As filed with the Securities and Exchange Commission on August 15, 2016

File No. 001-37817

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1 to

Form 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR 12(g)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Conduent Incorporated

(Exact name of registrant as specified in its charter)

 

 

 

New York		81-2983623
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
P.O. Box 4505, 45 Glover Avenue Norwalk, Connecticut		06856
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(203) 968-3000

 

 

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class to be so Registered		Name of Each Exchange on Which Each Class is to be Registered
Common Stock, par value $1.00

Securities to be registered pursuant to Section 12(g) of the Act:

None.

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,

a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”

“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (Do not check if a smaller reporting company)		Smaller reporting company		¨

 

 

 

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Conduent Incorporated

Information Required in Registration Statement

Cross-Reference Sheet Between the Information Statement and Items of Form 10

This Registration Statement on Form 10 incorporates by reference information contained in our Information Statement filed as Exhibit 99.1 to this Form 10. For your convenience, we have provided below a cross-reference sheet identifying where the items required by Form 10 can be found in the Information Statement.

 

Item No.		Caption		Location in Information Statement
1.		Business		See “Summary,” “Risk Factors,” “Cautionary Statement Concerning Forward-Looking Statements,” “The Spin-Off,” “Capitalization,” “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Where You Can Find More Information”
1A.		Risk Factors		See “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements”
2.		Financial Information		See “Summary,” “Risk Factors,” “Capitalization,” “Selected Historical Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
3.		Properties		See “Business—Facilities”
4.		Security Ownership of Certain Beneficial Owners and Management		See “Security Ownership of Certain Beneficial Owners and Management”
5.		Directors and Executive Officers		See “Management”
6.		Executive Compensation		See “Management” and “Compensation Discussion and Analysis”
7.		Certain Relationships and Related Transactions, and Director Independence		See “Risk Factors,” “Management” and “Certain Relationships and Related Party Transactions”
8.		Legal Proceedings		See “Business—Legal Proceedings”
9.		Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters		See “The Spin-Off,” “Dividend Policy,” “Security Ownership of Certain Beneficial Owners and Management” and “Description of Our Capital Stock”
10.		Recent Sales of Unregistered Securities		See “Description of Our Capital Stock”
11.		Description of Registrant’s Securities to be Registered		See “Description of Our Capital Stock”
12.		Indemnification of Directors and Officers		See “Description of Our Capital Stock” and “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement”
13.		Financial Statements and Supplementary Data		See “Summary,” “Selected Historical Financial Data,” and “Index to Financial Statements” and the financial statements referenced therein

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Item No.		Caption		Location in Information Statement
14.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		None
15.		Financial Statements and Exhibits		(a) Financial Statements   See “Index to Financial Statements” and the financial statements referenced therein   (b) Exhibits   See below

 

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The following documents are filed as exhibits hereto:

 

Exhibit Number		Exhibit Description
2.1		Form of Separation and Distribution Agreement between Xerox Corporation and Conduent Incorporated*
3.1		Form of Restated Certificate of Incorporation of Conduent Incorporated*
3.2		Form of Amended and Restated By-Laws of Conduent Incorporated*
10.1		Form of Transition Services Agreement between Xerox Corporation and Conduent Incorporated*
10.2		Form of Tax Matters Agreement between Xerox Corporation and Conduent Incorporated*
10.3		Form of Employee Matters Agreement between Xerox Corporation and Conduent Incorporated*
10.4		Form of Intellectual Property Agreement between Xerox Corporation and Conduent Incorporated*
10.5		Form of Trademark License Agreement between Xerox Corporation and Conduent Incorporated*
10.6		Agreement, dated January 28, 2016, among Xerox Corporation, Icahn Partners Master Fund LP, Icahn Partners LP, Icahn Onshore LP, Icahn Offshore LP, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P., Icahn Enterprises G.P. Inc., Beckton Corp., High River Limited Partnership, Hopper Investments LLC, Barberry Corp., Jonathan Christodoro and Carl C. Icahn
10.7		Letter Agreement dated June 10, 2016 between Registrant and Ashok Vemuri regarding compensation arrangements.   Incorporated by reference to Exhibit 99.2 to Xerox Corporation’s Current Report on Form 8-K dated June 14, 2016. See SEC File Number 001-04471.
10.8		Form of Conduent Incorporated Performance Incentive Plan*
21.1		List of subsidiaries of Conduent Incorporated*
99.1		Preliminary Information Statement of Conduent Incorporated, subject to completion, dated August 15, 2016.

 

*	To be filed by amendment.

 

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SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this Registration Statement on Form 10 to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: August 15, 2016

 

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EXHIBIT INDEX

 

Exhibit Number		Exhibit Description
2.1		Form of Separation and Distribution Agreement between Xerox Corporation and Conduent Incorporated*
3.1		Form of Restated Certificate of Incorporation of Conduent Incorporated*
3.2		Form of Amended and Restated By-Laws of Conduent Incorporated*
10.1		Form of Transition Services Agreement between Xerox Corporation and Conduent Incorporated*
10.2		Form of Tax Matters Agreement between Xerox Corporation and Conduent Incorporated*
10.3		Form of Employee Matters Agreement between Xerox Corporation and Conduent Incorporated*
10.4		Form of Intellectual Property Agreement between Xerox Corporation and Conduent Incorporated*
10.5		Form of Trademark License Agreement between Xerox Corporation and Conduent Incorporated*
10.6		Agreement, dated January 28, 2016, among Xerox Corporation, Icahn Partners Master Fund LP, Icahn Partners LP, Icahn Onshore LP, Icahn Offshore LP, Icahn Capital LP, IPH GP LLC, Icahn Enterprises Holdings L.P., Icahn Enterprises G.P. Inc., Beckton Corp., High River Limited Partnership, Hopper Investments LLC, Barberry Corp., Jonathan Christodoro and Carl C. Icahn
10.7		Letter Agreement dated June 10, 2016 between Registrant and Ashok Vemuri regarding compensation arrangements.   Incorporated by reference to Exhibit 99.2 to Xerox Corporation’s Current Report on Form 8-K dated June 14, 2016. See SEC File Number 001-04471.
10.8		Form of Conduent Incorporated Performance Incentive Plan*
21.1		List of subsidiaries of Conduent Incorporated*
99.1		Preliminary Information Statement of Conduent Incorporated, subject to completion, dated August 15, 2016.

 

*	To be filed by amendment.

 

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Exhibit 10.6

EXECUTION COPY

AGREEMENT

This Agreement, dated 5:00 p.m, New York City time, on January 28, 2016 (this “Agreement”), is by and among the persons and entities listed on Schedule A hereto (collectively, the “Icahn Group”, and individually a “member” of the Icahn Group) and Xerox Corporation (the “Company”).

In consideration of and reliance upon the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

 

1.	SpinCo Matters.

 

(a)

Substantially concurrently with the announcement of this Agreement, the Company shall announce its intention to consummate a transaction (the “Separation”, and the effective time of the Separation, the “Separation Effective Time”) pursuant to which the Company’s business processing outsourcing business (“SpinCo”) shall be separated from the Company’s document technology business into its own publicly traded company.

 

(b)

Unless the Separation Effective Time shall have occurred by December 31, 2016, the Company shall call its 2017 annual meeting of the Company’s shareholders to be held no later than March 31, 2017, at which meeting any shareholder of the Company that has delivered written notice to the Company on or prior to January 31, 2017 (which notice shall contain the information required by the second paragraph of Article I, Section 6 of the Company’s bylaws, as in effect as of the date hereof) shall be permitted to nominate directors of the Company and/or propose other business; it being understood and agreed that such meeting shall not be required to be held by such date if the Separation Effective Time shall have occurred at or prior to 11:59 p.m. New York City time on March 30, 2017.

 

(c)

The initial board of directors of SpinCo (the “SpinCo Board”) shall be comprised of nine (9) members, who shall be selected as follows: (i) two (2) members selected by the current board of directors of the Company (the “Current Board”), who may, but shall not be required to be, members of the Current Board; (ii) three (3) members selected by the Icahn Group (the “Icahn Designees”), who may, but shall not be required to be, employees or affiliates of the Icahn Group, that are approved by the Current Board (such approval not to be unreasonably withheld, conditioned or delayed), provided that, if either such member is employed by Icahn Enterprises L.P. or Icahn Capital LP and listed on Schedule B hereto, the selection of such member shall not be subject to approval by the Current Board; and (iii) four (4) members

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selected by the Current Board, one (1) of whom is approved by the Icahn Group (such approval not to be unreasonably withheld, conditioned or delayed) and one (1) other of whom shall be the new Chief Executive Officer of SpinCo; it being understood and agreed that the SpinCo Board shall have no more than (x) two (2) members who are current or former directors, officers or employees of the Company or any affiliate of the Company and (y) three (3) members that are employees or affiliates of the Icahn Group. Should any of the Icahn Designees resign from the SpinCo Board or be rendered unable to, or refuse to be appointed to, or for any other reason fail to serve on or is not serving on, the SpinCo Board (other than due to the termination of the obligations to nominate and/or appoint under this Agreement), the Icahn Group shall be entitled to designate, and the Company or SpinCo, as applicable, shall cause to be appointed as a member of the SpinCo Board, a replacement (a “Replacement Designee”) that is approved by the Company or SpinCo, as applicable, such approval not to be unreasonably withheld, conditioned or delayed (an “Acceptable Replacement Designee”) (and if such proposed Replacement Designee is not an Acceptable Replacement Designee, the Icahn Group shall be entitled to continue designating a Replacement Designee until such proposed Replacement Designee is an Acceptable Replacement Designee). Any such Replacement Designee who becomes a SpinCo Board member in replacement of an Icahn Designee shall be deemed to be an Icahn Designee for all purposes under this Agreement.

 

(d)

The Company shall engage a nationally recognized search firm to find a new Chief Executive Officer for SpinCo, who shall: (i) be hired at or prior to the Separation Effective Time; (ii) not be a current or former director, officer or employee of the Company or any affiliate of the Company; and (iii) be selected by the Current Board. In connection therewith, the Current Board will form a new committee of the Board (the “CEO Search Committee”), which will be responsible for running the process for the selection of the new Chief Executive Officer of SpinCo.

Subject to the Icahn Group’s compliance with the Confidentiality Agreement (as defined below), for so long as the Icahn Group has Beneficial Ownership of at least 4.9% of the outstanding Voting Securities (as defined below) of the Company, a person selected by the Icahn Group (the “Observer”), which such person shall be Jonathan Christodoro, shall receive copies of all documents distributed to the CEO Search Committee, including notice of all meetings of the CEO Search Committee, all written consents executed by the CEO Search Committee and all materials prepared for consideration at any meeting of the CEO Search Committee, and shall be permitted to attend, but not vote, at all meetings (whether such meetings are held in person or telephonically or otherwise) of the CEO Search Committee; provided

 

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that if Jonathan Christodoro resigns or withdraws as the Observer or is rendered unable to, or refuses to, serve as the Observer (other than due to the termination of the obligations of the Company under this Agreement), the Icahn Group shall be entitled to designate, a replacement observer (a “Replacement Observer”) that is approved by the Company, such approval not to be unreasonably withheld, conditioned or delayed (an “Acceptable Replacement Observer”) (and if such proposed designee is not an Acceptable Replacement Observer, the Icahn Group shall be entitled to continue designating a Replacement Observer until such proposed designee is an Acceptable Replacement Observer). Any such Replacement Observer who becomes an Acceptable Replacement Observer shall be deemed to be the Observer for all purposes under this Agreement.

The Company acknowledges that the Observer desires to have conversations with members of the CEO Search Committee regarding the selection of the new Chief Executive Officer of SpinCo. The Company and the Current Board shall not take any actions to limit such dialogue or restrict members of the CEO Search Committee from speaking to the Observer (or suggest that members of the CEO Search Committee not do so). In the event the process for the selection of the new Chief Executive Officer of SpinCo is conducted by the Current Board or any committee thereof instead of the CEO Search Committee, the Observer shall be entitled to the same observer rights on the Current Board or such committee thereof, solely with respect to matters pertaining to the selection of the new Chief Executive Officer of SpinCo, as the Observer is entitled to under this Section 1(h) with respect to the CEO Search Committee.

 

(e)

If, immediately prior to the Separation Effective Time, the Icahn Group has Beneficial Ownership of at least 4.9% of the outstanding Voting Securities (as defined below) of the Company and the Icahn Group has not materially breached this Agreement and failed to cure such material breach within five business days of written notice from the Company specifying any such material breach, the Company will take such action (if it has not previously so acted), and after the Separation Effective Time, SpinCo will take such action (if it has not previously so acted), in each case as necessary to provide that, from and after the Separation Effective Time until otherwise approved by a majority vote of the stockholders of SpinCo or in the case of clauses (iv) through (x) until the Icahn Group no longer has Beneficial Ownership of at least 4.9% of the outstanding Voting Securities of SpinCo:

 

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(i)	the SpinCo Board shall be annually elected (i.e., not a “staggered” board);

 

(ii)	SpinCo will not have a Rights Plan (as defined below) at or immediately following the Separation Effective Time;

 

(iii)

any Rights Plan adopted by the SpinCo Board after the Separation Effective Time not ratified by stockholders within one hundred thirty-five (135) days of its taking effect, shall automatically expire;

 

(iv)

the provisions of SpinCo’s certificate of incorporation (the “SpinCo Charter”) and/or the bylaws of SpinCo (the “SpinCo Bylaws”) (but if only in the SpinCo Bylaws, then the provision granting stockholders such right to call special meetings may not be amended without a stockholder vote or restricted in the SpinCo Charter) shall require the SpinCo Board to call a special meeting of stockholders at the request of stockholders who own not less than 20% of the outstanding shares of common stock of SpinCo (the “SpinCo Shares”) and meet reasonable requirements specified therein (including advance notice, required disclosures, permitted matters and other terms, but excluding any length of ownership or similar holding period requirements); provided that (X) until such time after the Separation Effective Time that a single person or entity (or “group” of persons or entities who have filed as a “group” as defined under Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with respect to their ownership in SpinCo) owns at least a majority of the outstanding stock of SpinCo, business at stockholder-requested special meetings shall not be authorized to include the removal of directors or the election of directors, which matters shall only be taken by the stockholders at an annual meeting or at a special meeting called by the SpinCo Board and (Y) following such time after the Separation Effective Time that a single person or entity (or “group” of persons or entities who have filed as a “group” as defined under Section 13(d) of the Exchange Act with respect to their ownership in SpinCo) owns at least a majority of the outstanding stock of SpinCo, stockholders of SpinCo shall have the power to remove (without cause) and replace directors at a special meeting and such removal (without cause) and replacement of directors shall not require a vote of more than a majority of shares present and voted at such meeting;

 

(v)	neither the SpinCo Charter nor the SpinCo Bylaws shall impose minimum voting requirements for which matters subject to a stockholder vote are

 

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deemed approved greater than requiring approval from a majority of the outstanding SpinCo Shares, except as required by law;

 

(vi)	SpinCo will schedule its first annual meeting of stockholders following the Separation Effective Time no later than the twelve-month anniversary of the Separation Effective Time;

 

(vii)

SpinCo shall have elected not to be governed by Section 912 of the New York Business Corporation Law;

 

(viii)

SpinCo shall not adopt or approve change-of-control provisions in plans benefiting or agreements with directors, officers or employees (including equity plans and change-of-control severance agreements) with ownership triggers below 50%;

 

(ix)

if SpinCo receives a bona fide, binding premium offer from a third party (the “Initial Party”) to acquire all of the outstanding SpinCo Shares and rejects that offer in favor of an offer from another party (the “Other Party”) that the SpinCo Board deems superior, and if SpinCo engages in substantive negotiations with such Other Party and provides material non-public information to it and the Initial Party then makes a “topping” bona fide, binding premium bid that is superior to the Other Party’s offer and requests non-public information from SpinCo, SpinCo will, subject to fiduciary duties and compliance with contractual arrangements, enter into a confidentiality agreement (on terms no less favorable to the Company than entered into with the Other Party) with the Initial Party that would enable non-competitively sensitive non-public information to be shared with such party; and

 

(x)	SpinCo shall be a corporation incorporated under the laws of the State of New York.

