<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: March 31, 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 April 30,1999
Common Stock 661,308,844 shares
This document consists of 33 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 35% 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
March 31, 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 13
Discontinued Operations 23
Capital Resources and Liquidity 26
Risk Management 28
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 29
Part II - Other Information
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
Exhibit Index
Computation of Net Income per Common Share 32
Computation of Ratio of Earnings to Fixed Charges 33
By-Laws of Registrant, as amended through
April 6, 1999 (filed in electronic form only)
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
March 31,
(In millions, except per-share data) 1999 1998
Revenues
Sales $ 2,116 $ 2,205
Service and rentals 1,922 1,833
Finance income 262 266
Total Revenues 4,300 4,304
Costs and Expenses
Cost of sales 1,114 1,228
Cost of service and rentals 1,080 1,001
Equipment financing interest 133 142
Research and development expenses 251 234
Selling, administrative and general
expenses 1,171 1,196
Other, net 57 58
Total Costs and Expenses 3,806 3,859
Income before Income Taxes, Equity Income
and Minorities' Interests 494 445
Income taxes 153 147
Equity in net income of unconsolidated
affiliates 10 14
Minorities' interests in earnings of
subsidiaries 8 11
Income from Continuing Operations 343 301
Discontinued Operations - (190)
Net Income $ 343 $ 111
Basic Earnings (Loss) per Share
Continuing Operations $ 0.50 $ 0.44
Discontinued Operations - (0.29)
Basic Earnings per Share $ 0.50 $ 0.15
Diluted Earnings (Loss) per Share
Continuing Operations $ 0.48 $ 0.42
Discontinued Operations - (0.26)
Diluted Earnings per Share $ 0.48 $ 0.16
See accompanying notes.
Xerox Corporation
Consolidated Balance Sheets
March 31, December 31,
(In millions, except share data in thousands) 1999 1998
Assets (Unaudited)
Cash $ 106 $ 79
Accounts receivable, net 2,758 2,671
Finance receivables, net 4,876 5,220
Inventories 3,309 3,269
Deferred taxes and other current assets 1,322 1,236
Total Current Assets 12,371 12,475
Finance receivables due after one year, net 8,652 9,093
Land, buildings and equipment, net 2,335 2,366
Investments in affiliates, at equity 1,402 1,456
Goodwill, net 1,724 1,731
Other assets 1,233 1,233
Investment in discontinued operations 1,559 1,670
Total Assets $ 29,276 $ 30,024
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 4,159 $ 4,104
Accounts payable 789 948
Accrued compensation and benefit costs 537 722
Unearned income 229 210
Other current liabilities 1,956 2,523
Total Current Liabilities 7,670 8,507
Long-term debt 11,806 10,867
Postretirement medical benefits 1,103 1,092
Deferred taxes and other liabilities 2,513 2,711
Discontinued operations liabilities -
policyholders' deposits and other 797 911
Deferred ESOP benefits (370) (370)
Minorities' interests in equity of subsidiaries 107 124
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures of
the Company 638 638
Preferred stock 683 687
Common shareholders' equity 4,329 4,857
Total Liabilities and Equity $ 29,276 $ 30,024
Shares of common stock issued 659,940 657,196
Shares of common stock outstanding 659,940 656,787
See accompanying notes.
Xerox Corporation
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31 (In millions) 1999 1998
Cash Flows from Operating Activities
Income from Continuing Operations $ 343 $ 301
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 223 200
Provisions for doubtful accounts 60 45
Provision for postretirement medical
benefits, net of payments 11 11
Charges against 1998 restructuring reserve (90) -
Minorities' interests in earnings of subsidiaries 8 11
Undistributed equity in income of
affiliated companies (10) (9)
Increase in inventories (319) (346)
Increase in on-lease equipment (35) (64)
Increase in finance receivables (144) (45)
Increase in accounts receivable (122) (125)
Decrease in accounts payable and accrued
compensation and benefit costs (333) (472)
Net change in current and deferred income taxes (7) (16)
Decrease in other current and noncurrent
liabilities (336) (298)
Other, net (106) 8
Total (857) (799)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (116) (88)
Proceeds from sales of land, buildings and equipment 17 7
Other, net (25) 1
Total (124) (80)
Cash Flows from Financing Activities
Net change in debt 1,106 894
Dividends on common and preferred stock (146) (133)
Proceeds from sale of common stock 79 26
Repurchase of common and preferred stock - (1)
Dividends to minority shareholders (23) (3)
Total 1,016 783
Effect of Exchange Rate Changes on Cash (4) 5
Cash Provided (Used) by Continuing Operations 31 (91)
Cash Provided (Used) by Discontinued Operations (4) 35
Increase (Decrease) in Cash 27 (56)
Cash at Beginning of Period 79 75
Cash at End of Period $ 106 $ 19
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.
Prior years' financial statements have been restated to reflect
certain reclassifications to conform with the 1999 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):
March 31, December 31,
1999 1998
Finished products $ 1,965 $ 1,923
Work in process 137 111
Raw materials and supplies 511 464
Equipment on operating leases, net 696 771
Total $ 3,309 $ 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 first 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 described below. Key initiatives of the
restructuring include:
1) Consolidating 56 European customer support centers into one
facility and implementing a shared services organization for
order entry, invoicing, and other back-office and sales
operations.
2) Streamlining manufacturing, logistics, distribution and
service operations. This will include centralizing U.S. parts
depots and outsourcing storage and distribution.
3) Overhauling our internal processes and associated resources,
including closing one of four geographically-organized U.S.
customer administrative centers.
The 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 March 31,
Total Against 1999
Reserve Reserve Balance
Severance and related costs $1,017 $387 $630
Asset impairment 316 316 -
Lease cancellation and other costs 198 35 163
Inventory charges 113 113 -
Total $1,644 $851 $793
As of March 31, 1999, approximately 6,400 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):
March 31, December 31,
1999 1998
Common stock $ 663 $ 660
Additional paid-in-capital 1,393 1,265
Retained earnings 3,889 3,712
Translation adjustments (1,616) (761)
Treasury stock - (19)
Total $ 4,329 $ 4,857
Comprehensive income for the three months ended March 31, 1999
and 1998 is as follows (in millions):
March 31, March 31,
1999 1998
Net income $ 343 $ 111
Translation adjustments (855) (71)
Comprehensive income (loss) $ (512) $ 40
6. Interest expense totaled $206 million and $177 million for
the three months ended March 31, 1999 and 1998, respectively.
7. Operating segment profit or loss information for the three
months ended March 31, 1999 and 1998 is as follows (in millions):
Core Paper and
Business Media Other Total
1999
Revenue from external
customers $3,480 $281 $277 $4,038
Finance income 261 - 1 262
Intercompany revenues (34) - 34 -
Total segment revenues $3,707 $281 $312 $4,300
Segment profit (loss) $ 486 $ 17 $ (9) $ 494
1998
Revenue from external
customers $3,468 $299 $271 $4,038
Finance income 266 - - 266
Intercompany revenues (59) - 59 -
Total segment Revenues $3,675 $299 $330 $4,304
Segment profit (loss) $ 456 $ 16 $(27) $ 445
Our 50% share of the income from Fuji-Xerox, which is accounted
for under the equity method, included in Equity in net income of
unconsolidated affiliates and is shown net of tax.
8. 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 filed a notice of appeal 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.
We deny any wrongdoing and we intend to vigorously defend both
the Texas and New Jersey actions.
9. Subsequent Event
In May, 1999 Xerox Capital (Europe) plc, an indirect wholly owned
subsidiary of ours, issued 5.75% debentures maturing May 15, 2002
for net proceeds of $498 million and 5.875% debentures maturing
May 15, 2004 for net procceds of $496 million. The 5.75%
debentures pay interest semi-annually and were issued at an
effective interest rate of 5.82% per annum. The 5.875%
debentures pay interest semi-annually and were issued at an
effective interest rate of 5.99% per annum. The proceeds were
used to reduce commercial paper borrowings.
Item 2 Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Document Processing
Summary
Income from continuing operations increased 14 percent to $343
million in the 1999 first quarter from $301 million in the 1998
first quarter. The increase was primarily due to improved
operating margins that reflected ongoing benefits from the
company's worldwide restructuring program and a heightened focus
on productivity and expense controls. The productivity and
expense control actions included significant cost reductions in
our Brazilian operations, encompassing branch consolidations and
centralization of administrative support functions, as well as
additional worldwide cost constraints.
