-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOGnqTUybAJa1i2YONKpJCWBjyZko5GEMzEUnxXadSKhm1bAUcPzWQafQVwE+rdg oRE0QE/tVFv2Hs43bBo2uw== 0000108772-96-000025.txt : 19960808 0000108772-96-000025.hdr.sgml : 19960808 ACCESSION NUMBER: 0000108772-96-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960807 SROS: BSE SROS: CSE SROS: CSX SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: XEROX CORP CENTRAL INDEX KEY: 0000108772 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 160468020 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04471 FILM NUMBER: 96605301 BUSINESS ADDRESS: STREET 1: P O BOX 1600 STREET 2: 800 LONG RIDGE ROAD CITY: STAMFORD STATE: CT ZIP: 069041600 BUSINESS PHONE: 2039683000 MAIL ADDRESS: STREET 1: 800 LONG RIDGE ROAD STREET 2: PO BOX 1600 CITY: STAMFORD STATE: CT ZIP: 06904 FORMER COMPANY: FORMER CONFORMED NAME: HALOID XEROX INC DATE OF NAME CHANGE: 19730813 10-Q 1 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, 1996 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 31,1996 Common Stock 324,799,357 shares This document consists of 26 pages. 1 (THIS PAGE IS INTENTIONALLY LEFT BLANK) 2 Xerox Corporation Form 10-Q June 30, 1996 Table of Contents Page Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Income 4 Consolidated Balance Sheets 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Document Processing 10 Discontinued Operations 16 Capital Resources and Liquidity 19 Hedging Instruments 20 Part II - Other Information Item 1. Legal Proceedings 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 Exhibit Index Computation of Net Income per Common Share 25 Computation of Ratio of Earnings to Fixed Charges 26 Financial Data Schedule (filed in electronic form only) 3 PART I - FINANCIAL INFORMATION Xerox Corporation Consolidated Statements of Income Three months ended Six months ended June 30, June 30, (In millions, except per-share data) 1996 1995 1996 1995 Revenues Sales $ 2,200 $ 2,081 $ 4,117 $ 3,945 Service and rentals 1,770 1,722 3,525 3,373 Finance income 247 251 503 503 Total Revenues 4,217 4,054 8,145 7,821 Costs and Expenses Cost of sales 1,193 1,193 2,285 2,295 Cost of service and rentals 880 846 1,778 1,683 Equipment financing interest 125 130 255 255 Research and development expenses 264 247 518 465 Selling, administrative and general expenses 1,269 1,167 2,435 2,266 Other, net 27 59 31 78 Total Costs and Expenses 3,758 3,642 7,302 7,042 Income before Income Taxes, Equity Income and Minorities' Interests 459 412 843 779 Income taxes 164 160 303 302 Equity in net income of unconsolidated affiliates 42 51 62 64 Minorities' interests in earnings of subsidiaries 44 49 72 100 Income from Continuing Operations 293 254 530 441 Discontinued Operations - (16) - (56) Net Income $ 293 $ 238 $ 530 $ 385 Primary Earnings per Share Continuing Operations $ 0.85 $ 0.74 $ 1.53 $ 1.27 Discontinued Operations - (.05) - (.17) Primary Earnings per Share $ 0.85 $ 0.69 $ 1.53 $ 1.10 Fully Diluted Earnings per Share Continuing Operations $ 0.81 $ 0.70 $ 1.46 $ 1.21 Discontinued Operations - (.05) - (.16) Fully Diluted Earnings per Share $ 0.81 $ 0.65 $ 1.46 $ 1.05 See accompanying notes. 4 Xerox Corporation Consolidated Balance Sheets June 30, December 31, (In millions, except share data in thousands) 1996 1995 Assets Cash $ 18 $ 136 Accounts receivable, net 2,158 1,914 Finance receivables, net 4,051 4,069 Inventories 3,001 2,656 Deferred taxes and other current assets 1,053 1,095 Total Current Assets 10,281 9,870 Finance receivables due after one year, net 6,417 6,406 Land, buildings and equipment, net 2,142 2,105 Investments in affiliates, at equity 1,305 1,314 Goodwill 621 627 Other assets 938 876 Investment in discontinued operations 4,614 4,810 Total Assets $ 26,318 $ 26,008 Liabilities and Equity Short-term debt and current portion of long-term debt $ 3,254 $ 3,274 Accounts payable 505 578 Accrued compensation and benefit costs 603 731 Unearned income 211 228 Other current liabilities 2,057 2,216 Total Current Liabilities 6,630 7,027 Long-term debt 8,878 7,867 Postretirement medical benefits 1,030 1,018 Deferred taxes and other liabilities 2,326 2,437 Discontinued operations liabilities - policyholders' deposits and other 2,492 2,810 Deferred ESOP benefits (547) (547) Minorities' interests in equity of subsidiaries 789 755 Preferred stock 730 763 Common shareholders' equity 3,990 3,878 Total Liabilities and Equity $ 26,318 $ 26,008 Shares of common stock issued and outstanding 323,492 325,029 See accompanying notes. 5 Xerox Corporation Consolidated Statements of Cash Flows Six months ended June 30 (In millions) 1996 1995 Cash Flows from Operating Activities Income from Continuing Operations $ 530 $ 441 Adjustments required to reconcile income to cash flows from operating activities: Depreciation and amortization 357 349 Provisions for doubtful accounts 88 90 Provision for postretirement medical benefits 23 30 Charges against 1993 restructuring reserve (91) (194) Minorities' interests in earnings of subsidiaries 72 100 Undistributed equity in income of affiliated companies (62) (63) Increase in inventories (543) (614) Increase in finance receivables (187) (23) Increase in accounts receivable (282) (218) Decrease in accounts payable and accrued compensation and benefit costs (177) (47) Net change in current and deferred income taxes 124 