sale of the last remaining
Xerox Centre office building, 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 has
been fully paid down at September 30, 1999. Debt totaled $86
million at December 31, 1998.
Capital Resources and Liquidity
Total debt, including ESOP and Discontinued Operations debt not
shown separately in our consolidated balance sheets, increased to
$15,688 million at September 30, 1999 or $554 million more than at
December 31, 1998. The changes in consolidated indebtedness during
the first nine months of 1999 and 1998 are summarized as follows.
1999 1998
Total debt* as of January 1 $15,107 $12,903
Non-Financing Businesses:
Document Processing operations
cash usage 687 1,115
Brazil dollar debt reallocation 572 -
Discontinued businesses (109) (388)
Non-Financing Businesses 1,150 727
Financing Businesses (1,154) 647
Shareholder dividends 439 398
Acquisitions 161** 380
Common stock, cash balance and other (15) 79
Total Debt* as of September 30 $15,688 $15,134
* Includes discontinued operations.
** Includes $54 million of India joint venture debt
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 nine months of 1999 and 1998 (in millions):
1999 1998
Total equity as of January 1 $6,306 $6,454
Income from Continuing Operations 1,130 (29)
Loss from Discontinued Operations - (190)
Shareholder dividends (439) (398)
Exercise of stock options 120 99
Repurchase of common stock - (147)
Change in minorities' interests (2) -
Translation adjustments (1,051) (153)
All other, net 81 50
Total equity as of September 30 $6,145 $5,686
Non-Financing Operations
The following table summarizes document processing non-financing
operations cash generation and usage for the nine months ended
September 30, 1999 and 1998 (in millions):
1999 1998
Document Processing Non-Financing:
Income (loss) from continuing
operations $ 886 $ (140)
1998 restructuring charge,
net of tax - 1,107
Depreciation* and amortization 659 589
Subtotal 1,545 1,556
Additions to land, buildings and
equipment (393) (337)
Increase in inventories (57) (887)
Increase in on-lease
equipment (249) (286)
Increase in accounts receivable (480) (390)
Net change in other assets and
liabilities (726) (574)
Subtotal (1,905) (2,474)
Cash charges against 1998
restructuring reserve (327) (197)
Net Cash Usage $ (687) $(1,115)
* Includes rental equipment depreciation of $332 million and $303
million in the nine months ended September 30, 1999 and 1998,
respectively.
Non-financing operations' cash usage during the first nine months
of 1999 totaled $687 million or $428 million less than in the first
nine months of 1998. The improved cash performance resulted from
significant improvement in inventory turns and lower disbursements
due to our productivity programs. Offsetting these items were
increased capital spending related to our pan European initiatives,
an increase in the aging of accounts receivable resulting from the
centralization of the U.S. customer administration centers and
higher payments related to the 1998 restructuring reserve.
Financing Businesses
Customer financing-related debt declined by $1,154 million and
increased by $647 million during the first nine months of 1999 and
1998, respectively. This period-over-period reduction reflects
the securitization in 1999 of $1,150 million of Xerox Credit
Corporation financing contracts and an allocation to non financing
operations, based on our 8:1 debt to equity guideline. This
allocation was necessary because of the impact on our Brazilian
finance receivables of the significant devaluation in the Brazilian
Real.
Debt related to discontinued third party financing and real estate
activities, which has been included in financing business debt, was
fully paid down at September 30, 1999. Third party financing and
real estate related debt was reduced by $86 million and $19 million
during the first nine months of 1999 and 1998, respectively.
Risk Management
Xerox is typical of multinational corporations because 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 11 contained in the "Notes to
Consolidated Financial Statements" on pages 12-14 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 September 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 July 1, 1999, Registrant issued
1,717 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
$59.0625 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 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 June 24, 1999 and dated
September 22, 1999 reporting Item 5 "Other Events" 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: November 10, 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 Nine Months
ended September 30, ended September 30,
1999 1998 1999 1998
I. Basic Net Income (Loss) Per Common Share
Income (loss) from
continuing operations $ 339 $ 381 $ 1,130 $ (29)
Accrued dividends on ESOP preferred
stock, net (9) (11) (29) (34)
Adjusted income (loss)from
continuing operations 330 370 1,101 (63)
Discontinued operations - - - (190)
Adjusted net income (loss) $ 330 $ 370 $ 1,101 $ (253)
Average common shares outstanding
during the period 663,409 655,310 661,094 655,476
Common shares issuable with respect
to exchangeable shares 1,078 3,300 1,739 3,300
Adjusted average shares outstanding
for the period 664,487 658,610 662,833 658,776
Basic earnings (loss) per share:
Continuing operations $ 0.50 $ 0.56 $ 1.66 $ (0.10)
Discontinued operations - - - (0.29)
Basic earnings per share $ 0.50 $ 0.56 $ 1.66 $ (0.39)
II. Diluted Net Income (Loss) Per Common Share
Income (loss) from
continuing operations $ 339 $ 381 $ 1,130 $ (29)
ESOP expense adjustment, net of tax 1 1 5 -
Interest on convertible debt,
net of tax 4 4 12 -
Accrued dividends on ESOP preferred
stock, net - - - (34)
Adjusted income (loss) from
continuing operations 344 386 1,147 (63)
Discontinued operations - - - (190)
Adjusted net income (loss) $ 344 $ 386 $ 1,147 $ (253)
Average common shares outstanding
during the period 663,409 655,310 661,094 655,476
Stock options, incentive and
exchangeable shares 10,403 13,070 12,028 3,300
Convertible debt 13,191 13,190 13,191 -
ESOP preferred stock 52,159 53,622 52,159 -
Adjusted average shares outstanding
for the period 739,162 735,192 738,472 658,776
Diluted earnings (loss) per share:
Continuing operations $ 0.47 $ 0.53 $ 1.55 $ (0.10)
Discontinued operations - - - (0.29)
Diluted earnings per share $ 0.47 $ 0.53 $ 1.55 $ (0.39)
<PAGE>
Exhibit 12 Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Nine months ended Year ended
September 30, December 31,
(In millions) 1999 1998* 1998* 1997 1996 1995 1994
Fixed charges:
Interest expense $ 606 $ 553 $ 748 $ 617 $ 592 $ 603 $ 520
Rental expense 94 104 145 140 140 142 170
Total fixed charges
before capitalized
interest and preferred
stock dividends of
subsidiaries 700 657 893 757 732 745 690
Preferred stock dividends
of subsidiaries 41 41 55 50 - - -
Capitalized interest 2 - - - - - 2
Total fixed charges $ 743 $ 698 $ 948 $ 807 $ 732 $ 745 $ 692
Earnings available for
fixed charges:
Earnings** $1,671 $ (60) $ 837 $2,268 $2,067 $1,980 $1,602
Less undistributed
income in minority
owned companies (39) (49) (27) (84) (84) (90) (54)
Add fixed charges before
capitalized interest
and preferred stock
dividends of
subsidiaries 700 657 893 757 732 745 690
Total earnings
available for
fixed charges $2,332 $ 548 $1,703 $2,941 $2,715 $2,635 $2,238
Ratio of earnings to
fixed charges (1)(2) 3.14 0.79 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 nine months of 1998 were inadequate to cover fixed charges.
The coverage deficiency was $150 million. Excluding the restructuring
charge, the ratio of earnings to fixed charges would have been 3.14 and 3.55
for the nine months ended September 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 9-30-99 FINANCIAL STATEMENTS AND IS
QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
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<PERIOD-END> SEP-30-1999
<CASH> 106
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638
674
<COMMON> 666
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<SALES> 7,140
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