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Annual Report 2005
True Colors

Table of contents

  • Page 1
    Annual Report 2005 True Colors

  • Page 2
    ... keep us at the forefront of technological innovation, timely product delivery and end-to-end services that spur profitable growth. They keep us financially strong and intently focused on increasing value to our shareholders. The True Colors of Xerox guide us every day and will continue to propel us...

  • Page 3
    ...Letter 09 True Colors of Our Customers 14 Social Responsibility 16 Description of Business 26 Management's Discussion and Analysis of Results of Operations and Financial Condition 104 Corporate Information Financial Overview ($ millions, except EPS) 2005 Total Revenue Equipment Sales Post Sale...

  • Page 4
    Anne M. Mulcahy Chairman and Chief Executive Officer Fellow shareholders: I am pleased to report another solid year of progress for Xerox. Our company is in excellent financial health. Our balance sheet is strong and getting stronger. Our new business model is doing what we intended: whatever the ...

  • Page 5
    ... purpose - to return Xerox to growth, thereby providing value to our shareholders. We made progress in 2005, but not enough. We accelerated the pace of install activity for Xerox digital systems such as color printers, digital presses and multifunction devices that print, copy, fax and scan. In...

  • Page 6
    .... More and more businesses are shifting to digital color systems to produce personalized, colorful materials such as marketing collaterals, financial statements, catalogs and user guides on Xerox digital devices. The number of pages printed on Xerox color devices has doubled in the past two years...

  • Page 7
    ... brand-building achievement is worthy of special mention. J.D. Power and Associates named Xerox the first document management company to receive its certification for excellence in customer service and support. J.D. Power evaluated the breadth of our on-site, phone and online customer service. In...

  • Page 8
    ...So there you have it - a half-dozen reasons that give us a competitive advantage in the marketplace and should serve to give you confidence that you have invested your money wisely. As I write this letter, I am gathered with the senior leadership team of Xerox - some 300 individuals whom I am proud...

  • Page 9
    ... Xerox Corporation Stamford, CT 2. Glenn A. Britt A, C President and Chief Executive Officer Time Warner Cable Stamford, CT 8. Vernon E. Jordan, Jr. B, C Senior Managing Director Lazard Fréres & Co., LLC New York, NY Of Counsel, Akin, Gump, Strauss, Hauer & Feld, LLP Attorneys-at-Law Washington, DC...

  • Page 10
    ...mailings, what's more important to bringing people together than the right communication, at the right time? Even in the most 'paperless' society, there will always be the printed word. " At the same time, the True Colors of the success we've enjoyed at Taylor Corporation...and security.' Some ...

  • Page 11
    ...why we've grown to 85 Taylor companies. I like to think of them as entrepreneurial ventures that are continually evolving. " When we touch customers, what are they really getting? People. Human interaction. The desire, responsiveness and expertise that they know can improve their business, and their...

  • Page 12
    ... of printed communication. So are we. That makes Taylor and Xerox natural partners. Together, we understand that the "New Business of Printing" is not really just about printing. It's about increasing value to client companies. That means, for example, communicating with prospective customers one...

  • Page 13
    .... In short, Taylor's iGen3 presses produce much more than striking, made-to-order printed materials. They produce cost-effective results - and satisfied customers. That's important work. And we're privileged to be a part of it. TC, Denise, Steve, Kim Brad Schreier CEO Taylor Corporation 9

  • Page 14
    ...-in-class technology and work-process systems. The result is that we're truly global. Walk into an operation in Argentina and you'll see the same approach to our business as in Osaka. Which means our quality remains uniformly excellent and our productivity is always improving. " Making continuous...

  • Page 15
    ... that is capable of making the world a better place, every day. By creating solutions for society. By protecting the health and safety of our people and our communities around the world. By viewing every customer relationship as a partnership in which we create value for one another. These...

  • Page 16
    ...Dow tapped Xerox to streamline its copy, print, scan and fax capabilities at all of its locations worldwide. We learned pretty quickly that Dow does nothing by halves. When it makes improvements, it does so globally. The direction seemed straightforward enough: Make sure that uniform, cost-effective...

  • Page 17
    ...color or complexity can be sent halfway around the world as easily as to the building next door. That means huge savings in time and cost, as Dow's documents will no longer have to be shipped...local user at a time. Mack Murrell Senior Director Enterprise IT Operations & Office Facilities The Dow ...