111 Other, net (353) (89) Total (501) (127) Cash Flows from Investing Activities Cost of additions to land, buildings and equipment (241) (171) Proceeds from sales of land, buildings and equipment 30 30 Purchase of additional interest in Rank Xerox - (972) Proceeds from sale of Constitution Re - 421 Total (211) (692) Cash Flows from Financing Activities Net change in debt 1,079 1,072 Dividends on common and preferred stock (220) (195) Proceeds from sale of common stock 74 89 Repurchase of common and preferred stock (215) (60) Dividends to minority shareholders (1) (42) Total 717 864 Effect of Exchange Rate Changes on Cash (2) (4) Cash Provided (Used) by Continuing Operations 3 41 Cash Provided (Used) by Discontinued Operations (121) (40) Decrease in Cash (118) 1 Cash at Beginning of Period 136 41 Cash at End of Period $ 18 $ 42 See accompanying notes. 6 Xerox Corporation Notes to Consolidated Financial Statements 1. The consolidated financial statements presented herein have been prepared by Xerox Corporation ("the Company") in accordance with the accounting policies described in its 1995 Annual Report to Shareholders and should be read in conjunction with the notes thereto. Effective with 1996 reporting, the Company's China operations are fully consolidated. The 1995 financial statements presented herein have been restated to reflect this change and several other accounting reclassifications to conform with the 1996 presentation. The impact of these changes is not material and did not affect net income. 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. Interim financial data presented herein are unaudited. 2. Inventories consist of (in millions): June 30, December 31, 1996 1995 Finished products $ 1,850 $ 1,646 Work in process 123 88 Raw materials and supplies 381 295 Equipment on operating leases, net 647 627 Total $ 3,001 $ 2,656 3. Common shareholders' equity consists of (in millions): June 30, December 31, 1996 1995 Common stock $ 330 $ 327 Additional paid-in-capital 1,381 1,334 Retained earnings 2,628 2,321 Net unrealized gain (loss) on investment securities 3 (1) Translation adjustments (213) (103) Treasury stock (139) - Total $ 3,990 $ 3,878 4. The Company's Consolidated Balance Sheet at June 30, 1996 includes current and non-current accrued liabilities of $206 million and $95 million, respectively, associated with the Document Processing restructuring program announced in December 1993. At December 31, 1995, the corresponding accrued liabilities aggregated $395 million. During the six month period ended June 30, 1996, restructuring-related activity reduced the 7 Xerox Corporation Notes to Consolidated Financial Statements accrued liability by $94 million. Management believes the aggregate reserve balance of $301 million at June 30, 1996 is adequate for the completion of the restructuring program. Additional information concerning the progress of the restructuring program is included in the accompanying Management's Discussion and Analysis on page 13. 5. Interest expense totaled $295 million and $296 million for the six months ended June 30, 1996 and 1995, respectively. 6. At the Company's annual meeting on May 16, 1996, shareholders approved an increase in the number of authorized shares of common stock, from 350 million to 1.05 billion to effect a three-for-one stock split. The effective date of the split was June 6 for shareholders of record as of May 23. All share and per share amounts have been restated to retroactively reflect the stock split. 7. The Board of Directors has authorized the Company to repurchase up to $1 billion of Xerox common stock. The stock will be purchased from time to time on the open market depending on market conditions. As of June 30, 1996, the Company has repurchased 4 million shares for $182 million. 8. Litigation Continuing Operations On March 10, 1994, a lawsuit was filed in the United States District Court for the District of Kansas by two independent service organizations (ISOs) in Kansas City and St. Louis and their parent company. Plaintiffs claim damages predominately resulting from the Company's alleged refusal to sell parts or license diagnostic software for high volume copiers and printers to plaintiffs prior to 1994 and the Company's alleged continued refusal to sell parts at nonexclusionary prices or to license diagnostic software on nonexclusionary terms. In addition to monetary damages in excess of $10 million (to be trebled), injunctive relief is sought. 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 the plaintiffs in the Kansas action, were not included in that class action. The Company has asserted counterclaims against the plaintiffs alleging patent and 8 Xerox Corporation Notes to Consolidated Financial Statements copyright infringement, misappropriation of Xerox trade secrets, conversion and unfair competition and/or false advertising. On December 11, 1995, the District Court issued a preliminary injunction against the parent company for copyright infringement. A trial date of April 15, 1997 has been set. The Company denies any wrongdoing and intends to vigorously defend these actions and pursue its counterclaims. Xerox has reached an agreement in principle to settle antitrust litigation with 20 different ISOs. The terms of the settlement will have no material effect on the Company. Discontinued Operations Farm & Home Savings Association, now known as Roosevelt Bank, (Farm & Home) and certain Talegen insurance companies (Insurance Companies) entered into an agreement (Indemnification Agreement) under which the Insurance Companies are required to defend and indemnify Farm & Home from certain actual and punitive damage claims being made against Farm & Home relating to the Brio superfund site (Brio). In a number of lawsuits pending against Farm & Home in the District Courts of Harris County, Texas, several hundred plaintiffs seek both actual and punitive damages allegedly relating to injuries arising out of the hazardous substances at Brio. The Insurance Companies have been defending these cases under a reservation of rights because it is unclear whether certain of the claims fall under the coverage of either the policies or the Indemnification Agreement. The Insurance Companies have been successful in having some claims dismissed which were brought by plaintiffs who were unable to demonstrate a pertinent nexus to the Southbend subdivision. However, there are numerous plaintiffs who do have a nexus to the Southbend subdivision. The Insurance Companies have been in settlement discussions with respect to claims brought by plaintiffs who have or had a pertinent nexus to the Southbend subdivision. In addition, Farm & Home presently has pending motions for summary judgment which would dispose of many of the claims asserted. If not settled or resolved by summary judgment, one or more of these cases can be expected to be tried in late 1996 or 1997. 9 Xerox Corporation Management's Discussion and Analysis of Results of Operations and Financial Condition Document Processing Underlying Growth To understand the trends in the business, we believe that it is helpful to adjust revenue and expense growth (except for ratios) to exclude the impact of changes in the translation of foreign currencies into U.S. dollars. We refer to this adjusted growth as "underlying growth." When compared with the major European currencies, the U.S. dollar was approximately 5 percent stronger in the 1996 second quarter than in the 1995 second quarter. As a result, foreign currency translation had an unfavorable impact of 2 percentage points on total revenues in the 1996 second quarter. A substantial portion of our consolidated revenues is derived from operations outside of the United States in subsidiaries where the U.S. dollar is not the functional currency. Revenues denominated in currencies where the local currency is the functional currency are not hedged for purposes of translation into U.S. dollars. Revenues We estimate that the components of underlying revenue growth were as follows: Underlying Growth 1996 1995 Q2 Q1 FY Q4 Q3 Q2 Q1 Total Revenues 6% 4% 7% 2% 8% 8% 11% Sales Equipment* 9 7 6 (1) 12 8 8 Supplies 6 - 9 (1) 9 10 21 Paper (7) (2) 39 22 42 42 54 Total 7 2 9 - 11 12 18 Service/Rentals/Outsourcing/Other Service (1) 1 2 1 1 4 3 Rentals 2 2 1 1 3 (2) 3 Document Outsourcing 51 48 46 51 44 43 46 Total 4 6 6 5 6 6 6 Finance Income - 1 (4) (1) (7) (2) (4) Memo: Revenues Excluding Equipment Sales* 4 2 7 4 6 9 12 * Equipment sales to end-users only 10 The increase in equipment sales to end users in the second quarter, compared with the 1995 second quarter, primarily reflects double digit growth in the United States and Latin America and good growth in Rank Xerox. Revenues from supplies, paper, service, rentals, document outsourcing and other revenues, and income from customer financing represented 68 percent of total revenues in the 1996 second quarter. Growth in these revenues is primarily a function of the growth in our installed population of equipment, usage and pricing. Supplies sales: The improved growth in the 1996 second quarter from prior quarters is due principally to strong growth in enterprise printing and an increase in OEM demand. Paper sales: Our strategy is to charge a spread over mill wholesale prices to cover our costs and value added as a distributor. The decline in the 1996 second quarter is due to lower prices as the paper industry moves into a period of excess supply. Service revenues: The decline in growth in the 1996 second quarter and the modest growth in the several preceding quarters reflects the increasing customer preference for rental plans and document outsourcing as well as competitive pressures. Rental revenues: Non-U.S. rental revenues continued the long term decline reflecting a customer preference for outright purchase. This decline has been offset by increases in the U.S. where there has been an increasing trend toward cost-per- copy rental plans, which adversely affects up-front equipment sales, service revenues and finance income. Document Outsourcing: This growth reflects the trend of customers to outsource their document processing requirements to Xerox. This has the effect of diverting some revenues from equipment sales, service and finance income. This trend reduces current period total revenues but increases revenues in future periods. Finance income: Our strategy for financing equipment sales is to charge a spread over our cost of borrowing and to lock in that spread by match-funding the notes receivable with borrowings of similar maturities. Strong growth in the financing of equipment sales in Brazil offset a decline in interest income in the U.S. and Rank Xerox resulting from lower average interest rates and the trends to document outsourcing and rental plans. 