Pre-currency revenues, excluding Brazil, grew 3 percent,
reflecting revenue growth of 4 percent in the United States and 2
percent in Europe. U.S. and European revenue growth was depressed
in the 1999 first quarter, reflecting the impact of the
implementation of initiatives announced in January 1999 to
provide industry-oriented global document solutions for major
customers. These initiatives required substantial one-time
investments, including enhanced sales training and development
and some changes in customer relationships, which impacted first
quarter sales productivity more than anticipated. Including
Brazil and the effects of currency, revenues of $4.3 billion were
flat compared with the first quarter of 1998.
Diluted earnings per share from continuing operations increased
14 percent to $0.48 in the 1999 first quarter from $0.42 in the
1998 first quarter.
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 amounts 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 weaker in the
1999 first quarter than in the 1998 first quarter. As a result,
European currency translation had a favorable impact of
approximately 1 percentage point on revenue growth.
The total unfavorable impact of our Brazilian Operations on our
revenue growth was approximately 4 percentage points. This
included the very significant currency devaluation as the Real
weakened to an average exchange rate of 1.73 in the 1999 first
quarter compared with 1.13 in the 1998 first quarter, and weaker
activity as interest rates in Brazil remained high.
Operationally, significant price increases were implemented which
are intended to offset the effect of the devaluation over time.
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 declined 1 percent in the 1999 first
quarter, but grew 3 percent excluding Brazil. For the major
product categories, the pre-currency revenue growth rates are as
follows:
1998 1999 .
Q1 Q2 Q3 Q4 FY Q1 Q1
(Excl.
Brazil)
Total Revenues 10% 10% 6% 7% 8% (1)% 3%
Digital Products 34 41 38 33 36 28 33
Light-Lens Copiers (4) (8) (15) (16) (11) (24) (20)
Digital product revenues, which grew 28 percent in the 1999 first
quarter, 33 percent excluding Brazil, were driven by the
continued outstanding revenue growth from our expanding family of
black-and-white Document Centre digital multi-function products
and reached 48 percent of total revenues compared with 38 percent
of total revenues in the 1998 first quarter. Production
publishing revenues grew 12 percent in the 1999 first quarter
consistent with recent trends but production printing revenue
declined 6 percent due primarily to lower activity. Color
copying and printing growth was 8 percent in the 1999 first
quarter with strong growth in DocuColor 40 revenues and excellent
DocuColor 70 and indirect channels growth. Office color copier
revenue declined as unit volumes declined, and pricing pressure
and some shift to less-featured models continued. 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. Black-and-white light-lens
copier revenues declined 24 percent in the 1999 first quarter as
a result of 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
Total Revenues 10% 10% 6% 7% 8% (1)%
United States 7 13 10 11 10 4
Europe 13 10 5 8 9 2
Other Areas 11 6 (4) (4) 1 (16)
Memo: Fuji Xerox 2 (4) (6) (4) (3) (1)
First quarter revenue growth in both the U.S. and Europe was
disappointing, slowing significantly from prior quarters due to
substantial one-time investments, including enhanced sales
training and development, and some changes in customer
relationships, associated with the initiatives announced in
January 1999 to provide industry-oriented global document
solutions for major customers. These initiatives temporarily
reduced sales time with customers and impacted sales productivity
more than anticipated. Sales force retention in both the U.S. and
Europe continued to be consistent with 1998 trends. In addition,
statutory regulations and practices associated with the
implementation of our pan-European approach for customer support
and back office operations required considerable management time
and diverted focus from revenue generation. Within Europe,
revenues in Germany were flat in the first quarter and revenues
in France and the U.K. declined modestly, while revenues grew in
Italy and Eastern Europe. We are very confident that revenue
growth in both the U.S. and Europe will improve as the year
progresses.
Other Areas include operations principally in Latin America,
Canada, China, Russia, the Middle East and Africa. Revenue in
Brazil declined by 45 percent in the 1999 first quarter
reflecting primarily the very significant currency devaluation
and also the Brazilian recession. Brazilian revenues represented
approximately 4 percent of Xerox revenues in the 1999 first
quarter compared with 8 percent in the 1998 first quarter.
Excluding Brazil, revenue in Other Areas had modest growth.
China, the Middle East and Africa had strong revenue growth in
the first quarter, Canada and Mexico had good revenue growth,
while revenue declined in Argentina, Venezuela and Russia due to
economic weakness.
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 1 percent in the 1999 first
quarter 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:
1998 1999 .
Q1 Q2 Q3 Q4 FY Q1 Q1
(Excl.
Brazil)
Total Revenues 10% 10% 6% 7% 8% (1)% 3%
Sales 15 14 5 6 9 (5) -
Equipment 17 19 7 10 12 (3) 4
Supplies 8 10 4 4 6 (3) -
Paper 15 4 - (6) 3 (6) (5)
Service/Outsourcing/
Rentals/Other 4 6 6 7 6 4 7
Service 3 1 1 1 1 (5) (3)
Document Outsourcing* 24 25 26 25 25 25 27
Finance Income 8 7 9 5 7 (2) 4
Memo:
Revenues Excluding Equip.
Sales 6 6 5 4 5 1 3
* Excludes equipment in outsourcing contracts that are accounted
for as sales.
Equipment sales in the 1999 first quarter declined 3 percent and
were impacted significantly by the currency devaluation and
recession in Brazil. Excluding Brazil, equipment sales growth
slowed to 4 percent as North American and European sales
productivity was impacted more than anticipated by the effects of
the January initiatives previously discussed. In addition,
indirect channels equipment sales growth was temporarily below
recent trends. Approximately 45 percent of 1999 first 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 DocuTech
6180 Production Publisher, and the expanding monochrome and color
laser and inkjet product families sold through indirect channels.
North American and European equipment sales growth should improve
significantly beginning in the second quarter.
Excluding Brazil, supplies revenue was flat in the 1999 first
quarter reflecting diversion of U.S. supplies revenue to document
outsourcing and some impact of marketing agreements to expand
supplies distribution providing royalties rather than supplies
revenue.
Paper sales: Our strategy is to charge a spread over mill
wholesale prices to cover our costs and value added as a
distributor. The first quarter 1999 revenue decline reflects
slight volume increases due to expanding distribution channels,
which was more than offset by lower industry prices due to an
excess of worldwide supply.
Combined service, document outsourcing, rentals and other
revenues grew 4 percent in the 1999 first quarter and 7 percent
excluding Brazil. Document Outsourcing revenues are split between
Equipment Sales and Document Outsourcing. Where document
outsourcing contracts include revenue accounted for as equipment
sales, this revenue is included as Equipment Sales. All other
document outsourcing revenue, including service, equipment
rental, supplies, paper and labor, are included in
Service/Outsourcing/ Rentals/Other. This has the effect of
diverting significant revenues from supplies, paper, service and
rental. The continuing excellent Document Outsourcing growth
reflects the trend of customers focusing on their core businesses
and outsourcing their document processing requirements to Xerox.
The growth rate for total document outsourcing revenue is higher
than the growth included in the Service/Outsourcing/Rentals/Other
category, reflecting an increase in the proportion of equipment
in outsourcing contracts accounted for as sales. Service
revenues declined 3 percent (excluding Brazil) in the 1999 first
quarter compared with abnormal growth in the 1998 first quarter
as the impact of higher machine populations resulting from higher
equipment sales was more than offset by the impact of the strong
customer preference for document outsourcing and competitive
price pressures.
Finance income: Our strategy for financing equipment sales in the
industrialized economies is to charge a spread over our cost of
borrowing and to lock in that spread by match funding the finance
receivables with borrowings of similar maturities. Excluding
Brazil, modest growth in finance income in the 1999 first quarter
is the result of continuing good growth in the financing of
equipment sales in the U.S. partially offset by lower average
interest rates.
Key Ratios and Expenses
The trend in key ratios was as follows:
1998 1999
Q1 Q2 Q3 Q4 FY Q1
Gross Margin 44.9% 45.6% 46.3% 48.0% 46.3% 45.9%
SAG % Revenue 27.8 27.3 27.7 26.8 27.3 27.2
The gross margin improved by 1.0 percentage points in the 1999
first quarter from the 1998 first quarter as manufacturing and
other productivity improvements and favorable currency were only
partially offset by continuing competitive price pressures and
business mix impact 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 first quarter from the 1998 first quarter
driven by a substantial decline in general and administrative
expenses reflecting the benefits of our 1998 restructuring
program, our sharpened focus on productivity and expense controls
implemented in January 1999 to mitigate the impact of the
economic turmoil in Brazil, as well as the beneficial currency
translation impact of the devaluation on SAG in Brazil. In the
1999 first quarter, SAG represented 27.2 percent of revenue, an
improvement of 0.6 percentage points from the 1998 first quarter.
