<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to___________
Commission File Number 1-4471
XEROX CORPORATION
(Exact Name of Registrant as
specified in its charter)
New York 16-0468020 _
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
P.O. Box 1600
Stamford, Connecticut 06904-1600
(Address of principal executive offices)
(Zip Code)
(203) 968-3000 _
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
Common Stock 666,753,398 shares
This document consists of 61 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 25% of the Registrant's revenues. This segment of the general
office market is mature with anticipated declining industry revenues as the
market transitions to digital technology. Some of the Registrant's new
digital products replace or compete with the Registrant's current light-lens
equipment. Changes in the mix of products from light-lens to digital, and the
pace of that change as well as competitive developments could cause actual
results to vary from those expected.
Pricing - the Registrant's ability to succeed is dependent upon its ability to
obtain adequate pricing for its products and services which provide a
reasonable return to shareholders. Depending on competitive market factors,
future prices the Registrant can obtain for its products and services may vary
from historical levels. In addition, pricing actions to offset currency
devaluations may not prove sufficient to offset further devaluations or may
not hold in the face of customer resistance and/or competition.
Financing Business - a significant portion of the Registrant's profits arise
from the financing of its customers' purchases 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. 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. A downgrade or lowering 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.
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 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.
Restructuring - the Registrant's ability to ultimately reduce pre-tax annual
expenditures by approximately $1.4 billion, before reinvestments, is dependent
upon its ability to successfully implement the 1998 and 2000 restructuring
programs including the elimination of 14,200 net jobs worldwide (9,000 under
1998 program, 5,200 under 2000 program), the closing and consolidation of
facilities and the successful implementation of process and systems changes.
Revenue Growth - the Registrant's ability to attain a consistent trend of
revenue growth over the intermediate to longer term is largely dependent upon
expansion of its equipment sales worldwide. The ability to achieve equipment
sales growth is subject to the successful implementation of our initiatives to
provide industry-oriented global solutions for major customers and expansion
of our distribution channels in the face of global competition and pricing
pressures. Our inability to attain a consistent trend of revenue growth could
materially affect the trend of our actual results.
Xerox Corporation
Form 10-Q
June 30, 2000
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 21
Discontinued Operations 31
Capital Resources and Liquidity 32
Risk Management 35
Supplemental Revenue Discussion 37
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 39
Part II - Other Information
Item 1. Legal Proceedings 40
Item 2. Changes in Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits and Reports on Form 8-K 41
Signatures 42
Exhibit Index
Computation of Net Income per Common Share 43
Computation of Ratio of Earnings to Fixed Charges 44
By-Laws of Registrant, as amended through
May 11, 2000 (filed in electronic form only)
Separation Agreement dated May 11, 2000 between Registrant
and G. Richard Thoman, former President and Chief Executive
Officer of Registrant (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 Six months ended
June 30, June 30,
(In millions, except per-share data) 2000 1999 2000 1999
Revenues
Sales $ 2,527 $ 2,561 $ 4,818 $ 4,681
Service, outsourcing, financing and
rentals 2,161 2,301 4,301 4,481
Total Revenues 4,688 4,862 9,119 9,162
Costs and Expenses
Cost of sales 1,489 1,400 2,758 2,514
Cost of service, outsourcing, financing
and rentals 1,285 1,258 2,586 2,471
Inventory charges - - 119 -
Research and development expenses 255 256 504 507
Selling, administrative and general
expenses 1,338 1,252 2,569 2,423
Restructuring charge and asset
impairments (2) - 504 -
Mexico provision 115 - 115 -
Gain on affiliate's sale of stock - - (21) -
Purchased in-process research and
development - - 27 -
Other, net 49 63 148 120
Total Costs and Expenses 4,529 4,229 9,309 8,035
Income (Loss) before Income Taxes
(Benefits), Equity Income and
Minorities' Interests 159 633 (190) 1,127
Income taxes (benefits) 48 196 (65) 349
Equity in net income of
unconsolidated affiliates (46) (24) (50) (34)
Minorities' interests in earnings of
subsidiaries 12 13 23 21
Net Income (Loss) $ 145 $ 448 $ (98) $ 791
Basic Earnings (Loss) per Share $ 0.21 $ 0.66 $ (0.17) $ 1.16
Diluted Earnings (Loss) per Share $ 0.19 $ 0.62 $ (0.17) $ 1.09
See accompanying notes.
Xerox Corporation
Consolidated Balance Sheets
June 30, December 31,
(In millions, except share data in thousands) 2000 1999
Assets (Unaudited)
Cash $ 120 $ 126
Accounts receivable, net 2,951 2,622
Finance receivables, net 5,054 5,115
Inventories 3,289 2,961
Deferred taxes and other current assets 1,487 1,230
Total Current Assets 12,901 12,054
Finance receivables due after one year, net 8,238 8,203
Land, buildings and equipment, net 2,503 2,456
Investments in affiliates, at equity 1,596 1,615
Goodwill and intangible assets, net 2,233 1,724
Other assets 1,976 1,701
Investment in discontinued operations 867 1,130
Total Assets $ 30,314 $ 28,883
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 4,211 $ 3,957
Accounts payable 895 1,016
Accrued compensation and benefit costs 641 715
Unearned income 337 186
Other current liabilities 1,975 2,163
Total Current Liabilities 8,059 8,037
Long-term debt 13,296 10,994
Postretirement medical benefits 1,157 1,133
Deferred taxes and other liabilities 2,130 2,245
Discontinued operations liabilities -
policyholders' deposits and other 111 428
Deferred ESOP benefits (299) (299)
Minorities' interests in equity of subsidiaries 129 127
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures of
the Company 638 638
Preferred stock 661 669
Common shareholders' equity 4,432 4,911
Total Liabilities and Equity $ 30,314 $ 28,883
Shares of common stock issued and
outstanding 666,584 665,156
See accompanying notes.
Xerox Corporation
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30 (In millions) 2000 1999
Cash Flows from Operating Activities
Net Income (Loss) $ (98) $ 791
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 536 457
Provisions for doubtful accounts 178 123
Restructuring and other charges 623 -
Mexico provision 115 -
Gain on affiliate's sale of stock (21) -
Gain on divestitures (63) -
Purchased in-process research and development 27 -
Provision for postretirement medical
benefits, net of payments 24 22
Cash payments for the 1998 restructuring (96) (221)
Cash payments for the 2000 restructuring (35) -
Minorities' interests in earnings of subsidiaries 23 21
Undistributed equity in income of
affiliated companies (11) (33)
Increase in inventories (281) (100)
Increase in on-lease equipment (335) (125)
Increase in finance receivables (467) (649)
Proceeds from securitization of finance
receivables - 750
Increase in accounts receivable (362) (281)
Decrease in accounts payable and accrued
compensation and benefit costs (216) (319)
Net change in current and deferred income taxes (390) 124
Change in other current and noncurrent liabilities (300) (414)
Other, net (230) (217)
Total (1,379) (71)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (240) (310)
Proceeds from sales of land, buildings and equipment 55 26
Proceeds from divestitures 50 -
Acquisitions, net of cash acquired (873) -
Other, net - (26)
Total (1,008) (310)
Cash Flows from Financing Activities
Net change in debt 2,759 609
Dividends on common and preferred stock (294) (293)
Proceeds from sale of common stock 18 117
Dividends to minority shareholders (3) (28)
Total 2,480 405
Effect of Exchange Rate Changes on Cash - (6)
Cash Provided by Continuing Operations 93 18
Cash Provided (Used) by Discontinued Operations (99) 6
Increase (Decrease) in Cash (6) 24
Cash at Beginning of Period 126 79
Cash at End of Period $ 120 $ 103
See accompanying notes
Xerox Corporation
Notes to Consolidated Financial Statements
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 1999 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 2000 presentation.
The impact of these changes is not material and did not affect net
income.
References herein to "we" or "our" refer to Xerox and consolidated
subsidiaries unless the context specifically requires otherwise.
2. Inventories consist of (in millions):
June 30, December 31,
2000 1999
Finished products $ 1,988 $ 1,800
Work in process 168 122
Raw materials and supplies 411 363
Sub-total 2,567 2,285
Equipment on operating leases, net 722 676
Total $ 3,289 $ 2,961
3. On March 31, 2000, we announced details of a worldwide
restructuring program designed to enhance shareholder value, spur
growth and strengthen the company's competitive position in the
digital marketplace primarily through cost and expense reductions.
