<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 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 April 30, 2000
Common Stock 666,266,136 shares
This document consists of 39 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 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, certain asset
write-offs 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
March 31, 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 19
Discontinued Operations 28
Capital Resources and Liquidity 29
Risk Management 32
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 33
Part II - Other Information
Item 1. Legal Proceedings 33
Item 2. Changes in Securities 33
Item 5. Other Events 34
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
Exhibit Index
Computation of Net Income per Common Share 38
Computation of Ratio of Earnings to Fixed Charges 39
Financial Data Schedule (filed in electronic form only)
For additional information about The Document Company Xerox,
please visit our World-Wide Web site at www.xerox.com/investor
PART I - FINANCIAL INFORMATION
Item 1 Xerox Corporation
Consolidated Statements of Income (Unaudited)
Three months ended
March 31,
(In millions, except per-share data) 2000 1999
Revenues
Sales $ 2,291 $ 2,120
Service, outsourcing, financing and rentals 2,140 2,180
Total Revenues 4,431 4,300
Costs and Expenses
Cost of sales 1,269 1,114
Cost of service, outsourcing, financing and
rentals 1,301 1,213
Inventory charges 119 -
Research and development expenses 249 251
Selling, administrative and general
expenses 1,231 1,171
Restructuring charge and asset
impairments 506 -
Gain on affiliate's sale of stock (21) -
Purchased in-process research and development 27 -
Other, net 99 57
Total Costs and Expenses 4,780 3,806
Income (Loss) before Income Taxes (Benefits),
Equity Income and Minorities' Interests (349) 494
Income taxes (benefits) (113) 153
Equity in net income of unconsolidated
affiliates 4 10
Minorities' interests in earnings of
subsidiaries 11 8
Net Income (Loss) $ (243) $ 343
Basic Earnings (Loss) per Share $(0.38) $ 0.50
Diluted Earnings (Loss) per Share $(0.38) $ 0.48
See accompanying notes.
Xerox Corporation
Consolidated Balance Sheets
March 31, December 31,
(In millions, except share data in thousands) 2000 1999
Assets (Unaudited)
Cash $ 61 $ 126
Accounts receivable, net 2,994 2,622
Finance receivables, net 5,186 5,115
Inventories 3,293 2,961
Deferred taxes and other current assets 1,424 1,161
Total Current Assets 12,958 11,985
Finance receivables due after one year, net 8,128 8,203
Land, buildings and equipment, net 2,545 2,456
Investments in affiliates, at equity 1,594 1,615
Goodwill and intangible assets, net 2,335 1,724
Other assets 1,882 1,701
Investment in discontinued operations 1,056 1,130
Total Assets $ 30,498 $ 28,814
Liabilities and Equity
Short-term debt and current portion of
long-term debt $ 5,864 $ 3,957
Accounts payable 912 1,016
Accrued compensation and benefit costs 584 630
Unearned income 233 186
Other current liabilities 2,168 2,161
Total Current Liabilities 9,761 7,950
Long-term debt 11,197 10,994
Postretirement medical benefits 1,144 1,133
Deferred taxes and other liabilities 2,372 2,263
Discontinued operations liabilities -
policyholders' deposits and other 298 428
Deferred ESOP benefits (299) (299)
Minorities' interests in equity of subsidiaries 131 127
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures of
the Company 638 638
Preferred stock 665 669
Common shareholders' equity 4,591 4,911
Total Liabilities and Equity $ 30,498 $ 28,814
Shares of common stock issued and
outstanding 666,164 665,156
See accompanying notes.
Xerox Corporation
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31 (In millions) 2000 1999
Cash Flows from Operating Activities
Net Income (Loss) $ (243) $ 343
Adjustments required to reconcile income to cash
flows from operating activities:
Depreciation and amortization 261 223
Provisions for doubtful accounts 77 60
Restructuring and other charges 625 -
Gain on affiliate's sale of stock (21) -
Purchased in-process research and development 27 -
Provision for postretirement medical
benefits, net of payments 12 11
Cash payments for the 1998 restructuring (62) (90)
Minorities' interests in earnings of subsidiaries 11 8
Undistributed equity in income of
affiliated companies 35 (10)
Increase in inventories (302) (319)
Increase in on-lease equipment (167) (75)
Increase in finance receivables (117) (144)
Increase in accounts receivable (302) (122)
Decrease in accounts payable and accrued
compensation and benefit costs (164) (333)
Net change in current and deferred income taxes (254) (7)
Decrease in other current and noncurrent
liabilities (234) (336)
Other, net (200) (66)
Total (1,018) (857)
Cash Flows from Investing Activities
Cost of additions to land, buildings and equipment (124) (116)
Proceeds from sales of land, buildings and equipment 3 17
Acquisitions, net of cash acquired (852) -
Other, net (4) (25)
Total (977) (124)
Cash Flows from Financing Activities
Net change in debt 2,170 1,106
Dividends on common and preferred stock (147) (146)
Proceeds from sale of common stock 11 79
Dividends to minority shareholders (1) (23)
Total 2,033 1,016
Effect of Exchange Rate Changes on Cash (1) (4)
Cash Provided by Continuing Operations 37 31
Cash Used by Discontinued Operations (102) (4)
Increase (Decrease) in Cash (65) 27
Cash at Beginning of Period 126 79
Cash at End of Period $ 61 $ 106
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):
March 31, December 31,
2000 1999
Finished products $ 1,960 $ 1,800
Work in process 164 122
Raw materials and supplies 444 363
Equipment on operating leases, net 725 676
Total $ 3,293 $ 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 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 March 31,
Total Against 2000
Reserve Reserve Balance
Severance and related costs $384 $ - $384
Asset impairment 71 71 -
Lease cancellation and other costs 51 - 51
Inventory charges 119 119 -
Total $625 $190 $435/1/
/1/ Of this amount, $325 is included in Other current liabilities.