Research and development (R&D) expense in the 1999 first quarter
increased 7 percent from the 1998 first quarter. 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 increased by 100 in the 1999 first quarter
to 92,800 as a result of the net hiring of 1,100 employees
substantially offset by 1,000 employees leaving the company under
the worldwide restructuring program. The hiring was primarily
for the company's fast-growing document outsourcing and
professional services businesses, staffing for the centralized
European customer care and shared services operations in Ireland
and research and development skills enhancement.
The $1 million decrease in other expenses, net, from the 1998
first quarter was primarily due to a small gain on foreign
currency transactions in 1999 compared with a loss in 1998, and
several other one-time items 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, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in the Earnings of Subsidiaries
Income before income taxes increased 11 percent to $494 million
in the 1999 first quarter from $445 million in the 1998 first
quarter.
The effective tax rate, which was 31.0 percent in the 1999 first
quarter compared with 33.0 percent in the 1998 first quarter, was
generally consistent with the 1998 full year pre-restructuring
rate of 31.6 percent. We expect the 1999 full year tax rate to
be in line with the 1999 first quarter rate.
Equity in the net income of unconsolidated affiliates is
principally our 50 percent share of Fuji Xerox income. Total
equity in net income decreased in the 1999 first quarter due to
lower Fuji Xerox income, reflecting difficult economic conditions
in Japan and other Asia Pacific countries. 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, 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 first 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 described below. Key initiatives of the restructuring
include:
1) Consolidating 56 European customer support centers into one
facility and implementing a shared services organization for
order entry, invoicing, and other back-office and sales
operations.
2) Streamlining manufacturing, logistics, distribution and
service operations. This will include centralizing U.S. parts
depots and outsourcing storage and distribution.
3) Overhauling our internal processes and associated resources,
including closing one of four geographically-organized U.S.
customer administrative centers.
The 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 March 31,
Total Against 1999
Reserve Reserve Balance
Severance and related costs $1,017 $387 $630
Asset impairment 316 316 -
Lease cancellation and other costs 198 35 163
Inventory charges 113 113 -
Total $1,644 $851 $793
As of March 31, 1999, approximately 6,400 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.
In April 1998, we announced that we were reactivating our $1
billion stock repurchase program, which was suspended when we
acquired the remaining financial interest in Xerox Limited in
1997. During the 1999 first quarter the company did not
repurchase any stock. Since inception of the program we have
repurchased 20.6 million shares for $594 million.
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 March 31,
1999, is as follows:
Applications - 97 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 - 93 percent of our mainframe/smaller computer
environments have been upgraded to be Y2K compliant with the
remainder scheduled to be completed by mid-1999.
Infrastructure - 83 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 - 74 percent of internal mission-critical
components are Y2K compliant with the remainder planned for
compliance by mid-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 assessment phase. We are on track for achieving
compliance of critical owned sites by August 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 November
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, 70% of mission critical suppliers have been assessed.
New suppliers have been added to the list and assessments are
underway. Of the suppliers assessed, 87% are rated "high
confidence" as of March 1999. We will continue to work with the
13% of suppliers rated "low confidence" to ensure supply
continuity through 2000. Assessments for the remaining 30% of
mission critical suppliers should be completed by June 1999.
The Y2K process as it relates to our manufacturing operations
has primarily focused on our first tier suppliers, and given the
vastness and complexity of our supplier base, we had growing
concern about the adequacy of a single strategy approach. In
response to these concerns, we expect to 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
currently expect to acquire up to $100 million of this additional
inventory which we believe can be utilized in the normal course
of business during the first half of 2000. 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 will include on-site inspection of 20 key
suppliers in the second quarter of 1999 and contingency planning.
Regarding Product Compliance, 98% of our products, excluding
end-of-life products, are Y2K compliant, or we have developed a
software/hardware patch or have another solution in progress. We
have implementation plans in place to deploy these Y2K solutions
so that all in-field Xerox products worldwide will be made
compliant by mid-1999.
In Facilities Management, we have completed inventory,
compliance assessment, and action plans. Remediation activities
are underway for all customers; 60% of required remediation of
third party components has been accomplished. Completion of
remediation, on-site integrated testing of components and full
deployment is scheduled for mid-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
processes 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, $18 million in the first quarter of 1999. We
estimate $45 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 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. This Statement
is effective for fiscal years beginning after June 15, 1999. We
will adopt this accounting standard beginning January 1, 2000.
Discontinued Operations
The net investment in the discontinued financial services
businesses which includes Insurance, Other Financial Services and
Third Party Financing and Real Estate totaled $762 million at
March 31, 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
nearly entirely offset by the sale of six of our remaining eight
financing leases and the sale of other Real Estate investments.
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, three of the insurance companies and one service company
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. In 1998, the remaining insurance and service
companies were sold. In the first quarter, we completed the sale
of the Westchester Specialty Group, Inc. (WSG) for $338 million
in cash, less approximately $70 million in transaction-related
costs. In the third quarter, we completed the sale of Crum &
Forster Holdings, Inc. (CFI) for $680 million, including the
repayment of $115 million in debt, less approximately $75 million
in transaction-related costs. With the completion of the CFI
transaction, we have effectively completed our disengagement
strategy from the Talegen companies. In the first quarter of
1998 an additional after-tax charge of $190 million was recorded.
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 total $748 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 March 31, 1999, Ridge Re had recognized the
discounted value of approximately $454 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 WSG's
reinsurance coverage. 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 March 31,
1999, there were three remaining annual premium installments of
$43 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 $800 million letter of credit
facility. This facility is required to provide security with
respect to aggregate excess of loss reinsurance obligations under
contracts with 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 March 31, 1999 totaled $595
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, payment for the settlement of litigation 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 March 31, 1999
was $138 million compared with $132 million at December 31, 1998.
Debt associated with these assets totaled $50 million at March
31, 1999 and December 31, 1998. The increase in the investment
is primarily due to payment related to the settlement of certain
litigation and interest on the assigned debt.
On June 1, 1995, XFSI completed the sale of Xerox Financial
Services Life Insurance Company and related companies (Xerox
Life). In connection with the transaction, OakRe Life Insurance
Company (OakRe), a wholly owned XFSI subsidiary, has assumed
responsibility, via Coinsurance Agreements, for existing Single
Premium Deferred Annuity (SPDA) policies issued by Xerox Life.
The Coinsurance Agreements include a provision for the assumption
(at their election) by the purchaser's companies, of all of the
SPDA policies at the end of their current rate reset periods. A
Novation Agreement with an affiliate of the new owner provides
for the assumption of the liability under the Coinsurance
Agreements for any SPDA policies not so assumed.
As a result of the Coinsurance Agreements, at March 31, 1999,
OakRe retained approximately $0.7 billion of investment portfolio
assets (transferred from Xerox Life) and liabilities related to
the reinsured SPDA policies. Interest rates on these policies
are fixed and were established upon issuance of the respective
policies. Substantially all of these policies will reach their
rate reset periods through the year 2000 and will be assumed
under the Agreements as described above. Xerox Life's portfolio
was designed to recognize that policy renewals extended liability
"maturities," thereby permitting investments with average
duration somewhat beyond the rate reset periods. OakRe's
practice is to selectively improve this match over time as market
conditions allow.
In connection with the aforementioned sale, XFSI established a
$500 million letter of credit and line of credit with a group of
banks to support OakRe's coinsurance obligations. The term of
this letter of credit is five years and it is unused and
available at March 31, 1999. Upon a drawing under the letter of
credit, XFSI has the option to cover the drawing in cash or to
draw upon the credit line.