In connection with this program, in the first quarter of 2000 we
recorded a pre-tax provision of $625 million ($444 million after
taxes and including our $18 million share of a restructuring
charge recorded by Fuji Xerox, an unconsolidated affiliate). The
$625 million pre-tax charge includes severance costs related to
the elimination of 5,200 positions worldwide. The employment
reductions are wide-ranging, impacting all levels, business groups
and geographic regions of the corporation. None of the reductions
will reduce sales coverage or affect direct research and
development. The charge also includes $71 million related to
facility closings and other asset write-offs and $119 million for
inventory charges , which were recorded as a component of cost of
revenues. For facility fixed assets classified as assets to be
disposed of, the impairment loss recognized is based on the fair
value less cost to sell, with fair value based on estimates of
existing market prices for similar assets. The inventory charges
relate primarily to the consolidation of distribution centers and
warehouses and the exit from certain product lines. The $625
million pre-tax charge was reduced by $2 million in the second
quarter due to a change in estimate.
The restructuring will be completed in early 2001. Key initiatives
of the restructuring, which will result in charges for severance
and exit activities, include the following:
1) Sharpening the company's focus on cost, quality and delivery
in manufacturing by reducing the production infrastructure
and moving certain product lines to regions where they are in
the greatest customer demand.
2) Driving greater efficiency in logistics and supply chain
operations through the consolidation of distribution centers
and warehouses, reducing costs and improving inventory turns.
3) Enhancing customer service delivery by deploying technology
and executing process changes to reduce costs.
4) Implementing an average 10 percent reduction in the number of
middle and upper managers across the various Xerox businesses
in the United States, with similar reductions in other
geographic areas.
5) Eliminating redundancies in support functions by moving to a
shared service model for marketing, human resources and
finance.
6) Outsourcing work in areas not related to the company's core
business operations and where there is economic advantage.
7) Accelerating the integration of business functions in General
Markets Operations to achieve benchmark expenses and
processes for indirect sales channels.
8) Implementing a wide-ranging series of initiatives across
Developing Markets Operations (DMO) geographies to improve
productivity and cost levels.
9) Leveraging Web-based technology to simplify and streamline
processes across internal business operations, and extending
to vendor and customer relationships.
The following table summarizes the status of the restructuring
reserve (in millions):
Charges June 30,
Total Against 2000
Cash Charges: Reserve Reserve/2/ Balance
Severance and related costs $384 $ 33 $351
Lease cancellation and other costs 49/1/ 1 48
Sub-total 433 34 399
Non-cash Charges:
Asset impairment 71 71 -
Inventory charges 119 119 -
Sub-total 190 190 -
Total $623 $224 $399/3/
/1/ Includes $2 million reduction recorded in second quarter 2000.
/2/ Includes the impact of currency rate changes.
/3/ Of this amount, $330 is included in Other current liabilities.
As of June 30, 2000, approximately 600 employees have left the
Company under the 2000 restructuring program. There have been no
material changes to the program since its announcement, and the
remaining reserve relates to cash expenditures to be incurred
primarily during the remainder of 2000 and early 2001.
4. In April 1998, we announced a worldwide restructuring program
intended to enhance our competitive position and lower our overall
cost structure. In connection with this program, 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 included
$113 million of inventory charges recorded as cost of revenues,
and $316 million of asset impairments. The inventory charges
relate to certain light-lens products that were scrapped as a
result of our decision to accelerate the transition to digital
products and excess spare parts that were scrapped as a result of
our decision to centralize certain parts depots. Included in the
asset impairment charge were 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 remaining $160 million of asset impairments included
the write-down of certain technology assets and other items
impacted by the consolidation activities described below. The
lease cancellation costs relate to facilities primarily located in
the U.S. and Europe.
Key initiatives of the restructuring included:
1) Consolidation of 56 European customer support centers into one
facility and implementing a shared services organization for
back-office operations.
2) Streamlining manufacturing, logistics, distribution and
service operations. This includes 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 June 30,
Total Against 2000
Cash Charges: Reserve Reserve/1/ Balance
Severance and related costs $1,017 $ 846 $171
Lease cancellation and other costs 198 107 91
Sub-total 1,215 953 262
Non-cash Charges:
Asset impairment 316 316 -
Inventory charges 113 113 -
Sub-total 429 429 -
Total $1,644 $1,382 $262
/1/ Includes the impact of currency rate changes.
As of June 30, 2000, approximately 11,100 employees have left the
Company under the 1998 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 through the remainder of 2000 for the
completion of certain European initiatives and continued payments
associated with the severance and lease cancellation initiatives
already implemented.
5. Common shareholders' equity consists of (in millions):
June 30, December 31,
2000 1999
Common stock $ 668 $ 667
Additional paid-in-capital 1,572 1,539
Retained earnings 4,106 4,501
Accumulated other comprehensive
income /1/ (1,914) (1,796)
Total $ 4,432 $ 4,911
/1/ Accumulated other comprehensive income at June 30, 2000 is composed of
cumulative translation $(1,896), minimum pension liability of $(32), and
unrealized gains on marketable securities of $14.
Comprehensive income (loss) for the three months and six months
ended June 30, 2000 and 1999 is as follows (in millions):
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
Net income (loss) $ 145 $ 448 $ (98) $ 791
Translation adjustments (169) (121) (132) (975)
Unrealized gains on marketable
Securities - - 14 -
Comprehensive income (loss) $ (24) $ 327 $ (216) $ (184)
6. Interest expense totaled $474 million and $405 million for the
six months ended June 30, 2000 and 1999, respectively.
7. Segment Reporting
In the first quarter of 2000, we completed the realignment of our
operations to better align the company to serve its diverse
customers/distribution channels and to provide an industry-
oriented focus for global document services and solutions. As a
result of this realignment, our reportable segments have been
revised accordingly and are as follows: Industry Solutions,
General Markets and Developing Markets.
The Industry Solutions operating segment (ISO) covers the direct
sales and service organizations in North America and Europe. It is
organized around key industries and focused on providing our
largest customers with document solutions consisting of hardware,
software and services, including document outsourcing, systems
integration and document consulting.
The General Markets operating segment (GMO) includes sales agents
in North America, concessionaires in Europe and our Channels Group
which includes retailers and resellers and our expanding Internet
sales and telebusiness. It is responsible for increasing
penetration of the general market space, including small office
solutions, products for networked work group environments and
personal/home office products. In addition, it has responsibility
for product development and acquisition for its markets, providing
customer- and channel-ready products and solutions.
The Developing Markets operating segment (DMO) includes operations
in Latin America, China, Russia, India, the Middle East and
Africa. It takes advantage of growth opportunities in emerging
markets/countries around the world, building on the leadership
Xerox has already established in a number of those markets.
Other businesses include several units, none of which met the
thresholds for separate segment reporting. The revenues included
in this group are primarily from Xerox Supplies Group (XSG) and
Xerox Engineering Systems (XES).
All corporate expenses have been allocated to the operating
segments.
Operating segment profit or loss information for the three months
ended June 30, 2000 and 1999 is as follows (in millions):
Industry General Developing Other
Solutions Markets Markets Businesses Total
2000
Revenue from external
customers $ 2,319 $1,295 $ 694 $ 380 $ 4,688
Intercompany revenues 12 62 - (74) -
Total segment revenues $ 2,331 $1,357 $ 694 $ 306 $ 4,688
Segment profit/1/ $ 127 $ 12 $ (48) $ 66 $ 157
1999
Revenue from external
customers $ 2,519 $1,166 $ 710 $ 467 $ 4,862
Intercompany revenues 10 22 - (32) -
Total segment revenues $ 2,529 $1,188 $ 710 $ 435 $ 4,862
Segment profit $ 433 $ 36 $ 106 $ 58 $ 633
Operating segment profit or loss information for the six months
ended June 30, 2000 and 1999 is as follows (in millions):
Industry General Developing Other
Solutions Markets Markets Businesses Total
2000
Revenue from external
customers $ 4,478 $2,561 $1,303 $ 777 $ 9,119
Intercompany revenues 23 134 - (157) -
Total segment revenues $ 4,501 $2,695 $1,303 $ 620 $ 9,119
Segment profit/1/ $ 282 $ 50 $ (34) $ 162 $ 460
1999
Revenue from external
customers $ 4,763 $2,258 $1,238 $ 903 $ 9,162
Intercompany revenues 19 43 - (62) -
Total segment revenues $ 4,782 $2,301 $1,238 $ 841 $ 9,162
Segment profit $ 795 $ 132 $ 116 $ 84 $ 1,127
/1/ The following is a reconciliation of segment profit to total Company Income
(Loss) before Income Taxes (Benefits), Equity Income and Minorities'
Interest:
Three months ended Six months ended
June 30, June 30,
2000 2000
Total segment profit $ 157 $ 460
2000 Restructuring:
Inventory charges - (119)
Restructuring charge and asset
impairments 2 2 (504) (623)
CPID purchased in-process R&D - (27)
Income (Loss) before Income Taxes (Benefits),
Equity Income and Minorities' Interests $ 159 $ (190)
8. Acquisitions
On January 1, 2000 we, and Fuji Xerox, completed the acquisition
of the Color Printing and Imaging Division of Tektronix, Inc.