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. 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. Key
initiatives of the restructuring included:
1) Consolidating 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 March 31,
Total Against 2000
Reserve Reserve/1/ Balance
Severance and related costs $1,017 $ 792 $225
Asset impairment 316 316 -
Lease cancellation and other costs 198 104 94
Inventory charges 113 113 -
Total $1,644 $1,325 $319
/1/ Includes the impact of currency rate changes.
As of March 31, 2000, approximately 10,700 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):
March 31, December 31,
2000 1999
Common stock $ 668 $ 667
Additional paid-in-capital 1,558 1,539
Retained earnings 4,110 4,501
Accumulated other comprehensive
income /1/ (1,745) (1,796)
Total $ 4,591 $ 4,911
/1/ Accumulated other comprehensive income at March 31, 2000 is composed of
cumulative translation $(1,727), minimum pension liability of $(32), and
unrealized gains on marketable securities of $14.
Comprehensive income (loss) for the three months ended March 31,
2000 and 1999 is as follows (in millions):
March 31, March 31,
2000 1999
Net income (loss) $ (243) $ 343
Translation adjustments 37 (855)
Unrealized gains on marketable
Securities 14 -
Comprehensive income (loss) $ (192) $ (512)
6. Interest expense totaled $227 million and $206 million for the
three months ended March 31, 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.
All corporate expenses have been allocated to the operating
segments.
Operating segment profit or loss information for the three months
ended March 31, 2000 and 1999 is as follows (in millions):
Industry General Developing Other
Solutions Markets Markets Businesses Total
2000
Revenue from external
customers $ 2,195 $1,228 $ 608 $ 400 $ 4,431
Intercompany revenues 11 71 - (82) -
Total segment revenues $ 2,206 $1,299 $ 608 $ 318 $ 4,431
Segment profit/1/ $ 179 $ 13 $ 16 $ 95 $ 303
Total assets $16,700 $1,911 $4,578 $7,309 $30,498
/2/
1999
Revenue from external
customers $ 2,268 $1,066 $ 528 $ 438 $ 4,300
Intercompany revenues 9 21 - (30) -
Total segment revenues $ 2,277 $1,087 $ 528 $ 408 $ 4,300
Segment profit $ 359 $ 92 $ 17 $ 26 $ 494
Total assets/3/ $16,585 $ 723 $4,371 $7,135 $28,814
/2/
/1/ The following is a reconciliation of segment profit to total Company
Income (Loss) before Income Taxes (Benefits), Equity Income and Minorities'
Interest:
Total segment profit $ 303
2000 Restructuring:
Inventory charges (119)
Restructuring charge and asset
impairments (506) (625)
CPID purchased in-process R&D (27)
Income (Loss) before Income Taxes (Benefits),
Equity Income and Minorities' Interests $ (349)
/2/ Other businesses' total assets include centrally managed inventories,
manufacturing and corporate land, buildings and equipment, deferred tax
assets, Xerox Europe's goodwill , the investment in Fuji Xerox and the
remaining investment in discontinued operations.
/3/ Total assets as of December 31, 1999.
8. Acquisitions
On January 1, 2000 we, and Fuji Xerox, completed the acquisition
of the Color and Printing 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.
9. 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.
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' 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. The Court has issued a
stay in the first case filed until May 12, 2000 and in the second
case until June 23, 2000 . In the most recently-filed case a
status conference is set for October 10, 2000.
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.
Item 2 Xerox Corporation
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Document Processing
Summary
First quarter 2000 pre-currency revenues grew 6 percent including
the beneficial impact of the January 1, 2000 acquisition of the
Tektronix, Inc. Color Printing and Imaging Division (CPID).