Third Party Financing and Real Estate
Third Party Financing and Real Estate assets at March 31, 1999
and December 31, 1998 totaled $123 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 $44 million and $86 million at March 31,
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
$16,059 million at March 31, 1999 or $952 million more than at
December 31, 1998. The changes in consolidated indebtedness
during the first three 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 987 1,017
Brazil dollar debt reallocation 446 -
Discontinued businesses 4 (35)
Non-Financing Businesses 1,437 982
Financing Businesses (505) (99)
Shareholder dividends 146 133
Stock options exercised
and other changes (126) (247)
Total debt* as of March 31 $16,059 $13,672
* 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 three months of 1999 and 1998 (in millions):
1999 1998
Total equity as of January 1 $6,306 $6,454
Income from Continuing Operations 343 301
Loss from Discontinued Operations - (190)
Shareholder dividends (146) (133)
Exercise of stock options 79 26
Change in minorities' interests (17) -
Translation adjustments (855) (71)
All other, net 47 19
Total equity as of March 31 $5,757 $6,406
Non-Financing Operations
The following table summarizes document processing non-financing
operations cash generation and usage for the three months ended
March 31, 1999 and 1998 (in millions):
1999 1998
Document Processing Non-Financing:
Income from continuing operations $ 266 $ 239
Depreciation* and amortization 223 200
Loss from discontinued operations - (190)
Subtotal 489 249
Additions to land, buildings and
equipment (116) (88)
Increase in inventories (319) (346)
Increase in on-lease equipment (35) (64)
Increase in accounts receivable (122) (125)
Decrease in other assets and
liabilities (794) (643)
Subtotal (897) (1,017)
Cash charges against 1998
restructuring reserve (90) -
Net Cash Usage $(987) $(1,017)
* Includes rental equipment depreciation of $105 and $95 million
in first quarter 1999 and 1998, respectively
Non-financing operations' cash usage during the first three
months of 1999 totaled $987 million or $30 million less than in
the first three months of 1998. Higher net income and non-cash
charges, and lower inventory growth, were partially offset by
higher capital spending, net changes in other assets and
liabilities such as prepaid expenses, accounts payable and
accrued compensation, and cash charges against the 1998
restructuring reserve.
Financing Businesses
Customer financing-related debt declined by $505 million during
the first three months of 1999 or $406 more than in first quarter
1998. The decline is more than due to a reallocation to non
financing operations of a portion of Xerox do Brasil's U.S.
dollar denominated debt used to fund customer finance receivables
denominated in Brazilian currency. The reallocation is in line
with our 8:1 debt to equity guideline for financing operations.
Debt related to discontinued third party financing and real
estate activities, which is included in financing business debt,
totaled $44 million at March 31, 1999 or $42 million less than at
year end 1998. Asset sales and portfolio run-off account for the
first quarter reduction. Third party financing and real estate
debt was $119 at March 31, 1998 essentially unchanged from the
year end 1997 level.
Funding Plans for 1999
During the first quarter of 1999, the company filed a new $4
billion shelf registration statement with the Securities and
Exchange Commission. This shelf facility is available to Xerox
Corporation, Xerox Credit Corporation and Xerox Capital (Europe)
plc. In May 1999, Xerox Capital (Europe) plc issued a total of
$1 billion of 3 and 5 year debt under this shelf facility.
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, within
industrialized economies, 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.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The information set forth under the caption "Risk Management" on
pages 28-29 of this Quarterly Report on Form 10-Q is hereby
incorporated by reference in answer to this Item.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Note 8 contained in the "Notes to
Consolidated Financial Statements" on pages 11-12 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 March 31, 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 January 1, 1999, Registrant issued
1746 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, J.D. Macomber, 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
$59.00 per share (aggregate price $102,625), 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 (in electronic form only).
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 December 18, 1998, January
25, 1999 and March 26, 1999 reporting Item 5 "Other Events" was
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)
_____________________________
Date: May 14, 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 ended
March 31,
1999 1998
I. Basic Net Income Per
Common Share
Income from continuing operations $ 343 $ 301
Accrued dividends on ESOP preferred stock, net (10) (11)
Adjusted income from continuing operations 333 290
Discontinued operations - (190)
Adjusted net income $ 333 $ 100
Average common shares outstanding
during the period 658,472 653,740
Common shares issuable with respect
to exchangeable shares 2,402 3,388
Adjusted average shares outstanding
for the period 660,874 657,128
Basic earnings per share:
Continuing operations $ 0.50 $ 0.44
Discontinued operations - (0.29)
Basic earnings per share $ 0.50 $ 0.15
II. Diluted Net Income Per
Common Share
Income from continuing operations $ 343 $ 301
ESOP expense adjustment, net of tax 3 1
Interest on convertible debt, net of tax 3 1
Adjusted income from continuing operations 349 303
Discontinued operations - (190)
Adjusted net income $ 349 $ 113
Average common shares outstanding
during the period 658,472 653,740
Stock options, incentive and
exchangeable shares 10,749 12,058
Convertible debt 13,190 5,288
ESOP preferred stock 52,531 53,978
Adjusted average shares outstanding
for the period 734,942 725,064
Diluted earnings per share:
Continuing operations $ 0.48 $ 0.42
Discontinued operations - (0.26)
Diluted earnings per share $ 0.48 $ 0.16
<PAGE>
Exhibit 12
Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Three months ended Year ended
March 31, December 31,
(In millions) 1999 1998 1998* 1997 1996 1995 1994
Fixed charges:
Interest expense $ 206 $ 177 $ 748 $ 617 $ 592 $ 603 $ 520
Rental expense 35 28 145 140 140 142 170
Total fixed charges
before capitalized
interest and preferred
stock dividends of
subsidiaries 241 205 893 757 732 745 690
Preferred stock dividends
of subsidiaries 14 14 55 50 - - -
Capitalized interest - - - - - - 2
Total fixed charges $ 255 $ 219 $ 948 $ 807 $ 732 $ 745 $ 692
Earnings available for
fixed charges:
Earnings** $ 504 $ 459 $ 837 $2,268 $2,067 $1,980 $1,602
Less undistributed
income in minority
owned companies (10) (9) (27) (84) (84) (90) (54)
Add fixed charges before
capitalized interest
and preferred stock
dividends of
subsidiaries 241 205 893 757 732 745 690
Total earnings
available for
fixed charges $ 735 $ 655 $1,703 $2,941 $2,715 $2,635 $2,238
Ratio of earnings to
fixed charges (1)(2) 2.88 2.99 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-financial businesses.
* Excluding the effects of the charges recorded in connection with the 1998
restructuring plan, the ratio of earnings to fixed charges would be
3.55.
** Sum of "Income before Income Taxes, Equity Income and Minorities'
Interests" and "Equity in Net Income of Unconsolidated Affiliates."
<PAGE>
BY-LAWS
of
XEROX CORPORATION
April 6, 1999
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. Annual Meetings: A meeting of shareholders entitled to vote shall
be held for the election of Directors and the transaction of other business in
May of each year on any day (except a Saturday, Sunday, or holiday) in that
month as determined by the Board of Directors.
SECTION 2. Special Meetings: Special Meetings of the shareholders may be
called at any time by the Chairman of the Board, the President or the Board of
Directors.
SECTION 3. Place of Meetings: Meetings of shareholders shall be held at the
principal office of the Company or at such other place, within or without the
State of New York, as may be fixed by the Board of Directors.
SECTION 4. Notice of Meetings:
(a)Notice of each meeting of shareholders shall be in writing and shall state
the place, date and hour of the meeting. Notice of a Special Meeting shall
state the purpose or purposes for which it is being called and shall also
indicate that it is being issued by or at the direction of the person or persons
calling the meeting. If, at any meeting, action is proposed to be taken which
would, if taken, entitle shareholders, ful-filling the requirements of Section
623 of the Business Corporation Law to receive payment for their shares, the
notice of such meeting shall include a statement of that purpose and to that
effect.
(b)A copy of the notice of any meeting shall be given, personally or by mail,
not less than ten nor more than sixty days before the date of the meeting, to
each shareholder entitled to vote at such meeting. If mailed, such notice is
given when de-posited in the United States mail, with postage thereon prepaid,
directed to the share-holder at his address as it appears on the record of
shareholders, or, if he shall have filed with the Secretary a written request
that notices to him be mailed to some other address, then directed to him at
such other address.
(c)Notice of meeting need not be given to any shareholder who submits a signed
waiver of notice, in person or by proxy, whether before or after the meeting.
The attendance of any shareholder at a meeting, in person or by proxy, without
pro-testing prior to the conclusion of the meeting the lack of notice of such
meeting, shall constitute a waiver of notice by him.
SECTION 5. Quorum and Adjourned Meetings:
(a)At any Annual or Special Meeting the holders of a majority of the votes of
shares entitled to vote thereat, present in person or by proxy, shall constitute
a quorum for the transaction of any business, provided that when a specified
item of business is required to be voted on by a class or series, voting as a
class, the holders of a majority of the votes of shares of such class or series
shall constitute a quorum for the transaction of such specified item of
business. When a quorum is once present to organize a meeting, it is not broken
by the subsequent withdrawal of any shareholders.