11 Geographically, the underlying revenue growth rates are estimated as follows: 1996 1995 Q2 Q1 FY Q4 Q3 Q2 Q1 Total Revenues 6% 4% 7% 2% 8% 8% 11% United States 6 5 3 (3) 5 5 8 Rank Xerox 2 (2) 8 10 2 5 13 Other Areas 10 11 16 2 27 25 17 The improvement in U.S. revenue growth in the 1996 second quarter from prior quarters was driven by exceptional sales of the DocuTech and color products resulting from sales coverage improvements implemented since mid-1995. Rank Xerox (Rank Xerox Limited and related companies) manufactures and markets Xerox products principally in Europe. The modest revenue growth in Rank Xerox reflects essentially flat revenues in France, the U.K. and Germany, declines in Spain and Russia, and good growth in the rest of Europe. Other Areas include operations principally in Latin America and Canada. Revenue growth was excellent in Brazil and good in Mexico, as the economy recovers. Revenues declined modestly in Canada and the rest of Latin America. Our 1995 revenues were approximately $1.4 billion in Brazil and $200 million in Mexico. For the major product categories, the underlying revenue growth rates are estimated as follows: 1996 1995 Q2 Q1 FY Q4 Q3 Q2 Q1 Total Revenues 6% 4% 7% 2% 8% 8% 11% Black & White Copiers - - 2 (2) 3 2 4 Enterprise Printing 21 19 17 10 18 20 22 Revenues from black-and-white copying represented 57 percent of total document processing revenues in the 1996 second quarter, and 59 percent in the 1996 first quarter and for the 1995 full year. Strong growth in personal copiers and modest growth in convenience, workgroup and departmental copiers was offset by declines in duplicators, as volume is transferring to electronic applications on DocuTech, and copiers for large engineering drawings due to competitive pressures. Revenues from enterprise printing, including production publishing, data center printing, network printing, and color copying and printing, represented 29 12 percent of total revenues in the 1996 second quarter compared with 27 percent in the 1996 first quarter and 25 percent for the 1995 full year. DocuTech and color products revenue growth was excellent and printing systems products growth was modest. The 2 percentage points of increased enterprise printing growth from the 1996 first quarter growth was principally due to the recently launched Document Centre Systems and DocuColor 40. Productivity Initiatives In 1993, we announced a restructuring program to significantly reduce the cost base and to improve productivity. Our objectives were to reduce our worldwide work force by more than 10,000 employees and to close or consolidate a number of facilities. To date, the activities associated with the 1993 restructuring program have reduced employment by 13,400, achieved pre-tax cost reductions of approximately $350 million in 1994 and $650 million in 1995, and we are on track towards achieving our restructuring program objectives. A portion of the savings has been reinvested to reengineer business processes, to support the expansion in growth markets, and to mitigate pricing pressures. Employment decreased by 100 in the 1996 second quarter to 86,600. Reductions from our ongoing productivity program of 1,000 in the quarter were partially offset by the hiring of additional sales representatives and employees to support our fast-growing document outsourcing business. Gross Profit and Expenses Gross profit increased 7 percent as a result of volume and an improvement in gross margins. The gross margins by revenue stream were as follows: Gross Margins 1996 1995 Q2 Q1 FY Q4 Q3 Q2 Q1 Total Gross Margin % 47.9% 46.0% 46.1% 46.7% 46.0% 46.5% 45.2% Sales 45.8 43.0 43.0 45.0 42.7 42.7 40.9 Service and Rentals 50.3 48.9 49.6 48.9 49.3 50.8 49.3 Financing 49.5 49.0 49.7 50.1 50.1 48.3 50.4 Total gross margins improved by 1.4 percentage points in the 1996 second quarter from the 1995 second quarter. The improvement of 3.1 percentage points in the sales gross margin from the 1995 second quarter was principally due to cost reductions and 13 favorable product and geographical mix, partially offset by pricing pressures. The erosion in the service and rentals gross margin of 0.5 percentage points from the 1995 second quarter was largely due to pricing pressures and economic cost increases, partially offset by the benefits from productivity initiatives. Our objective for the second half is to continue to improve the total gross margin from the 1995 levels. Research and development (R&D) expense increased 7 percent compared with the 1995 second quarter and 12 percent compared with the 1995 first half reflecting increased investment in future product introductions. We will continue to invest in technological development to maintain our premier position in the rapidly changing document processing market. We expect to introduce a stream of new, technologically innovative products in the coming months. Xerox R&D is strategically coordinated with that of Fuji Xerox Co., Ltd., an unconsolidated joint venture between Rank Xerox Limited and Fuji Photo Film Company Limited. Fuji Xerox invested approximately $600 million in R&D in 1995. Selling, administrative and general expenses (SAG) increased 10 percent in the 1996 second quarter and 8 percent in the 1996 first