Excluding CPID, pre-currency revenues grew 3 percent reflecting
flat revenues in Industry Solutions Operations, growth of 6
percent in General Markets Operations and 15 percent growth in
Developing Markets. 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 the effect of
adverse currency translation and the beneficial CPID impact, total
2000 first quarter revenues grew 3 percent to $4.4 billion
compared with $4.3 billion in the 1999 first quarter.
Income in the 2000 first quarter declined 36 percent to $220
million from $343 million in the 1999 first quarter before an
after-tax charge of $444 million (including our $18 million share
of a separate Fuji Xerox restructuring charge) in connection with
the company's previously announced worldwide restructuring program
and a previously announced $27 million before-tax charge for
acquired in-process research and development associated with the
CPID acquisition. This decline in 2000 first quarter income
included significant gross margin deterioration. The January, 2000
final phase of the realignment of the direct sales organization to
an industry and solutions approach necessitated the establishment
of many new customer relationships, resulting in weak equipment
sales in North America and Europe, particularly in the high end of
our business. In addition, higher growth in the lower gross-
margin document outsourcing and channels businesses and
unfavorable product mix continued. As expected, the CPID
acquisition adversely impacted first quarter income by
approximately two cents, as the synergies we expect to capture
from the integration will not offset the higher goodwill and
interest expense until later in 2000. Equity income from Fuji
Xerox improved in the 2000 first quarter reflecting improved
business results and favorable currency translation.
Including the effect of the restructuring charge and the charge
for the acquired CPID in-process research and development costs,
we had a net loss of $243 million in the 2000 first quarter.
Diluted earnings per share declined 38 percent to $0.30 in the
2000 first quarter from $0.48 in the 1999 first quarter, excluding
the 2000 restructuring charge and the acquired CPID in-process R&D
charge. First quarter 2000 earnings per share included an
unfavorable year-over-year currency impact of approximately five
cents. Including both charges, the first quarter 2000 loss was
$0.38.
The following table summarizes net income (loss) and diluted
earnings (loss) per share (EPS) for the 1st Quarter:
(in millions, except per-share data) 1st Quarter
2000 1999
Income before restructuring and
CPID in-process research and
Development (IPRD) charges $ 220 $ 343
Restructuring and IPRD charges (463) -
Net Income (Loss) $ (243) $ 343
EPS:
Income before restructuring and
CPID in-process research and
Development (IPRD) charges $ 0.30 $ 0.48
Restructuring and IPRD charges (0.68) -
Diluted EPS $(0.38) $ 0.48
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 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.
Revenues
Total pre-currency revenues grew 6 percent in the 2000 first
quarter including the beneficial impact of the January 1, 2000
CPID acquisition. Excluding CPID, pre-currency revenues grew 3
percent.
Beginning this quarter we have changed our revenue reporting to
provide a more meaningful portrayal of the results. The former
product revenue reporting highlighted the impact of the transition
from light-lens copiers to digital products. Now that we have
successfully transitioned (digital products represented 53 percent
of 1999 full year total revenues), our new product revenue
reporting focuses on the major product categories: black and white
office/SOHO (small office/home office), black and white
production, and color. We have also changed our former
geographical reporting to conform to our new organizational
alignment which was fully completed at the beginning of 2000 and
which represents the basis for our 2000 Segment Reporting. The
2000 Segment reporting is included in note 7 of the "Notes to
Consolidated Financial Statements" on page 12 of this Quarterly
Report on Form 10-Q. The responsibilities of each of the
organizational components are described in the applicable revenue
reporting section that follows.
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
Total Revenues (1)% 4% 2% (3)% -% $19.2 6%
B&W Office/SOHO (2) 1 - (4) (1) 8.3 -
B&W Production (2) 2 1 (8) (2) 5.9 (5)
Color 8 10 11 1 7 1.8 64
Memo: Fuji Xerox (1) (3) - 7 1 $7.8 2
*Revenues are pre-currency except Total and Fuji Xerox. Dollars are in
billions. Revenues include major product categories only and exclude paper and
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. A modest
office copying revenue decline and a decline in indirect channels
laser printers were essentially offset by growth in indirect
channels copier and facsimile revenues. Black & white office
copying revenue declined as equipment sales declined reflecting
lower light-lens copier installations and increased competitive
and pricing pressures partially offset by higher Document Centre
installations. The sales force realignment to an industry basis
necessitated the establishment of new customer relationships
resulting in weaker equipment sales. Equipment sale declines were
partially offset by modest recurring revenue growth. Black & White
Office and SOHO revenues represented 43 percent of first quarter
2000 revenues compared with 45 percent in the 1999 first quarter.