  • Page 18
    ... connected. Thoughts truly do make a difference in creating what we call Aha! opportunities. " So I guess you could say that the True Colors of The ConferenceWorks! are to promote deeper learning, new ideas and real tools our clients can use to support conscious evolution in their lives, their...

  • Page 19
    ...the number of insights and positive experiences that our clients have many weeks, even months, after attending our seminars. " My job is ...time and money. " Challenging to be sure, but gratifying. As close to 100% customer satisfaction as I've ever seen. It's a great feeling to promote a product that ...

  • Page 20
    ... Indiana Business Equipment, one of Xerox's 1,100 authorized sales agencies that sell the complete line of Xerox office systems to small and medium-sized businesses. What our sales agents found went way beyond the analog copiers and printers that they were using for everyday office management. It...

  • Page 21
    ... time they solicit a potential client to when that prospect becomes a bona fide customer. What we discovered led us to the Xerox WorkCentre® Pro C3545 and its ability to bring high-quality, affordable color to an office environment. Talk about an Aha! opportunity. As the result of our analysis and...

  • Page 22
    ... a 2005 Corporate Citizenship Award. • • • • Xerox encourages employees to volunteer in their communities through programs like Social Service Leave, which offers paid sabbaticals for community service; the Community Involvement Program, which provides seed money for Xerox teams to fund...

  • Page 23
    ...' Equity 50 Notes to the Consolidated Financial Statements 99 Reports of Management 100 Report of Independent Registered Public Accounting Firm 101 Quarterly Results of Operations (Unaudited) 102 Five Years in Review 103 Officers 104 Corporate Information Xerox Annual Repor t 2005 15

  • Page 24
    ... from older technology light-lens devices to digital systems, from black and white to color and from paper documents to an increased reliance on electronic documents. More and more people are creating and storing documents digitally and using the Internet to easily exchange electronic documents. We...

  • Page 25
    ... quality printing. Our products include high-end printing and publishing systems, digital multifunctional devices ("MFDs") (which can print, copy, scan and fax), digital copiers, laser and solid ink printers, fax machines, document-management software, and supplies such as toner, paper and ink. We...

  • Page 26
    ... operations for Xerox products, supplies and services in Latin America, the Middle East, India, Eurasia, Central-Eastern Europe and Africa. $1,731 million The Other segment primarily includes revenue from paper sales, wideformat systems and value-added services. 18 Xerox Annual Repor t 2005

  • Page 27
    ... parts of the printing process. These new workflow products make it easy to integrate digital printing into JDF (job definition format)based workflows, enabling a common set of software instructions to direct a print job from creation to completion, in a consistent, uniform manner. Xerox Annual...

  • Page 28
    ...-use office system. These products are also available as WorkCentre, offering copy/print capabilities and optional fax and CopyCentre standalone digital copiers. - The Phaser 6300 and 6350: The Phaser 6300 and 6350 laser printers at speeds of 26 ppm color and 36 ppm black and white. These new laser...

  • Page 29
    ...reported within the Production, Office or DMO segments. In 2005, value-added services and managed services revenue, including equipment, totaled $3.3 billion. Twenty-nine percent of our revenue comes from Equipment sales, primarily from either lease arrangements that qualify as sales for accounting...

  • Page 30
    ... applications to drive the "New Business of Printing," on extending our color capabilities, and on lower-cost platforms and customer productivity enablers to drive digitization of the office. The Xerox iGen3, an advanced next-generation digital printing press launched in October 2002 that uses...

  • Page 31
    ... lower-cost distribution channel for our Office portfolio. Additionally, we expanded our distribution channels in North America in 2005. In Europe, Africa, the Middle East, India and parts of Asia, we distribute our products through Xerox Limited, a company established under the laws of England, and...

  • Page 32
    ... manufacturing operations are primarily located in Rochester, New York, and Dundalk, Ireland, for our high-end production products and consumables and Wilsonville, Oregon, for solid ink products, consumable supplies and components for our Office segment products. Service As of December 31, 2005, we...

  • Page 33
    ...Other Information Xerox is a New York corporation and our principal executive offices are located at 800 Long Ridge Road, P. O. Box 1600, Stamford, Connecticut 06904-1600. Our telephone number is (203) 968-3000. Through the Investor Information section of our Internet website, our Annual Reports on...