half. SAG was 30.1 percent of revenue in the second quarter, an increase of 1.3 percentage points from the 1995 second quarter. The growth was due to economic cost increases, and investments to increase worldwide sales effectiveness, including the expansion of direct sales coverage and indirect distribution channels, new product advertising, and systems to improve productivity, partially offset by expense reductions. Our objective for the second half is to ensure that SAG growth does not exceed revenue growth. The $32 million decrease in other expenses, net, from the 1995 second quarter reflects reduced interest expense, increased interest income and the non-recurrence of several one-time charges in the 1995 second quarter, partially offset by increased currency losses from balance sheet translation in our Latin American operations. Income Taxes, Equity in Net Income of Unconsolidated Affiliates and Minorities' Interests in the Earnings of Subsidiaries Income before income taxes, equity in net income of unconsolidated affiliates and minorities' interests increased 11 percent to $459 million in the 1996 second quarter from $412 million in the 1995 second quarter. The effective tax rate was 35.7 percent in the 1996 second quarter and 36 percent in the 1996 first half compared with 38.9 in the 1995 second quarter and 38.8 percent in the 1995 second half. The decline was primarily due to a lower statutory tax 14 rate in Brazil and the mix of profits from our worldwide operations. Equity in the net income of unconsolidated affiliates, principally Fuji Xerox, decreased in the 1996 second quarter to $42 million from $51 million in the 1995 second quarter. The underlying growth in Fuji Xerox income was offset by the adverse impact of currency translation and there were declines in income from smaller investments. Minorities' interests in the earnings of subsidiaries was $44 million in the 1996 second quarter compared with $49 million in the 1995 second quarter due to lower Rank Xerox income. Income Income from continuing operations grew 15 percent to $293 million in the 1996 second quarter and 20 percent to $530 million in the 1996 first half. Primary earnings per share increased 15 percent to 85 cents in the 1996 second quarter and 20 percent to $1.53 in the first half. Fully diluted earnings per share increased 16 percent to 81 cents and 21 percent to $1.46 for the first half. All earnings per share amounts reflect the 3 for 1 stock split effective June 6, 1996. China Operations Consolidation and Other Reclassifications Effective with 1996 reporting, our China operations are fully consolidated. Prior year financial and operating results have been restated to reflect this change and several other accounting reclassifications to conform with 1996 reporting. The impact of these changes on the financial statements and underlying trends is not material and there is no change in income. 15 Discontinued Operations The investment in the discontinued financial services businesses which includes Insurance, Other Financial Services, Third-Party / Real-Estate and assigned debt totaled $2.122 billion at June 30, 1996 compared with $2.000 billion at December 31, 1995. The increase primarily includes scheduled payments to Ridge Re for annual premium installments and associated finance charges, and interest for the period on the assigned debt, partially offset by reductions in third-party assets, primarily from sales and run- off activity. The Company believes that the liquidation of the remaining net discontinued assets will not result in a loss. A discussion of the discontinued businesses follow. Insurance Segment In January 1996, Xerox announced agreements to sell all of its Remaining Talegen insurance units (Coregis Group, Inc., Crum & Forster Holdings, Inc., Industrial Indemnity Holdings, Inc., Westchester Specialty Group, Inc. and two insurance-related service companies) and The Resolution Group, Inc. (TRG) to investor groups led by Kohlberg Kravis Roberts & Co. (KKR) and senior management of the Remaining companies. The sales, expected to close in the third quarter, will consist of two concurrent transactions with proceeds totaling $2.7 billion, including the assumption of Talegen debt. The transactions are subject to customary closing conditions, including buyer financing and regulatory approvals. In connection with the announced sales, the Company recorded a fourth quarter, 1995, $1,546 million after-tax charge. As a result of the sales of the Talegen units, the insurance segment has been classified as a discontinued operation for all periods presented and its operating results did not affect the Company's earnings in the first half of 1996. Operating results for the discontinued insurance segment in the second quarter and first half of 1996 and 1995 follow: Revenue After-Tax Income (In Millions) 1996 1995 1996 1995 Second Quarter Talegen / TRG $ 547 $ 525 $ 27 $ 37 Total Insurance $ 536 $ 520 $ (6) $(16) First Half Talegen / TRG $1,077 $1,045 $ 51 $ 57 Total Insurance $1,061 $1,031 $ (16) $ (56) The preceding table only includes the revenue of the remaining insurance units. Constitution Re Corporation (CRC) was sold during April 1995 and Viking was sold during July 1995. The revenues from CRC and Viking for the second quarter and first half of 1995 were $70 million and $233 million, respectively. 