(CPID). The aggregate consideration paid of $925 million in cash,
which includes $73 million paid directly by Fuji Xerox, is subject
to certain post-closing adjustments. CPID manufactures and sells
color printers, ink and related products, and supplies. The
acquisition was accounted for in accordance with the purchase
method of accounting. The operating results of CPID have been
included in the consolidated statement of income since January 1,
2000.
The excess of cash paid over the fair value of net assets acquired
has been allocated to identifiable intangible assets and goodwill.
An independent appraiser, using a discounted cash flow approach,
valued the identifiable intangible assets. The value of the
identifiable intangible assets includes $27 million for acquired
in-process research and development which was written off in the
first quarter of 2000. This charge represents the fair value of
certain acquired research and development projects that were
determined not to have reached technological feasibility as of the
date of the acquisition. We determined the amount of the purchase
price to be allocated to in-process research and development,
based on the methodology that focused on the after-tax cash flows
attributable to the in-process products combined with the
consideration of the stage of completion of the individual
research and development project at the date of acquisition. The
remaining excess of the purchase price was allocated to other
identifiable intangible assets and goodwill. Identifiable
intangible assets included in the valuation, exclusive of
intangible assets acquired by Fuji Xerox, were the installed
customer base ($209 million), the distribution network ($123
million), the existing technology ($103 million), the workforce
($71 million), and trademarks ($23 million). The remaining excess
has been assigned to goodwill. Other identifiable intangible
assets and goodwill are being amortized on a straight-line basis
over their estimated useful lives which range from 7 to 25 years.
The valuation of the identifiable intangible assets, referred to
above, is based on studies and valuations which are currently
being finalized. Management does not believe that the final
valuation and the final purchase price allocation will produce
materially different results than those reflected herein. In
addition, the final valuation may be affected by any post-closing
adjustments to the purchase price.
9. Divestitures
In April 2000, the Company sold a 25 percent ownership interest in
its wholly-owned subsidiary, ContentGuard, to Microsoft, Inc. for
$50 million and recognized a pre-tax gain of $23 million, which is
included in Other, net. An additional pre-tax gain of $27 million
was deferred and is included in Unearned income in the
Consolidated Balance Sheet. In connection with the sale,
ContentGuard also received $40 million from Microsoft for a non-
exclusive license of its patents and other intellectual property
and a $25 million advance against future royalty income from
Microsoft on sales of products incorporating ContentGuard's
technology. The license payment is being amortized over the life
of the license agreement of 10 years and the royalty advance will
be recognized in income as earned.
In June 2000, the Company completed the sale of its U.S. and
Canadian commodity paper business, including an exclusive license
for the Xerox brand, to Georgia Pacific and recorded a pre-tax
gain of approximately $40 million which is included in Other, net.
In addition to the proceeds from the sale of the business, the
Company will receive royalty payments on future sales of Xerox
branded commodity paper by Georgia Pacific and will earn
commissions on Xerox originated sales of commodity paper as an
agent for Georgia Pacific. The U.S. and Canadian commodity paper
business had annual sales of approximately $275 million of our
$1.0 billion total worldwide paper sales in 1999.
10. Mexico Provision
During the second quarter of 2000, the Company recorded a pre-tax
provision of $115 million ($78 million after taxes) related to its
previously announced issues in Mexico. The provision relates to
establishing reserves for uncollectible long-term receivables,
recording liabilities for amounts due to concessionaires and, to a
lesser extent, for contracts that did not fully meet the
requirements to be recorded as sales-type leases. The charge
represents the Company's best estimate of the impact of currently
known events. Management, with the assistance of outside advisors,
continues to investigate our Mexican operations. Until the
investigation is complete, the need, if any, for further
provisions will not be known. Accordingly, it is not practical to
estimate at this time, what, if any, additional provisions may be
needed.
In response to these issues, the Company has taken the following
actions - a number of senior local managers in Mexico were held
accountable and removed from the Company; a new general manager
was appointed in Mexico with a strong financial background; the
Audit Committee of the Board of Directors has launched an
independent investigation into the Mexican operation and an
extensive review of the Company's worldwide internal controls was
initiated to ensure that the issues identified in Mexico are not
present elsewhere.
The Company was recently advised that the Securities and Exchange
Commission (SEC) had entered an order of a formal, non-public
investigation into our accounting and financial reporting
practices in Mexico. The SEC has also issued subpoenas for the
production of certain documents. We are cooperating fully with the
SEC.
11. Litigation
On March 10, 1994, a lawsuit was filed in the United States
District Court for the District of Kansas by two independent
service organizations (ISOs) in Kansas City and St. Louis and
their parent company. Subsequently, a single corporate entity,
CSU, L.L.C. (CSU), was substituted for the three affiliated
companies. CSU claimed damages predominately resulting from the
Company's alleged refusal to sell parts for high-volume copiers
and printers to CSU prior to 1994. The Company's policies and
practices with respect to the sale of parts to ISOs were at issue
in an antitrust class action in Texas, which was settled by the
Company during 1994. Claims for individual lost profits of ISOs
who were not named parties, such as CSU, were not included in that
class action. The Company asserted counter-claims 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. 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 million was
entered in favor of the Company and against CSU on the copyright
infringement counterclaim. On February 16, 2000, the United States
Court of Appeals for the Federal Circuit affirmed the judgment of
the District Court dismissing CSU's antitrust claims and on July
11, 2000 CSU petitioned the Supreme Court for a writ of certiorari
to review the Appeals Court's judgment.
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 trial ended on October 25, 1999 with a
jury verdict of $10 million. The Company's motion to set aside the
verdict or, in the alternative, to grant a new trial was denied by
the Court. The Company is appealing to the Court of Appeals for
the Federal Circuit.
A consolidated lawsuit is currently pending in the United
States District Court for the Western District of Texas. It is a
consolidation of two previously separate lawsuits, one of which
had been filed in the United States District Court for the
District of New Jersey and had been transferred to Texas, and the
other which was commenced in Texas. Plaintiffs in both cases
claimed that the withdrawal of Crum & Forster Holdings, Inc. (a
former subsidiary of ours) (C&F) from the Xerox Corporation
Employee Stock Ownership Plan (ESOP) constituted a wrongful
termination under the Employee Retirement Income Security Act
(ERISA). Both cases were also brought as purported class actions.
The complaints in the two cases asserted different legal theories
for recovery. In one case damages of $250 million were alleged and
in the other case damages were unspecified.
On December 14, 1999, the Court granted plaintiffs' motion to
amend their complaint. The amended complaint alleges violations of
ERISA only and seeks unspecified damages, injunctive relief, costs
and attorneys' fees. Under the amended complaint, plaintiffs
purport to bring this action on behalf of themselves and a class
of approximately 10,000 persons who were C&F participants in the
ESOP on January 1, 1993. The plaintiffs have filed a new motion
for class certification based upon the allegations in the amended
complaint, which is currently pending. Plaintiffs' previous motion
to certify a class action was denied by the Court. Xerox denies
liability and intends to vigorously defend this action.
On June 24, 1999, Xerox Corporation was served with a summons
and complaint filed in the Superior Court of the State of
California for the County of Los Angeles. The complaint was filed
on behalf of 681 individual plaintiffs claiming damages as a
result of Xerox's alleged disposal and/or release of hazardous
substances into the soil, air and groundwater. On July 22, 1999
and on April 12, 2000,respectively, two additional complaints were
filed in the same Court, which have not yet been served on Xerox.
These separate actions are on behalf of an additional 80
plaintiffs and 140 plaintiffs, respectively, with the same claims
for damages as the June, 1999 action. Plaintiffs in all three
cases further allege that they have been exposed to such hazardous
substances by inhalation, ingestion and dermal contact, including
but not limited to hazardous substances contained within the
municipal drinking water supplied by the City of Pomona and the
Southern California Water Company. Plaintiffs' claims against
Xerox include personal injury, wrongful death (claimed in the
first two complaints), property damage, negligence, trespass,
nuisance, fraudulent concealment, absolute liability for ultra-
hazardous activities, civil conspiracy, battery and violation of
the California Unfair Trade Practices Act. Damages are
unspecified.