The term “Rights Plan” shall mean any plan or arrangement of the sort commonly referred to as a “rights plan” or “stockholder rights plan” or “shareholder rights plan” or “poison pill” that is designed to increase the cost to a potential acquirer of exceeding the applicable ownership thresholds through the issuance of new rights, common stock or preferred shares (or any other security or device that may be issued to stockholders of SpinCo other than ratably to all stockholders of SpinCo) that carry severe redemption provisions, favorable purchase provisions or otherwise, and any related rights agreement that effectuates the Rights Plan.

 

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(f)

So long as an Icahn Designee is a member of the SpinCo Board: (1) the SpinCo Board will not (or if prior to the Separation Effective Time, the Company shall not permit the SpinCo Board to) form an executive committee of the SpinCo Board or any other committee of the SpinCo Board with functions similar to those customarily granted to an executive committee unless, in each case, one of the Icahn Designees is a member (if the committee has more than 4 members then no less than two (2) Icahn Designees shall be appointed members thereof); and (2) all SpinCo Board consideration of, and voting with respect to, any tender offer or exchange offer, merger, acquisition, business combination, reorganization, restructuring, recapitalization, sale or acquisition of material assets, liquidation or dissolution, in each case involving SpinCo or any of its Subsidiaries or its or their securities or a material amount of the assets or businesses of SpinCo or any of its Subsidiaries, and any material financing transactions and appointment and employment of executive officers, will take place only at the full SpinCo Board level or in committees of which one of the Icahn Designees is a member (if the applicable committee has more than 4 members then no less than two (2) Icahn Designees shall be appointed members thereof).

 

(g)

From and after the Separation Effective Time, so long as an Icahn Designee is on the SpinCo Board, SpinCo shall notify the Icahn Group in writing no less than 45 calendar days before the advance notice deadline set forth in the SpinCo Bylaws which Icahn Designees, if any, are to be nominated by SpinCo for election as a director at such meeting. If the Icahn Group is notified by SpinCo that any of the Icahn Designees are to be nominated, SpinCo shall use its reasonable best efforts to cause the election of such Icahn Designees to the SpinCo Board at such meeting (including listing such Icahn Designees in the proxy statement and proxy card prepared, filed and delivered in connection with such meeting and recommending that SpinCo’s stockholders vote in favor of the election of each of such Icahn Designees (along with all other SpinCo nominees) and otherwise supporting him or her for election in a manner no less rigorous and favorable than the manner in which SpinCo supports its other nominees in the aggregate). The Icahn Group agrees to provide, or cause to be provided, to the Company or SpinCo, as applicable, such information as is required to be disclosed in proxy statements under applicable law or is otherwise necessary for appointment of the Icahn Designees to the SpinCo Board or inclusion of any Icahn Designees on a slate of directors, as applicable.

 

(h)

Prior to the Separation Effective Time, the Company shall cause SpinCo to execute and deliver to the Icahn Group a joinder agreement in the form attached hereto as Exhibit A. Effective upon SpinCo’s execution and delivery of such joinder agreement, SpinCo shall have no liability with respect to the covenants and

 

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agreements (or liabilities) of the Company contained herein and the Company shall have no liability with respect to the covenants and agreements (or liabilities) of SpinCo contained herein.

 

2.

SpinCo Standstill. No member of the Icahn Group shall, directly or indirectly, from the Separation Effective Time to the date that no Icahn Designee serves on the SpinCo Board (such period, the “SpinCo Standstill Period”), with respect to SpinCo and its controlled Affiliates which are not publicly traded entities (which shall not include, for the avoidance of doubt, the Company), so long as SpinCo has not materially breached this Agreement and failed to cure such breach within five business days of written notice from the Icahn Group specifying any such breach:

 

(a)

solicit proxies or written consents of stockholders or conduct any other type of referendum (binding or non-binding) with respect to, or from the holders of, the Voting Securities of SpinCo, or become a “participant” (as such term is defined in Instruction 3 to Item 4 of Schedule 14A promulgated under the Exchange Act) in or assist any third party in any “solicitation” of any proxy, consent or other authority (as such terms are defined under the Exchange Act) to vote or withhold from voting any Voting Securities of SpinCo (other than such encouragement, advice or influence that is consistent with SpinCo management’s recommendation in connection with such matter);

 

(b)

encourage, advise or influence any other person or assist any third party in so encouraging, assisting or influencing any person with respect to the giving or withholding of any proxy, consent or other authority to vote or in conducting any type of referendum (other than such encouragement, advice or influence that is consistent with SpinCo management’s recommendation in connection with such matter);

 

(c)	form or join in a partnership, limited partnership, syndicate or a “group” as defined under Section 13(d) of the Exchange Act, with respect to the Voting Securities of SpinCo, or otherwise support or participate in any effort by a third party with respect to the matters set forth in this Section 2;

 

(d)

present (or request to present) at any annual meeting or any special meeting of SpinCo’s stockholders, any proposal for consideration for action by stockholders or propose (or request to propose) any nominee for election to the SpinCo Board or seek representation on the SpinCo Board (in each case except pursuant to Section 1(c)) or the removal of any member of the SpinCo Board;

 

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(e)

grant any proxy, consent or other authority to vote with respect to any matters (other than to the named proxies included in SpinCo’s proxy card for any annual meeting or special meeting of stockholders) or deposit any Voting Securities of SpinCo in a voting trust or subject them to a voting agreement or other arrangement of similar effect (excluding customary brokerage accounts, margin accounts, prime brokerage accounts and the like), in each case, except as provided in Section 2 below;

 

(f)

call or seek to call any special meeting of SpinCo or make any request under Section 220 of the Delaware General Corporation Law (the “DGCL”) or other applicable legal provisions (including equivalent statutes in any other State in which SpinCo is incorporated) regarding inspection of books and records or other materials (including stocklist materials) of SpinCo or any of its subsidiaries;

 

(g)	institute, solicit, assist or join, as a party, any litigation, arbitration or other proceeding against or involving SpinCo or any of its current or former directors or officers (including derivative actions) other than to enforce the provisions of this Agreement;

 

(h)

seek, propose, participate in, facilitate or assist any third party to seek or propose any merger, consolidation, business combination, tender or exchange offer, sale or purchase of assets, sale or purchase of securities, dissolution, liquidation, restructuring, recapitalization, extraordinary dividend, significant share repurchase or similar transaction involving SpinCo or any of its non-publicly traded controlled Affiliates (other than the Company after the Separation Effective Time) (collectively, a “SpinCo Extraordinary Transaction”); provided that the members of the Icahn Group shall be permitted to sell or tender their Voting Securities of SpinCo, and otherwise receive consideration, pursuant to any SpinCo Extraordinary Transaction and provided, further that (without limiting the following clause (i)) SpinCo may waive the restrictions in this clause (h) with the approval of the SpinCo Board and provided, further, that from the commencement by a third party (not a party to this Agreement or an Affiliate of a party) of any bona fide tender or exchange offer that is not recommended by the SpinCo Board in its Recommendation Statement on Schedule 14D-9 which, if consummated, would constitute a SpinCo Extraordinary Transaction, then the Icahn Group shall similarly be permitted to commence a tender or exchange offer for all of the Voting Securities of SpinCo at the same or higher consideration per share;

 

(i)	request, directly or indirectly, any amendment or waiver of the foregoing in a manner that would reasonably likely require public disclosure by the Icahn Group or SpinCo.

 

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Notwithstanding the foregoing, nothing in this Section 2 shall prevent an Icahn Designee acting in his or her capacity as a director of the Company from raising any such matters at the SpinCo Board.

From the date of this Agreement until the end of the SpinCo Standstill Period, (1) the Icahn Group shall not directly or indirectly make, or cause to be made, by press release or similar public statement to the press or media (including social media), or in an SEC or other public filing, any statement or announcement that disparages (as distinct from objective statements reflecting business criticism of SpinCo but not of its individual directors or officers (provided that the Icahn Group shall provide advance notice of, and a copy of, any written statement before it is made)) SpinCo or any of its officers or directors with respect to matters relating to their service at SpinCo (including any former officers or directors); and (2) neither SpinCo nor any of its officers or directors shall directly or indirectly make, or cause to be made, by press release or similar public statement to the press or media (including social media), or in an SEC or other public filing, any statement or announcement that disparages (as distinct from objective statements reflecting business criticism (provided that SpinCo shall provide advance notice of, and a copy of, any written statement before it is made)) any member of the Icahn Group or any of its current or former officers or directors with respect to matters relating to the Company or SpinCo. For the avoidance of doubt, the foregoing restrictions shall not be deemed to apply to advisors of the Icahn Group or SpinCo who are not acting at the behest of such party.

From the date of this Agreement until the end of the SpinCo Standstill Period, (1) the Icahn Group shall not permit any Icahn Affiliate to do any of the items in this Section 2 that the Icahn Group is restricted from doing and shall not publicly encourage or support any other person to take any of the actions described in this Section 2 that the Icahn Group is restricted from doing and (2) SpinCo shall not permit any of its controlled Affiliates to do any of the items in this Section 2 that SpinCo is restricted from doing and shall not publicly encourage or support any other person to take any of the actions described in this Section 2 that SpinCo is restricted from doing.

 

3.

Voting Commitment. Unless the Company has materially breached this Agreement and failed to cure within five business days following receipt of written notice from the Icahn Group specifying such breach, at the 2016 annual meeting of the Company’s shareholders (the “2016 Annual Meeting”), the Icahn Group shall (i) not, directly or indirectly, nominate directors or propose any other business for consideration by shareholders at the 2016 Annual Meeting, (ii) (A) cause, in the case of all Voting Securities of the Company owned of record, and (B) instruct the record owner, in the case of all shares of Voting Securities of the Company Beneficially Owned but not owned of record, directly or indirectly, by it, or by any controlled Affiliates of the members of the Icahn Group (such controlled Affiliates, collectively and

 

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individually, the “Icahn Affiliates”), in each case as of the record date for the 2016 Annual Meeting, in each case that are entitled to vote at the 2016 Annual Meeting, to be present for quorum purposes and to be voted, at the 2016 Annual Meeting or at any adjournments or postponements thereof (x) for all directors nominated by the Current Board for election at the 2016 Annual Meeting and (y) against any directors proposed that are not nominated by the Current Board for election at the 2016 Annual Meeting, (iii) not, directly or indirectly, solicit proxies or written consents of stockholders or conduct any other type of referendum (binding or non-binding) with respect to, or from the holders of, the Voting Securities of the Company, or become a “participant” (as such term is defined in Instruction 3 to Item 4 of Schedule 14A promulgated under the Exchange Act) in or assist any third party in any “solicitation” of any proxy, consent or other authority (as such terms are defined under the Exchange Act) to vote or withhold from voting any Voting Securities of the Company (other than such encouragement, advice or influence that is consistent with the Company management’s recommendation in connection with such matter) and (iv) not, directly or indirectly, encourage, advise or influence any other person or assist any third party in so encouraging, assisting or influencing any person with respect to the giving or withholding of any proxy, consent or other authority to vote or in conducting any type of referendum (other than such encouragement, advice or influence that is consistent with the Company management’s recommendation in connection with such matter). Except as provided in the foregoing sentence, the Icahn Group shall not be restricted from voting “For”, “Against” or “Abstaining” from any other proposals at the 2016 Annual Meeting.

 

4.

Public Announcement. No earlier than 6:45 a.m., New York City time, on January 29, 2016, the Company and the Icahn Group shall announce this Agreement and the material terms hereof by means of a press release in the form attached hereto as Exhibit B (the “Press Release”). Neither the Company nor the Icahn Group shall make any public announcement or statement that contradicts or disagrees with the statements made in the Press Release, except as required by law or the rules of any stock exchange or with the prior written consent of the other party.

 

5.	Representations and Warranties of All Parties; Representations and Warranties of the Icahn Group.

 

(a)

Each of the parties represents and warrants to the other party that: (a) such party has all requisite company power and authority to execute and deliver this Agreement and to perform its obligations hereunder; (b) this Agreement has been duly and validly authorized, executed and delivered by it and is a valid and binding obligation of such party, enforceable against such party in accordance with its terms; (c) this Agreement will not result in a violation of any terms or conditions of any agreements to which such person is a party or by which such party may otherwise be bound or of any law,

 

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rule, license, regulation, judgment, order or decree governing or affecting such party; and (d) there is currently no pending or outstanding litigation between the Icahn Group and the Company or Affiliates thereof.

 

(b)

Each member of the Icahn Group jointly represents and warrants that, as of the date of this Agreement, (i) the Icahn Group collectively Beneficially Own, an aggregate of 92,377,043 shares of Common Stock, par value $1.00, of the Company (“Common Stock”); and (ii) except for such ownership, no member of the Icahn Group, individually or in the aggregate with all other members of the Icahn Group and Icahn Affiliates, has any other Beneficial Ownership of, and/or economic exposure to, any Voting Securities of the Company, including through any derivative transaction described in the definition of “Beneficial Ownership” above. As used in this Agreement, the term “Voting Securities” means common stock or such other equity securities of the Company or SpinCo, as applicable, having the power to vote in the election of members of the board of directors of the Company or SpinCo, as applicable, and shall include securities convertible into, or exercisable or exchangeable for such common stock or such other equity securities, whether or not subject to the passage of time or other contingencies, “Beneficial Ownership” of “Voting Securities” means ownership of: (i) Voting Securities, (ii) rights or options to own or acquire any Voting Securities (whether such right or option is exercisable immediately or only after the passage of time or upon the satisfaction of one or more conditions (whether or not within the control of such person), compliance with regulatory requirements or otherwise) and (iii) any other economic exposure to Voting Securities, including through any derivative transaction that gives any such person or any of such person’s controlled Affiliates the economic equivalent of ownership of an amount of Voting Securities due to the fact that the value of the derivative is explicitly determined by reference to the price or value of Voting Securities, or which provides such person or any of such person’s controlled Affiliates an opportunity, directly or indirectly, to profit, or to share in any profit, derived from any increase in the value of Voting Securities, in any case without regard to whether (x) such derivative conveys any voting rights in Voting Securities to such person or any of such person’s Affiliates, (y) the derivative is required to be, or capable of being, settled through delivery of Voting Securities, or (z) such person or any of such person’s Affiliates may have entered into other transactions that hedge the economic effect of such Beneficial Ownership of Voting Securities and “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated by the SEC under the Exchange Act. “SEC” shall mean the U.S. Securities and Exchange Commission.