(b)Despite the absence of a quorum, the shareholders present may adjourn the
meeting to another time and place, and it shall not be necessary to give any
notice of the adjourned meeting if the time and place to which the meeting is
adjourned are announced at the meeting at which the adjournment is taken. At
the adjourned meeting any business may be transacted that might have been
transacted on the original date of the meeting. If after the adjournment,
however, the Board of Directors fixes a new record date for the adjourned
meeting, a notice of the adjourned meeting shall be given to each shareholder on
the new record date entitled to notice under Section 4 of this Article I of the
By-Laws.
SECTION 6. Nominations and Business at Meetings
At any annual meeting of shareholders, only persons who are nominated or
business which is proposed in accordance with the procedures set forth in this
Section 6 shall be eligible for election as Directors or considered for action
by shareholders. Nominations of persons for election to the Board of Directors
of the Company may be made or business proposed at a meeting of shareholders (i)
by or at the direction of the Board of Directors or (ii) by any shareholder of
the Company entitled to vote at the meeting who complies with the notice and
other procedures set forth in this Section 6. Such nominations or business
proposals, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Company and such business proposals must, under applicable law, be a
proper matter for shareholder action. To be timely, a shareholder's notice
shall be delivered to or mailed and received at the principal executive offices
of the Company not less than 120 days nor more than 150 days in advance of the
date which is the anniversary of the date the Company's proxy statement was
released to security holders in connection with the previous year's annual
meeting or if the date of the applicable annual meeting has been changed by more
than 30 days from the date contemplated at the time of the previous year's proxy
statement, not less than 90 days before the date of the applicable annual
meeting.
Such shareholder's notice shall set forth (a) as to each person whom such
shareholder proposes to nominate for election or reelection as a Director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including such person's writ-ten consent to being named in the proxy
statement as a nominee and to serving as a Director if elected); (b) as to any
other business that the shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the annual
meeting, the reasons for conducting such business at the annual meeting and any
material interest in such business of such person on whose behalf such proposal
is made; and (c) as to the shareholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made, (i) the name
and address of such shareholder, as they appear on the Company's books and (ii)
the class and number of shares of the Company which are beneficially owned by
such shareholder. No person shall be eligible for election as a Director of the
Company and no business shall be conducted at the annual meeting of shareholders
unless nominated or proposed in accordance with the procedures set forth in this
Section 6. The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination or proposal was not made in accordance
with the provisions of this Section 6 and, if he should so determine, he shall
so declare to the meeting and the defective nomination or proposal shall be
disregarded.
SECTION 7. Organization: At every meeting of the shareholders, the Chairman
of the Board, or in his absence, the President, or in his absence, a Vice
Chairman, or in the absence of such officers, an Executive Vice President
designated by the Chairman of the Board, or in the absence of such officers, a
person selected by the meeting, shall act as chairman of the meeting. The
Secretary or, in his absence, an Assistant Secretary shall act as secretary of
the meeting, and in the absence of both the Secretary and an Assistant
Secretary, a per-son selected by the meeting shall act as secretary of the
meeting.
SECTION 8. Voting:
(a)Whenever any corporate action, other than the election of Directors, is to be
taken by vote of the shareholders, it shall, except as otherwise required by law
or by the Certificate of Incorporation be authorized by a majority of the votes
cast in favor of or against such action at a meeting of shareholders by the
holders of shares entitled to vote thereon. An abstention shall not constitute
a vote cast.
(b)Directors shall, except as otherwise required by law, be elected by a
plurality of the votes cast at a meeting of shareholders by holders of shares
entitled to vote in the election. [; provided, however, a nomination shall be
accepted, and votes cast for a nominee shall be counted by the inspectors of
election, only if the Secretary of the Company has received at least twenty-four
hours prior to the meeting a statement over the signature of the nominee that he
consents to being a nominee and, if elected, intends to serve as a Director.] *
SECTION 9. Qualification of Voters:
(a)Every shareholder of record of Common Stock and Series B Convertible
Preferred Stock of the Company shall be entitled at every meeting of such share-
holders to one vote for every share of Common Stock and Series B Convertible
Preferred Stock, respectively, standing in his name on the record of
shareholders.
(b)Shares of stock belonging to the Company and shares held by another domestic
or foreign corporation of any type or kind, if a majority of the shares entitled
to vote in the election of directors of such other corporation is held by the
Company, shall not be shares entitled to vote or to be counted in determining
the total number of out-standing shares.
(c)Shares held by an administrator, executor, guardian, conservator, commit-tee,
or other fiduciary, except a trustee, may be voted by him, either in person or
by proxy, without transfer of such shares into his name. Shares held by a
trustee may be voted by him, either in person or by proxy, only after the shares
have been transferred into his name as trustee or into the name of his nominee.
(d)Shares standing in the name of another domestic or foreign corporation of any
type or kind may be voted by such officer, agent or proxy as the By-Laws of such
corporation may provide, or in the absence of such provision, as the Board of
Directors of such corporation may provide.
SECTION 10. Proxies:
(a)Every shareholder entitled to vote at a meeting of shareholders or to ex-
press consent or dissent without a meeting may authorize another person or
persons to act for him by proxy.
(b)No proxy shall be valid after the expiration of eleven months from the date
thereof unless otherwise provided in the proxy. Every proxy shall be revocable
at the pleasure of the shareholder executing it, except as otherwise provided by
law.
(c)The authority of the holder of a proxy to act shall not be revoked by the in-
competence or death of the shareholder who executed the proxy unless, before the
authority is exercised, written notice of an adjudication of such incompetence
or of such death is received by the Secretary or an Assistant Secretary.
(d)Without limiting the manner in which a shareholder may authorize another per-
son or persons to act for him as proxy pursuant to paragraph (a) of this
Section, the following shall constitute a valid means by which a shareholder may
grant such authority:
(1)A shareholder may execute a writing authorizing another person or persons to
act for him as proxy. Execution may be accomplished by the share-holder or the
shareholder's authorized officer, director, employee or agent signing such
writing or causing his or her signature to be affixed to such writing by any
reasonable means including, but not limited to, by facsimile signature.
(2)A shareholder may authorize another person or persons to act for the
shareholder as proxy by transmitting or authorizing the transmission of a tele-
gram, cablegram or other means of electronic transmission to the person who will
be the holder of the proxy or to a proxy solicitation firm, proxy support ser-
vice organization or like agent duly authorized by the person who will be the
holder of the proxy to receive such transmission, provided that such telegram,
cablegram or other means of electronic transmission must either set forth or be
submitted with information from which it can be reasonably determined that the
telegram, cablegram or other electronic transmission was authorized by the
shareholder. If it is determined that such telegrams, cablegrams or other elec-
tronic transmissions are valid, the inspectors shall specify the nature of the
in-formation upon which they relied.
(e)Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission created pursuant to paragraph (d) of this Section may be
substituted or used in lieu of the original writing or transmission for any and
all purposes for which the original writing or transmission could be used,
provided that such copy, facsimile, telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or transmission.
SECTION 11. Inspectors of Election:
(a)The Board of Directors, in advance of any shareholders' meeting, shall
appoint one or more inspectors to act at the meeting or any adjournment thereof.
The Board of Directors may designate one or more persons as alternate inspectors
to re-place any inspector who fails to act. If no inspector or alternate has
been appointed, or if such persons are unable to act at a meeting of
shareholders, the person presiding at a shareholders' meeting shall appoint one
or more inspectors. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to exe-cute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability.
(b)The inspectors shall determine the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence of a
quo-rum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the result, and do such acts as are proper to conduct the election or
vote with fairness to all shareholders. On re-quest of the person presiding at
the meeting or any shareholder entitled to vote thereat, the inspectors shall
make a report in writing of any challenge, question or matter determined by them
and execute a certificate of any fact found by them. Any report or certificate
made by them shall be prima facie evidence of the facts stated and of the vote
as certified by them.
SECTION 12. List of Shareholders at Meetings: A list of share-holders as of
the record date, certified by the Secretary or by the transfer agent, shall be
produced at any meeting of shareholders upon the request thereat or prior
thereto of any share-holder. If the right to vote at any meeting is challenged,
the inspectors of election, or person presiding thereat shall require such list
of shareholders to be produced as evidence of the right of the persons
challenged to vote at such meeting, and all persons who appear from such list to
be shareholders entitled to vote thereat may vote at such meeting.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. Power of Board and Qualification of Directors: The business of
the Company shall be managed under the direction of the Board of Directors, each
of whom shall be at least eighteen years of age.