Black & White Production revenues, which include DocuTech,
production printing, and light-lens copiers over 90 pages per
minute, declined 5 percent in the 2000 first quarter from the 1999
first quarter. DocuTech revenues declined slightly in the 2000
first quarter as equipment sales were weak due to the sales force
realignment and unfavorable product mix. Production printing
revenues in the 2000 first quarter declined slightly from the 1999
first quarter as excellent growth in Developing Markets was
essentially offset by weak revenues in North America. Production
light-lens revenues declined significantly in the 2000 first
quarter from the 1999 first quarter as the transition to digital
products continued and pricing pressures accelerated. Black &
White Production revenues represented 25 percent of first quarter
2000 revenues compared with 28 percent in the 1999 first quarter.
Color Copying and Printing revenues grew 64 percent in the 2000
first quarter from the 1999 first quarter including the beneficial
impact of the CPID acquisition. Excluding CPID, color revenues
grew 26 percent reflecting a significant acceleration from recent
trends. Growth reflects the exceptional success of our recently-
introduced DocuColor 12 and Document Centre ColorSeries 50, the
first color-enabled digital multi-function product. Inkjet
revenue growth was also excellent as unit placements grew
significantly and supply revenues accelerated reflecting the
growing installed population. Including the CPID acquisition,
color revenues represented 14 percent of first quarter 2000
revenues compared with 9 percent in the 1999 first quarter.
Revenue By Organization
The pre-currency revenue growth rates by organization are as
follows:
1999 2000
FY
Total
$* Q1
Total Revenues $19.2 6%
Industry Solutions Ops. $10.2 -
General Markets Ops. 4.7 19
Developing Markets Ops. 2.7 15
*Revenues are pre-currency except Total. Dollars are in billions. Revenues
include major organizations only and exclude some smaller operations.
Industry Solutions Operations covers the direct sales and service
organizations in North America and Europe. Revenues were flat in
the 2000 first quarter as the January, 2000 final phase of the
realignment of the direct sales organization to an industry
approach necessitated establishment of many new customer
relationships. The competitive environment intensified in North
America and Europe and pricing pressure continued and intensified,
particularly in light-lens copiers in the U.S. Revenue growth in
the 2000 first quarter was essentially flat in the U.S., good in
Canada, and strong in the U.K., but revenues declined modestly in
France and Germany.
General Markets Operations 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 19 percent
in the 2000 first quarter from the 1999 first quarter including
the CPID acquisition. Excluding CPID, General Markets revenues
grew 6 percent in the 2000 first quarter as excellent Channels
recurring revenue growth from the growing installed equipment
population was partially offset by temporarily weak monochrome and
color laser printer equipment sales as the Xerox office printing
business was integrated with CPID.
Developing Market Operations includes operations in Latin America,
China, Russia, India, the Middle East and Africa. First quarter
2000 revenue growth was strong in Brazil reflecting an improving
economic environment, a stable currency and activity growth.
First quarter 2000 revenue growth was excellent in China and
strong growth was evident in several other countries.
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.
Excluding CPID, Fuji Xerox revenues grew 2 percent in the 2000
first quarter reflecting modest revenue growth in Japan and strong
revenue growth in Fuji Xerox' other Asia Pacific territories.
Revenue By Type
The pre-currency growth rates by type of revenue are as follows:
1999 2000
Q1 Q2 Q3 Q4 FY Q1
Equipment Sales (3)% 2% 5% (8)% (2)% 5%
Recurring Revenue 1 4 - - 1 6
Total Revenues (1)% 4% 2% (3)% -% 6%
Memo:
Document Outsourcing* 31 34 32 16 26 22
*Includes equipment accounted for as equipment sales.
Equipment sales grew 5 percent in the 2000 first quarter including
the beneficial impact of the CPID acquisition. Excluding CPID,
equipment sales grew 1 percent including excellent growth in
Brazil where installations increased across all product lines.
Equipment sales in North America and Europe were adversely
affected by the sales force realignment, intensified competition
and some increased pricing pressures.
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 first quarter grew
6 percent compared with the 1999 first quarter. Excluding CPID,
recurring revenues grew 3 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 and increased
paper pricing and volume growth. Recurring revenues in the 2000
first quarter included approximately $40 million of increased
licensing and stand-alone software revenues representing excellent
growth from the licensing of a number of patents from our
intellectual property portfolio. Recurring revenues were adversely
impacted by lower service revenues reflecting lower equipment
sales and the page volume impact of pages diverted from light-lens
copiers to printers which have not been fully offset by page
volume increases on network-connected Document Centre multi-
function products. Finance income was lower largely due to the
unfavorable impact of the 1999 finance receivables
securitizations.