 

6.	Confidentiality Agreement. The Icahn Group, the Observer and the Company shall enter into a customary confidentiality agreement (the “Confidentiality Agreement”) covering any

 

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confidential information relating to the selection of directors pursuant to Section 1(c) and the selection of the Chief Executive Officer of SpinCo pursuant to Section 1(d).

 

7.

Remedies; Forum and Governing Law. The parties hereto recognize and agree that if for any reason any of the provisions of this Agreement are not performed in accordance with their specific terms or are otherwise breached, immediate and irreparable harm or injury would be caused for which money damages would not be an adequate remedy. Accordingly, each party agrees that in addition to other remedies the other party shall be entitled to at law or equity, the other party shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement exclusively in the Court of Chancery or other federal or state courts of the State of Delaware. In the event that any action shall be brought in equity to enforce the provisions of this Agreement, no party shall allege, and each party hereby waives the defense, that there is an adequate remedy at law. Furthermore, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of the Court of Chancery or other federal or state courts of the State of Delaware in the event any dispute arises out of this Agreement or the transactions contemplated by this Agreement, (b) agrees that it shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (c) agrees that it shall not bring any action relating to this Agreement or the transactions contemplated by this Agreement in any court other than the Court of Chancery or other federal or state courts of the State of Delaware, and each of the parties irrevocably waives the right to trial by jury, (d) agrees to waive any bonding requirement under any applicable law, in the case any other party seeks to enforce the terms by way of equitable relief and (e) irrevocably consents to service of process by a reputable overnight mail delivery service, signature requested, to the address of such party’s principal place of business or as otherwise provided by applicable law. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES OF SUCH STATE.

 

8.

No Waiver. Any waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement.

 

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9.	Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and may be amended only by an agreement in writing executed by the parties hereto.

 

10.

Notices. All notices, consents, requests, instructions, approvals and other communications provided for herein and all legal process in regard hereto shall be in writing and shall be deemed validly given, made or served, if (a) given by telecopy and email, when such telecopy and email is transmitted to the telecopy number set forth below and sent to the email address set forth below and the appropriate confirmation is received or (b) if given by any other means, when actually received during normal business hours at the address specified in this subsection:

If to the Company:

Xerox Corporation

P.O. Box 4505, 45 Glover Avenue

Norwalk, CT 06850

Attention: General Counsel

Facsimile: (203) 849-5152

Email: don.liu@xerox.com

With a copy to (which shall not constitute notice):

Cravath, Swaine & Moore LLP

825 Eighth Avenue

New York, New York 10019

Attention: Scott A. Barshay     O. Keith Hallam, III

Facsimile: (212) 474-3700      (212) 474-3700

Email: sbarshay@cravath.com khallam@cravath.com

If to the Icahn Group:

Icahn Associates Corp.

767 Fifth Avenue, 47^th Floor

New York, New York 10153

Attention: Carl C. Icahn     Keith Cozza

Facsimile: (212) 750-5807      (212) 702-4323

Email: sgordon@sfire.com      kcozza@sfire.com

With a copy to (which shall not constitute notice):

Icahn Associates Corp.

767 Fifth Avenue, 47^th Floor

New York, New York 10153

Attention: Jesse Lynn           Louie Pastor

 

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Facsimile: (917) 591-3310     (212) 688-1158

Email: jlynn@sfire.com      lpastor@sfire.com

 

11.

Severability. If at any time subsequent to the date hereof, any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect, but the illegality or unenforceability of such provision shall have no effect upon the legality or enforceability of any other provision of this Agreement.

 

12.	Counterparts. This Agreement may be executed in two or more counterparts (including by facsimile or PDF) which together shall constitute a single agreement.

 

13.	Successors and Assigns. This Agreement and the rights hereunder shall not be assignable or assigned, directly or indirectly, by operation of law or otherwise, by any of the parties to this Agreement.

 

14.

No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and is not enforceable by any other persons; provided that from and after the Separation Effective Time, SpinCo shall be a beneficiary of this Agreement, both SpinCo and the Company shall be bound to this Agreement as applicable (and for the avoidance of doubt the Icahn Group shall remain bound), and for purposes of enforcement of this Agreement prior to the Separation Effective Time only, references herein to the “Company” shall also be deemed to refer to SpinCo.

 

15.	Fees and Expenses. Neither the Company (nor SpinCo), on the one hand, nor the Icahn Group, on the other hand, will be responsible for any fees or expenses of the other in connection with this Agreement.

 

16.

Interpretation and Construction. Each of the parties hereto acknowledges that it has been represented by counsel of its choice throughout all negotiations that have preceded the execution of this Agreement, and that it has executed the same with the advice of said independent counsel. Each party and its counsel cooperated and participated in the drafting and preparation of this Agreement and the documents referred to herein, and any and all drafts relating thereto exchanged among the parties shall be deemed the work product of all of the parties and may not be construed against any party by reason of its drafting or preparation. Accordingly, any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against any party that drafted or prepared it is of no application and is hereby expressly waived by each of the parties hereto, and any controversy over interpretations of this Agreement shall be decided without regards to events of drafting or preparation. The section headings contained in this Agreement are for reference

 

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purposes only and shall not affect in any way the meaning or interpretation of this Agreement. The term “including” shall be deemed to mean “including without limitation” in all instances.

[Signature Pages Follow]

 

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IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement, or caused the same to be executed by its duly authorized representative as of the date first above written.

 

[Signature Page to Agreement between the Icahn Group and Xerox]

 

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Accepted and agreed as of the date first written above:

 

[Signature Page to Agreement between the Icahn Group and Xerox]

 

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[Signature Page to Agreement between the Icahn Group and Xerox]

 

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[Signature Page to Agreement between the Icahn Group and Xerox]

 

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[Signature Page to Agreement between the Icahn Group and Xerox]

 

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[Signature Page to Agreement between the Icahn Group and Xerox]

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SCHEDULE A

 

                                             

MR. CARL C. ICAHN

HIGH RIVER LIMITED PARTNERSHIP

HOPPER INVESTMENTS LLC

BARBERRY CORP.

ICAHN PARTNERS LP

ICAHN PARTNERS MASTER FUND LP

ICAHN ENTERPRISES G.P. INC.

ICAHN ENTERPRISES HOLDINGS L.P.

IPH GP LLC

ICAHN CAPITAL LP

ICAHN ONSHORE LP

ICAHN OFFSHORE LP

BECKTON CORP.

MR. JONATHAN CHRISTODORO

Schedule B

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SCHEDULE B

 

                                             

SungHwan Cho

Jonathan Christodoro

Keith Cozza

Hunter C. Gary

Vincent J. Intrieri

Andrew Langham

Jesse A. Lynn

Courtney Mather

Samuel Merksamer

Louis J. Pastor

Schedule B

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EXHIBIT A

WHEREAS, Xerox Corporation (the “Company”) has entered into that certain Agreement by and among the parties listed on Schedule A thereto (the “Icahn Group”) and the Company (the “Agreement”), dated January 24, 2016, a copy of which is attached hereto; and

WHEREAS, the Company is pursuing a Separation (as defined in the Agreement); and

WHEREAS, the Agreement requires that SpinCo execute and deliver to the Icahn Group this Joinder Agreement.

NOW, THEREFORE, the undersigned hereby joins in the Agreement and agrees that, immediately upon the Separation Effective Time (as defined in the Agreement), it shall be deemed to be “SpinCo” within the meaning of the Agreement and shall be bound by all of the terms and conditions of the Agreement applicable to SpinCo thereunder.

[Signature page follows]

 

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IN WITNESS WHEREOF, the undersigned has executed this Joinder Agreement as of             , 2016.

 

ACCEPTED:

MR. CARL C. ICAHN

Carl C. Icahn

HIGH RIVER LIMITED PARTNERSHIP

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

HOPPER INVESTMENTS LLC

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

 

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BARBERRY CORP.

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

ICAHN PARTNERS LP

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

[Signature Page to Joinder to Xerox/Icahn Agreement]

ICAHN PARTNERS MASTER FUND LP

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

ICAHN ENTERPRISES G.P. INC.

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

ICAHN ENTERPRISES HOLDINGS L.P.

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

IPH GP LLC

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

ICAHN CAPITAL LP

 

A-3

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By:
Name:		Keith Cozza
Title:		Authorized Signatory

ICAHN ONSHORE LP

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

ICAHN OFFSHORE LP

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

[Signature Page to Joinder to Xerox/Icahn Agreement]

BECKTON CORP

 

By:
Name:		Keith Cozza
Title:		Authorized Signatory

[Signature Page to Joinder to Xerox/Icahn Agreement]

 

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EXHIBIT B

Xerox and Carl Icahn Announce Agreement

NORWALK, Conn., Jan. 29, 2016 – Xerox (NYSE:XRX) and Carl C. Icahn announced today that they have entered into an agreement related to the governance of the Business Process Outsourcing (“BPO”) company that will be created as a result of the planned separation of Xerox into two independent, publicly-traded companies, which was announced earlier today.

Under the agreement, when the separation is complete, the BPO company will have certain best-in-class corporate governance provisions and a Board of Directors composed of nine members: six directors selected by Xerox (two of whom may come from the current Xerox Board of Directors) and three directors selected by Icahn. In addition, in connection with the planned separation, Xerox agreed that a committee of its Board of Directors will begin searching for an external candidate to be Chief Executive Officer of the BPO company and to allow a person selected by Icahn to observe and advise the committee in that search process. Additional details regarding the agreement will be included in a Form 8-K to be filed by Xerox later today.

“We are pleased to have reached an agreement with Mr. Icahn that ensures that we will have strong leadership and best-in-class governance for the new Business Process Outsourcing company that will be created by our separation plan,” said Ursula Burns, chairman and chief executive officer of Xerox.

Mr. Icahn said: “We applaud Ursula Burns and Xerox’s Board of Directors for recognizing the importance of separating Xerox into two publicly-traded companies. We strongly believe that an independent BPO company with fresh, focused leadership and best-in-class corporate governance will greatly enhance shareholder value, and we are proud to be a part of that process.”

About Xerox

Xerox is helping change the way the world works. By applying our expertise in imaging, business process, analytics, automation and user-centric insights, we engineer the flow of work to provide greater productivity, efficiency and personalization. We conduct business in 180 countries, and our more than 140,000 employees create meaningful innovations and provide business process services, printing equipment, software and solutions that make a real difference for our clients - and their customers. Learn more at www.xerox.com.

Forward-looking Statements

This release contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect management’s current beliefs, assumptions and expectations, including with respect to the proposed separation of the Business Process Outsourcing (“BPO”)

 

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business from the Document Technology and Document Outsourcing business, the expected timetable for completing the separation, the future financial and operating performance of each business, the strategic and competitive advantages of each business, future opportunities for each business and the expected amount of cost reductions that may be realized in the cost transformation program, and are subject to a number of factors that may cause actual results to differ materially. Such factors include but are not limited to: changes in economic conditions, political conditions, trade protection measures, licensing requirements and tax matters in the United States and in the foreign countries in which we do business; changes in foreign currency exchange rates; our ability to successfully develop new products, technologies and service offerings and to protect our intellectual property rights; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term and that civil or criminal penalties and administrative sanctions could be imposed on us if we fail to comply with the terms of such contracts and applicable law; the risk that our bids do not accurately estimate the resources and costs required to implement and service very complex, multi-year governmental and commercial contracts, often in advance of the final determination of the full scope and design of such contracts or as a result of the scope of such contracts being changed during the life of such contracts; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; service interruptions; actions of competitors and our ability to promptly and effectively react to changing technologies and customer expectations; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions and the relocation of our service delivery centers; the risk that individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security systems; the risk in the hiring and retention of qualified personnel; the risk that unexpected costs will be incurred; our ability to recover capital investments; the risk that our Services business could be adversely affected if we are unsuccessful in managing the start-up of new contracts; the collectability of our receivables for unbilled services associated with very large, multi-year contracts; reliance on third parties, including subcontractors, for manufacturing of products and provision of services; our ability to expand equipment placements; interest rates, cost of borrowing and access to credit markets; the risk that our products may not comply with applicable worldwide regulatory requirements, particularly environmental regulations and directives; the outcome of litigation and regulatory proceedings to which we may be a party; the possibility that the proposed separation of the BPO business from the Document Technology and Document Outsourcing business will not be consummated within the anticipated time period or at all, including as the result of regulatory, market or other factors; the potential for disruption to our business in connection with the proposed separation; the potential that BPO and Document Technology and Document Outsourcing do not realize all of the expected benefits of the separation; and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of our Quarterly Reports on Form 10-Q for the quarters ended, March 31, 2015, June 30, 2015 and September 30, 2015 and our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Xerox assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

-XXX-

Media Contacts:

 

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Sean Collins, Xerox, +1-310-497-9205, sean.collins2@xerox.com

Carl Langsenkamp, Xerox, +1-585-423-5782, carl.langsenkamp@xerox.com

Investor Contacts:

Jennifer Horsley, Xerox, +1-203-849-2656, jennifer.horsley@xerox.com

Sean Cornett, Xerox, +1-203-849-2672, sean.cornett@xerox.com

Note: To receive RSS news feeds, visit http://news.xerox.com. For open commentary, industry perspectives and views visit http://twitter.com/xerox, http://www.linkedin.com/company/xerox, http://simplifywork.blogs.xerox.com, http://www.facebook.com/XeroxCorp or http://www.youtube.com/XeroxCorp.

Xerox^® and Xerox and Design^® are trademarks of Xerox in the United States and/or other countries.

 

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Table of Contents

Exhibit 99.1

Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

SUBJECT TO COMPLETION, DATED AUGUST 15, 2016

INFORMATION STATEMENT

Conduent Incorporated

P.O. Box 4505, 45 Glover Avenue

Norwalk, Connecticut 06856

Common Stock

(par value $1.00)

 

 

We are sending you this Information Statement in connection with the spin-off by Xerox Corporation, or “Xerox,” of its wholly owned subsidiary, Conduent Incorporated, or “Conduent.” To effect the spin-off, Xerox will distribute all of the shares of Conduent common stock on a pro rata basis to the holders of Xerox common stock. We expect that the distribution of Conduent common stock will be tax-free to holders of Xerox common stock for U.S. federal income tax purposes, except for cash that shareholders receive in lieu of fractional shares.

If you are a record holder of Xerox common stock as of the close of business on                    , 2016, which is the record date for the distribution, you will be entitled to receive             shares of Conduent common stock for every            shares of Xerox common stock you hold on that date. Xerox will distribute the shares of Conduent common stock in book-entry form, which means that we will not issue physical stock certificates. The distribution agent will not distribute any fractional shares of Conduent common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to each holder (net of any required withholding for taxes applicable to each holder) who would otherwise have been entitled to receive a fractional share in the distribution.