SECTION 2. Number, Term of Office and Classification:
(a)The Board of Directors shall consist of not less than five nor more
than twenty-one members. The number of Directors shall be determined from time
to time by resolution of a majority of the entire Board of Directors then in
office, provided that no decrease in the number of Directors shall shorten the
term of any incumbent Director. At each Annual Meeting of shareholders
Directors shall be elected to hold office until the next annual meeting.
(b)If and whenever six full quarter-yearly dividends (whether or not
consecutive) payable on the Cumulative Preferred Stock of any series shall be in
arrears, in whole or in part, the number of Directors then constituting the
Board of Directors shall be increased by two and the holders of the Cumulative
Preferred Stock, voting separately as a class, regardless of series, shall be
entitled to elect the two additional Directors at any annual meeting of
shareholders or special meeting held in place thereof, or at a special meeting
of the holders of the Cumulative Preferred Stock called as hereinafter provided.
Whenever all arrears in dividends on the Cumulative Preferred Stock then
outstanding shall have been paid and dividends thereon for the current quarter-
yearly dividend period shall have been paid or declared and set apart for
payment, then the right of the holders of the Cumulative Preferred Stock to
elect such additional two Directors shall cease (but subject always to the same
provisions for the vesting of such voting rights in the case of any similar
future arrearages in dividends), and the terms of office of all persons elected
as Directors by the holders of the Cumulative Preferred Stock shall forthwith
terminate and the number of the Board of Directors shall be reduced accordingly.
At any time after such voting power shall have been so vested in the Cumulative
Preferred Stock, the Secretary of the Company may, and upon the written request
of any holder of the Cumulative Preferred Stock (addressed to the Secretary at
the principal office of the Company) shall, call a special meeting of the
holders of the Cumulative Preferred Stock for the election of the two Directors
to be elected by them as herein provided, such call to be made by notice similar
to that provided in the By-Laws for a special meeting of the shareholders or as
required by law. If any such special meeting required to be called as above
provided shall not be called by the Secretary within twenty days after receipt
of any such request, then any holder of Cumulative Preferred Stock may call such
meeting, upon the notice above provided, and for that purpose shall have access
to the stock books of the Company. The Directors elected at any such special
meeting shall hold office until the next annual meeting of the shareholders or
special meeting held in place thereof. In case any vacancy shall occur among
the Directors elected by the holders of the Cumulative Preferred Stock, a
successor shall be elected to serve until the next annual meeting of the
shareholders or special meeting held in place thereof by the then remaining
Director elected by the holders of the Cumulative Preferred Stock or the
successor of such remaining Director.
(c) All Directors shall have equal voting power.
SECTION 3. Organization: At each meeting of the Board of Directors, the
Chairman of the Board, or in his absence, the President, or in his absence, a
chairman chosen by a majority of the Directors present shall preside. The
Secretary shall act as secretary of the Board of Directors. In the event the
Secretary shall be absent from any meeting of the Board of Directors, the
meeting shall select its secretary.
SECTION 4. Resignations: Any Director of the Company may resign at any time
by giving written notice to the Chairman of the Board, the President or to the
Secretary of the Company. Such resignation shall take effect at the time
specified therein or, if no time be specified, then on delivery.
SECTION 5. Vacancies: Newly created directorships resulting from an in-
crease in the number of Directors and vacancies occurring in the Board of
Directors for any reason except the removal of Directors without cause may be
filled by a vote of a majority of the Directors then in office, although less
than a quorum exists. A Director elected to fill a vacancy shall hold office
until the next annual meeting.
SECTION 6. Place of Meeting: The Board of Directors may hold its meetings at
such place or places within or without the State of New York as the Board of
Directors may from time to time by resolution determine.
SECTION 7. First Meeting: On the day of each annual election of Directors,
the Board of Directors shall meet for the purpose of organization and the
transaction of other business. Notice of such meeting need not be given. Such
first meeting may be held at any other time which shall be specified in a notice
given as hereinafter provided for special meetings of the Board of Directors.
SECTION 8. Regular Meetings: Regular meetings of the Board of Directors may
be held at such times as may be fixed from time to time by resolution of the
Board of Directors without notice.
SECTION 9. Special Meetings: Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, the President, or by
any two of the Directors. Oral, telegraphic or written notice shall be given,
sent or mailed not less than one day before the meeting and shall state, in
addition to the purposes, the date, place and hour of such meeting.
SECTION 10. Waivers of Notice: Notice of a meeting need not be given to any
Director who submits a signed waiver of notice whether before or after the
meeting, or who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to him.
SECTION 11. Quorum and Manner of Acting:
(a)If the number of Directors is twelve or more, seven Directors shall
constitute a quorum for the transaction of business or any specified item of
business. If the number of Directors is less than twelve, a majority of the
entire Board of Directors shall constitute a quorum.
(b)A majority of the Directors present, whether or not a quorum is present, may
adjourn any meeting to another time and place without notice to any Director.
SECTION 12. Written Consents: Any action required or permitted to be taken
by the Board of Directors or any committee thereof may be taken without a
meeting if all members of the Board or the committee consent in writing to the
adoption of a resolution authorizing the action. The resolution and the written
consents thereto by the members of the Board or committee shall be filed with
the minutes of the proceedings of the Board or committee.
SECTION 13. Participation At Meetings By Telephone: Any one or more members
of the Board of Directors or any committee thereof may participate in a meeting
of such Board or committee by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at a meeting.
SECTION 14. Compensation: The Board of Directors shall have authority to fix
the compensation of Directors for services in any capacity.
SECTION 15. Interested Directors:
(a)No contract or other transaction between the Company and one or more of its
Directors, or between the Company and any other corporation, firm, association
or other entity in which one or more of its Directors are directors or officers,
or are financially interested, shall be either void or voidable for this reason
alone or by reason alone that such Director or Directors are present at the
meeting of the Board of Directors, or of a committee thereof, which approves
such contract or transaction, or that his or their votes are counted for such
purpose, provided that the parties to the contract or transaction establish
affirmatively that it was fair and reasonable as to the Company at the time it
was approved by the Board, a committee, or the shareholders.
(b)Any such contract or transaction may not be avoided by the Company for the
reasons set forth in (a) if
(1)the material facts as to such Director's interest in such contract or
transaction and as to any such common directorship, officership or financial
interest are disclosed in good faith or known to the Board or committee, and the
Board or committee approves such contract or transaction by a vote sufficient
for such purpose without counting the vote of such interested Director or, if
the votes of the disinterested Directors are insufficient for such purpose, by
unanimous vote of the disinterested Directors (although common or interested
Directors may be counted in determining the presence of a quorum at a meeting of
the Board or of a committee which approves such contract or transactions), or
(2)the material facts as to such Director's interest in such contract or
transaction and as to any such common directorship, officership or financial
interest are disclosed in good faith or known to the shareholders entitled to
vote thereon, and such contract or transaction is approved by vote of such
shareholders.
SECTION 16. Loans to Directors: The Company may not lend money to or
guarantee the obligation of a Director of the Company unless the particular loan
or guarantee is approved by the shareholders, with the holders of a majority of
the shares entitled to vote thereon constituting a quorum, but shares held of
record or beneficially by Directors who are benefited by such loan or guarantee
shall not be entitled to vote or to be included in the determination of a
quorum.
ARTICLE III
EXECUTIVE COMMITTEE
SECTION 1. How Constituted and Powers: There shall be an Executive Committee,
consisting of not less than three nor more than nine Directors, including the
Chairman of the Board, the Chairman of the Executive Committee and the
President, elected by a majority of the entire Board of Directors, who shall
serve at the pleasure of the Board. The Executive Committee shall have all the
authority of the Board, except it shall have no authority as to the following
matters:
(a)The submission to shareholders of any action that needs shareholders'
authorization.
(b)The filling of vacancies in the Board or in any committee.
(c)The fixing of compensation of the Directors for serving on the Board or on
any committee.
(d)The amendment or repeal of the By-Laws, or the adoption of new By-Laws.
(e)The amendment or repeal of any resolution of the Board which, by its terms,
shall not be so amendable or repealable.
(f)The declaration of dividends.
SECTION 2. Meetings: Meetings of the Executive Committee, of which no notice
shall be necessary, shall be held on such days and at such place as shall be
fixed, either by the Chairman of the Board, the Chairman of the Executive
Committee, or by a vote of the majority of the whole Committee.