We deny any liability for the plaintiffs' alleged damages and
intend to vigorously defend these actions. In the most recently-
filed case a status conference is set for October 10, 2000. The
remaining two cases have been stayed, by stipulation of the
parties, until the October 10th status conference.
On December 9, 1999, a complaint was filed in the United
States District Court for the District of Connecticut in an action
entitled Giarraputo, et al. vs. Xerox Corporation, Barry Romeril,
Paul Allaire and Richard Thoman which purports to be a class
action on behalf of the named plaintiff and all other purchasers
of Common Stock of the Registrant between January 25, 1999 and
October 7, 1999 (Class Period). On December 13, 1999, an amended
complaint was filed adding an additional named plaintiff,
extending the Class Period through December 10, 1999, and
expanding the class to include individuals who purchased call
options or sold put options. The amended complaint alleges that
pursuant to the Securities Exchange Act of 1934, as amended, each
of the defendants is liable as a participant in a fraudulent
scheme and course of business that operated as a fraud or deceit
on purchasers of the Company's Common Stock during the Class
Period by disseminating materially false and misleading statements
and/or concealing material facts. The amended complaint further
alleges that the alleged scheme: (i) deceived the investing
public regarding the economic capabilities, sales proficiencies,
growth, operations and the intrinsic value of the Company's Common
Stock; (ii) allowed several corporate insiders, such as the named
individual defendants, to sell shares of privately held Common
Stock of the Company while in possession of materially adverse,
non-public information; and (iii) caused the individual plaintiffs
and the other members of the purported class to purchase Common
Stock of the Company at inflated prices. The amended complaint
seeks unspecified compensatory damages in favor of the plaintiffs
and the other members of the purported class against all
defendants, jointly and severally, for all damages sustained as a
result of defendants' alleged wrongdoing, including interest
thereon, together with reasonable costs and expenses incurred in
the action, including counsel fees and expert fees. Several
additional class action complaints alleging the same or
substantially similar claims were filed in the same Court.
On March 14, 2000, the Court issued an order consolidating
all of these related cases into a single action captioned In re
Xerox Corporation Securities Litigation, and appointing lead
plaintiffs, and lead and liaison counsel. On April 28, 2000
plaintiffs filed an amended consolidated class action complaint on
behalf of a redefined class consisting of themselves and all other
purchasers of Common Stock of Registrant during the period between
October 22, 1998 through October 7, 1999.
The named individual defendants and we deny any wrongdoing
and intend to vigorously defend the action.
On July 5, 2000, a shareholder derivative action was
commenced in the Supreme Court of the State of New York, County of
New York on behalf of Registrant against all current members of
the Board of Directors (with the exception of Anne M. Mulcahy)
(collectively, the "Individual Defendants"), and Registrant, as a
nominal defendant. Plaintiff claims breach of fiduciary duties
related to certain of the accounts receivable related to
Registrant's operations in Mexico. The complaint alleges that the
Individual Defendants breached their fiduciary duties by, among
other things, permitting wrongful business practices to occur,
inadequately supervising and failing to instruct employees and
managers of Registrant and taking no steps to institute
appropriate legal action against those responsible for unspecified
wrongful conduct. Plaintiff claims that Registrant has suffered
unspecified damages but which are "expected to exceed tens of
millions of dollars", and seeks judgment, among other things,
requiring the Individual Defendants to pay to Registrant the
amounts by which Registrant has been damaged by reason of their
breach of their fiduciary duties and/or to the extent they have
been unjustly enriched and to institute and enforce appropriate
procedural safeguards to prevent the alleged wrongdoing.
The Individual Defendants deny the wrongdoing alleged in the
complaint and intend to vigorously defend the action.
Item 2 Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Document Processing
Summary
Total second quarter 2000 revenues declined 4 percent to $4.7
billion compared with $4.9 billion in the 1999 second quarter.
Excluding adverse currency translation, pre-currency revenues
declined 1 percent. Excluding the beneficial impact of the
January 1, 2000 acquisition of the Tektronix, Inc. Color Printing
and Imaging Division (CPID), pre-currency revenues declined 4
percent.
Total revenues in the first half of 2000 of $9.1 billion declined
1 percent compared with $9.2 billion in the first half of 1999.
Excluding adverse currency translation, pre-currency revenues
increased 2 percent. Excluding the beneficial impact of the CPID
acquisition, pre-currency revenues declined 1 percent. First
quarter 2000 revenues included an increase of approximately $40
million associated with excellent growth in licensing patents from
our intellectual property portfolio and selling standalone
software.
Including a $115 million pre-tax provision ($78 million after
taxes) related to the company's previously announced issues in
Mexico, income in the 2000 second quarter was $145 million. Over
a period of years, several senior managers in Mexico had
collaborated to circumvent Xerox accounting policies and
administrative procedures, resulting in a charge primarily for
uncollectible receivables and unrecorded liabilities. Excluding
the Mexico provision, income declined 50 percent to $223 million
from $448 million in the 1999 second quarter.
This decline in 2000 second quarter income included significant
gross margin deterioration. Continued disruption in customer
relationships caused by the company's direct sales force
realignment resulted in weak equipment sales, primarily in North
America and particularly in the high end of our business. In
addition, higher growth in the lower-margin document outsourcing
and channels businesses and unfavorable product mix continued.
Selling, administrative and general expense (SAG) as a percent of
revenue deteriorated in the 2000 second quarter from the 1999
second quarter due largely to increased bad debt provisions;
significant marketing, advertising and promotional investments
including the DRUPA graphic arts show in Germany in May and our
major inkjet printer initiative with Sharp Corporation and Fuji
Xerox; significant transition costs associated with the
implementation of our European shared services organization and
the continued impact of the U.S. customer administration issues.
Equity income from Fuji Xerox improved in the 2000 second quarter
reflecting improved business results and favorable currency
translation.
Including the effect of special items, we had a net loss of $98
million in the first half of 2000. Excluding special items, net
income in the first half of 2000 declined 44 percent to $442
million from $791 million in the first half of 1999. Special items
included the following after-tax charges - $443 million in
connection with the 2000 restructuring program (including our $18
million share of a separate Fuji Xerox restructuring charge), $19
million for acquired in-process research and development
associated with the CPID acquisition and $78 million for the
Mexico provision. The decline in net income reflects the
significant gross margin deterioration and higher SAG in the first
and second quarters.
Diluted earnings per share, including the $0.11 provision related
to accounting issues in our Mexico business, was $0.19 in the 2000
second quarter. Excluding this provision, second quarter 2000
earnings per share of $0.30 declined 52 percent from $0.62 in the
1999 second quarter.
The CPID acquisition adversely impacted second quarter earnings by
approximately one cent as the synergies we expect to capture from
the integration will not begin to offset the higher goodwill and
interest expense until later in 2000. Unfavorable year-over-year
currency adversely affected our results by an estimated 4 cents.
The 2000 second quarter results also include gains of
approximately 6 cents related to sales of assets including the
sale in June 2000 of the Xerox-branded commodity paper business in
the United States and Canada to Georgia-Pacific Corporation and
the sale in April 2000 of a minority interest in ContentGuard to
Microsoft.
Including special items, the first half 2000 diluted loss per
share was $0.17. Excluding special items, diluted earnings per
share declined 45 percent to $0.60 in the first half of 2000 from
$1.09 in the first half of 1999. The CPID acquisition and
unfavorable year-over-year currency changes adversely impacted
first half earnings by approximately three cents and nine cents,
respectively.
The following table summarizes net income (loss) and diluted
earnings (loss) per share (EPS) for the second quarter and first
half of 2000:
(in millions, except per-share data) 2nd Quarter First Half
2000 1999 2000 1999
Income before special items $ 222 $ 448 $ 442 $ 791
Restructuring and IPRD charges 1 - (462) -
Mexico Provision (78) - (78) -
Net Income (Loss) $ 145 $ 448 $ (98) $ 791
EPS:
Income before special items $ 0.30 $ 0.62 $ 0.60 $ 1.09
Restructuring and IPRD charges - - (0.66) -
Mexico Provision (0.11) - (0.11) -
Diluted EPS $ 0.19 $ 0.62 $(0.17) $ 1.09
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 European
and Canadian currencies into U.S. dollars. We refer to this
adjusted growth as "pre-currency growth."
A substantial portion of our consolidated revenues is derived from
operations outside of the United States where the U.S. dollar is
not the functional currency. When compared with the average of the
major European and Canadian currencies on a revenue-weighted
basis, the U.S. dollar was approximately 10 percent stronger in
the 2000 second quarter than in the 1999 second quarter and 9
percent stronger in the 2000 first quarter than in the 1999 first
quarter. As a result, currency translation had an unfavorable
impact of approximately three percentage points on revenue growth
in both the second quarter and first half of 2000.