Total Document Outsourcing revenues grew 22 percent in the 2000
first quarter which is an improvement from the 1999 fourth
quarter.
Key Ratios and Expenses
The trend in key ratios was as follows:
1999 2000
Q1 Q2 Q3 Q4 FY Q1
Gross Margin 45.9% 45.3% 43.3% 41.8% 44.0% 42.0%*
SAG % Revenue 27.2 25.8 26.1 27.8 26.8 27.8
* Excludes inventory charges associated with the 2000 restructuring program. If
included, the Gross Margin would have been 39.3%.
The gross margin declined by 3.9 percentage points in the 2000
first quarter from the 1999 first quarter or 3.5 percentage points
excluding CPID. Higher revenue growth in the lower-margin document
outsourcing and channels businesses represented approximately 1.5
percentage points of the decline. In addition, the gross margin
was adversely impacted by weak DocuTech equipment sales due to the
sales force realignment, unfavorable product mix, unfavorable
transaction currency and some decline in service gross margins as
service revenue declines have not yet been accompanied by
corresponding cost reductions. Manufacturing and other
productivity improvements offset competitive price pressures and
gross margin benefited by approximately 0.5 percentage points 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 first quarter including the CPID acquisition as the
impact of the U.S. customer administration issues and transition
costs associated with the creation of our European shared services
organization was only partially offset by the benefits of our 1998
restructuring program and expense controls. In the 2000 first
quarter, SAG represented 27.8 percent of revenue compared with
27.2 percent of revenue in the 1999 first quarter.
Research and development (R&D) expense in the 2000 first quarter
was essentially flat with the 1999 first quarter 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 1,600 in the 2000 first quarter
to 96,200 as a result of our acquisition of CPID with 2,200
employees, which was partially offset by 600 employees leaving the
company under the 1998 worldwide restructuring program.
Gain on affiliate's sale of stock reflects our proportionate share
of the increase in equity of Scansoft Inc. (NASDAQ: SSFT)
resulting from Scansoft's issuance of stock in connection with an
acquisition. This gain is partially offset by a $5 million charge
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 $42 million increase in other expenses, net, from the 1999
first quarter largely reflects increased non-financing interest
expense and goodwill amortization associated with the January,
2000 CPID acquisition, lower aggregate currency exchange gains and
the absence of several one-time gains in 1999. These increases
were partially offset by reduced Y2K remediation spending.
Income Taxes, Equity in Net Income of Unconsolidated Affiliates
and Minorities' Interests in Earnings of Subsidiaries
Income before income taxes, excluding the restructuring charge and
the CPID in-process research and development (IPRD) charge
declined 39 percent to $303 million in the 2000 first quarter from
$494 million in the 1999 first quarter. Including the
restructuring and IPRD charges, the loss before income taxes was
$349 million in the 2000 first quarter.
The effective tax rate before the restructuring charge and the
CPID IPRD charge was 31.0 percent in the 2000 first quarter which
is consistent with the 1999 first quarter and 1999 full year rate.
We expect the underlying 2000 tax rate to be similar to the 1999
full year rate. The effective tax rate of 32.4 percent including
the restructuring and IPRD charges reflects the mix of
restructuring provisions in various countries.
Equity in net income of unconsolidated affiliates is principally
our 50 percent share of Fuji Xerox income. Total equity in net
income before our $18 million share of a separate Fuji Xerox
restructuring charge increased significantly in the 2000 first
quarter reflecting improved Fuji Xerox business results and
favorable currency translation. This was partially offset by the
$5 million charge reflecting our share of Scansoft's in-process
research and development write-off.
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 restructuring will be completed in early 2001. 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% 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.
Additional details regarding the initiatives and status of the
2000 restructuring reserve are included in Note 3 of the "Notes to
Consolidated Financial Statements" on pages 8-9 of this Quarterly
Report on Form 10-Q.
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 worldwide
employment reductions, the closing and consolidation of
facilities, and the write-down of certain assets.
As of March 31, 2000, approximately 10,700 employees have left the
Company under the 1998 restructuring program. Pre-tax savings from
the implementation through March 31, 2000 are approximately $0.6
billion annually, resulting primarily in lower selling,
administrative and general expenses. The majority of the annual
savings to date have been reinvested to implement process and
systems changes in order to enable the restructuring, and to
sustain ongoing efforts to broaden and strengthen marketing
programs and distribution channels to enhance revenue growth.
When the 1998 restructuring program initiatives are fully
implemented, the ongoing pre-tax savings before reinvestments will
be approximately $1.0 billion annually.
The status of the 1998 restructuring reserve is included in Note 4
of the "Notes to Consolidated Financial Statements" on pages 10-11
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 $758 million
at March 31, 2000 compared with $702 million at December 31, 1999.