SECTION 3. Quorum and Manner of Acting: Unless otherwise provided by
resolution of the Board of Directors, a majority of the Executive Committee
shall constitute a quorum for the transaction of business and the act of a
majority of all of the members of the Committee, whether present or not, shall
be the act of the Executive Committee. The members of the Executive Committee
shall act only as a Committee. The procedure of the Committee and its manner of
acting shall be subject at all times to the directions of the Board of
Directors.
SECTION 4. Additional Committees: The Board of Directors by resolution
adopted by a majority of the entire Board may designate from among its members
additional committees, each of which shall consist of one or more Directors and
shall have such authority as provided in the resolution designating the
committee, except such authority shall not exceed the authority conferred on the
Executive Committee by Section 1 of this Article.
SECTION 5. Alternate Members: The Board of Directors may designate one or
more eligible Directors as alternate members of the Executive Committee, or of
any other committee of the Board, who may replace any absent or disqualified
member or members at any meeting of any such committee.
ARTICLE IV
OFFICERS
SECTION 1. Number: The officers of the Company shall be a Chairman of the
Board, a President, a Chairman of the Executive Committee, one or more Vice
Chairman of the Board, one or more Vice Presidents, a Treasurer, a Secretary, a
Controller, and such other officers as the Board of Directors may in its
discretion elect. Any two or more offices may be held by the same person.
SECTION 2. Term of Offices and Qualifications: Those officers whose titles
are specifically mentioned in Section 1 of this Article IV shall be chosen by
the Board of Directors on the day of the Annual Meeting. Unless a shorter term
is provided in the resolution of the Board electing such officer, the term of
office of such officer shall ex-tend to and expire at the meeting of the Board
held on the day of the next Annual Meeting. The Chairman of the Board, the
President , the Chairman of the Executive Committee and the Vice Chairmen shall
be chosen from among the Directors.
SECTION 3. Additional Officers: Additional officers other than those whose
titles are specifically mentioned in Section 1 of this Article IV shall be
elected for such period, have such authority and perform such duties, either in
an administrative or sub-ordinate capacity, as the Board of Directors may from
time to time determine.
SECTION 4. Removal of Officers: Any officer may be removed by the Board of
Directors with or without cause, at any time. Removal of an officer without
cause shall be without prejudice to his contract rights, if any, but his
election as an officer shall not of itself create contract rights.
SECTION 5. Resignation: Any officer may resign at any time by giving written
notice to the Board of Directors, or to the President, or to the Secretary. Any
such resignation shall take effect at the time specified therein, or if no time
be specified, then upon delivery.
SECTION 6. Vacancies: A vacancy in any office shall be filled by the Board
of Directors.
SECTION 7. Chairman of the Board: The Chairman of the Board shall preside at
all meetings of the shareholders at which he is present, unless at such meetings
the shareholders shall appoint a chairman other than the Chairman of the Board.
The Chairman of the Board shall preside at all meetings of the Directors at
which he is pre-sent. In the absence or inability to act of the President, or if
the office of the President be vacant, the Chairman of the Board, subject to the
right of the Board from time to time to extend or confine such powers and duties
or to assign them to others, shall perform all the duties and may exercise all
the powers of the President. The Chairman of the Board shall have such powers
and perform such other duties as may be assigned to him by the Board.
SECTION 8. President: The President shall, in the absence of the Chair-man of
the Board, preside at all meetings of the shareholders, Directors or the
Executive Committee at which he is present. The President shall act as the
Chief Executive Officer of the Company and it shall be his duty to supervise
generally the management of the business of the Company with responsibility di-
rect to the Board and subject to the control of the Board. The President shall
have such powers and perform such other duties as may be assigned to him by the
Board.
SECTION 9. Chairman of the Executive Committee: The Chairman of the Ex-
ecutive Committee shall have such powers and perform such duties as may be as-
signed to him by the Board. The Chairman of the Executive Committee shall
preside at meetings of the Executive Committee of the Board of Directors.
SECTION 10. The Vice Chairmen: Each Vice Chairman of the Board shall have such
power and shall perform such duties as may be assigned to him by the Board of
Directors or the President.
SECTION 11. The Vice Presidents: Each Vice President shall have such powers
and shall perform such duties as may be assigned to him by the Board of
Directors or President.
SECTION 12. The Treasurer: The Treasurer shall, if required by the Board of
Directors, give a bond for the faithful discharge of his duties, in such sum and
with such sureties as the Board of Directors shall require. He shall have
charge and custody of, and be responsible for, all funds and securities of the
Company, and deposit all such funds in the name of and to the credit of the
Company in such banks, trust companies, or other depositories as shall be
selected by the Board of Directors. The Treasurer may sign certificates for
stock of the Company authorized by the Board of Directors. He shall also
perform all other duties customarily incident to the office of Treasurer and
such other duties as from time to time may be assigned to him by the Board of
Directors.
SECTION 13. The Controller: The Controller shall keep and maintain the books
of account for internal and external reporting purposes. He shall also perform
all other duties customarily incident to the office of Controller and such other
duties as may be assigned to him from time to time by the Board of Directors.
SECTION 14. The Secretary: It shall be the duty of the Secretary to act as
secretary of all meetings of the Board of Directors, and of the shareholders,
and to keep the minutes of all such meetings at which he shall so act in a
proper book or books to be provided for that purpose; he shall see that all
notices required to be given by the Company are duly given and served; he may
sign and execute in the name of the Company certificates for the stock of the
Company, deeds, mortgages, bonds, con-tracts or other instruments authorized by
the Board of Directors; he shall prepare, or cause to be prepared, for use at
meetings of shareholders the list of shareholders as of the record date referred
to in Article I, Section 12 of these By-Laws and shall certify, or cause the
transfer agent to certify, such list; he shall keep a current list of the Com-
pany's Directors and officers and their residence addresses; he shall be
custodian of the seal of the Company and shall affix the seal, or cause it to be
affixed, to all agreements, documents and other papers requiring the same. The
Secretary shall have custody of the Minute Book containing the minutes of all
meetings of shareholders, Directors, the Executive Committee, and any other
committees which may keep minutes, and of all other contracts and documents
which are not in the custody of the Treasurer or the Controller of the Company,
or in the custody of some other person authorized by the Board of Directors to
have such custody.
SECTION15. Appointed Officers: The Board of Directors may delegate to any
officer or committee the power to appoint and to remove any subordinate officer,
agent or employee.
SECTION16. Assignment and Transfer of Stocks, Bonds, and Other Securities: The
Chairman of the Board, the President, the Treasurer, the Secretary, any
Assistant Secretary, any Assistant Treasurer, and each of them, shall have power
to assign, or to endorse for transfer, under the corporate seal, and to deliver,
any stock, bonds, subscription rights, or other securities, or any beneficial
interest therein, held or owned by the Company.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS AND BANK ACCOUNTS
SECTION 1. Execution of Contracts: The Board of Directors, except as in these
By-Laws otherwise provided, may authorize any officer or officers, agent, or
agents, in the name of and on behalf of the Company to enter into any contract
or exe-cute and deliver any instrument, and such authority may be general or
confined to specific instances; but, unless so authorized by the Board of
Directors, or expressly authorized by these By-Laws, no officer, agent or
employee shall have any power or authority to bind the Company by any contract
or engagement or to pledge its credit or to render it liable pecuniarily in any
amount for any purpose.
SECTION 2. Loans: No loans shall be contracted on behalf of the Company, and
no negotiable paper shall be issued in its name unless specifically authorized
by the Board of Directors.
SECTION 3. Checks, Drafts, etc.: All checks, drafts, and other orders for
the payment of money out of the funds of the Company, and all notes or other
evidences of indebtedness of the Company, shall be signed on behalf of the
Company in such manner as shall from time to time be determined by resolution of
the Board of Directors.
SECTION 4. Deposits: All funds of the Company not otherwise employed shall
be deposited from time to time to the credit of the Company in such banks, trust
companies or other depositories as the Board of Directors may select.
ARTICLE VI
STOCKS AND DIVIDENDS
SECTION 1. Shares of Stock: Shares of stock of the Company shall be rep-
resented by certificates except to the extent that the Board of Directors of the
Company shall provide by resolution that some or all of any or all classes and
series of the Company's shares shall be uncertificated shares, provided that
such resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the Company. Except as otherwise expressly
provided by law, the rights and obligations of holders of uncertificated shares
and the rights and obligations of the holders of certificates representing
shares of the same class and series shall be identical.