  • Page 34
    ... of our revenue is recurring revenue (supplies, service, paper, outsourcing and rentals), which we collectively refer to as post sale revenue. Post sale revenue is heavily dependent on the amount of equipment installed at customer locations and the utilization of those devices. As such, our critical...

  • Page 35
    ... from digital products and in DMO, which were partially offset by declines in light lens. • 6% decline in Finance income including benefits from currency Sales Less: Supplies, paper and other sales Equipment Sales Service, outsourcing and rentals Add: Supplies, paper and other sales Post sale and...

  • Page 36
    ... operations and financial condition in any quarterly or annual period. Revenue Recognition Under Bundled Arrangements: We sell most of our products and services under bundled lease arrangements, which typically include equipment, service, supplies and financing components for which the customer pays...

  • Page 37
    ...reasonably consistent with the lease selling prices, taking into account residual values that accrue to our benefit, in order for us to determine that such lease prices are indicative of fair value. Our pricing interest rates, which are used in determining customer payments, are developed based upon...

  • Page 38
    ... of the net periodic pension cost. The calculated value approach reduces the volatility in net periodic pension cost that results from using the fair market value approach. The difference between the actual return on plan assets and the expected return on plan assets is added to, or subtracted from...

  • Page 39
    ... WorkCentre Pro digital multifunction systems, DocuColor color multifunction products, color laser, solid ink and monochrome laser desktop printers, digital and light-lens copiers and facsimile products. These products are sold through direct and indirect sales channels in North America and Europe...

  • Page 40
    ... in lower-end office black and white devices, color Production 2005 Equipment sales increased 1% from 2004, primarily reflecting install growth with a negligible impact from currency, partially offset by price declines of approximately 5% and product mix. Production system install activity for...

  • Page 41
    ...black and white digital copiers and Post Sale and Other Revenue Post sale revenue is largely a function of the equipment placed at customer locations, the volume of prints and copies that our customers make on that equipment and the mix of color pages, as well as associated services. 2005 Post sale...

  • Page 42
    ... a decline in Latin America's rental equipment population. In response, we have continued our transition to indirect distribution channels that is intended to increase, over time, the sales of office devices and the associated supplies and service revenue. Other: 2005 Post sale and other revenue...

  • Page 43
    ... of sustaining engineering costs increased gross margins by approximately 1% for the year ended 2005. Gross Margins Gross margins by revenue classification were as follows: Year Ended December 31, 2005 2004 2003 Total gross margin Sales Service, outsourcing and rentals Finance income...

  • Page 44
    ... table illustrates the effects of our 2005 reclassification of our sustaining engineering costs from cost of sales to R,D&E: 2004 2005 Q4 YTD Q1 Q2 Q3 Q4 YTD (in millions) Q1 Q2 Q3 Total Sustaining Engineering ("SE") Gross Margin %, with SE Gross Margin %, without SE R&D % revenue, without SE...

  • Page 45
    ... related to the sale of Xerox Engineering Systems subsidiaries in France and Germany, which were partially offset by a gain on the sale of our investment in Xerox South Africa. related to the MPI arbitration panel ruling (refer to Note 16 - Contingencies in the Consolidated Financial Statements...

  • Page 46
    ...N In 2003, legal matters costs primarily consisted of a $239 million provision for litigation relating to the court-approved settlement of the Berger v. Retirement Income Guarantee Plan ("RIGP") litigation. RIGP represents the primary U.S. pension plan for salaried employees. The settlement was paid...

  • Page 47
    ... Xerox Palo Alto Research Center ("PARC"), licenses intellectual property and technologies related to digital rights management. During 2005, we sold our remaining interest in ContentGuard. Recent Accounting Pronouncements: Refer to Note 1 of the Consolidated Financial Statements for a description...

  • Page 48
    ... from new secured financings, reflecting a rebalancing of our secured and unsecured debt portfolio. • $433 million cash usage for the acquisition of common stock under the authorized October 2005 share repurchase program. • A partially offsetting $235 million decrease in net payments on term...

  • Page 49
    ... in Canada, France, the Netherlands, the U.K. and U.S. While terms and conditions vary somewhat between countries, in general these arrangements call for the financial counterparty to provide loans secured by the sales-type lease originations in the country for which it has been contracted to...

  • Page 50
    ... Xerox Canada Capital Limited, Xerox Capital (Europe) plc and other qualified foreign subsidiaries (excluding Xerox Corporation, the "Overseas Borrowers"). The 2003 Credit Facility matures on September 30, 2008. As of December 31, 2005, the $300 million term loan and $15 million of letters of credit...