The increase in the first quarter 2000 was primarily caused by the
scheduled funding of reinsurance coverage for certain of the
former Talegen Holdings, Inc. companies to Ridge Reinsurance
Limited.
Activity for the remainder of 2000 is expected to include
substantial completion of the run-off of our OakRe life insurance
business and the sale of a portion of our remaining real estate
holdings.
Capital Resources and Liquidity
Total debt, including ESOP and Discontinued Operations debt not
shown separately in our consolidated balance sheets, increased to
$17,112 million at March 31, 2000 or $2,111 million more than at
December 31, 1999. The changes in total indebtedness during the
first three 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 1,284 987
Brazil dollar debt reallocation** (32) 446
Discontinued businesses*** 102 4
Non-Financing Businesses 1,354 1,437
Financing Businesses** (117) (505)
Shareholder dividends 147 146
Purchase of CPID 852 -
All other changes (125) (126)
Total debt* as of March 31 $17,112 $16,059
* 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 reflects a one-time tax payment in 2000
in settlement of prior year tax liability. 1999 includes net cash
proceeds from the sale of assets. We do not anticipate any further
significant cash usage for the balance of the year.
Document Processing Non-Financing Operations
The following table summarizes document processing non-financing
operations cash generation and usage for the three months ended
March 31, 2000 and 1999 (in millions):
2000 1999
Income* $ 164 $ 266
Depreciation** and amortization 261 223
Cash from Operations 425 489
Additions to land, buildings
and equipment (124) (116)
Increase in inventories (302) (319)
Increase in on-lease equipment (167) (75)
Increase in accounts receivable (302) (122)
Net change in other assets and
liabilities (752) (754)
Sub-total (1,222) (897)
Cash charges against 1998
restructuring reserve (62) (90)
Net Cash Usage $(1,284) $ (987)
* Before 2000 restructuring and IPRD charges
** Includes on-lease equipment depreciation of $137 and $105 million in
first quarter 2000 and 1999, respectively
Non-financing operations' net cash usage during first quarter 2000
and 1999 totaled $1,284 million and $987 million, respectively. On
a quarter-over-quarter 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
quarter 2000 cash from operations totaled $425 million versus $489
million in first quarter 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. Inventory
growth during first quarter 2000 was somewhat less than in first
quarter 1999 as inventory turns improved only slightly as a result
of the timing of inventory production and less than anticipated
first quarter equipment sales. On-lease equipment increased by $92
million more than in first quarter 1999, before first quarter
depreciation, reflecting some growth in customer preference to
finance equipment on operating leases. Accounts receivable
increased by $180 million more than in first quarter 1999
reflecting both business growth and some deterioration in days
sales outstanding in our international operations partially offset
by some improvement in our U.S. operations.
Document Processing Non-Financing Operations (Cont'd)
Cash charges to the 1998 restructuring reserve amounted to $62
million and $90 million in first quarter 2000 and 1999,
respectively. There were no cash charges to the 2000 restructuring
reserve announced March 31, 2000. The status of the restructuring
reserves is included in Notes 3 and 4 of the "Notes to
Consolidated Financial Statements" pages 8-11 of this Quarterly
Report on Form 10-Q.
Financing Businesses
Customer financing-related debt declined by $117 million in the
first quarter of 2000 and by $505 million in first quarter 1999.
The first quarter 2000 change reflects business growth, which was
more than offset by currency translation impacts related to the
devaluation of the Euro, and higher deferred taxes. The first
quarter 1999 change reflects the impact on our Brazilian finance
receivables of the significant first quarter 1999 devaluation of
the Brazilian real.
For analytical purposes, total equity includes common equity, ESOP
preferred stock, mandatorily redeemable preferred securities and
minorities' interests.
The following table summarizes the changes in total equity during
the first three months of 2000 and 1999 (in millions):
2000 1999
Total equity as of January 1 $6,345 $6,306
Net income (loss)* (243) 343
Shareholder dividends (147) (146)
Exercise of stock options 11 79
Change in minorities' interests 4 (17)
Translation adjustments 37 (855)
All other, net 18 47
Total equity as of March 31 $6,025 $5,757
* Includes restructuring and IPRD charges
Funding Plans for 2000
The Company's present credit ratings, including the following
events, enable ready access to the credit markets. On April 6,
2000, Moody's Investors Service, Inc. announced that the long and
short term credit ratings of Xerox (and its financially supported
subsidiaries) were downgraded to A3 from A2 and to Prime-2 from
Prime-1, respectively. On April 7, 2000, Fitch IBCA announced
that the long-term credit rating of Xerox was downgraded to A from
A+. Simultaneously, Fitch re-affirmed Xerox' short-term ratings at
F1. On May 11, 2000, following the announcement of the resignation
of President and CEO G. Richard Thoman, Standard and Poor's placed
the company's credit ratings on "CreditWatch with negative
implications". The downgrades and negative outlook will result in
somewhat higher borrowing costs for the Company in future periods
as debt is refinanced.