Revenues
Revenues By Segment
Revenues and revenue growth rates by segment are as follows:
Memo:
2Q 2000 Pre-Currency
1999 Revenue Growth Revenue
Full Year Post Pre Growth
Revenues Revenues Currency Currency Q1 .
Total Revenues $19.2 $4.7 (4)% (1)% 6%
Industry Solutions Ops. 10.0 2.3 (8) (5) -
General Markets Ops. 4.7 1.3 11 14 19
Developing Markets Ops. 2.7 0.7 (2) (2) 15
Other Businesses 1.8 0.4 (19) (16) (4)
Memo: Fuji Xerox 7.8 2.2 20 7 2
YTD 2000 .
Revenue Growth .
Post Pre
Revenues Currency Currency
Total Revenues $9.1 (1)% 2%
Industry Solutions Ops. 4.5 (6) (3)
General Markets Ops. 2.6 13 16
Developing Markets Ops. 1.3 5 6
Other Businesses 0.8 (14) (10)
Memo: Fuji Xerox 4.3 19 4
Dollars are in billions.
Industry Solutions Operations (ISO) covers the direct sales and
service organizations in North America and Europe. Revenues
declined 8 percent (5 percent pre-currency) in the 2000 second
quarter as disruptions in customer relationships caused by the
sales force realignment, at a time when competitive product
capabilities have strengthened, produced a drag on second quarter
equipment sales, particularly of high-end products. Pricing
pressure continued and accelerated in color products and also
accelerated in light lens copiers in Europe. Revenues in the
2000 second quarter declined in the U.S., France and Germany, were
flat in Canada, and reflected good growth in the U.K.
ISO revenues declined 6 percent (3 percent pre-currency) in the
first half of 2000 due to the disruptions caused by the sales
force realignment and intensified competitive and pricing
pressures.
General Markets Operations (GMO) includes sales agents in North
America, concessionaires in Europe and our Channels Group which
includes retailers and resellers and our expanding Internet sales
and telebusiness. General Markets Operations revenues grew 11
percent (14 percent pre-currency) in the 2000 second quarter from
the 1999 second quarter including the CPID acquisition. Excluding
CPID, General Markets pre-currency revenues were essentially flat
in the 2000 second quarter. European concessionaires had good
growth while revenues from North American sales agents were
essentially flat. Excluding CPID, strong Channels recurring
revenue growth from the growing installed equipment population was
essentially offset by weak monochrome and color laser printer
equipment sales. Excellent placements of inkjet equipment were
more than offset by unfavorable mix and continuing equipment price
declines. Shipments of our new M series family of inkjet printers,
resulting from our alliance with Sharp Corporation and Fuji Xerox,
will begin in the third quarter.
GMO revenues increased 13 percent (16 percent pre-currency) in the
first half of 2000 including the favorable impact from the CPID
acquisition. Excluding CPID, pre-currency revenues grew by 3
percent in the first half of 2000. European concessionaires had
good growth while revenues from North American sales agents were
essentially flat in the first half. Excluding CPID, strong
Channels recurring revenue growth in the first half was offset by
lower equipment sales, particularly in the second quarter.
Developing Market Operations (DMO) includes operations in Latin
America, China, Russia, India, the Middle East and Africa. Revenue
in Brazil in the 2000 second quarter improved sequentially as
activity and momentum continue to increase and the economic
environment improves. However, compared with the 1999 second
quarter, revenue in Brazil temporarily declined due to an
inability in 1999 to subsequently sustain the price increases
implemented following the maxi-devaluation. China, Russia, the
Middle East and Africa had excellent revenue growth in the second
quarter but revenue declined in Mexico and Argentina.
DMO revenues increased 5 percent (6 percent pre-currency) in the
first half of 2000 reflecting excellent revenue growth in China,
India and the Middle East but revenue declined in Mexico and
Argentina.
Other Businesses revenues declined 19 percent (16 percent pre-
currency) in the 2000 second quarter and 14 percent (10 percent
pre-currency) in the first half of 2000, including a decline in
Xerox Engineering Systems and a decline in the Xerox Supplies
Group, primarily print media other than paper.
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 revenues grew 20 percent (7 percent pre-currency) in
the 2000 second quarter reflecting good revenue growth in both
Japan and Fuji Xerox's other Asia Pacific territories.
Fuji Xerox revenues grew 19 percent (4 percent pre-currency) in
the first half of 2000 reflecting modest revenue growth in Japan
and strong revenue growth in Fuji Xerox's other Asia Pacific
territories.
Key Ratios and Expenses
1999 2000 .
Q1 Q2 Q3 Q4 FY Q1 Q2 YTD
Gross Margin 45.9% 45.3% 43.3% 41.8% 44.0% 42.0%* 40.8% 41.4%*
SAG % Revenue 27.2 25.8 26.1 27.8 26.8 27.8 28.5% 28.2%
* Excludes inventory charges associated with the 2000 restructuring program. If
included, the Gross Margin in Q1 and YTD would have been 39.3% and 40.1%,
respectively.
Gross margin declined by 4.5 percentage points in the 2000 second
quarter from the 1999 second quarter or 4.1 percentage points
excluding CPID. Manufacturing and other productivity improvements
helped to only partially offset margin pressures from weak
DocuTech and Production Printing equipment sales, competitive
price pressures and unfavorable currency. Higher growth in the
lower-margin document outsourcing and channels businesses also
reduced margins in the quarter. In addition, gross margin was
adversely impacted by unfavorable product mix and lower service
gross margins as service revenue declines have not yet been
accompanied by corresponding cost reductions.
Gross margin declined by 4.2 percentage points in the first half
of 2000 from the first half of 1999 or 3.8 percentage points
excluding CPID. The decline reflects the unfavorable trends noted
above. Gross margin in the first quarter of 2000 benefited from
increased licensing and stand-alone software revenues associated
with the licensing of a number of patents from our intellectual
property portfolio.
Selling, administrative and general expenses (SAG) grew 7 percent
in the 2000 second quarter. Excluding the favorable effect of
currency, SAG grew 10 percent, or 6 percent excluding CPID. In the
first half of 2000, SAG grew 6 percent. Excluding the favorable
effect of currency, SAG grew 9 percent, or 5 percent excluding
CPID. SAG growth in the second quarter and first half reflects
increased bad debt provisions; significant marketing, advertising
and promotional investments including the DRUPA graphic arts trade
show in Germany in May and our major inkjet printer initiative
with Sharp Corporation and Fuji Xerox; significant transition
costs associated with the implementation of our European shared
services organization and the continued impact of the U.S.
customer administration issues. These increases were only
partially offset by the benefits of our 1998 restructuring program
and ongoing expense controls. In the 2000 second quarter, SAG
represented 28.5 percent of revenue compared with 25.8 percent of
revenue in the 1999 second quarter. Year-to-date, SAG represented
28.2 percent of revenue compared with 26.5 percent of revenue in
1999.
Research and development (R&D) expense in the 2000 second quarter
and first half was essentially flat both pre and post currency
with the 1999 second quarter and first half, as increased program
spending was offset by lower overhead expenses. We continue to
invest in technological development to maintain our position in
the rapidly changing document processing market with an added
focus on increasing the effectiveness and value of that
investment. Xerox R&D is strategically coordinated with Fuji Xerox
which invested $555 million in R&D in the 1999 full year, for a
combined total of $1.5 billion.
Worldwide employment increased by 100 in the 2000 second quarter
to 96,300 as a result of the net hiring of 1,100 employees,
primarily for the company's fast-growing document outsourcing
business, direct sales representatives and staffing for the
centralized European customer care and shared services operations
in Ireland, which was partially offset by 1,000 employees leaving
the company under the 1998 and 2000 worldwide restructuring
programs. Worldwide employment increased by 1,700 in the first
half of 2000 as a result of our acquisition of CPID with 2,200
employees and a net hiring of 1,200 employees, primarily in the
second quarter, partially offset by 1,700 employees leaving the
company under the 1998 and 2000 worldwide restructuring programs.
Gain on affiliate's sale of stock of $21 million, which was
recorded in the first quarter of 2000, reflects our proportionate
share of the increase in equity of Scansoft Inc. resulting from
Scansoft's issuance of stock in connection with an acquisition.