  • Page 51
    ...and operations. Failure to be in compliance with the covenants in the Loan Agreement, including the financial maintenance covenants incorporated from the 2003 Credit Facility, would result in an event of termination under the Loan Agreement and in such case GECC would not be required to make further...

  • Page 52
    ... global mainframe system processing, application maintenance and support, desktop services and helpdesk support, voice and data network management, and server management through June 30, 2009. There are no minimum payments required under the contract. After July 1, 2006, we can terminate the current...

  • Page 53
    Xerox Corporation of inventory, municipal service taxes on rentals and gross revenue taxes. We are disputing these tax and labor matters and intend to vigorously defend our position. Based on the opinion of legal counsel, we do not believe that the ultimate resolution of these matters will ...

  • Page 54
    ...) Year ended December 31, 2005 2004 2003 Revenues Sales Service, outsourcing and rentals Finance income Total Revenues Costs and Expenses Cost of sales Cost of service, outsourcing and rentals Equipment financing interest Research, development and engineering expenses Selling, administrative and...

  • Page 55
    ... Equipment on operating leases, net Land, buildings and equipment, net Investments in affiliates, at equity Intangible assets, net Goodwill Deferred tax assets, long-term Other long-term assets Total Assets Liabilities and Equity Short-term debt and current portion of long-term debt Accounts payable...

  • Page 56
    ... benefit plans (Increase) decrease in inventories Increase in equipment on operating leases Decrease in finance receivables (Increase) decrease in accounts receivable and billed portion of finance receivables Decrease in other current and long-term assets Increase in accounts payable and accrued...

  • Page 57
    ... cash flow hedges, net of tax Comprehensive income Stock option and incentive plans, net Series C mandatory convertible preferred stock dividends ($6.25 per share) Payments to acquire treasury stock Cancellation of treasury stock Other Balance at December 31, 2005 (1) 11 37 111 446 (15) (58) (15...

  • Page 58
    ... July 1, 2005, we reclassified sustaining engineering costs from cost of sales and cost of service, outsourcing and rentals to a new line item in our Consolidated Statements of Income entitled Research, development and engineering expenses ("R,D&E"). This presentation aligns our external reporting...

  • Page 59
    ...WEEE Directive associated with our leased equipment will generally be charged to cost of sales when equipment is placed in service and is not expected to have a material effect on our financial condition or results of operations. In March 2005, the FASB issued Interpretation No. 47, "Accounting for...

  • Page 60
    ... per-share data) 2005 2004 2003 Refer to Note 18 - Common Stock for additional disclosures regarding our stock compensation programs. Summary of Accounting Policies Revenue Recognition: We generate revenue through the sale and rental of equipment, service and supplies and income associated with...

  • Page 61
    ... to be cancelable and account for it as an operating lease. Aside from the initial lease of equipment to our customers, we may enter subsequent transactions with the same customer whereby we extend the term. We evaluate the classification of lease extensions of sales-type leases using the originally...

  • Page 62
    ... reasonably consistent with the lease selling prices, taking into account residual values that accrue to our benefit, in order for us to determine that such lease prices are indicative of fair value. Our pricing interest rates, which are used to determine customer lease payments, are developed based...

  • Page 63
    ... to net periodic pension cost over the remaining service lives of the employees participating in the pension plan. The discount rate is used to present-value our future anticipated benefit obligations. In estimating our discount rate, we consider rates of return on high-quality fixed-income...

  • Page 64
    ... systems, DocuColor color multifunction products, color laser, solid ink color printers and multifunction devices, monochrome laser desktop printers, digital and light-lens copiers and facsimile products. These products are sold through direct and indirect sales channels in North America and Europe...

  • Page 65
    ... for litigation includes the $239 charge related to the court, approved settlement of the Berger v. RIGP litigation discussed in Note 14 - Employee Benefit Plans. See Note 1 - "New Accounting Standards and Accounting Changes" for discussion of this charge. (2) Xerox Annual Repor t 2005 57

  • Page 66
    ... Short-term investments as of December 31, 2005 (in millions): Maturities Less Than 12 Months Maturities 12 Months or Greater Fair Value Unrealized Losses Fair Value Total Unrealized Loses Description of Securities Corporate bonds Auction rate municipal bonds U.S. government agency securities Total...