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.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The information set forth under the caption "Risk Management" on
pages 32-33 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 9 contained in the "Notes to
Consolidated Financial Statements" on pages 15-18 of this
Quarterly Report on Form 10-Q is incorporated by reference in
answer to this item.
Item 2. Changes in Securities
During the quarter ended March 31, 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 January 1, 2000, Registrant issued
3,897 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
$26.00 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 5. Other Events
On May 11, 2000 we issued the following press release:
"Xerox Chairman Paul A. Allaire today returned as chief
executive officer after the company's board of directors
accepted the resignation of Rick Thoman as president, CEO and
board director. The board promoted Anne M. Mulcahy to the
position of president and chief operating officer, and nominated
her for election to the board at the annual shareholders meeting
on May 18, in place of Thoman.
The board agreed that Allaire would continue as chairman for the
next two years. Allaire announced that he would lead a four-
member Office of the Chairman, which includes Mulcahy and Vice
Chairmen William Buehler and Barry Romeril.
"This team is totally committed to advancing our existing
business strategies and implementing the initiatives we've
undertaken to capture the growth opportunities in the markets we
serve," said Allaire.
"We are grateful for Rick's contributions in leading the company
through a period of major repositioning," said Allaire. "However,
both Rick and the board felt it best for the company to move
forward with an experienced Xerox (NYSE:XRX) team that will lead
Xerox people and efficiently execute the strategy."
Mulcahy said she would first concentrate on galvanizing
employees to place the customer first.
"It's my job to make change happen, to make growth happen
and to operationalize the strategy we jointly created," said
Mulcahy. "We will merge the traditional Xerox values with the
new culture of speed, risk-taking and entrepreneurialism. Our
execution will be as strong as our strategy."
Mulcahy, who assumes her new duties immediately, began her 24-
year Xerox career as a field sales representative and assumed
increasingly responsible management and executive positions.
Allaire noted her ability to "inspire, motivate and lead."
"Anne brings to the Office of the Chairman a proven record of
success in executive positions within the marketing and direct
sales organizations, as chief staff officer and, most recently,
as president of our General Markets Operations," said Allaire.
"Her relationships with Xerox people, and her broad and deep
understanding of our business will both solidify the changes we
have implemented internally and reinforce our customer
relationships. Anne has an aggressive approach toward the
business and -- simply put -- she gets things done."
Thoman thanked Xerox employees and wished them well as they move
Xerox "into a future filled with opportunity."
"I have never failed to be amazed at all the great things
Xerox employees can do. And with you behind our new management
team, there really is no limit to Xerox' future," he said.
Xerox Growth Strategy
In 1999, Xerox adopted a strategy to grow its served markets by
implementing two distinct business models within the company.
One focuses the direct sales force on providing solutions
consisting of hardware, software and services for larger
enterprises; and the second on delivering networked and personal
printers, copiers, multifunction, facsimile and other document
products through indirect channels to the general office and
small and home office markets. Last March, the company
announced an initiative to drive greater productivity and remove
costs from the business.
"Our management team remains committed to and will be
accountable for achieving the goals of both of these initiatives
- -- driving growth in our primary businesses and improving
productivity," said Allaire. "And they bring to the table a
proven record of success to inspire our people and ensure we get
the job done."
In her new role, Mulcahy will be chief operating officer
responsible for the day-to-day activities of the company's
worldwide direct and indirect sales organizations as well as
manufacturing, product development and logistics operations.
Buehler continues as vice chairman. In his new role as a member
of the Office of the Chairman, he will assume responsibility for
the company's strategy and external relations, including
corporate staff functions, new business relationships,
marketing, and relations with Fuji Xerox Co. Ltd.
Romeril also continues as vice chairman and chief financial
officer and joins the Office of the Chairman."
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3(a)(1) Restated Certificate of Incorporation of
Registrant filed by the Department of State of the State of
New York on October 29, 1996. Incorporated by reference to
Exhibit 3(a)(1) to Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1996.