This gain is partially offset by a $5 million charge, in the first
quarter, reflecting our share of Scansoft's write-off of in-
process research and development associated with this acquisition,
which is included in Equity in net income of unconsolidated
affiliates. Scansoft, an equity affiliate, is a developer of
digital imaging software that enables users to leverage the power
of their scanners, digital cameras, and other electronic devices.
The $14 million decrease in Other, net, from the 1999 second
quarter largely reflects gains from the asset sales discussed
below and the absence of Y2K remediation spending. These gains
were partially offset by increased non-financing interest expense
and goodwill amortization associated with the January, 2000 CPID
acquisition as well as increased non-financing interest expense
associated with higher interest rates and higher debt. For the
first half of 2000, Other, net increased $28 million as the asset
gains were more than offset by increased non-financing interest
expense and goodwill amortization associated with the CPID
acquisition as well as increased non-financing interest expense
associated with higher interest rates and higher debt.
In April 2000, the Company sold a 25 percent ownership interest in
its wholly-owned subsidiary, ContentGuard, to Microsoft, Inc. and
recognized a pre-tax gain of $23 million which is included in
Other, net. In connection with the sale, ContentGuard also
received $40 million from Microsoft for a non-exclusive license of
its patents and other intellectual property. This payment is being
amortized over the life of the license agreement of 10 years. In
addition, ContentGuard will receive future royalty income from
Microsoft on sales of Microsoft products incorporating
ContentGuard's technology.
In June 2000, the Company completed the sale of its U.S. and
Canadian commodity paper business, including an exclusive license
for the Xerox brand, to Georgia Pacific and recorded a pre-tax
gain of approximately $40 million which is included in Other, net.
In addition to the proceeds from the sale of the business, the
Company will receive royalty payments on future sales of Xerox
branded commodity paper by Georgia Pacific and will earn
commissions on Xerox originated sales of commodity paper as an
agent for Georgia Pacific. The U.S. and Canadian commodity paper
business had annual sales of approximately $275 million of our
$1.0 billion total worldwide paper sales in 1999. Although future
revenue is expected to be lower as a result of the sale, operating
income should remain essentially unchanged as a result of payments
received under the royalty/agent elements of the agreement. We
expect a cash flow benefit as the existing working capital is
reduced.
During the second quarter, the Company recorded a pre-tax
provision of $115 million ($78 million after taxes or $0.11 per
share) related to its previously announced issues in Mexico. Over
a period of years, several senior managers in Mexico had
collaborated to circumvent Xerox's accounting policies and
administrative procedures. The provision relates to establishing
reserves for uncollectible long-term receivables, recording
liabilities for amounts due to concessionaires and, to a lesser
extent, for contracts that did not fully meet the requirements to
be recorded as sales-type leases. The charge represents the
Company's best estimate of the impact of currently known events.
Management, with the assistance of outside advisors, continues to
investigate our Mexican operations. Until the investigation is
complete, the need, if any, for further provisions will not be
known. Accordingly, it is not practical to estimate at this time,
what, if any, additional provisions may be needed.
In response to these issues, the Company has taken the following
actions - a number of senior local managers in Mexico were held
accountable and removed from the Company; a new general manager
was appointed in Mexico with a strong financial background; the
Audit Committee of the Board of Directors has launched an
independent investigation into the Mexican operation and an
extensive review of the Company's worldwide internal controls was
initiated to ensure that the issues identified in Mexico are not
present elsewhere.
The Company was recently advised that the Securities and Exchange
Commission (SEC) had entered an order of a formal, non-public
investigation into our accounting and financial reporting
practices in Mexico. The SEC has also issued subpoenas for the
production of certain documents. We are cooperating fully with the
SEC.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in Earnings of Subsidiaries
Income before income taxes was $159 million in the 2000 second
quarter including the Mexico provision. Excluding the Mexico
provision, income before income taxes declined 57 percent to $274
million in the 2000 second quarter from $633 million in the 1999
second quarter.
Including the effect of special items, the loss before income
taxes was $190 million in the first half of 2000. Excluding
special items, income before income taxes in the first half of
2000 declined 49 percent to $575 million from $1,127 million in
the first half of 1999. Special items included the following pre-
tax charges - a charge of $623 million in connection with the 2000
restructuring program, a $27 million charge for acquired in-
process research and development associated with the CPID
acquisition and a $115 million provision for Mexico.
The effective tax rate before special items was 31.0 percent in
the 2000 second quarter and 2000 first half which is consistent
with the 1999 second quarter, 1999 first half and 1999 full year
rates. The second quarter effective tax rate of 30.2 percent
including the Mexico provision reflects the effective tax rate in
Mexico.
Equity in net income of unconsolidated affiliates is principally
our 50 percent share of Fuji Xerox income. Total equity in net
income increased significantly in the 2000 second quarter and
first half reflecting improved Fuji Xerox business results and
favorable currency translation.
Fuji Xerox revenues of $2.2 billion in the 2000 second quarter
increased 20 percent compared with the 1999 second quarter,
including the favorable impact of currency translation resulting
primarily from the strengthening yen compared with the U.S.
dollar. Pre-currency revenue growth was 7 percent. Net income of
$86 million in the 2000 second quarter increased 50 percent from
the 1999 second quarter driven by the higher revenues, lower SAG
as a percent of revenue due to higher revenue growth in lower cost
distribution channels, a lower statutory tax rate and favorable
currency.
Fuji Xerox revenues of $4.3 billion in the first six months of
2000 increased 19 percent compared with the same period in 1999
including the favorable impact of currency translation. Pre-
currency revenue growth was 4 percent. Net income of $137 million
in the first half of 2000 increased from the prior year due to
improved business results and favorable currency.
On March 31, 2000 we announced details of a worldwide
restructuring program designed to enhance shareholder value, spur
growth and strengthen the company's competitive position in the
digital marketplace primarily through cost and expense reductions.
In connection with this program, in the first quarter of 2000 we
recorded a pre-tax provision of $625 million ($444 million after
taxes including our $18 million share of the Fuji Xerox
restructuring charge). The resulting pre-tax provision of $625
million includes severance costs related to the elimination of
5,200 positions, net worldwide through a combination of voluntary
programs and layoffs. The charge also includes $190 million
related to facility closings and other asset write-offs such as
scrapping certain inventory. The $625 million pre-tax charge was
reduced by $2 million in the second quarter due to a change in
estimate.
The pre-tax savings from this restructuring plan, net of
implementation costs, are expected to be approximately $95 million
in 2000 and an incremental $300 million in 2001. These savings are
not expected to be reinvested. Approximately 60 percent of the
savings are expected in SAG with the balance in other activities.
With respect to the headcount reductions we expect that
approximately 3,400 positions will be eliminated by the end of
2000 and the balance in early 2001.
As of June 30, 2000, approximately 600 employees had left the
company under the program, and termination benefits of $33 million
have been charged to the reserve. Asset impairment, inventory
charges and other charges of $71 million, $119 million and $1
million, respectively, have also been charged against the
restructuring reserve. The 2000 restructuring reserve balance at
June 30, 2000 amounted to $399 million which relates to cash
expenditures to be incurred primarily during the remainder of 2000
and early 2001.
Additional details regarding the initiatives and status of the
2000 restructuring reserve are included in Note 3 of the "Notes to
Consolidated Financial Statements" of this Quarterly Report on
Form 10-Q.
On April 7, 1998, we announced a worldwide restructuring program
associated with enhancing our competitive position and lowering
our overall cost structure. In connection with this program, we
recorded a second quarter 1998 pre-tax provision of $1,644 million
($1,107 million after taxes including our $18 million share of a
restructuring charge recorded by Fuji Xerox). The program
includes employment reductions, the closing and consolidation of
facilities, and the write-down of certain assets.
As of June 30, 2000, approximately 11,100 employees had left the
company under the 1998 restructuring program. The majority of the
reserve balance of $262 million at June 30, 2000 relates to cash
expenditures to be incurred primarily during 2000 for the
completion of certain European initiatives and continued payments
associated with the severance and lease cancellation initiatives
already implemented.
The status of the 1998 restructuring reserve is included in Note 4
of the "Notes to Consolidated Financial Statements" of this
Quarterly Report on Form 10-Q.
On January 1, 2000 we completed the acquisition of the Tektronix,
Inc. Color Printing and Imaging Division (CPID) for $925 million
in cash including $73 million paid by Fuji Xerox for the Asia
Pacific operations of CPID. This transaction resulted in goodwill
and other identifiable intangible assets of approximately $637
million, which will be amortized over their useful lives, ranging
from seven to 25 years. In addition, we recognized a $27 million
pre-tax charge in the 2000 first quarter for acquired in-process
research and development associated with this acquisition.