The distribution will be effective as of                    p.m., New York City time, on                    , 2016. Immediately after the distribution becomes effective, Conduent will be an independent, publicly traded company.

Xerox’s shareholders are not required to vote on or take any other action to approve the spin-off. We are not asking you for a proxy and request that you do not send us a proxy. Xerox shareholders will not be required to pay any consideration for the shares of Conduent common stock they receive in the spin-off, and they will not be required to surrender or exchange their shares of Xerox common stock or take any other action in connection with the spin-off.

Xerox currently owns all of the outstanding shares of Conduent common stock. Accordingly, no trading market for Conduent common stock currently exists. We expect, however, that a limited trading market for Conduent common stock, commonly known as a “when-issued” trading market, will develop as early as two trading days prior to the record date for the distribution, and we expect “regular-way” trading of Conduent common stock will begin on the first trading day after the distribution date. We intend to list Conduent common stock on                          under the symbol “    .”

 

 

In reviewing this Information Statement, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 15 of this Information Statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.

This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

The date of this Information Statement is                    , 2016.

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TABLE OF CONTENTS

 

		Page
INDUSTRY AND MARKET DATA			1
TRADEMARKS AND COPYRIGHTS			1
SUMMARY			2
RISK FACTORS			15
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS			32
THE SPIN-OFF			33
DIVIDEND POLICY			42
CAPITALIZATION			43
SELECTED HISTORICAL FINANCIAL DATA			44
BUSINESS			45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			61
MANAGEMENT			99
COMPENSATION DISCUSSION AND ANALYSIS			103
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			145
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			147
DESCRIPTION OF OUR INDEBTEDNESS			152
DESCRIPTION OF OUR CAPITAL STOCK			153
WHERE YOU CAN FIND MORE INFORMATION			158
INDEX TO FINANCIAL STATEMENTS			F-1

 

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INDUSTRY AND MARKET DATA

This Information Statement includes information concerning our industry and the markets in which we operate that is based on information from public filings, internal company sources, various third-party sources and management estimates. We have also included information derived from market research and industry modeling that was conducted by third-party research organizations at our request not in connection with this Information Statement. Management estimates are derived from publicly available information released by independent industry and research analysts and third-party sources, as well as data from our internal research and information from commissioned third-party research not in connection with this Information Statement, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets, which we believe to be reasonable. While we are not aware of any misstatements regarding any industry data presented in this Information Statement and believe such data are accurate, we have not independently verified any data obtained from third-party sources and cannot assure you of the accuracy or completeness of such data. Such data involve uncertainties and are subject to change based on various factors.

TRADEMARKS AND COPYRIGHTS

We own or have rights to various trademarks, logos, service marks and trade names that we use in connection with the operation of our business. We also own or have the rights to copyrights that protect the content of our products. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this Information Statement are listed without the ™, ^® or ^© symbols, but such references do not constitute a waiver of any rights that might be associated with the respective trademarks, service marks, trade names and copyrights included or referred to in this Information Statement.

 

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RISK FACTORS

You should carefully consider all of the information in this Information Statement and each of the risks described below, which we believe are the principal risks that we face. Some of the risks relate to our business, others to the Spin-Off. Some risks relate principally to the securities markets and ownership of our common stock.

Any of the following risks could materially adversely affect our results of operations and financial condition and the actual outcome of matters as to which forward-looking statements are made in this Information Statement.

Risks Relating to Our Business

Our government contracts are subject to termination rights, audits and investigations, which, if exercised, could negatively impact our reputation and reduce our ability to compete for new contracts.

A significant portion of our revenues is derived from contracts with U.S. federal, state and local governments and their agencies, and some of our revenues are derived from contracts with foreign governments and their agencies. Government entities typically finance projects through appropriated funds. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and/or at their convenience. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g., Congressional sequestration of funds under the Budget Control Act of 2011) or other debt or funding constraints, such as those recently experienced in the United States and Europe, could result in lower governmental sales and in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of incurred costs, reimbursable expenses and profits on work completed prior to the termination. Additionally, if the government discovers improper or illegal activities or contractual non-compliance (including improper billing), we may be subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Any resulting penalties or sanctions could materially adversely affect our results of operations and financial condition. Moreover, government contracts are generally subject to audits and investigations by government agencies. If the government finds that we inappropriately charged any costs to a contract, the costs are not reimbursable or, if already reimbursed, the cost must be refunded to the government. Further, the negative publicity that could arise from any such penalties, sanctions or findings in such audits or investigations could have an adverse effect on our reputation in the industry and reduce our ability to compete for new contracts and could materially adversely affect our results of operations and financial condition.

We derive significant revenue and profit from commercial and government contracts awarded through competitive bidding processes, including renewals, which can impose substantial costs on us, and we will not achieve revenue and profit objectives if we fail to accurately and effectively bid on such projects.

Many of these contracts are extremely complex and require the investment of significant resources in order to prepare accurate bids and proposals. Competitive bidding imposes substantial costs and presents a number of risks, including: (i) the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may or may not be awarded to us; (ii) the need to estimate accurately the resources and costs that will be required to implement and service any contracts we are awarded, sometimes in advance of the final determination of their full scope and design; (iii) the expense and delay that may arise if our competitors protest or challenge awards made to us pursuant to competitive bidding and the risk that such protests or challenges could result in the requirement to resubmit bids and in the termination, reduction or modification of the awarded contracts; and (iv) the opportunity cost of not bidding on and winning other contracts we might otherwise pursue. If our competitors protest or challenge an award made to us on a government contract, the costs to defend such an award may be significant and could involve subsequent litigation that could take years to resolve.

 

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We rely to a significant extent on third-party providers, such as subcontractors, a relatively small number of primary software vendors, utility providers and network providers; if they cannot deliver or perform as expected or if our relationships with them are terminated or otherwise change, our results of operations and financial condition could be materially adversely affected.

Our ability to service our customers and clients and deliver and implement solutions depends to a large extent on third-party providers such as subcontractors, a relatively small number of primary software vendors, software application developers, utility providers and network providers meeting their obligations to us and our expectations in a timely, quality manner. Our results of operations and financial condition could be materially adversely affected and we might incur significant additional liabilities if any of our third-party providers do not meet these obligations or our or our clients’ expectations or if they terminate or refuse to renew their relationships with us or were to offer their products to us with less advantageous prices and other terms than we previously had.

Failure to deliver on our contractual obligations properly and on time could materially adversely affect our results of operations and financial condition.

Our business model depends in large part on our ability to retain existing and attract new work from our base of existing clients, as well as on relationships we develop with our clients so that we can understand our clients’ needs and deliver solutions and services that are tailored to meet those needs. In order for our business to grow, we must successfully manage the provision of services under our contracts. If a client is not satisfied with the quality of work performed by us or a subcontractor, or with the type of services or solutions delivered, then we could incur additional costs to address the situation, the profitability of that work might be impaired and the client’s dissatisfaction with our services could damage our ability to obtain additional work from that client or obtain new work from other potential clients. In particular, many of our contracts with non-government clients may be terminated by the client, without cause, upon specified advance notice, so clients who are not satisfied might seek to terminate existing contracts prior to their scheduled expiration date, which may result in our inability to fully recover our up-front investments. In addition, clients could direct future business to our competitors. We could also trigger contractual credits to clients or a contractual default. Failure to properly transition new clients to our systems, properly budget transition costs or accurately estimate contract operational costs could result in delays in our contract performance, trigger service level penalties, impair fixed or intangible assets or result in contract profit margins that do not meet our expectations or our historical profit margins.

In addition, we incur significant expenditures for the development and construction of system software platforms needed to support our clients’ needs. Our failure to fully understand client requirements or implement the appropriate operating systems or databases or solutions which enable the use of other supporting software may delay the project and result in cost overruns or potential impairment of the related software platforms.

We face significant competition and our failure to compete successfully could materially adversely affect our results of operations and financial condition.

We operate in an environment of significant competition, driven by rapid technological developments, changes in industry standards and demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. Some of the large international companies have significant financial resources and compete with us globally to provide business process services in each of the markets we serve. In addition, we must frequently compete with a client’s own internal business process and information technology capabilities, which may constitute a fixed cost for the client. We compete primarily on the basis of technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve, to promptly and effectively react to changing technologies and customer expectations and to expand into additional market segments. To remain competitive, we must develop services and applications; periodically enhance our existing offerings; remain cost efficient; and attract and retain key personnel and management. If we are unable to compete successfully, we could lose market share and important customers to our competitors and that could materially adversely affect our results of operations and financial condition.

 

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Our business is dependent on continued interest in outsourcing.

Our business and growth depend in large part on continued interest in outsourced business process services. Outsourcing means that an entity contracts with a third party, such as us, to provide business process services rather than perform such services in-house. There can be no assurance that this interest will continue, as organizations may elect to perform such services themselves and/or the business process outsourcing industry could move to an as-a-Service model, thereby eliminating traditional business process outsourcing tasks. A significant change in this interest in outsourcing could materially adversely affect our results of operations and financial condition. Additionally, there can be no assurance that our cross-selling efforts will cause clients to purchase additional services from us or adopt a single-source outsourcing approach.

Our profitability is dependent upon our ability to obtain adequate pricing for our services and to improve our cost structure.

Our success depends on our ability to obtain adequate pricing for our services that will provide a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our services may decline from previous levels. If we are unable to obtain adequate pricing for our services, it could materially adversely affect our results of operations and financial condition. In addition, our contracts are increasingly requiring tighter timelines for implementation as well as more stringent service level metrics. This makes the bidding process for new contracts much more difficult and requires us to adequately consider these requirements in the pricing of our services.

We regularly review our operations with a view towards reducing our cost structure, including, without limitation, reducing our employee base, exiting certain businesses, improving process and system efficiencies and outsourcing some internal functions. We from time to time engage in restructuring actions to reduce our cost structure. On January 29, 2016, Xerox announced a three-year strategic transformation program targeting cost savings across all segments, including the BPO Business. If we are unable to continue to maintain our cost base at or below the current level and maintain process and systems changes resulting from prior restructuring actions or to realize the expected cost reductions in the ongoing strategic transformation program, it could materially adversely affect our results of operations and financial condition.

In addition, in order to meet the service requirements of our customers, which often includes 24/7 service, and to optimize our employee cost base, including our back-office support, we often locate our delivery service and back-office support centers in lower-cost locations, including several developing countries. Concentrating our centers in these locations presents a number of operational risks, many of which are beyond our control, including the risks of political instability, natural disasters, safety and security risks, labor disruptions, excessive employee turnover and rising labor rates. Additionally, a change in the political environment in the United States or the adoption and enforcement of legislation and regulations curbing the use of such centers outside of the United States could materially adversely affect our results of operations and financial condition. These risks could impair our ability to effectively provide services to our customers and keep our costs aligned to our associated revenues and market requirements.

Our ability to sustain and improve profit margins is dependent on a number of factors, including our ability to continue to improve the cost efficiency of our operations through such programs as robotic process automation, to absorb the level of pricing pressures on our services through cost improvements and to successfully complete information technology initiatives. If any of these factors adversely materialize or if we are unable to achieve and maintain productivity improvements through restructuring actions or information technology initiatives, our ability to offset labor cost inflation and competitive price pressures would be impaired, each of which could materially adversely affect our results of operations and financial condition.

 

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We may be subject to claims of infringement of third-party intellectual property rights which could adversely affect our results of operation and financial condition.

We rely heavily on the use of intellectual property. We do not own a significant portion of the software that we use to run our business; instead we license this software from a small number of primary vendors. If these vendors assert claims that we or our clients are infringing on their software or related intellectual property, we could incur substantial costs to defend these claims, which could materially adversely affect our results of operations and financial condition. In addition, if any of our vendors’ infringement claims are ultimately successful, our vendors could require us to (i) cease selling or using products or services that incorporate the challenged software or technology, (ii) obtain a license or additional licenses from our vendors or (iii) redesign our services which rely on the challenged software or technology. In addition, we may be exposed to claims for monetary damages. If we are unsuccessful in defending an infringement claim and our vendors require us to initiate any of the above actions, or we are required to pay monetary damages, then such actions could materially adversely affect our results of operations and financial condition.

We are subject to laws of the United States and foreign jurisdictions relating to individually identifiable information and personal health information, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and negatively impact our operations.

We receive, process, transmit and store information relating to identifiable individuals, both in our role as a service provider and as an employer. As a result, we are subject to numerous United States (both federal and state) and foreign jurisdiction laws and regulations designed to protect both individually identifiable information as well as personal health information, including the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) and the HIPAA regulations governing, among other things, the privacy, security and electronic transmission of individually identifiable health information, and the European Union Directive on Data Protection (Directive 95/46/EC). Other United States (both federal and state) and foreign jurisdiction laws apply to our processing of individually identifiable information and these laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. For example, the recent invalidation of the U.S.-EU Safe Harbor regime will require us to implement alternative mechanisms in order for some of our data flows from Europe to the United States to comply with applicable law. Changes to existing laws, introduction of new laws in this area or failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to obtain and process information and allegations by our customers and clients that we have not performed our contractual obligations, any of which could materially adversely affect our results of operations and financial condition.

We are subject to laws of the United States and foreign jurisdictions relating to processing certain financial transactions, including payment card transactions and debit or credit card transactions, and failure to comply with those laws, whether or not inadvertent, could subject us to legal actions and materially adversely affect our results of operations and financial condition.

We receive, process and implement financial transactions, and disburse funds, on behalf of both government and commercial customers. This activity includes receiving debit and credit card information to process payments due to our customers as well as disbursing funds on payment or debit cards to payees of our customers. As a result, we are subject to numerous United States (both federal and state) and foreign jurisdiction laws and regulations, including the Electronic Fund Transfer Act, as amended, the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (including the so-called Durbin Amendment), as amended, the Gramm-Leach-Bliley Act (also known as the Financial Modernization Act of 1999), as amended, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended. Other United States (both federal and state) and foreign jurisdiction laws apply to our processing of certain financial transactions and these laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. Changes to existing laws, introduction of

 

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new laws in this area or failure to comply with existing laws that are applicable to us may subject us to, among other things, additional costs or changes to our business practices, liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to process financial transactions and allegations by our customers and clients that we have not performed our contractual obligations, any of which could materially adversely affect our results of operations and financial condition.

We are subject to breaches of our security systems and service interruptions which could expose us to liability, impair our reputation or temporarily render us unable to fulfill our service obligations under our contracts.

We have implemented security systems, both directly and with third-party subcontractors and service providers, with the intent of maintaining both the physical security of our facilities and the data security of our customers’, clients’ and suppliers’ confidential information and information related to identifiable individuals (including payment card and debit and credit card information and health information) against unauthorized access through our information systems or by other electronic transmission or through the misdirection, theft or loss of physical media. These include, for example, the appropriate encryption of information. Despite such efforts, we are subject to breach of security systems which may result in unauthorized access to our facilities and/or the information we are trying to protect. Because the techniques used to obtain unauthorized access are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we or our third-party service providers may be unable to anticipate these techniques or implement sufficient preventative measures. Additionally, with advances in computer capabilities and data protection requirements to address ongoing threats, we may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by security breaches. Moreover, employee error or malfeasance, faulty password management or other irregularities may result in a defeat of our or our third-party service providers’ security measures and breach our or our third-party service providers’ information systems (whether digital or otherwise).