SECTION 2. Certificates For Shares. To the extent that shares of stock of the
Company are to be represented by certificates, the certificates therefor shall
be in such form as shall be approved by the Board of Directors. The
certificates of stock shall be numbered in order of their issue, shall be signed
by the Chairman of the Board, the President, a Vice Chairman or a Vice
President, and the Secretary or an Assistant Secretary, or the Treasurer or an
Assistant Treasurer. The signature of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or regis-
tered by a registrar other than the Company itself or its employee. In case any
officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Company with the same effect as if he were an
officer at the date of issue.
SECTION 3. Transfer of Stock: Transfers of stock of the Company shall be
made only on the books of the Company by the holder thereof, or by his duly
authorized attorney, on surrender of the certificate or certificates for stock
represented by certificates, properly endorsed, or in the case of shares of
stock not represented by certificates, on delivery to the Company of proper
transfer instructions. Within a reasonable time after the issuance or transfer
of uncertificated stock, the Company shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to the Business Corporation Law of the State of New
York. Every certificate surrendered to the Company shall be marked "Canceled",
with the date of cancellation, and no new certificate shall be issued in
exchange there-for until the old certificate has been surrendered and canceled.
A person in whose name stock of the Company stands on the books of the Company
shall be deemed the owner thereof as regards the Company; provided that,
whenever any transfer of stock shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary of the Company, or to its
transfer agent shall be so expressed in the entry of the transfer. No transfer
of stock shall be valid as against the Company, or its share-holders for any
purpose, until it shall have been entered in the stock records of the Company as
specified in these By-Laws by an entry showing from and to whom transferred.
SECTION 4. Transfer and Registry Agents: The Company may, from time to time,
maintain one or more transfer offices or agencies and/or registry offices at
such place or places as may be determined from time to time by the Board of
Directors; and the Board of Directors may, from time to time, define the duties
of such transfer agents and registrars and make such rules and regulations as it
may deem expedient, not in-consistent with these By-Laws, concerning the issue,
transfer and registration of certificates for stock or uncertificated stock of
the Company.
SECTION 5. Lost, Destroyed and Mutilated Certificates: The holder of any
certificated stock of the Company shall immediately notify the Company of any
loss, destruction or mutilation of the certificate therefor. The Company may
issue a new certificate or uncertificated stock in place of the lost or
destroyed certificate, but as a condition to such issue, the holder of such
certificate must make satisfactory proof of the loss or destruction thereof, and
must give to the Company a bond of indemnity in form and amount and with one or
more sureties satisfactory to the Treasurer, the Secretary or any Assistant
Treasurer or Assistant Secretary. Such bond of indemnity shall also name as
obligee each of the transfer agents and registrars for the stock the certificate
for which has been lost or destroyed.
SECTION 6. Record Dates for Certain Purposes: The Board of Directors of the
Company shall fix a day and hour not more than sixty days preceding the date of
any meeting of shareholders, or the date for payment of any cash or stock
dividend, or the date for the allotment of any rights of subscription, or the
date when any change or conversion or exchange of capital stock shall go into
effect, as a record date for the determination of the shareholders entitled to
notice of, and to vote at, any such meeting and any adjournment thereof, or
entitled to receive payment of any such dividend, or entitled to receive any
such allotment of rights of subscription, or entitled to exercise rights in
respect of any such change, conversion or exchange of capital stock, and in such
case, such shareholders and only such shareholders as shall be shareholders of
record on the day and hour so fixed shall be entitled to such notice of, and to
vote at, such meeting or any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights of subscription, or to exercise
rights in connection with such change or conversion or exchange of capital
stock, as the case may be, notwithstanding any transfer of any stock on the
books of the Company after such day and hour fixed as aforesaid.
SECTION 7. Dividends and Surplus: Subject to the limitations prescribed by
law, the Board of Directors (1) may declare dividends on the stock of the
Company whenever and in such amounts as, in its opinion, the condition of the
affairs of the Company shall render it advisable, (2) may use and apply, in its
discretion, any part or all of the surplus of the Company in purchasing or
acquiring any of the shares of stock of the Company, and (3) may set aside from
time to time out of such surplus or net profits such sum or sums as it in its
absolute discretion, may think proper as a reserve fund to meet contingencies or
for equalizing dividends, or for the purpose of maintaining or increasing the
property or business of the Company, or for any other purpose it may think
conducive to the best interest of the Company.
ARTICLE VII
OFFICES AND BOOKS
SECTION 1. Offices: The Company shall maintain an office at such place in
the County of Monroe, State of New York, as the Board of Directors may
determine. The Board of Directors may from time to time and at any time
establish other offices of the Company or branches of its business at whatever
place or places seem to it expedient.
SECTION 2. Books and Records:
(a)There shall be kept at one or more offices of the Company (1) correct and
complete books and records of account, (2) minutes of the proceedings of the
share-holders, Board of Directors and the Executive Committee, (3) a current
list of the Directors and officers of the Company and their residence addresses,
and (4) a copy of these By-Laws.
(b)The stock records may be kept either at the office of the Company or at the
office of its transfer agent or registrar in the State of New York, if any, and
shall contain the names and addresses of all shareholders, the number and class
of shares held by each and the dates when they respectively became the owners of
record thereof.
ARTICLE VIII
GENERAL
SECTION 1. Seal: The corporate seal shall be in the form of a circle and
shall bear the full name of the Company and the words and figures "Incorporated
1906, Rochester, N. Y.".
SECTION 2. Indemnification of Directors and Officers: Except to the extent
expressly prohibited by law, the Company shall indemnify any person, made or
threatened to be made, a party in any civil or criminal action or proceeding,
including an action or proceeding by or in the right of the Company to procure a
judgment in its favor or by or in the right of any other corporation of any type
or kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any Director or officer of the Company
served in any capacity at the request of the Company, by reason of the fact that
he, his testator or intestate is or was a Director or officer of the Company or
serves or served such other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, in any capacity, against judgments,
fines, penalties, amounts paid in settlement and reasonable expenses, including
attorneys' fees, incurred in connection with such action or proceeding, or any
appeal therein, provided that no such indemnification shall be required with
respect to any settlement unless the Company shall have given its prior approval
thereto. Such indemnification shall include the right to be paid advances of
any expenses incurred by such person in connection with such action, suit or
proceeding, consistent with the provisions of applicable law. In addition to
the foregoing, the Company is authorized to extend rights to indemnification and
advancement of expenses to such persons by i) resolution of the shareholders,
ii) resolution of the Directors or iii) an agreement, to the extent not
expressly prohibited by law.
ARTICLE IX
FISCAL YEAR
SECTION 1. Fiscal Year: The fiscal year of the Company shall end on the 31st
day of December in each year.
ARTICLE X
AMENDMENTS
SECTION 1. Amendments: By-Laws of the Company may be amended, re-pealed or
adopted by a majority of the votes of the shares at the time entitled to vote in
the election of any Directors. If, at any meeting of shareholders, action is
proposed to be taken to amend, repeal or adopt By-Laws, the notice of such
meeting shall include a brief statement or summary of the proposed action. The
By-Laws may also be amended, repealed or adopted by the Board of Directors, but
any By-Law adopted by the Board may be amended or repealed by shareholders
entitled to vote thereon as hereinabove provided. If any By-Law regulating an
impending election of Directors is adopted, amended or repealed by the Board of
Directors, there shall be set forth in the notice of the next meeting of
shareholders for the election of Directors the By-Law so adopted, amended or
repealed, together with a concise statement of the changes made.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CORPORATION'S MARCH 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 106
<SECURITIES> 0
<RECEIVABLES> 16,766
<ALLOWANCES> 487
<INVENTORY> 3,309
<CURRENT-ASSETS> 12,371
<PP&E> 5,184
<DEPRECIATION> 2,849
<TOTAL-ASSETS> 29,276
<CURRENT-LIABILITIES> 7,670
<BONDS> 16,059
638
683
<COMMON> 663
<OTHER-SE> 3,666
<TOTAL-LIABILITY-AND-EQUITY> 29,276
<SALES> 2,116
<TOTAL-REVENUES> 4,300
<CGS> 1,114
<TOTAL-COSTS> 2,327
<OTHER-EXPENSES> 1,479
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> 494
<INCOME-TAX> 153
<INCOME-CONTINUING> 343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 343
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.48
</TABLE>