New Accounting Standards. In 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No.133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives as assets or liabilities measured at
their fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge
accounting. We will adopt SFAS No. 133, as amended, beginning
January 1, 2001. We do not expect this Statement to have a
material impact on our consolidated financial statements.
Discontinued Operations - Insurance and Other
The net investment in our discontinued businesses which includes
Insurance and Other Discontinued Businesses totaled $756 million
at June 30, 2000 compared with $702 million at December 31, 1999.
The increase in the first half of 2000 was primarily caused by the
scheduled funding of reinsurance coverage for certain of the
former Talegen Holdings, Inc. companies to Ridge Reinsurance
Limited.
In July 2000, our OakRe life insurance business entered into an
agreement with a subsidiary of the buyer of Xerox Life whereby the
subsidiary assumed the remaining reinsurance liabilities
associated with the Single Premium Deferred Annuity policies
issued by Xerox Life. The agreement results in the completion of
the run-off of OakRe. By the end of the 2000 third quarter, upon
regulatory approval, OakRe will pay a dividend of approximately
$80 million to Xerox Financial Services, Inc., a wholly owned
subsidiary of the Company. The dividend is approximately equal to
the remaining carrying value of our investment in OakRe.
Capital Resources and Liquidity
Total debt, including ESOP and Discontinued Operations debt not
shown separately in our consolidated balance sheets, increased to
$17,557 million at June 30, 2000 or $2,556 million more than at
December 31, 1999. The changes in total indebtedness during the
first six months of 2000 and 1999 are summarized as follows (in
millions):
2000 1999
Total debt* as of January 1 $15,001 $15,107
Non-Financing Businesses:
Document Processing
operations cash usage 1,522 889
Brazil dollar debt reallocation** - 446
Discontinued businesses*** 99 (6)
Non-Financing Businesses 1,621 1,329
Financing Businesses** (34) (1,050)
Shareholder dividends 294 293
Acquisitions, primarily CPID 873 -
Proceeds from divestitures (50) -
All other changes (148) (166)
Total debt* as of June 30 $17,557 $15,513
* Includes discontinued operations.
** Includes re-allocations from and to our non-financing businesses of a
portion of Xerox do Brasil's U.S. dollar denominated debt used to fund
customer finance receivables denominated in Brazilian currency. The re-
allocations were performed consistent with the 8:1 debt to equity
guideline used in our customer financing businesses.
*** The increase in cash usage primarily reflects a one-time tax payment
in 2000 in settlement of prior year tax liability and the absence of net
cash proceeds from the sale of assets in 1999. We anticipate that
discontinued businesses will generate cash for the balance of the year
that will almost fully offset the first half of the year usage.
Document Processing Non-Financing Operations
The following table summarizes document processing non-financing
operations cash generation and usage for the six months ended June
30, 2000 and 1999 (in millions):
2000 1999
Income (loss) $ (213) $ 624
Add back special items:
Restructuring charge, net 443 -
Tektronix IPRD charge, net 19 -
Mexico charge, net 78 -
Income before special items 327 624
Depreciation* and amortization 536 457
Cash from Operations 863 1,081
Additions to land, buildings
and equipment (240) (310)
Increase in inventories (281) (100)
Increase in on-lease equipment (335) (125)
Increase in accounts receivable (362) (281)
Net change in other assets and
liabilities (1,036) (933)
Sub-total (1,391) (668)
Cash payments for 1998 and 2000
restructurings (131) (221)
Net Cash Usage $(1,522) $ (889)
* Includes on-lease equipment depreciation of $288 and $216 million in
the six months ended June 30, 2000 and 1999, respectively
Non-financing operations' net cash usage during the first six
months of 2000 and 1999 totaled $1,522 million and $889 million,
respectively. On a year-over-year basis, lower non-financing
income was partially offset by higher non-cash on-lease equipment
depreciation charges and higher goodwill amortization primarily
associated with our January, 2000 CPID acquisition. Overall first
half 2000 cash from operations totaled $863 million versus $1,081
million in the first half of 1999.
Additions to land, buildings and equipment primarily include
office furniture and fixtures, production tooling and our
investments in Ireland, where we are consolidating European
customer support centers and investing in manufacturing. The
decline in the first half of 2000 versus 1999 is primarily due to
lower spending for the Ireland projects. Inventory growth during
first half of 2000 was higher than in the first half of 1999 due
to less than anticipated first half equipment sales and some
inventory build for new products being launched in the third
quarter. On-lease equipment increased by $210 million more than in
the first half of 1999, before first half depreciation, reflecting
growth in our document outsourcing business and customer
preference to finance equipment on operating leases. Accounts
receivable increased by $81 million more than in the first half of
1999 reflecting some improvement in days sales outstanding being
more than offset by the changing mix of rental versus sale
business. The increase in other asset and liability usage is due
primarily to higher tax payments in 2000 versus 1999. This
increase was partially offset by lower cash payments made under
employee compensation plans as well as payments received in
connection with the license and royalty elements of the
ContentGuard transaction.
Cash payments related to the 1998 restructuring amounted to $96
million and $221 million in first half of 2000 and 1999,
respectively. The decline reflects the maturity and overall wind-
down of the program. Cash payments related to the 2000
restructuring amounted to $35 million. The status of the
restructuring reserves is included in Notes 3 and 4 of the "Notes
to Consolidated Financial Statements" of this Quarterly Report on
Form 10-Q.
Financing Businesses
Customer financing-related debt declined by $34 million in the
first half of 2000 and by $1,050 million in the first half of 1999
as first half 2000 new business was funded with financing business
net income and higher deferred taxes. The first half 1999 change
reflects the impact on our Brazilian finance receivables of the
significant first quarter 1999 devaluation of the Brazilian real
and the pay-down of debt with the proceeds from the June 1999
finance receivable securitization.
For analytical purposes, total equity includes common equity, ESOP
preferred stock, mandatorily redeemable preferred securities and
minorities' interests.
The following table summarizes the components and changes in total
equity during the first six months of 2000 and 1999 (in millions):
2000 1999
Minorities' interests $ 127 $ 124
Mandatorily redeemable preferred
Securities 638 638
Preferred stock 669 687
Common equity 4,911 4,857
Total equity as of January 1 $6,345 $6,306
Net income (loss) (98) 791
Shareholder dividends (294) (293)
Exercise of stock options 18 117
Change in minorities' interests 2 (6)
Translation adjustments (132) (975)
All other, net 19 73
Total equity as of June 30 $5,860 $6,013
Minorities' interests $ 129 $ 118
Mandatorily redeemable preferred
Securities 638 638
Preferred stock 661 678
Common equity 4,432 4,579
Total equity as of June 30 $5,860 $6,013
Funding Plans for 2000
Xerox's present credit ratings, which reflect the following
events, enable ready access to the credit markets.
* On July 26, 2000, Moody's placed the long-term ratings of Xerox
under review for possible downgrade.
* On July 27, 2000, Standard & Poor's lowered its senior debt and
commercial paper ratings for Xerox from A to A-, and from A-1
to A-2, respectively and maintained its negative CreditWatch on
the Company's senior debt.
These actions will result in higher borrowing costs for the
Company as debt is refinanced. There is no assurance that these
credit ratings will be maintained and/or that the Company will
continue to have ready access to the credit markets in the future.
Decisions related to term funding of our businesses will remain
based on the interest rate environment and capital market
conditions, and our desire to maintain ample liquidity and capital
strength. We believe our short-term credit facilities ensure the
ability to finance our day-to-day operations, and we have ready
access to the global capital markets to satisfy medium- and long-
term financing needs.
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. 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 often 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.
Supplemental Second Quarter Revenue Discussion:
Revenue By Major Product Category
For the major product categories, the pre-currency revenue growth
rates are as follows:
1999 2000 .
FY
Total
Q1 Q2 Q3 Q4 FY $* Q1 Q2 YTD
Total Revenues (1)% 4% 2% (3)% -% $19.2 6% (1)% 2%
B&W Office/SOHO (2) 1 - (4) (1) 8.2 (1) (5) (3)
B&W Production (2) 2 1 (8) (2) 5.9 (4) (11) (8)
Color 8 10 11 1 7 1.9 66 59 62
*Revenues are pre-currency except Total. Dollars are in billions. Revenues
include major product categories only and exclude some small operations.