If unauthorized parties gain physical access to one of our or one of our third-party service providers’ facilities or electronic access to our or one of our third-party service providers’ information systems or such information is misdirected, lost or stolen during transmission or transport, any theft or misuse of such information could result in, among other things, unfavorable publicity, governmental inquiry and oversight, difficulty in marketing our services, allegations by our customers and clients that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for damages related to the theft or misuse of such information, any of which could materially adversely affect our results of operations and financial condition. Moreover, a security breach could require us to devote significant management resources to address the problems created by the security breach and to expend significant additional resources to upgrade further the security measures that we employ to guard such important personal information against cyber attacks and other attempts to access such information and could result in a disruption of our operations. We also maintain various systems and data centers for our customers. Often these systems and data centers must be maintained worldwide and on a 24/7 basis. Although we endeavor to ensure that there is adequate backup and maintenance of these systems and centers, we could experience service interruptions that could result in curtailed operations and loss of customers, which could reduce our revenues and profits in addition to impairing our reputation. If our information systems and our back-up systems are damaged, breached or cease to function properly, we may have to make a significant investment to repair or replace them, and we may suffer interruptions in our operations in the interim, each of which could materially adversely affect our results of operations and financial condition.

Our ability to recover capital and other investments in connection with our contracts is subject to risk.

In order to attract and retain large outsourcing contracts, we sometimes make significant capital and other investments to enable us to perform our services under those contracts, such as purchases of information technology equipment, facility costs, labor resources and costs incurred to develop and implement software. The net book value of certain assets recorded, including a portion of our intangible assets, could be impaired, and our

 

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results of operations and financial condition could be materially adversely affected in the event of the early termination of all or a part of such a contract or a reduction in volumes and services thereunder for reasons such as a customer’s or client’s merger or acquisition, divestiture of assets or businesses, business failure or deterioration or a customer’s or client’s exercise of contract termination rights.

If we underestimate the scope of work or the costs of performance in our contracts, or we misperform our contracts, our results of operations and financial condition could be materially adversely affected.

In order to stay competitive in our industry, we must also keep pace with changing technologies and customer preferences. Many of our contracts require us to design, develop and implement new technological and operating systems for our customers. Many of these systems involve detailed and complex computer source code which must be created and integrated into a working system that meets contract specifications. The accounting for these contracts requires judgment relative to assessing risks, estimating contract revenues and costs and making assumptions for schedule and technical issues. To varying degrees, each contract type involves some risk that we could underestimate the costs and resources necessary to fulfill the contract. In each case, our failure to accurately estimate costs or the resources and technology needed to perform our contracts or to effectively manage and control our costs during the performance of our work could result, and in some instances has resulted, in reduced profits or in losses. In addition, in many of our contracts, we have complicated performance obligations, including, without limitation, designing and building new integrated computer systems or doing actuarial work for pension, medical and other plans with beneficiaries that can rely on future projection of obligations to determine appropriate levels of funding. These contracts carry potential financial penalties or could result in financial damages or exposures if we fail to properly perform those obligations and could result in our results of operations and financial condition being materially adversely affected.

If we are unable to collect our receivables for unbilled services, our results of operations and financial condition could be materially adversely affected.

The profitability of certain of our large contracts depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. Actual losses on client balances could differ from current estimates and, as a result, may require adjustment of our receivables for unbilled services. Our receivables include long-term contracts and over the course of a long-term contract, our customers’ financial condition may change such that their ability to pay their obligations, and our ability to collect our fees for services rendered, is adversely affected. Additionally, we may perform work for the federal, state and local governments, with respect to which we must file requests for equitable adjustment or claims with the proper agency to seek recovery in whole or in part, for out-of-scope work directed or caused by the government customer in support of its project, and the amounts of such recoveries may not meet our expectations or cover our costs. Macroeconomic conditions could result in financial difficulties, including, without limitation, limited access to the credit markets, insolvency or bankruptcy, for our clients and, as a result, could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance or default on their payment obligations to us. Timely collection of client balances also depends on our ability to complete our contractual commitments (for example, achieve specified milestones in percentage-of-completion contracts) and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our results of operations and financial condition could be materially adversely affected.

A decline in revenues from or a loss or failure of significant clients could materially adversely affect our results of operations and financial condition.

Our results of operations and financial condition could be materially adversely affected by the loss or failure of significant clients. Some of our clients are in business sectors which have experienced significant financial difficulties or consolidation, and/or the reduction of volumes or their inability to make payments to us, as a result

 

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of, among other things, their merger or acquisition, divestiture of assets or businesses, contract expiration, non-renewal or early termination (including termination for convenience) or business or financial failure or deterioration. Economic and political conditions could affect our clients’ businesses and the markets they serve. A prolonged economic downturn or a negative or uncertain political climate could, or could continue to, adversely affect our clients’ financial conditions and the level of business activity of our clients and the industries we serve, which may reduce our clients’ demand for our services or depress pricing of those services and could materially adversely affect our results of operations and financial condition. In addition, we incur certain fixed costs related to providing our services to our clients. Therefore, the loss or failure of any one of our significant clients could leave us with a significantly higher level of fixed costs than is necessary for some period of time to serve our remaining clients, thereby materially adversely affecting our results of operations and financial condition.

We have non-recurring revenue, which subjects us to a risk that our revenues and cash flows from operations may fluctuate from period to period.

Revenue generated from our non-recurring services may fluctuate due to factors both within and outside of our control. Our mix of non-recurring and recurring revenues is impacted by acquisitions as well as growth in our non-recurring lines of business. There is less predictability and certainty in the timing and amount of revenues generated by our non-recurring services and, accordingly, our results of operations and financial condition could be materially adversely affected by the timing and amount of revenues generated from our non-recurring services.

The failure to obtain or maintain a satisfactory credit rating could adversely affect our liquidity, capital position, borrowing costs, access to capital markets and ability to post surety or performance bonds to support clients’ contracts.

Our credit risk is expected to be evaluated by the major independent rating agencies. Once a credit rating is obtained, which we expect to be below investment grade, any future downgrades to such rating could negatively impact our ability to renew contracts with our existing clients, limit our ability to compete for new clients, result in increased premiums for surety or performance bonds to support our clients’ contracts and/or result in a requirement that we provide collateral to secure our surety or performance bonds. Further, certain of our commercial outsourcing contracts provide that, in the event our credit ratings are downgraded to specified levels, the client may elect to terminate its contract with us and either pay a reduced termination fee or, in some limited instances, no termination fee. Such a credit rating downgrade could adversely affect these client relationships. Moreover, once a credit rating is obtained, there may be reductions thereof if we incur additional indebtedness. There can be no assurance that we will be able to maintain our credit ratings once established, and any additional actual or anticipated downgrades of our credit ratings, including any announcement that our ratings are under review for a downgrade, may have a negative impact on our liquidity, capital position and access to capital markets.

A failure to attract and retain key employees and members of our management team could materially adversely affect our results of operations and financial condition.

Our success depends on the skills, experience and performance of key employees and members of our management team. The competitive environment for employee and management talent in the business processing outsourcing industry could impact our ability to attract and retain key employees and management. Identifying, developing internally or hiring externally, training and retaining key employees and management is critical to our future. Our failure to successfully hire key employees and management or the loss of the services of key employees or members of management could materially adversely affect our results of operations and financial condition.

 

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A failure to attract and retain necessary technical personnel and qualified subcontractors could materially adversely affect our results of operations and financial condition.

Because we operate in intensely competitive markets, our success depends to a significant extent upon our ability to attract, retain and motivate highly skilled and qualified technical personnel and to subcontract with qualified, competent subcontractors. If we fail to attract, train and retain sufficient numbers of qualified engineers, technical staff and sales and marketing representatives or are unable to contract with qualified, competent subcontractors, our results of operations and financial condition could be materially adversely affected. Experienced and capable personnel in the services industry remain in high demand, and there is continual competition for their talents. Additionally, we may be required to increase our hiring in geographic areas outside of the United States, which could subject us to increased geopolitical and exchange rate risk. The loss of any key technical employee or the loss of a key subcontractor relationship could materially adversely affect our results of operations and financial condition.

Increases in the cost of telephone and data services or significant interruptions in such services could materially adversely affect our results of operations and financial condition.

Our business is significantly dependent on telephone and data service provided by various local and long distance telephone and data service providers around the world. Accordingly, any disruption of these services could materially adversely affect our results of operations and financial condition. We have taken steps to mitigate our exposure to service disruptions by investing in redundant circuits, although there is no assurance that the redundant circuits would not also suffer disruption. Any inability to obtain telephone or data services at favorable rates could materially adversely affect our results of operations and financial condition. Where possible, we have entered into long-term contracts with various providers to mitigate short-term rate increases and fluctuations. There is no obligation, however, for the vendors to renew their contracts with us, or to offer the same or lower rates in the future, and such contracts are subject to termination or modification for various reasons outside of our control. A significant increase in the cost of telephone or data services that is not recoverable through an increase in the price of our services could materially adversely affect our results of operations and financial condition. In addition, a number of our facilities are located in jurisdictions outside of the United States where the provision of utility services, including electricity and water, may not be consistently reliable, and while there are backup systems in many of our operating facilities, an extended outage of utility or network services could materially adversely affect our results of operations and financial condition.

We may make acquisitions of businesses, engage in joint ventures or divest our non-core businesses. These strategic decisions, if taken, involve potential risks.

We regularly evaluate opportunities to improve our services through acquisitions of new businesses, investments in joint ventures with other businesses and divestitures of our non-core businesses. In pursuing acquisitions and joint ventures we may be unable to identify businesses or counterparties that complement our strategies, and even if we identify a business or a counterparty that complements our strategies, we may be unable to acquire such business or transact with such counterparty at a reasonable cost or upon acceptable terms and conditions. The full amount of anticipated benefits of any acquisition, joint venture or divestiture may not be realized on the expected timing or at all. Moreover, any acquisitions we undertake expose us to the risks that come with the incurrence of additional indebtedness and/or could result in dilutive effects on the issuance of additional equity securities. In addition, the actual integration of an acquired business may divert attention of management from operating the existing business and could result in additional and unforeseen expenses. We may fail to sustain the acquired businesses’ quality of services that we have historically provided and key employees of the acquired business may leave after the acquisition.

Divestitures of our non-core businesses could have similar effects, including the loss of earnings of the divested business or operation. Failure to execute acquisitions, investments and divestitures in a satisfactory manner could materially adversely affect our results of operations and financial condition.

 

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We will be a holding company and, therefore, may not be able to receive dividends or other payments in needed amounts from our subsidiaries.

Our principal assets are the shares of capital stock and indebtedness of our subsidiaries. We rely on dividends, interest and other payments from these subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations, paying corporate expenses and, if determined by our Board, paying dividends to shareholders and repurchasing common shares. Certain of our subsidiaries are subject to regulatory requirements of the jurisdictions in which they operate or other restrictions that may limit the amounts that these subsidiaries can pay in dividends or other payments to us. No assurance can be given that there will not be further changes in law, regulatory actions or other circumstances that could restrict the ability of our subsidiaries to pay dividends to us. In addition, due to differences in tax rates, repatriation of funds from certain countries into the United States could have unfavorable tax ramifications for us. Furthermore, no assurance can be given that our subsidiaries may be able to make timely payments to us in order for us to meet our obligations.

Our ability to obtain future contracts, or perform services under existing contracts, for certain government clients is dependent on our ability to maintain necessary security clearances.

Select U.S. and non-U.S. government clients require us to maintain security clearances for certain of our facilities used in the performance of classified contracts. Employees who perform under certain government contracts are required to possess appropriate personnel security clearances for access to classified information granted by the respective government. The competition for qualified personnel who possess security clearance is very strong in certain public sector markets. In the event that a government customer were to revoke the facility and/or personnel clearances of all or substantially all of the employees performing work under a classified contract, such revocation could be grounds for termination of the contract by the government customer and impede the ability to obtain future contracts. Similarly, if we are unable to hire sufficient qualified and cleared personnel to meet contractual commitments, a contract could be terminated for non-performance. Under either circumstance, such termination, depending on the contract value, could materially adversely affect our results of operations and financial condition.

Our results of operations and financial condition could be materially adversely affected by legal and regulatory matters.

We are potentially subject to various contingent liabilities that are not reflected on our balance sheet, including those arising as a result of being involved in a variety of claims, lawsuits, investigations and proceedings concerning: securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act of 1974 (ERISA); and other laws and regulations, as discussed under Note 15—Contingencies and Litigation in our Combined Financial Statements included elsewhere in this Information Statement. Should developments in any of these matters cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual or materially increase an existing accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts above any existing accruals, it could materially adversely affect our results of operations and financial condition in the period or periods in which such change in determination, judgment or settlement occurs.

There can be no assurances as to the favorable outcome of any claim, lawsuit, investigation or proceeding. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could materially adversely affect our results of operations and financial condition. These proceedings could also result in reputational harm, criminal sanctions, consent decrees or orders preventing us from offering certain services, requiring a change in our business practices in costly ways or requiring development of non-infringing or otherwise altered products or technologies. In addition, it can be very costly to defend litigation and these costs could materially adversely affect our results of operations and financial condition. See Note 15—Contingencies and Litigation to our Combined Financial Statements included elsewhere in this Information Statement.

 

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Our results of operations and financial condition may be materially adversely affected by conditions abroad, including local economics, political environments, fluctuating foreign currencies and shifting regulatory schemes.

A portion of our revenues is generated from operations outside the United States. In addition, we maintain significant operations outside the United States. Our results of operations and financial condition could be materially adversely affected by changes in foreign currency exchange rates, as well as by a number of other factors, including, without limitation, changes in economic conditions from country to country, changes in a country’s political conditions, trade protection measures, licensing requirements, local tax issues, capitalization and other related legal matters. We generally hedge foreign currency denominated assets, liabilities and anticipated transactions primarily through the use of currency derivative contracts. The use of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. We do not hedge the translation effect of international revenues and expenses, which are denominated in currencies other than our U.S. parent functional currency, within our combined financial statements. If we are unable to effectively hedge these risks, our results of operations and financial condition could be materially adversely affected.

If we fail to successfully develop new service offerings, including new technology components, and protect our intellectual property rights, we may be unable to retain current customers and gain new customers and our revenues would decline.