Exhibit 3 (b) By-Laws of Registrant, as amended through
April 6, 1999. Incorporated by reference to Exhibit 3 (b)
to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
Exhibit 11 Computation of Net Income (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 February 7, 2000, February
23, 2000 and March 31, 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)
_____________________________
Date: May 12, 2000 By Gregory B. Tayler
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
Exhibit 11
Xerox Corporation
Computation of Net Income (Loss) Per Common Share
(Dollars in millions, except per-share data; shares in thousands)
Three months ended
March 31,
2000 1999
I. Basic Net Income (Loss) Per
Common Share
Net Income (Loss) $ (243)$ 343
Accrued dividends on ESOP preferred stock, net (11) (10)
Adjusted net income (loss) $ (254)$ 333
Average common shares outstanding
during the period 665,735 658,472
Common shares issuable with respect
to exchangeable shares 921 2,402
Adjusted average shares outstanding
for the period 666,656 660,874
Basic earnings (loss) per share $ (0.38)$ 0.50
II. Diluted Net Income (Loss) Per
Common Share*
Net Income (Loss) $ (243)$ 343
ESOP expense adjustment, net of tax (11) 3
Interest on convertible debt, net of tax - 3
Adjusted net income (loss) $ (254)$ 349
Average common shares outstanding
during the period 665,735 658,472
Stock options, incentive and
exchangeable shares 921 10,749
Convertible debt - 13,190
ESOP preferred stock - 52,531
Adjusted average shares outstanding
for the period 666,656 734,942
Diluted earnings (loss) per share $ (0.38)$ 0.48
* Impact of restructuring charge is limited due to antidilutive
restrictions.
<PAGE>
Exhibit 12
Xerox Corporation
Computation of Ratio of Earnings to Fixed Charges
Three months ended Year ended
(In millions) March 31, December 31,
2000 1999 1999 1998** 1997 1996 1995
Fixed charges:
Interest expense $ 227 $ 206 $ 803 $ 749 $ 617 $ 592 $ 603
Rental expense 29 35 132 145 140 140 142
Total fixed charges
before capitalized
interest and preferred
stock dividends of
subsidiaries 256 241 935 894 757 732 745
Preferred stock dividends
of subsidiaries 14 14 55 55 50 - -
Capitalized interest 3 - 8 - - - -
Total fixed charges $ 273 $ 255 $ 998 $ 949 $ 807 $ 732 $ 745
Earnings available for
fixed charges:
Earnings*** $ (345) $ 504 $2,104 $ 837 $2,268 $2,067 $1,980
Adjustment to reflect
distributed income
from minority owned
companies 35 (10) (68) (27) (84) (84) (90)
Add fixed charges before
capitalized interest
and preferred stock
dividends of
subsidiaries 256 241 935 894 757 732 745
Total earnings
available for
fixed charges $ (54) $ 735 $2,971 $1,704 $2,941 $2,715 $2,635
Ratio of earnings to
fixed charges (1)(2) * 2.88 2.98 1.80 3.64 3.71 3.54
(1) The ratio of earnings to fixed charges has been computed based on the
Company's continuing operations by dividing total earnings available for
fixed charges, excluding capitalized interest and preferred stock
dividends of subsidiaries, by total fixed charges. Fixed charges consist
of interest, including capitalized interest and preferred stock dividends
of subsidiaries, and one-third of rent expense as representative of the
interest portion of rentals.
(2) The Company's ratio of earnings to fixed charges includes the effect of
the Company's finance subsidiaries, which primarily finance Xerox
equipment. Financing businesses are more highly leveraged and,
therefore, tend to operate at lower earnings to fixed charges ratio
levels than do non-financial businesses.
* Earnings for the three months of 2000 were inadequate to cover fixed
charges. The coverage deficiency was $327 million. Excluding the 2000
restructuring and CPID in-process R&D charge, the ratio of earnings to
fixed charges would be 2.19.
** Excluding the effects of the charges recorded in connection with the 1998
restructuring plan, the ratio of earnings to fixed charges would be 3.55.
*** Sum of "Income (Loss) before Income Taxes (Benefits), Equity Income and
Minorities' Interests" and "Equity in Net Income of Unconsolidated
Affiliates."
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM XEROX CORPORATION'S 3-31-00 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 61
<SECURITIES> 0
<RECEIVABLES> 16,858
<ALLOWANCES> 550
<INVENTORY> 3,293
<CURRENT-ASSETS> 12,958
<PP&E> 5,518
<DEPRECIATION> 2,973
<TOTAL-ASSETS> 30,498
<CURRENT-LIABILITIES> 9,761
<BONDS> 17,112
638
665
<COMMON> 668
<OTHER-SE> 3,923
<TOTAL-LIABILITY-AND-EQUITY> 30,498
<SALES> 2,291
<TOTAL-REVENUES> 4,431
<CGS> 1,269
<TOTAL-COSTS> 2,689
<OTHER-EXPENSES> 2,091
<LOSS-PROVISION> 77
<INTEREST-EXPENSE> 227
<INCOME-PRETAX> (349)
<INCOME-TAX> (113)
<INCOME-CONTINUING> (243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (343)
<EPS-BASIC> (0.38)
<EPS-DILUTED> (0.38)
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