Black & White Office and Small Office/Home Office (SOHO) revenues
include our expanding family of Document Centre digital multi-
function products, light-lens copiers under 90 pages per minute,
our DocuPrint N series of laser printers and digital copiers sold
through indirect sales channels, and facsimile products. Revenues
declined 5 percent in the 2000 second quarter from the 1999 second
quarter. An office copying revenue decline, a decline in indirect
channels laser printer revenues and a modest decline in indirect
channels copying revenues were partially offset by excellent
growth in facsimile revenues. Office copying revenue declined as
equipment sales declined reflecting lower light-lens copier
installations and continuing competitive and pricing pressures
partially offset by higher Document Centre installations. Office
copying revenues continue to be adversely affected by the page
volume impact of pages diverted from copiers to printers.
Document Centre multi-function products have not yet captured the
incremental print volume to the full extent anticipated. In North
America and Europe the sales force realignment to an industry
basis disrupted customer relationships resulting in weaker
equipment sales. Black & White Office and SOHO revenues
represented 40 percent of second quarter 2000 revenues compared
with 42 percent in the 1999 second quarter.
Black & White Production revenues include DocuTech, Production
Printing, and light-lens copiers over 90 pages per minute.
Revenues declined 11 percent in the 2000 second quarter from the
1999 second quarter reflecting weak equipment sales and a modest
decline in recurring revenue. DocuTech and production printing
revenues declined in the 2000 second quarter, as equipment sales
were weak due to disrupted customer relationships, open sales
territories, increased competition resulting in more contested
sales and elongated sales cycles and unfavorable product mix.
Production light-lens revenues declined significantly in the 2000
second quarter from the 1999 second quarter as the transition to
digital products continued. Black & White Production revenues
represented 27 percent of second quarter 2000 revenues compared
with 30 percent in the 1999 second quarter.
Color Copying and Printing revenues grew 59 percent in the 2000
second quarter from the 1999 second quarter including the
beneficial impact of the CPID acquisition. Excluding CPID, color
revenues grew 21 percent reflecting a continued significant
acceleration from 1999 trends. Growth reflects the exceptional
success of our DocuColor 12 and Document Centre ColorSeries 50,
the industry's first color-enabled digital multi-function product,
which were introduced in the 1999 second half, along with the
initial shipments of the DocuColor 2060 and DocuColor 2045 Digital
Color Presses which were introduced in February, 2000. Customer
acceptance of these products has been exceptional and we have
therefore substantially increased manufacturing capacity for these
products as we expect installations will accelerate throughout the
rest of the year. Total inkjet revenue was essentially flat as a
decline in equipment sales was offset by higher recurring revenue.
Inkjet equipment sales declined due to anticipated lower pricing
and unfavorable mix which more than offset excellent growth in
unit placements. Shipments of our new M series of inkjet printers
will begin in the third quarter. Inkjet recurring revenue growth
was excellent reflecting the growing installed population.
Including the CPID acquisition, color revenues represented 15
percent of second quarter 2000 revenues compared with 10 percent
in the 1999 second quarter.
Revenue By Type
The pre-currency growth rates by type of revenue are as follows:
1999 2000 .
Q1 Q2 Q3 Q4 FY Q1 Q2 YTD
Equipment Sales (3)% 2% 5% (8)% (2)% 5% (5)% (1)%
Recurring Revenue 1 4 - - 1 6 2 4
Total Revenues (1)% 4% 2% (3)% -% 6% (1)% 2%
Memo:
Document Outsourcing* 31 34 32 16 26 22 17 20
*Includes equipment accounted for as equipment sales.
Equipment sales declined 5 percent in the 2000 second quarter
including the beneficial impact of the CPID acquisition.
Excluding CPID, equipment sales declined 9 percent due to weak
equipment sales primarily in North America resulting from
disruptions in customer relationships due to the sales force
realignment, intense competition and pricing pressures. Channels
equipment sales, excluding CPID, reflected weak monochrome and
color laser printer equipment sales. Strong placements of inkjet
equipment were more than offset by unfavorable mix and continuing
equipment price declines.
Recurring revenues, including revenues from service, document
outsourcing, rentals, standalone software, supplies, paper and
finance income, represent the revenue stream that follows
equipment placement. These revenues are primarily a function of
our installed population of equipment, usage levels, pricing and
interest rates. Recurring revenues in the 2000 second quarter grew
2 percent compared with the 1999 second quarter. Excluding CPID,
recurring revenues declined 2 percent. Recurring revenues
benefited from continued strong growth in document outsourcing,
supplies growth from our growing installed population of inkjet
and laser printers and copiers sold through indirect channels.
Recurring revenues were adversely impacted by lower service
revenues reflecting the recent trend of lower equipment sales and
continue to be adversely affected by the page volume impact of
pages diverted from copiers to printers. Document Centre
multifunction products have not yet captured the incremental print
volume to the full extent anticipated. Finance income was lower
largely due to the unfavorable flow-through impact of the 1999
finance receivables securitizations as well as the $28 million
gain from the second quarter 1999 securitization.
Total Document Outsourcing revenues grew 17 percent in the 2000
second quarter and were impacted by disruptions in customer
relationships caused by the North American sales force
realignment.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The information set forth under the caption "Risk Management" on
pages 35-36 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 11 contained in the "Notes to
Consolidated Financial Statements" of this Quarterly Report on
Form 10-Q is incorporated by reference in answer to this item.
Item 2. Changes in Securities
During the quarter ended June 30, 2000, Registrant issued the
following securities in transactions which were not registered
under the Securities Act of 1933, as amended (the Act):
(a) Securities Sold: on April 1, 2000, Registrant issued
4,884 shares of Common stock, par value $1 per share.
(b) No underwriters participated. The shares were issued to
each of the non-employee Directors of Registrant: B.R.
Inman, A.A.Johnson, V.E. Jordan, Jr., Y. Kobayashi,
H. Kopper, R.S. Larsen, G.J. Mitchell, N.J. Nicholas, Jr.,
J.E. Pepper, P. F. Russo, M.R. Seger and T.C.Theobald.
(c) The shares were issued at a deemed purchase price of
$20.75 per share (aggregate price $101,125), based upon the
market value on the date of issuance, in payment of the
quarterly Directors' fees pursuant to Registrant's
Restricted Stock Plan for Directors.
(d) Exemption from registration under the Act was claimed based
upon Section 4(2) as a sale by an issuer not involving a
public offering.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Xerox Corporation was duly
called and held on May 18, 2000 at The Rittenhouse Hotel, 210 West
Rittenhouse Square, Philadelphia, Pennsylvania.
Proxies for the meeting were solicited on behalf of the Board of
Directors of the Registrant pursuant to Regulation 14A of the
General Rules and Regulations of the Commission. There was no
solicitation in opposition to the Board of Directors' nominees for
election as directors as listed in the Proxy Statement, and all
nominees were elected.
At the meeting, votes were cast upon the Proposals described in
the Proxy Statement for the meeting (filed with the Commission
pursuant to Regulation 14A and incorporated herein by reference)
as follows:
Proposal 1 - Election of directors for the ensuing year.
Name For Withheld Vote
Paul A. Allaire 598,185,902 18,626,101
William F. Buehler 599,933,536 16,878,467
B. R. Inman 600,460,725 16,351,278
Antonia Ax:son Johnson 600,792,768 16,019,235
Vernon E. Jordan, Jr. 595,907,918 20,904,085
Yotaro Kobayashi 596,653,418 20,158,585
Hilmar Kopper 601,050,113 15,761,890
Ralph S. Larsen 601,117,538 15,694,465
Anne M. Mulcahy 610,065,606 6,746,397
George J. Mitchell 599,883,484 16,928,519
N. J. Nicholas, Jr. 601,044,241 15,767,762
John E. Pepper 601,012,399 15,799,604
Barry D. Romeril 598,232,567 18,579,436
Patricia F. Russo 600,909,379 15,902,624
Martha R. Seger 600,958,737 15,853,266
Thomas C. Theobald 600,834,594 15,977,409
Proposal 2 - To elect KPMG LLP as independent auditors for the
year 2000.
For - 607,917,071
Against - 5,292,069
Abstain - 3,602,863
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
May 11, 2000 (in electronic form only).
Exhibit 10 (p) Separation Agreement dated May 11, 2000
between Registrant and G. Richard Thoman, former President
and Chief Executive Officer of Registrant (in electronic form
only).
Exhibit 11 Computation of Net Income (Loss) per Common Share.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule (in electronic form only).
(b) Current reports on Form 8-K dated June 16, 2000 and June 29,
2000 reporting Item 5 "Other Events" were filed during the
quarter for which this Quarterly Report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
XEROX CORPORATION
(Registrant)
/s/ Gregory B. Tayler
_____________________________
Date: August 14, 2000 By Gregory B. Tayler
Vice President and Controller
(Principal Accounting Officer)