16 The total insurance improvement in the second quarter, 1996 results compared with 1995 includes lower insurance losses at Ridge Re and lower debt service costs. These items were partially offset by 1995 reserve releases at Talegen which did not recur in 1996. The improvement in the first half 1996 results compared with 1995 include the aforementioned items and the absence of the 1995 settlement between Monsanto and Talegen which totaled $22 million after-tax. The 1996 total insurance after-tax loss of $6 million in the second quarter and $16 million in the first half was charged to reserves established for this purpose and, therefore, does not impact the Company's earnings. The investment at June 30, 1996 totaled $1,844 million compared with a restated balance of $1,678 million at December 31, 1995. The increase primarily includes contractual payments to Ridge Re for annual premium installments and associated finance charges and interest on the insurance debt that will continue until the closing of the Talegen sale. Other Financial Services Other Financial Services (OFS), which were discontinued in the fourth quarter of 1993, had no after-tax income in the first half of 1996 and 1995. The net investment in OFS at June 30, 1996 was $97 million compared with a restated $114 million at December 31, 1995. The decrease in the investment primarily reflects the sale of the remaining portion of First Quadrant Corp. On June 1, 1995, Xerox Financial Services, Inc. (XFSI) completed the sale of Xerox Financial Services Life Insurance Company and related companies (Xerox Life Companies) to a subsidiary of General American Life Insurance Company. After the sale, the Xerox Life Companies names were changed to replace the name "Xerox" in the corporate titles with the name "Cova" (Cova Companies). OakRe Life Insurance Company (OakRe), an XFSI subsidiary formed in 1994, has assumed responsibility for existing Single Premium Deferred Annuity (SPDA) policies issued by Xerox Life's Missouri and California companies via coinsurance agreements (Coinsurance Agreements). The Coinsurance Agreements include a provision for the assumption (at their election) by the Cova Companies, of all of the SPDA policies at the end of their current rate reset periods. A Novation Agreement with an affiliate of the new owner provides for the assumption of the liability under the Coinsurance Agreements for any SPDA policies not so assumed by the Cova Companies. Other policyholders (of Immediate, Whole Life, and Variable annuities as well as a minor amount of SPDAs issued by Xerox Life New York) will continue to be the responsibility of the Cova Companies. As a result of the Coinsurance Agreements, at June 30, 1996, OakRe retained approximately $2.2 billion of investment portfolio assets (transferred from the Xerox Life Companies) and liabilities related to the reinsured SPDA policies. Interest rates on these policies are fixed and were established upon 17 issuance of the respective policies. Substantially all of these policies will reach their rate reset periods within the next four years and will be assumed under the Agreements as described above. The Xerox Life Companies' portfolio was designed to recognize that policy renewals extended liability "maturities", thereby permitting investments with average duration somewhat beyond the rate reset periods. OakRe's practice is to selectively improve this match over time as market conditions allow. In connection with the aforementioned sale, XFSI established a $500 million letter of credit and line of credit with a group of banks to support OakRe's coinsurance obligations. The term of this letter of credit is five years and it is unused and available at June 30, 1996. Upon a drawing under the letter of credit, XFSI has the option to cover the drawing in cash or to draw upon the credit line. Third-Party / Real-Estate Third-party and real-estate assets at June 30, 1996 totaled $468 million, a $21 million reduction from the December 31, 1995 level. The asset decrease includes a $75 million reduction in third-party assets and a $54 million increase in reported real- estate net assets. Assigned debt increased to $237 million at June 30, 1996, a $6 million increase from the year-end 1995 level. The third-party asset decline primarily includes sales of assets and run-off activity. The increase in reported real- estate assets and the increase in assigned debt each include $49 million related to the Company's decision to fund the retirement of certain debt of its discontinued real-estate subsidiary with lower cost Company financing. This increased the assets and assigned debt of discontinued operations, but had no effect on the reported net investment in discontinued operations. 