  • Page 67
    ...39 $9,449 Secured Funding Arrangements GE Secured Borrowings: We have an agreement in the U.S. (the "Loan Agreement") under which GE Vendor Financial Services, a subsidiary of GE, is our primary third-party equipment financing provider, through the funding of loans secured by new lease originations...

  • Page 68
    ...transfer title of the equipment to these financial institutions and have no continuing ownership rights in the leased equipment subsequent to its sale. Accounts Receivable Funding Arrangement: In 2004, we completed a transaction with GE for a three-year $400 revolving credit facility secured by our...

  • Page 69
    ..., 2009. Services to be provided under this contract include support of global mainframe system processing, application maintenance, desktop and helpdesk support, voice and data network management and server management. There are no minimum payments due EDS under the contract. Payments to EDS, which...

  • Page 70
    ... Assets: Current assets Long-term assets Total Assets $10,009 9,406 603 215 8 $ 380 $ 9,450 8,595 855 331 18 $ 506 $ 8,430 8,011 419 194 34 $ 191 Investments in affiliates, at equity (1) Fuji Xerox is headquartered in Tokyo and operates in Japan, China, Australia, New Zealand and other areas of...

  • Page 71
    ... revenues under this agreement of $123, $119 and $110, respectively, which are included in Service, outsourcing and rental revenues in the Consolidated Statements of Income. We also have arrangements with Fuji Xerox whereby we purchase inventory from and sell inventory to Fuji Xerox. Pricing of the...

  • Page 72
    ... our employee base, exiting certain activities, outsourcing certain internal functions and engaging in other actions designed to reduce our cost structure and improve productivity. Management continues to evaluate our business and, therefore, there may be supplemental provisions for new plan...

  • Page 73
    ... of approximately 3,900 positions worldwide, a net charge of $6 for lease terminations and $15 for asset impairments. The initiatives in 2005 are focused on cost reductions in service, manufacturing and back-office support operations primarily within the Office and Production segments. We expect to...

  • Page 74
    ... 771 90 45 1 388 $ 2,073 $ 862 80 43 1 329 Other long-term liabilities Deferred and other tax liabilities $ Minorities' interests in equity of subsidiaries Financial derivative instruments Product warranties Other Total Other long-term liabilities $ 1,295 $ 1,315 66 Xerox Annual Repor t 2005

  • Page 75
    Xerox Corporation Note 11 - Debt Short-term borrowings at December 31, 2005 and 2004 were as follows (in millions): 2005 2004 U.S. Operations Weighted Average Interest Rates at December 31, 2005 2005 2004 Current maturities of long-term debt Notes payable Total $ 1,099 40 $ 1,139 $ 3,038 36 $...

  • Page 76
    ... in the Consolidated Statements of Income. (2) Equipment financing interest is determined based on an estimated cost of funds applied against an estimated level of debt required to support our financed receivables. The estimated cost of funds is primarily based on our secured borrowing rates. The...

  • Page 77
    ... liabilities in the December 31, 2005 Consolidated Balance Sheet. Trust I: In 1997, Xerox Capital Trust I ("Trust I") issued 650 thousand of 8.0% preferred securities (the "Preferred Securities") to investors for $644 ($650 liquidation value) and 20,103 shares of common securities to us for $20...

  • Page 78
    ... as we collect principal payments on the financing assets which secure them. The interest rates on a significant portion of those loans are fixed. As a result, these funding arrangements create natural match funding of the financing assets to the related debt. At December 31, 2005 and 2004, we had...

  • Page 79
    ... Cash Flow Hedges: During 2005, pay fixed/receive variableinterest rate swaps with notional amounts of £200 million ($345) and a net liability fair value of $(1), associated with the Xerox Finance Limited GE Capital borrowing, were designated and accounted for as cash flow hedges. The swaps...

  • Page 80
    .... During 2004, certain forward contracts were used to hedge the interest payments on Euro denominated debt of $377. The derivatives were designated and accounted for as cash flow hedges. No amount of ineffectiveness was recorded in the Consolidated Statements of Income during 2005 or 2004 for our...

  • Page 81
    ...' contributions Currency exchange rate changes Transfers/divestitures Benefits paid/settlements Fair value of plan assets, December 31 Funded status (including under-funded and non-funded plans) Unamortized transition (assets) obligations Unrecognized prior service cost Unrecognized net actuarial...