The process of developing new service offerings, including new technology components, is inherently complex and uncertain. It requires accurate anticipation of customers’ changing needs and emerging technological trends. We must make long-term investments and commit significant resources before knowing whether these investments will eventually result in service offerings that achieve customer acceptance and generate the revenues required to provide desired returns. For example, establishing internal automation processes to help us develop new service offerings will require significant up-front costs and resources, which, if not monetized effectively, could materially adversely affect our revenues. In addition, some of our service offerings rely on technologies developed by and licensed from third parties. We may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such third parties may demand cross-licenses to our intellectual property. It is also possible that our intellectual property rights could be challenged, invalidated or circumvented, allowing others to use our intellectual property to our competitive detriment. We also must ensure that all of our service offerings comply with both existing and newly enacted regulatory requirements in the countries in which they are sold. If we fail to accurately anticipate and meet our customers’ needs through the development of new service offerings (including technology components) or if we fail to adequately protect our intellectual property rights or if our new service offerings are not widely accepted or if our current or future service offerings fail to meet applicable worldwide regulatory requirements, we could lose market share and customers to our competitors and that could materially adversely affect our results of operations and financial condition.

Risks Relating to the Spin-Off

The Spin-Off could result in significant tax liability to Xerox and its shareholders.

Completion of the Spin-Off is conditioned on Xerox’s receipt of a written opinion of Cravath, Swaine & Moore LLP to the effect that the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Code and the receipt and continuing effectiveness and validity of the IRS Ruling.

The opinion of counsel will not address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinion will assume that the Spin-Off will be completed according to the terms of the Separation and Distribution Agreement and will rely on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, this Information Statement and a number of other documents as well as the continuing effectiveness and validity of the IRS Ruling. In addition, the opinion will be based on

 

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certain representations as to factual matters from, and certain covenants by, Xerox and us. The opinion cannot be relied on if any of the assumptions, representations or covenants is incorrect, incomplete or inaccurate or is violated in any material respect.

Xerox has requested the IRS Ruling. The IRS Ruling will rely on certain facts, assumptions, representations and undertakings from Xerox and us regarding the past and future conduct of Xerox’s and our businesses and other matters. If any of these facts, assumptions, representations or undertakings is incorrect or not otherwise satisfied, Xerox may not be able to rely on the IRS Ruling. In addition, the IRS ruling is not a comprehensive ruling from the IRS regarding all aspects of the U.S. federal income tax consequences of the transactions.

Accordingly, notwithstanding the opinion of counsel and the IRS Ruling, there can be no assurance that the IRS will not assert, or that a court would not sustain, a contrary position.

If the Distribution were determined not to qualify for non-recognition of gain and loss for U.S. federal income tax purposes, U.S. Holders could be subject to tax. In this case, each U.S. Holder who receives our common stock in the Distribution would generally, for U.S. federal income tax purposes, be treated as receiving a distribution in an amount equal to the fair market value of our common stock received, which would generally result in (i) a taxable dividend to the U.S. Holder to the extent of that U.S. Holder’s pro rata share of Xerox’s current and accumulated earnings and profits; (ii) a reduction in the U.S. Holder’s basis (but not below zero) in Xerox common stock to the extent the amount received exceeds the shareholder’s share of Xerox’s earnings and profits; and (iii) a taxable gain from the exchange of Xerox common stock to the extent the amount received exceeds the sum of the U.S. Holder’s share of Xerox’s earnings and profits and the U.S. Holder’s basis in its Xerox common stock. See below and “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

We could have an indemnification obligation to Xerox if the Distribution were determined not to qualify for non-recognition treatment, which could materially adversely affect our results of operations and financial condition.

If it were determined that the Distribution did not qualify for non-recognition of gain and loss under Section 355 of the Code, we could, under certain circumstances, be required to indemnify Xerox for the resulting taxes and related expenses. Any such indemnification obligation could materially adversely affect our results of operations and financial condition. For a description of such indemnification obligation, see “Certain Relationships and Related Party Transactions—Agreements with Xerox—Tax Matters Agreement.”

In addition, Section 355(e) of the Code generally creates a presumption that the Distribution would be taxable to Xerox, but not to shareholders, if we or our shareholders were to engage in transactions that result in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Distribution, unless it were established that such transactions and the Distribution were not part of a plan or series of related transactions giving effect to such a change in ownership. If the Distribution were taxable to Xerox due to such a 50% or greater change in ownership of our stock, Xerox would recognize gain equal to the excess of the fair market value of our common stock distributed to Xerox shareholders over Xerox’s tax basis in our common stock and we generally would be required to indemnify Xerox for the tax on such gain and related expenses. Any such indemnification obligation could materially adversely affect our results of operations and financial condition. See “Certain Relationships and Related Party Transactions—Agreements with Xerox—Tax Matters Agreement.”

We intend to agree to numerous restrictions to preserve the non-recognition treatment of the Distribution, which may reduce our strategic and operating flexibility.

We intend to agree in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355 of the Code. These covenants and indemnification obligations may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that may otherwise maximize

 

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the value of our business, and might discourage or delay a strategic transaction that our shareholders may consider favorable. See “Certain Relationships and Related Party Transactions—Agreements with Xerox—Tax Matters Agreement.”

We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.

We believe that, as an independent, publicly traded company, we will be able to, among other things, design and implement corporate strategies and policies that are targeted to our business, better focus our financial and operational resources on our specific business, create effective incentives for our management and employees that are more closely tied to our business performance, provide investors more flexibility and enable us to achieve alignment with a more natural shareholder base and implement and maintain a capital structure designed to meet our specific needs. However, by separating from Xerox, we may be more susceptible to market fluctuations and other adverse events. As an independent entity, we will have an arm’s-length relationship with Xerox and we may not be able to obtain supplies from Xerox on terms as favorable to us as those we had as a wholly owned subsidiary of Xerox prior to the Spin-Off. As a smaller, independent company, Conduent will have a narrower business focus and may be more vulnerable to changing market conditions as well as the risk of takeover by third parties. In addition, we may be unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all. Furthermore, Xerox currently guarantees our and our subsidiaries’ performance under certain services contracts and real estate leases. Following the Spin-Off, we expect that Conduent will provide such performance guarantees, and we may be unable to retain or renew such contracts on terms and conditions as favorable to us as those currently in effect. A loss of such services contracts or real estate leases or a failure to renew such contracts or leases on favorable terms and conditions could materially adversely affect our results of operations and financial condition. The completion of the Spin-Off will also require significant amounts of our management’s time and effort, which may divert management’s attention from operating and growing our business. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our results of operations and financial condition could be materially adversely affected.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent, publicly traded company, and we may experience increased costs after the Spin-Off.

We have historically operated as part of Xerox’s corporate organization, and Xerox has provided us with various corporate functions. Following the Spin-Off, Xerox will have no obligation to provide us with assistance other than the transition services described under “Certain Relationships and Related Party Transactions—Transition Services Agreement.” These services do not include every service that we have received from Xerox in the past, and Xerox is only obligated to provide these services for limited periods following completion of the Spin-Off. Accordingly, following the Spin-Off, we will need to provide internally or obtain from unaffiliated third parties the services we currently receive from Xerox. These services include senior management, legal, human resources, finance and accounting, treasury, information technology, marketing and communications, internal audit and other shared services, the effective and appropriate performance of which are critical to our operations. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from Xerox. Because our business has most recently operated as part of the wider Xerox organization, we may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or may incur additional costs that could adversely affect our business. If we fail to obtain the quality of services necessary to operate effectively or incur greater costs in obtaining these services, our results of operations and financial condition could be materially adversely affected.

We have no recent operating history as an independent, publicly traded company, and our historical financial data are not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

We derived the historical financial data included in this Information Statement from Xerox’s consolidated financial statements, and these data do not necessarily reflect the results of operations and financial condition we

 

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would have achieved as an independent, publicly traded company during the periods presented, or those that we will achieve in the future. This is primarily because of the following factors:

 

•

Prior to the Spin-Off, we operated as part of Xerox’s broader corporate organization and Xerox performed various corporate functions for us, including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology, marketing and communications, internal audit and other shared services. Our historical financial data reflect allocations of corporate expenses from Xerox for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent, publicly traded company.

 

•

We will enter into transactions with Xerox that did not exist prior to the Spin-Off, such as Xerox’s provision of transition services, which will cause us to incur new costs.

 

•

Our historical financial data do not reflect changes that we expect to experience in the future as a result of our separation from Xerox. As part of Xerox, we enjoyed certain benefits from Xerox’s operating diversity, size, purchasing power, credit rating, borrowing leverage and available capital for investments, and we will lose these benefits after the Spin-Off. Many of our services contracts, particularly those for our transportation service offerings in our Public Sector business, require significant capital investments, and after the Spin-Off, we may not have access to the capital (from both internal and external sources) necessary to fund these services contracts. As an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, or access capital markets on terms as favorable to us as those we obtained as part of Xerox prior to the Spin-Off.

Following the Spin-Off, we will also be responsible for the additional costs associated with being an independent, publicly traded company, including costs related to corporate governance, investor and public relations and public reporting. For additional information about our past financial performance and the basis of presentation of our financial statements, see “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and the notes thereto included elsewhere in this Information Statement.

Some of the contracts to be transferred or assigned to us in connection with the Internal Transactions and Distribution contain provisions that require the consent of a third party to the Internal Transactions, the Distribution or both. Failure to obtain such consents on commercially reasonable and satisfactory terms may impair our entitlement to the benefit of these contracts in the future.

We expect to incur new indebtedness concurrently with or prior to the Distribution, and the degree to which we will be leveraged following completion of the Distribution could materially adversely affect our results of operations and financial condition.

In connection with the Spin-Off, we expect to incur indebtedness. We have historically relied upon Xerox for working capital requirements, including in connection with our previous acquisitions. After the Distribution, we will not be able to rely on the earnings, assets or cash flow of Xerox and Xerox will not provide funds to finance our working capital or other cash requirements. As a result, after the Distribution, we will be responsible for servicing our own debt and obtaining and maintaining sufficient working capital and other funds to satisfy our cash requirements. After the Spin-Off, our access to and cost of debt financing will be different from the historical access to and cost of debt financing under Xerox. Differences in access to and cost of debt financing may result in differences in the interest rate charged to us on financings, as well as the amount of indebtedness, types of financing structures and debt markets that may be available to us.

Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the Spin-Off, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

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The terms of the new indebtedness we expect to incur concurrently with or prior to the Distribution will restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industries in which we operate, the economy and governmental regulations.

We expect that the terms of the indebtedness we expect to incur concurrently with or prior to the Distribution will include a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries and limit our ability to engage in actions that may be in our long-term best interests. These may restrict our and our subsidiaries’ ability to take some or all of the following actions:

 

•

incur or guarantee additional indebtedness or sell disqualified or preferred stock;

 

•

pay dividends on, make distributions in respect of, repurchase or redeem, capital stock;

 

•

make investments or acquisitions;

 

•

sell, transfer or otherwise dispose of certain assets, including accounts receivable;

 

•

create liens;

 

•

enter into sale/leaseback transactions;

 

•

enter into agreements restricting the ability to pay dividends or make other intercompany transfers;

 

•

consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries’ assets;

 

•

enter into transactions with affiliates;

 

•

prepay, repurchase or redeem certain kinds of indebtedness;

 

•

issue or sell stock of our subsidiaries; and/or

 

•

significantly change the nature of our business.

As a result of all of these restrictions, we may be:

 

•

limited in how we conduct our business and pursue our strategy;

 

•

unable to raise additional debt financing to operate during general economic or business downturns; or

 

•

unable to compete effectively or to take advantage of new business opportunities.

A breach of any of these covenants, if applicable, could result in an event of default under the terms of this indebtedness. If an event of default occurs, the lenders would have the right to accelerate the repayment of such debt and the event of default or acceleration may result in the acceleration of the repayment of any other of our debt to which a cross-default or cross-acceleration provision applies. Furthermore, the lenders of this indebtedness may require that we pledge our assets as collateral as security for our repayment obligations. If we were unable to repay any amount of this indebtedness when due and payable, the lenders could proceed against the collateral that secures this indebtedness. In the event our creditors accelerate the repayment of our borrowings, we may not have sufficient assets to repay such indebtedness, which could materially adversely affect our results of operations and financial condition.

As part of Xerox, we currently receive favorable terms and prices from existing third-party vendors that we source products and services from based on the full purchasing power of Xerox. Following the Spin-Off, we will be a smaller company and may experience increased costs resulting from a decrease in purchasing power.

Prior to the Spin-Off, we have been able to take advantage of Xerox’s size and purchasing power in sourcing products and services from third-party vendors. Following the Spin-Off, we will be a smaller company and are unlikely to have the same purchasing power that we had as part of Xerox. Although we are seeking to expand our direct purchasing relationships with many of our most important third-party vendors, we may be unable to obtain products and services at prices and on terms as favorable as those available to us prior to the separation, which could increase our costs and reduce our profitability.

 

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We may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements with Xerox.

We will enter into agreements with Xerox related to our separation from Xerox, including the Separation and Distribution Agreement, Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement and any other agreements, while we are still part of Xerox. Accordingly, these agreements may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of these agreements will relate to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations between Xerox and us. We may have received better terms from third parties. See “Certain Relationships and Related Party Transactions—Agreements with Xerox.”

Risks Relating to Our Common Stock and the Securities Market

No market for our common stock currently exists and an active trading market may not develop or be sustained after the Spin-Off. Following the Spin-Off, our stock price may fluctuate significantly.

There is currently no public market for our common stock. We intend to apply to list our common stock on             . We anticipate that before the Distribution Date, trading of shares of our common stock will begin on a “when-issued” basis and this trading will continue up to and including the Distribution Date. However, an active trading market for our common stock may not develop as a result of the Spin-Off or may not be sustained in the future. The lack of an active market may make it more difficult for shareholders to sell our shares and could lead to our share price being depressed or volatile.

We cannot predict the prices at which our common stock may trade after the Spin-Off. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

•

actual or anticipated fluctuations in our results of operations or financial condition due to factors related to our business;

 

•

success or failure of our business strategies;

 

•

our quarterly or annual earnings, or those of other companies in our industry;

 

•

our level of indebtedness, our ability to make payments on or service our indebtedness and our ability to obtain financing as needed;

 

•

changes in accounting standards, policies, guidance, interpretations or principles;

 

•

the failure of securities analysts to cover our common stock after the Spin-Off;

 

•

changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

•

the operating and stock price performance of other comparable companies;

 

•

investor perception of our company and the business process outsourcing industry;

 

•

overall market fluctuations;

 

•

results from any material litigation or government investigation;

 

•

changes in laws and regulations (including tax laws and regulations) affecting our business;

 

•

changes in capital gains taxes and taxes on dividends affecting shareholders; and

 

•

general economic conditions and other external factors.

Furthermore, our business profile and market capitalization may not fit the investment objectives of some Xerox shareholders and, as a result, those Xerox shareholders may sell their shares of our common stock after the Distribution. See “—Substantial sales of our common stock may occur in connection with the Spin-Off, which

 

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could cause our stock price to decline.” Low trading volume for our stock, which may occur if an active trading market does not develop, among other reasons, would amplify the effect of the above factors on our stock price volatility.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.

Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.

Xerox shareholders receiving shares of our common stock in the Distribution generally may sell those shares immediately in the public market. It is likely that some Xerox shareholders, including some of its larger shareholders, will sell their shares of our common stock received in the Distribution if, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives, or—in the case of index funds—we are not a participant in the index in which they are investing. The sales of significant amounts of our common stock, or the perception in the market that this will occur, may decrease the market price of our common stock.