18 Capital Resources and Liquidity Total debt, including ESOP and Discontinued Operations debt not shown separately in our consolidated balance sheets, increased to $12,762 million at June 30, 1996, from $11,794 million at December 31, 1995. The changes in consolidated indebtedness since year end and versus first-half 1995 are summarized as follows: (In millions) 1996 1995 Total Debt as of January 1 $11,794 $10,955 Non-Financing Businesses: Document Processing Operations 648 616 Increased financial interest in Rank Xerox - 972 Discontinued Businesses 109 (321) Total Non-Financing 757 1,267 Financing Businesses (14) (111) Total Operations 743 1,156 Shareholder dividends 220 195 Exercise of stock options (74) (89) Repurchase of common and preferred stock 215 60 Cash balance and other changes, net (136) (3) Total Debt as of June 30 $12,762 $12,274 For purposes of capital ratio analysis, total equity includes common equity, preferred stock and minorities' interests in the equity of subsidiaries. The following table summarizes the changes in total equity during the first six months of 1996 and 1995: (In millions) 1996 1995 Total equity as of January 1 $5,396 $6,042 Income from Continuing Operations 530 441 Shareholder dividends paid (220) (195) Exercise of stock options 74 89 Repurchase of common and preferred stock (215) (60) Change in unrealized gain on investment securities 4 434 All Other, net (60) (170) Balance as of June 30 $5,509 $6,581 On a consolidated basis, inclusive of deferred ESOP benefits, the debt-to-capital ratio at June 30,1996 was 72 percent compared with 71 percent at December 31, 1995. 19 Non-Financing Operations The following table summarizes Document Processing non-financing operations cash generation and borrowing for the six months ended June 30, 1996 and 1995: Cash Generated/(Borrowed) Six Months Ended June 30, (In millions) 1996 1995 Document Processing Non-Financing: Income $ 429 $ 326 Depreciation and Amortization 357 349 Restructuring Payments (91) (194) Capital Expenditures (241) (171) Working Capital/Other (1,102) (926) $ (648) $(616) First-half 1996 cash usage of $648 million was $32 million greater than in the first six months of 1995 due primarily to increased growth in capital spending and receivables largely offset by higher net income and lower restructuring payments. Financing Businesses Financing business debt was reduced by $14 million and $111 million during the first six months of 1996 and 1995, respectively. This smaller decline in 1996 reflects growth in new customer financing contracts driven by higher equipment sales activity. Financial leverage was 6.5:1 as of June 30, 1996, consistent with our 6.5:1 debt-to-equity guideline. Hedging Instruments 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 swaps, forward foreign exchange contracts and foreign currency swaps. We do not enter into derivative instrument transactions for trading purposes. We do 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 suppliers, or a forward foreign-exchange contract to fix the rate at which a dividend will be paid by a foreign subsidiary. In addition, when cost-effective, currency 20 derivatives may be used to hedge balance sheet exposures in hyperinflationary economies. We do not hedge foreign currency-denominated revenues of our foreign subsidiaries since these do not represent cross-border cash flows. With regard to interest rate hedging, virtually all customer financing assets earn fixed rates of interest and, therefore, we "lock in" an interest rate spread by arranging fixed-rate liabilities with similar maturities as the underlying assets. Additionally, customer financing assets in one currency are consistently funded 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 resulting from a rising interest rate environment. Conversely, this practice effectively eliminates opportunities to materially increase margins when interest rates are declining. More specifically, pay fixed-rate and receive variable-rate swaps are typically used in place of more expensive fixed-rate debt. Pay variable-rate and receive variable-rate swaps are used to transform variable-rate medium-term debt into commercial paper or local currency Libor obligations. Additionally, pay variable-rate and receive fixed-rate swaps are used from time to time to transform longer-term fixed-rate debt into commercial paper or Libor-based rate obligations. The transactions performed within each of these three categories enable the cost effective management of interest rate exposures. The potential risk attendant to this strategy is the non-performance of swap counterparties. 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. 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings The information set forth under note 8 contained in the "Notes to Consolidated Financial Statements" on pages 8-9 of this Quarterly Report, on Form 10-Q, is incorporated by reference in answer to this item. 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 16, 1996 at the Ritz-Carlton Buckhead, 3434 Peachtree Road, NE, Atlanta, Georgia. 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 102,989,329 1,137,602 B. R. Inman 103,129,909 997,023 Antonia Ax:son Johnson 102,296,245 1,830,686 Vernon E. Jordan, Jr. 102,391,032 1,735,899 Yotaro Kobayashi 103,245,876 881,056 Hilmar Kopper 93,137,938 10,988,993 Ralph S. Larsen 103,295,684 831,247 John D. Macomber 103,259,546 867,385 George J. Mitchell 103,105,809 1,021,122 N. J. Nicholas, Jr. 103,267,234 859,697 John E. Pepper 103,277,837 849,094 Martha R. Seger 103,265,260 861,671 Thomas C. Theobald 103,269,140 857,792 Proposal 2 - To elect KPMG Peat Marwick LLP as independent auditors for the year 1996. For - 103,380,158 Against - 411,404 Abstain - 335,369 22 Proposal 3 - To approve the amendment to the Certificate of Incorporation to increase the authorized shares. For - 101,018,450 Against - 1,915,694 Abstain - 1,192,787 Proposal 4 - To approve and adopt the 1996 Non-Employee Director Stock Option Plan. For - 90,392,340 Against - 12,001,573 Abstain - 1,732,928 Proposal 5 - To approve and adopt the Restricted Stock Plan For Directors. For - 91,639,998 Against - 10,039,827 Abstain - 2,447,106 Proposal 6 - Shareholder proposal relating to the MacBride Principles. For - 15,400,509 Against - 74,726,526 Abstain - 5,917,818 Broker Non-vote - 8,082,078 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 11 Computation of Net Income per Common Share. Exhibit 12 Computation of Ratio of Earnings to Fixed Charges. Exhibit 27 Financial Data Schedule(in electronic form only) (b) No Current Reports on Form 8-K were filed during the quarter for which this Quarterly Report is filed. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. XEROX CORPORATION (Registrant) /s/Philip Fishbach ------------------------- Date: August 7, 1996 By Philip D. Fishbach Vice President and Controller (Principal Accounting Officer) 24 EX-11 2 Exhibit 11 Xerox Corporation Computation of Net Income Per Common Share (Dollars in millions, except per-share data; shares in thousands) Three months Six months ended June 30, ended June 30, 1996 1995 1996 1995 I. Primary Net Income Per Common Share Income from continuing operations $ 293 $ 254 $ 530 $ 441 Accrued dividends on ESOP preferred stock, net (10) (10) (21) (21) Accrued dividends on redeemable preferred stock - (1) (1) (2) Adjusted income from continuing operations 283 243 508 418 Discontinued operations - (16) - (56) Adjusted net income $ 283 $ 227 $ 508 $ 362 Average common shares outstanding during the period 323,795 321,677 323,492 320,342 Common shares issuable with respect to common stock equivalents for stock options, incentive and exchangeable shares 8,961 8,878 8,961 8,878 Adjusted average shares outstanding for the period 332,756 330,555 332,453 329,220 Primary earnings per share: Continuing operations $ 0.85 $ 0.74 $ 1.53 $ 1.27 Discontinued operations - (.05) - (.17) Primary earnings per share $ 0.85 $ 0.69 $ 1.53 $ 1.10 II.Fully Diluted Net Income Per Common Share Income from continuing operations $ 293 $ 254 $ 530 $ 441 Accrued dividends on redeemable preferred stock - (1) (1) (2) ESOP expense adjustment, net of tax - (2) (1) (4) Interest on convertible debt, net of tax - - 1 1 Adjusted income from continuing operations 293 251 529 436 Discontinued operations - (16) - (56) Adjusted net income $ 293 $ 235 $ 529 $ 380 Average common shares outstanding during the period 323,795 321,677 323,492 320,342 Stock options, incentive and exchangeable shares 9,483 8,878 9,483 8,878 Convertible debt 2,644 2,644 2,644 2,644 ESOP preferred stock 28,137 28,849 28,137 28,849 Adjusted average shares outstanding for the period 364,059 362,048 363,756 360,713 Fully diluted earnings per share: Continuing operations $ 0.81 $ 0.70 $ 1.46 $ 1.21 Discontinued operations - (.05) - (.16) Fully diluted earnings per share $ 0.81 $ 0.65 $ 1.46 $ 1.05 25 EX-12 3 Exhibit 12 Xerox Corporation Computation of Ratio of Earnings to Fixed Charges Six months ended Year ended June 30, December 31, (In Millions) 1996 1995 1995 1994 1993* 1992 1991 Fixed charges: Interest expense $ 295 $ 296 $ 605 $ 520 $ 540 $ 627 $ 596 Rental expense 74 81 142 170 180 187 178 Total fixed charges before capitalized interest 369 377 747 690 720 814 774 Capitalized interest - - - 2 5 17 3 Total fixed charges $ 369 $ 377 $ 747 $ 692 $ 725 $ 831 $ 777 Earnings available for fixed charges: Earnings** $ 905 $ 843 $1,979 $1,602 $ (193) $1,183 $1,035 Less undistributed income in minority owned companies (62) (63) (90) (54) (51) (52) (70) Add fixed charges before capitalized interest 369 377 747 690 720 814 774 Total earnings available for fixed charges $1,212 $1,157 $2,636 $2,238 $ 476 $1,945 $1,739 Ratio of earnings to fixed charges (1)(2) 3.28 3.07 3.53 3.23 0.66 2.34 2.24 (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, by total fixed charges. Fixed charges consist of interest, including capitalized interest, and one-third of rent expense as representative of the interest portion of rentals. Debt has been assigned to discontinued operations based on historical levels assigned to the businesses when they were continuing operations adjusted for subsequent paydowns. The discontinued operations consist of the Company's Insurance and Other Financial Services businesses and its real-estate development and third-party financing businesses. (2) The Company's ratio of earnings to fixed charges includes the effect of the Company's finance subsidiaries, which primarily finance Xerox equipment. Financing businesses are more highly leveraged and, therefore, tend to operate at lower earnings to fixed charges ratio levels than do non-financial businesses. * 1993 earnings were inadequate to cover fixed charges. The coverage deficiency was $249 million. ** Sum of "Income before Income Taxes, Equity Income and Minorities' Interests" and "Equity in Net Income of Unconsolidated Affiliates." 26 EX-27 4 ART. 5 FDS FOR 2ND QUARTER 1996 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX CORPORATION'S JUNE 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1996 JUN-30-1996 18 0 12,993 367 3,001 10,281 4,851 2,708 26,318 6,630 12,762 0 730 326 3,064 26,318 4,117 8,145 2,285 4,318 2,984 87 295 843 303 530 0 0 0 530 1.53 1.46
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