  • Page 82
    ... plans, along with the results for our other defined benefit plans, are shown above in the actual return on plan assets caption. To the extent that investment results relate to TRA, such results are charged directly to these accounts as a component of interest cost. 74 Xerox Annual Repor t 2005

  • Page 83
    ... liabilities. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. This consideration involves the use of long-term measures that address both return and risk. The investment portfolio contains a diversified blend of...

  • Page 84
    ... valuations. The obligation related to this settlement has been included in plan amendments in the change in the benefit obligation noted above. Dividends declared on Convertible Preferred Stock Cash contribution to the ESOP Compensation expense $15 - - $ 41 14 8 76 Xerox Annual Repor t 2005

  • Page 85
    ... also includes after-tax benefits of $83 related to the favorable resolution of certain other tax matters. Of this amount, $53 is related to our discontinued operations and is reported within Income from discontinued operations in the Consolidated Statements of Income. The following is a summary of...

  • Page 86
    ... the payment of income taxes thereon. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings. Our March 31, 2001 sale of half of our ownership interest in Fuji Xerox resulted in our investment no longer qualifying as a foreign corporate joint...

  • Page 87
    ... issue product warranties. Our arrangements typically involve a separate full-service maintenance agreement with the customer. The agreements generally extend over a period equivalent to the lease term or the expected useful life under a cash sale. The service agreements involve the payment of fees...

  • Page 88
    ... our operating results. Legal Matters As more fully discussed below, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning securities law, intellectual property law, environmental law, employment law and the Employee Retirement Income Security Act ("ERISA"). We...

  • Page 89
    ... to the Company's financial condition and accounting and reporting practices. The plaintiffs contend that in relying on false and misleading statements allegedly made by the defendants, at various times from 1997 through 2000 they bought shares of the Company's common stock at artificially inflated...

  • Page 90
    ... subsequently filed in the same court making substantially similar claims. On October 16, 2002, the four actions were consolidated as In Re Xerox Corporation ERISA Litigation. On November 15, 2002, a consolidated amended complaint was filed. A fifth class action (Wright) was filed in the District...

  • Page 91
    ... award, Xerox has deposited into escrow funds ordered owing in the award as of the date the deposit was made. National Union Fire Insurance Company v. Xerox Corporation, et al.: On October 24, 2003, a declaratory judgment action was filed in the Supreme Court of the State of New York, County of New...

  • Page 92
    ... breach of contract and breach of fiduciary duty against KPMG. Additionally, plaintiffs claim that KPMG is liable to Xerox for contribution, based on KPMG's share of the responsibility for any injuries or damages for which Xerox is held liable to plaintiffs in related pending securities class action...

  • Page 93
    ... an action in U.S. District Court for the Western District of New York against Palm, formerly owned by 3Com Corporation, for infringement of the Xerox "Unistrokes" handwriting recognition patent by the Palm Pilot using "Graffiti." Upon reexamination, the U.S. Patent and Trademark Office confirmed...

  • Page 94
    ...the subsidiary's books and certain improper payments in connection with sales to government customers. These transactions were not material to the Company's financial statements. We have reported these transactions to the Indian authorities, the U.S. Department of Justice and to the SEC. The private...

  • Page 95
    ...of RSUs. Each of these awards is subject to settlement with newly issued shares of our common stock. At December 31, 2005 and 2004, 38.9 million and 33.9 million shares, respectively, were available for grant of options or awards. Total compensation related to these programs was $40, $22 and $15 for...

  • Page 96
    ... Grant Date Fair Value Weighted Average Remaining Contractual Term At December 31, 2005, the aggregate intrinsic value of PSs outstanding was $30. For 2005, the PSs were accounted for as variable awards requiring that the shares be adjusted to market value at each reporting period. Commencing...

  • Page 97
    ... cost of $433, including associated fees of $1. These treasury stock shares may be cancelled upon the Board of Directors' approval. In 2005, 16,585,300 repurchased shares were cancelled and were recorded as a reduction to both common stock of $17 and additional paid-in-capital of $213. Xerox Annual...

  • Page 98
    ... per Share Diluted Earnings per Share: Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle ESOP expense adjustment, net Accrued dividends on Series C Mandatory Convertible Preferred Stock Interest on Convertible securities, net...