We cannot assure you that we will pay dividends on our common stock and our indebtedness will limit our ability to pay dividends on our common stock.

Following the Spin-Off, the timing, declaration, amount and payment of future dividends to shareholders will fall within the discretion of our Board. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements of our business and covenants associated with debt obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. For more information, see “Dividend Policy.” There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends.

Your percentage ownership in Conduent may be diluted in the future.

Your percentage ownership in Conduent may be diluted in the future because of equity awards that we expect to grant to our directors, officers and other employees. Prior to completion of the Spin-Off, we expect to approve an incentive plan that will provide for the grant of common stock-based equity awards to our directors, officers and other employees. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic investments that we may make in the future or as necessary to finance our ongoing operations.

Certain provisions in our Restated Certificate of Incorporation and in our Amended and Restated By-Laws and New York law may discourage takeovers.

Several provisions of our Restated Certificate of Incorporation, Amended and Restated By-Laws and New York law may discourage, delay or prevent a merger or acquisition that is opposed by our Board. These include provisions that:

 

•

permit us to issue blank check preferred stock as more fully described under “Description of Our Capital Stock—Certain Provisions of New York Law, Our Restated Certificate of Incorporation and Amended and Restated By-Laws”;

 

•

provide that only the Chairman of the Board, the Board or the Secretary, at the request of the holders of record of not less than 20% of the outstanding shares of the common stock of Conduent will be able to call a special meeting of shareholders;

 

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•

establish advance notice requirements for shareholder nominations and proposals; and

 

•

limit our ability to enter into business combination transactions with certain stockholders.

These and other provisions of our Restated Certificate of Incorporation, Amended and Restated By-Laws and New York law may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of Conduent, including unsolicited takeover attempts, even though the transaction may offer our shareholders the opportunity to sell their shares of our common stock at a price above the prevailing market price. See “Description of Our Capital Stock—Certain Provisions of New York Law, Our Restated Certificate of Incorporation and Amended and Restated By-Laws” for more information.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Information Statement contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the business process outsourcing industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Important factors that could cause our actual results to differ materially from those in our forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors, among others:

 

•

competitive pressures;

 

•

changes in interest in outsourced business process services;

 

•

our ability to obtain adequate pricing for our services and to improve our cost structure;

 

•

the effects of any acquisitions, joint ventures and divestitures by us;

 

•

our ability to attract and retain key employees;

 

•

our ability to attract and retain necessary technical personnel and qualified subcontractors;

 

•

a decline in revenues from or a loss or failure of significant clients;

 

•

our ability to estimate the scope of work or the costs of performance in our contracts;

 

•

the failure to comply with laws relating to individually identifiable information and personal health information and laws relating to processing certain financial transactions, including payment card transactions and debit or credit card transactions;

 

•

our ability to deliver on our contractual obligations properly and on time;

 

•

our ability to renew commercial and government contracts awarded through competitive bidding processes;

 

•

increases in the cost of telephone and data services or significant interruptions in such services;

 

•

changes in tax and other laws and regulations;

 

•

changes in U.S. GAAP or other applicable accounting policies; and

 

•

the other risks and uncertainties detailed in the section titled “Risk Factors.”

Any forward-looking statements made by us in this Information Statement speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

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THE SPIN-OFF

Background

On January 29, 2016, Xerox announced plans for the complete legal and structural separation of the BPO Business from Xerox. To effect the separation, Xerox is undertaking the Internal Transactions described under “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement.”

Following the Internal Transactions, Xerox will distribute all of its equity interest in us, consisting of all of the outstanding shares of our common stock, to holders of Xerox’s common stock on a pro rata basis. Following the Spin-Off, Xerox will not own any equity interest in us, and we will operate independently from Xerox. No approval of Xerox’s shareholders is required in connection with the Spin-Off, and Xerox’s shareholders will not have any appraisal rights in connection with the Spin-Off.

Completion of the Spin-Off is subject to the satisfaction, or the Xerox Board’s waiver, of a number of conditions. In addition, Xerox has the right not to complete the Spin-Off if, at any time, the Xerox Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Xerox or its shareholders or is otherwise not advisable. For a more detailed description, see “—Conditions to the Spin-Off.”

Reasons for the Spin-Off

In October 2015, the Xerox Board authorized a review of Xerox’s business portfolio and capital allocation options, with the goal of enhancing shareholder value. In reaching the decision to create two independent public companies, Xerox considered a range of potential structural alternatives and concluded that the creation of two independent public companies is the most attractive alternative for enhancing shareholder value. As part of this evaluation, Xerox considered a number of factors, including the strategic clarity and flexibility for Xerox and Conduent after the Spin-Off, the ability of Conduent to compete and operate efficiently and effectively (including Conduent’s ability to retain and attract management talent) after the Spin-Off, the financial profile of Conduent and the potential reaction of investors.

As a result of this evaluation, Xerox determined that proceeding with the Spin-Off would be in the best interests of Xerox and its shareholders. Xerox considered the following potential benefits of this approach:

 

•

Enhanced Strategic and Operational Focus. Following the Spin-Off, Xerox and Conduent will each have a more focused business and be better able to dedicate financial, management and other resources to leverage its areas of strength and differentiation. Each company will pursue appropriate growth opportunities and execute strategic plans best suited to address the distinct market trends and opportunities for its business. Conduent plans to focus on leadership in attractive market segments, invest selectively in growth areas, ensure continued operational discipline and capture transformative productivity.

 

•

Simplified Organizational Structure and Resources. The Spin-Off will allow the management of each of Xerox and Conduent to devote its time and attention to the development and implementation of corporate strategies and policies that are based primarily on the specific business characteristics of their respective companies. Each company will be able to adapt faster to clients’ changing needs, address specific market dynamics, target innovation and investments in select growth areas and accelerate decision-making processes.

 

•

Distinct and Clear Financial Profiles and Compelling Investment Cases. Investment in one or the other company may appeal to investors with different goals, interests and concerns. The Spin-Off will allow investors to make independent investment decisions with respect to Xerox and Conduent and may result in greater alignment between the interests of Conduent’s shareholder base and the characteristics of Conduent’s business, capital structure and financial results.

 

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•

Performance Incentives. The Spin-Off will enable Conduent to create incentives for its management and employees that are more closely tied to its business performance and shareholder expectations. Conduent’s equity-based compensation arrangements will more closely align the interests of Conduent’s management and employees with the interests of its shareholders and should increase Conduent’s ability to attract and retain personnel.

 

•

Capital Structure. The Spin-Off will enable each of Xerox and Conduent to leverage its distinct growth profile and cash flow characteristics to optimize its capital structure and capital allocation strategy.

In determining whether to effect the Spin-Off, Xerox considered the costs and risks associated with the transaction, including the costs associated with preparing Conduent to become an independent, publicly traded company, the risk of volatility in our stock price immediately following the Spin-Off due to sales by Xerox’s shareholders whose investment objectives may not be met by our common stock, the time it may take for us to attract our optimal shareholder base, the possibility of disruptions in our business as a result of the Spin-Off, the risk that the combined trading prices of our common stock and Xerox’s common stock after the Spin-Off may drop below the trading price of Xerox’s common stock before the Spin-Off and the loss of synergies and scale from operating as one company. Notwithstanding these costs and risks, taking into account the factors discussed above, Xerox determined that the Spin-Off provided the best opportunity to achieve the above benefits and enhance shareholder value.

When and How You Will Receive Conduent Shares

Xerox will distribute to its shareholders, as a pro rata dividend,             shares of our common stock for every            shares of Xerox common stock outstanding as of                     , 2016, the Record Date of the Distribution.

Prior to the Distribution, Xerox will deliver all of the issued and outstanding shares of our common stock to the distribution agent.            will serve as distribution agent in connection with the Distribution and as transfer agent and registrar for our common stock.

If you own Xerox common stock as of the close of business on                     , 2016, the shares of our common stock that you are entitled to receive in the Distribution will be issued to your account as follows:

 

•

Registered shareholders. If you own your shares of Xerox common stock directly through Xerox’s transfer agent, Computershare Trust Company, N.A., you are a registered shareholder. In this case, the distribution agent will credit the whole shares of our common stock you receive in the Distribution by way of direct registration in book-entry form to a new account with our transfer agent. Registration in book-entry form refers to a method of recording share ownership where no physical stock certificates are issued to shareholders, as is the case in the Distribution. You will be able to access information regarding your book-entry account holding the Conduent shares at                  or by calling                 .

Commencing on or shortly after the Distribution Date, the distribution agent will mail to you an account statement that indicates the number of whole shares of our common stock that have been registered in book-entry form in your name. We expect it will take the distribution agent up to two weeks after the Distribution Date to complete the distribution of the shares of our common stock and mail statements of holding to all registered shareholders.

 

•

“Street name” or beneficial shareholders. If you own your shares of Xerox common stock beneficially through a bank, broker or other nominee, the bank, broker or other nominee holds the shares in “street name” and records your ownership on its books. In this case, your bank, broker or other nominee will credit your account with the whole shares of our common stock that you receive in the Distribution on or shortly after the Distribution Date. We encourage you to contact your bank, broker or other nominee if you have any questions concerning the mechanics of having shares held in “street name.”

 

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If you sell any of your shares of Xerox common stock on or before the Distribution Date, the buyer of those shares may in some circumstances be entitled to receive the shares of our common stock to be distributed in respect of the Xerox shares you sold. See “—Trading Prior to the Distribution Date” for more information.

We are not asking Xerox shareholders to take any action in connection with the Spin-Off. We are not asking you for a proxy and request that you not send us a proxy. We are also not asking you to make any payment or surrender or exchange any of your shares of Xerox common stock for shares of our common stock. The number of outstanding shares of Xerox common stock will not change as a result of the Spin-Off.

Number of Shares You Will Receive

On the Distribution Date, you will receive              shares of our common stock for every             shares of Xerox common stock you owned as of the Record Date.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Xerox shareholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and “when-issued” trades will generally settle within four trading days following the Distribution Date. See “—Trading Prior to the Distribution Date” for additional information regarding “when-issued” trading. The distribution agent will, in its sole discretion, without any influence by Xerox or us, determine when, how, through which broker-dealer and at what price to sell the whole shares. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Xerox or us.

The distribution agent will send to each registered holder of Xerox common stock entitled to a fractional share a check in the cash amount deliverable in lieu of that holder’s fractional share as soon as practicable following the Distribution Date. We expect the distribution agent to take about two weeks after the Distribution Date to complete the distribution of cash in lieu of fractional shares to Xerox shareholders. If you hold your shares through a bank, broker or other nominee, your bank, broker or nominee will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales. No interest will be paid on any cash you receive in lieu of a fractional share. The cash you receive in lieu of a fractional share will generally be taxable to you for U.S. federal income tax purposes. See “—Material U.S. Federal Income Tax Consequences of the Spin-Off” below for more information.

Material U.S. Federal Income Tax Consequences of the Spin-Off

Consequences to U.S. Holders of Xerox Common Stock

The following is a summary of the material U.S. federal income tax consequences to holders of Xerox common stock in connection with the Distribution. This summary is based on the Code, the Treasury Regulations promulgated under the Code and judicial and administrative interpretations of those laws, in each case as in effect and available as of the date of this Information Statement and all of which are subject to change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below.

This summary is limited to holders of Xerox common stock that are U.S. Holders, as defined immediately below, that hold their Xerox common stock as a capital asset. A “U.S. Holder” is a beneficial owner of Xerox common stock that is, for U.S. federal income tax purposes:

 

•

an individual who is a citizen or a resident of the United States;

 

•

a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;

 

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•

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

•

a trust if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) in the case of a trust that was treated as a domestic trust under law in effect before 1997, a valid election is in place under applicable Treasury Regulations.

This summary does not discuss all tax considerations that may be relevant to shareholders in light of their particular circumstances, nor does it address the consequences to shareholders subject to special treatment under the U.S. federal income tax laws, such as:

 

•

dealers or traders in securities or currencies;

 

•

tax-exempt entities;

 

•

banks, financial institutions or insurance companies;

 

•

real estate investment trusts, regulated investment companies or grantor trusts;

 

•

persons who acquired Xerox common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

•

shareholders who own, or are deemed to own, 10% or more, by voting power or value, of Xerox equity;

 

•

shareholders owning Xerox common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. federal income tax purposes;

 

•

certain former citizens or long-term residents of the United States;

 

•

shareholders who are subject to the alternative minimum tax;

 

•

persons who own Xerox common stock through partnerships or other pass-through entities; or

 

•

persons who hold Xerox common stock through a tax-qualified retirement plan.

This summary does not address any U.S. state or local or foreign tax consequences or any estate, gift or other non-income tax consequences.

If a partnership, or any other entity treated as a partnership for U.S. federal income tax purposes, holds Xerox common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership is urged to consult its own tax advisor as to its tax consequences.

YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL AND FOREIGN TAX CONSEQUENCES OF THE DISTRIBUTION.

General

Completion of the Spin-Off is conditioned upon Xerox’s receipt of a written opinion of Cravath, Swaine & Moore LLP, counsel to Xerox, to the effect that the Distribution should qualify for nonrecognition of gain and loss under Section 355 of the Code and upon the receipt and continuing effectiveness and validity of the IRS Ruling. If the Distribution qualifies for this treatment and subject to the qualifications and limitations set forth herein (including the discussion below relating to the receipt of cash in lieu of fractional shares), for U.S. federal income tax purposes:

 

•

no gain or loss should be recognized by, or be includible in the income of, a U.S. Holder as a result of the Distribution, except with respect to any cash received in lieu of fractional shares;

 

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•

the aggregate tax basis of the Xerox common stock and our common stock held by each U.S. Holder immediately after the Distribution should be the same as the aggregate tax basis of the Xerox common stock held by the U.S. Holder immediately before the Distribution, allocated between the Xerox common stock and our common stock in proportion to their relative fair market values on the date of the Distribution (subject to reduction upon the deemed sale of any fractional shares, as described below); and

 

•

the holding period of our common stock received by each U.S. Holder should include the holding period of its Xerox common stock, provided that such Xerox common stock is held as a capital asset on the date of the Distribution.

U.S. Holders that have acquired different blocks of Xerox common stock at different times or at different prices are urged to consult their tax advisors regarding the allocation of their aggregate adjusted tax basis among, and the holding period of, shares of our common stock distributed with respect to such blocks of Xerox common stock.

If a U.S. Holder receives cash in lieu of a fractional share of common stock as part of the Distribution, the U.S. Holder will be treated as though it first received a distribution of the fractional share in the Distribution and then sold it for the amount of cash actually received. Provided the fractional share is considered to be held as a capital asset on the date of the Distribution, the U.S. Holder will generally recognize capital gain or loss measured by the difference between the cash received for such fractional share and the U.S. Holder’s tax basis in that fractional share, as determined above. Such capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period for the Xerox common stock is more than one year on the date of the Distribution.