  • Page 99
    ..., which was originally created out of research developed at the Xerox Palo Alto Research Center ("PARC"), licenses intellectual property and technologies related to digital rights management. During 2005, we sold our remaining interest in ContentGuard. Xerox Engineering Systems: In the second...

  • Page 100
    ...* Total Company Revenues Sales Service, outsourcing and rentals Finance income Intercompany revenues Total Revenues Costs and Expenses Cost of sales Cost of service, outsourcing and rentals Equipment financing interest Intercompany cost of sales Research, development and engineering expenses...

  • Page 101
    ... equivalents and Short-term investments Accounts receivable, net Billed portion of finance receivables, net Finance receivables, net Inventories Other current assets Total Current assets Finance receivables due after one year, net Equipment on operating leases, net Land, buildings and equipment, net...

  • Page 102
    ... Statements of Cash Flows For the Year Ended December 31, 2005 Parent Company Guarantor Subsidiary Non-Guarantor Subsidiaries Total Company Net cash (used in) provided by operating activities Net cash used in investing activities Net cash used in financing activities Effect of exchange rate...

  • Page 103
    Xerox Corporation Condensed Consolidating Statements of Income For the Year Ended December 31, 2004 Parent Company Guarantor Subsidiary Non-Guarantor Subsidiaries Eliminations* Total Company Revenues Sales Service, outsourcing and rentals Finance income Intercompany revenues Total Revenues Cost ...

  • Page 104
    ... equivalents and Short-term investments Accounts receivable, net Billed portion of finance receivables, net Finance receivables, net Inventories Other current assets Total Current assets Finance receivables due after one year, net Equipment on operating leases, net Land, buildings and equipment, net...

  • Page 105
    ...* Total Company Revenues Sales Service, outsourcing and rentals Finance income Intercompany revenues Total Revenues Cost and Expenses Cost of sales Cost of service, outsourcing and rentals Equipment financing interest Intercompany cost of sales Research, development and engineering expenses...

  • Page 106
    ... as applicable legal and other considerations. Through February 16, 2006, we repurchased the following through our authorized repurchase programs: Common Stock Shares Aggregate Costs October 2005 Repurchase Program January 2006 Repurchase Program Total *This amount included $1 of associated fees...

  • Page 107
    Xerox Corporation REPORTS OF MANAGEMENT Management's Responsibility for Financial Statements Our management is responsible for the integrity and objectivity of all information presented in this annual report. The consolidated financial statements were prepared in conformity with accounting ...

  • Page 108
    ... REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Xerox Corporation: We have completed integrated audits of Xerox Corporation's 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and an...

  • Page 109
    ... Quarter Xerox Corporation (in millions, except per-share data) Third Quarter Fourth Quarter Full Year 2005 Revenues Costs and Expenses (1) Income from Continuing Operations before Income Taxes, Equity Income, Discontinued Operations and Cumulative Effect of Change in Accounting Principle...

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    ... shareholders of record at year-end Book value per common share Year-end common stock market price Employees at year-end Gross margin Sales gross margin Service, outsourcing and rentals gross margin Finance gross margin Working capital Current ratio Cost of additions to land, buildings and equipment...

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    ... American Agent Operations Xerox North America Gary R. Kabureck Vice President and Chief Accounting Officer John M. Kelly Vice President Senior Vice President and Chief Operating Officer Xerox Global Services James H. Lesko Vice President Investor Relations John E. McDermott Vice President Corporate...

  • Page 112
    ...Independent Auditors PricewaterhouseCoopers LLP 300 Atlantic Street Stamford, CT 06901 203 539-3000 This annual report is also available online at www.xerox.com/investor Xerox Common Stock Prices and Dividends New York Stock Exchange composite prices* 2005 First Quarter Second Quarter Third Quarter...

  • Page 113
    ... you to our customers who participated in this report: The Taylor Corporation, The Dow Chemical Company and The ConferenceWorks! All of us at Xerox deeply appreciate our relationships and look forward to making them even stronger. Marketing Communications: Pappas MacDonnell, Inc., Southport, CT

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    Xerox Annual Repor t 2005 Xerox Corporation 800 Long Ridge Road PO Box 1600 Stamford, CT 06904 www.xerox.com © 2006 Xerox Corporation. All rights reserved. Mohawk 50/10 Ultra Blue White 100# Matte cover and text contain 15% post-consumer waste. Mohawk BrightHue 50# Semi-Vellum text (Gold) ...