The opinion of counsel will not address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinion will assume that the Spin-Off will be completed according to the terms of the Separation and Distribution Agreement and will rely on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, this Information Statement and a number of other documents. In addition, the opinion will be based on certain representations as to factual matters from, and certain covenants by, Xerox and us as well as the continuing effectiveness and validity of the IRS Ruling. The opinion cannot be relied on if any of the assumptions, representations or covenants are incorrect, incomplete or inaccurate or are violated in any material respect.

Xerox has requested the IRS Ruling. The IRS Ruling will rely on certain facts, assumptions, representations and undertakings from Xerox and us regarding the past and future conduct of Xerox’s and our businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not otherwise satisfied, Xerox may not be able to rely on the IRS Ruling. In addition, the IRS Ruling is not a comprehensive ruling from the IRS regarding all aspects of the U.S. federal income tax consequences of the transactions.

Accordingly, notwithstanding the opinion of counsel and the IRS Ruling, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to one or more of the conclusions set forth above.

If the Distribution were determined not to qualify for non-recognition of gain and loss, the above consequences would not apply and U.S. Holders could be subject to tax. In this case, each U.S. Holder who receives our common stock in the Distribution would generally be treated as receiving a distribution in an amount equal to the fair market value of our common stock received, which would generally result in:

 

•

a taxable dividend to the U.S. Holder to the extent of that U.S. Holder’s pro rata share of Xerox’s current and accumulated earnings and profits;

 

•

a reduction in the U.S. Holder’s basis (but not below zero) in Xerox common stock to the extent the amount received exceeds the shareholder’s share of Xerox’s earnings and profits; and

 

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•

a taxable gain from the exchange of Xerox common stock to the extent the amount received exceeds the sum of the U.S. Holder’s share of Xerox’s earnings and profits and the U.S. Holder’s basis in its Xerox common stock.

Backup Withholding and Information Statement

Payments of cash in lieu of a fractional share of our common stock may, under certain circumstances, be subject to “backup withholding,” unless a U.S. Holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations will generally be exempt from backup withholding, but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding is not an additional tax, and it may be refunded or credited against a U.S. Holder’s U.S. federal income tax liability if the required information is timely supplied to the IRS.

Treasury Regulations require each Xerox shareholder that, immediately before the Distribution, owned 5% or more (by vote or value) of the total outstanding stock of Xerox to attach to such shareholder’s U.S. federal income tax return for the year in which the Distribution occurs a statement setting forth certain information related to the Distribution.

Consequences to Xerox

The following is a summary of the material U.S. federal income tax consequences to Xerox in connection with the Spin-Off that may be relevant to holders of Xerox common stock.

As discussed above, completion of the Spin-Off is conditioned upon Xerox’s receipt of a written opinion of Cravath, Swaine & Moore LLP, counsel to Xerox, to the effect that the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Code and the receipt and continuing effectiveness and validity of the IRS Ruling. If the Distribution qualifies for nonrecognition of gain and loss under Section 355 of the Code, no gain or loss should be recognized by Xerox as a result of the Distribution (other than income or gain arising from any imputed income or other adjustment to Xerox, us or our respective subsidiaries if and to the extent that the Separation and Distribution Agreement or any ancillary agreement is determined to have terms that are not at arm’s length). The opinion of counsel and IRS Ruling are subject to the qualifications and limitations as are set forth above under “—Consequences to U.S. Holders of Xerox Common Stock.”

If the Distribution were determined not to qualify for non-recognition of gain and loss under Section 355 of the Code, then Xerox would recognize gain equal to the excess of the fair market value of our common stock distributed to Xerox shareholders over Xerox’s tax basis in our common stock.

Indemnification Obligation

If it were determined that the Distribution did not qualify for non-recognition of gain and loss under Section 355 of the Code, we could, under certain circumstances, be required to indemnify Xerox for taxes resulting from the recognition of gain described above and related expenses. In addition, current tax law generally creates a presumption that the Distribution would be taxable to Xerox, but not to holders, if we or our shareholders were to engage in transactions that result in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Distribution, unless it were established that such transactions and the Distribution were not part of a plan or series of related transactions giving effect to such a change in ownership. If the Distribution were taxable to Xerox due to such a 50% or greater change in ownership of our stock, Xerox would recognize gain equal to the excess of the fair market value of our common stock distributed to Xerox shareholders over Xerox’s tax basis in our common stock and we generally would be required to indemnify Xerox for the tax on such gain and related expenses. For a description of our indemnification obligations, see “Certain Relationships and Related Party Transactions—Agreements with Xerox—Tax Matters Agreement.”

 

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Results of the Spin-Off

After the Spin-Off, we will be an independent, publicly traded company. Immediately following the Spin-Off, we expect to have approximately                 beneficial holders of shares of our common stock and approximately             shares of our common stock outstanding, based on the number of Xerox shareholders and shares of Xerox common stock outstanding on                     , 2016. The actual number of shares of our common stock Xerox will distribute in the Spin-Off will depend on the actual number of shares of Xerox common stock outstanding on the Record Date, which will reflect any issuance of new shares or exercises of outstanding options pursuant to Xerox’s equity plans, and any repurchase of Xerox shares by Xerox under its common stock repurchase program, on or prior to the Record Date. The Spin-Off will not affect the number of outstanding shares of Xerox common stock or any rights of Xerox shareholders, although we expect the trading price of shares of Xerox common stock immediately following the Distribution to be lower than immediately prior to the Distribution because the trading price of Xerox common stock will no longer reflect the value of the BPO Business.

Before our separation from Xerox, we intend to enter into a Separation and Distribution Agreement and several other agreements with Xerox related to the Spin-Off. These agreements will govern the relationship between us and Xerox up to and after completion of the Spin-Off and allocate between us and Xerox various assets, liabilities, rights and obligations, including employee benefits, intellectual property and tax-related assets and liabilities. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements with Xerox.”

Listing and Trading of our Common Stock

As of the date of this Information Statement, we are a wholly owned subsidiary of Xerox. Accordingly, no public market for our common stock currently exists, although a “when-issued” market in our common stock may develop prior to the Distribution. See “—Trading Prior to the Distribution Date” below for an explanation of a “when-issued” market. We intend to list our shares of common stock on                      under the symbol “            .”

Neither we nor Xerox can assure you as to the trading price of Xerox common stock or our common stock after the Spin-Off, or as to whether the combined trading prices of our common stock and the Xerox common stock after the Spin-Off will be less than, equal to or greater than the trading prices of Xerox common stock prior to the Spin-Off. The trading price of our common stock may fluctuate significantly following the Spin-Off. See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market” for more detail.

The shares of our common stock distributed to Xerox shareholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the Spin-Off include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for federal securities law purposes. These individuals may include some or all of our directors and executive officers. Individuals who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), or an exemption from the registration requirements of the Securities Act, such as those afforded by Section 4(a)(1) of the Securities Act or Rule 144 thereunder.

Trading Prior to the Distribution Date

We expect a “when-issued” market in our common stock to develop as early as two trading days prior to the Record Date for the Distribution and continue up to and including the Distribution Date. “When-issued” trading refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. If you own shares of Xerox common stock at the close of business on the Record Date, you will be entitled to receive shares of our common stock in the Distribution. You may trade this entitlement to receive shares of our common stock, without the shares of Xerox common stock you

 

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own, on the “when-issued” market. We expect “when-issued” trades of our common stock to settle within four trading days after the Distribution Date. On the first trading day following the Distribution Date, we expect that “when-issued” trading of our common stock will end and “regular-way” trading will begin.

We also anticipate that, as early as two trading days prior to the Record Date and continuing up to and including the Distribution Date, there will be two markets in Xerox common stock: a “regular-way” market and an “ex-distribution” market. Shares of Xerox common stock that trade on the regular-way market will trade with an entitlement to receive shares of our common stock in the Distribution. Shares that trade on the ex-distribution market will trade without an entitlement to receive shares of our common stock in the Distribution. Therefore, if you sell shares of Xerox common stock in the regular-way market up to and including the Distribution Date, you will be selling your right to receive shares of our common stock in the Distribution. However, if you own shares of Xerox common stock at the close of business on the Record Date and sell those shares on the ex-distribution market up to and including the Distribution Date, you will still receive the shares of our common stock that you would otherwise be entitled to receive in the Distribution.

Following the Distribution Date, we expect shares of our common stock to be listed on                      under the trading symbol “      .” If “when-issued” trading occurs, the listing for our common stock is expected to be under a trading symbol different from our “regular-way” trading symbol. We will announce our “when-issued” trading symbol when and if it becomes available. If the Spin-Off does not occur, all “when-issued” trading will be null and void.

Conditions to the Spin-Off

We expect that the Separation will be effective on the Distribution Date, provided that the following conditions shall have been satisfied or waived by Xerox:

 

•

the Xerox Board shall have authorized and approved the Internal Transactions and Distribution and not withdrawn such authorization and approval, and shall have declared the dividend of our common stock to Xerox shareholders;

 

•

the ancillary agreements contemplated by the Separation and Distribution Agreement shall have been executed by each party to those agreements;

 

•

our common stock shall have been accepted for listing on                      or another national securities exchange approved by Xerox, subject to official notice of issuance;

 

•

the SEC shall have declared effective our Registration Statement on Form 10, of which this Information Statement is a part, under the Exchange Act, and no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for that purpose shall be pending before or threatened by the SEC;

 

•

Xerox shall have received the written opinion of Cravath, Swaine & Moore LLP, which shall remain in full force and effect, that, subject to the accuracy of and compliance with certain representations, warranties and covenants, the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Code;

 

•

Xerox shall have received the IRS Ruling, and the IRS Ruling shall continue to be effective and valid;

 

•

the Internal Transactions (as described in “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement”) shall have been completed;

 

•

no order, injunction or decree issued by any governmental authority of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Distribution shall be in effect, and no other event outside the control of Xerox shall have occurred or failed to occur that prevents the consummation of the Distribution;

 

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•

no other events or developments shall have occurred prior to the Distribution Date that, in the judgment of the Xerox Board, would result in the Distribution having a material adverse effect on Xerox or its shareholders;

 

•

prior to the Distribution Date, this Information Statement shall have been mailed to the holders of Xerox common stock as of the Record Date;

 

•

Xerox shall have duly elected the individuals to be listed as members of our post-Distribution Board in this Information Statement, and such individuals shall be the members of our Board immediately after the Distribution; provided that our current directors shall appoint one independent director prior to the date on which “when-issued” trading of our common stock commences on             and such director shall serve on our Audit Committee, Compensation Committee and Corporate Governance Committee; and

 

•

immediately prior to the Distribution Date, our Restated Certificate of Incorporation and Amended and Restated By-Laws, each in substantially the form filed as an exhibit to the Registration Statement on Form 10 of which this Information Statement is a part, shall be in effect.

The fulfillment of the above conditions will not create any obligation on Xerox’s part to complete the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than the approval for listing of our common stock and the SEC’s declaration of the effectiveness of the Registration Statement, in connection with the Distribution. Xerox has the right not to complete the Spin-Off if, at any time, the Xerox Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Xerox or its shareholders or is otherwise not advisable.

Under the Icahn Agreement, if the Spin-Off has not occurred by December 31, 2016, Xerox must call its 2017 annual shareholders meeting to be held no later than March 31, 2017, at which meeting any shareholder of Xerox that has delivered written notice, which includes the information required by Xerox’s by-laws, to Xerox on or prior to January 31, 2017 shall be permitted to nominate directors of Xerox and/or propose other business. However, if the Spin-Off occurs on or before March 30, 2017 (even if it did not occur by December 31, 2016), then Xerox will not be required to hold its 2017 annual shareholders meeting by March 31, 2017.

Reasons for Furnishing this Information Statement

We are furnishing this Information Statement solely to provide information to Xerox’s shareholders who will receive shares of our common stock in the Distribution. You should not construe this Information Statement as an inducement or encouragement to buy, hold or sell any of our securities or any securities of Xerox. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither we nor Xerox undertakes any obligation to update the information except in the normal course of our and Xerox’s public disclosure obligations and practices.

 

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DIVIDEND POLICY

We have not yet determined our dividend policy, but we intend to do so prior to the Spin-Off. Our Board will make all decisions regarding the payment of future dividends, and such decisions will depend on many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends. See also “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We cannot assure you that we will pay dividends on our common stock and our indebtedness will limit our ability to pay dividends on our common stock.”

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of June 30, 2016, on a historical basis and on an as adjusted basis to give effect to the Spin-Off and the transactions related to the Spin-Off, as if they occurred on June 30, 2016. You should review the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Combined and Condensed Combined Financial Statements and the accompanying notes thereto included elsewhere in this Information Statement.

 

		As of June 30, 2016
		(unaudited)
		Historical				As adjusted
($ in millions)
Cash and cash equivalents		$	160			$
Capitalization
Debt:
Related party notes payable(1)		$	1,105
Short-term debt and current portion of long-term debt		$	22			$
Long-term debt			29
Total third party debt		$	51			$
Equity:
Net parent investment		$	5,700			$
Common stock, par value $1.00			—
Additional paid-in capital			—
Accumulated other comprehensive loss			(194	)
Total equity		$	5,506			$
Total capitalization		$	6,662			$

 

(1)	Represents the amount of Related party notes payable, which are expected to be settled in advance of the Spin-Off.

We have not yet finalized our post-Spin-Off capitalization. Adjusted financial data reflecting our post-Spin-Off capitalization will be included in an amendment to this Information Statement.

 

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SELECTED HISTORICAL FINANCIAL DATA

The following tables present selected historical financial data as of and for each of the years in the five-year period ended December 31, 2015 and as of June 30, 2016 and for the six months ended June 30, 2016 and 2015. The selected historical financial data as of December 31, 2015 and 2014 and for each of the fiscal years in the three-year period ended December 31, 2015 are derived from our audited Combined Financial Statements included elsewhere in this Information Statement. The selected historical financial data as of June 30, 2016 and for the six months ended June 30, 2016 and 2015 are derived from our unaudited Condensed Combined Financial Statements that are included elsewhere in this Information Statement. The selected historical financial data as of December 31, 2013 and as of and for the years ended December 31, 2012 and 2011 are derived from our unaudited financial statements that are not included in this Information Statement. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, consisting of only ordinary recurring adjustments, necessary for a fair presentation of the data set forth in this Information Statement.

The selected historical financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Combined and Condensed Combined Financial Statements and the accompanying notes thereto included elsewhere in this Information Statement. The financial data included herein may not be indicative of the BPO Business’s future performance, do not necessarily include the actual expenses that would have been incurred by the BPO Business and may not reflect the results of operations, financial position and cash flows of the BPO Business had Conduent been a separate, standalone company during the periods presented.

 

		Year Ended December 31,																				Six Months Ended June 30,
		2015				2014				2013				2012				2011				2016				2015
														(unaudited)				(unaudited)				(unaudited)				(unaudited)
($ in millions)
Selected Combined and Condensed Combined Statements of (Loss) Income Data:
Total Revenues		$	6,662			$	6,938			$	6,879			$	6,873			$	6,274			$	3,298			$	3,361
(Loss) Income from Continuing Operations			(336	)			34				135				137				134				(33	)			(109	)
Net (Loss) Income			(414	)			(81	)			182				170				189				(33	)			(170	)

 

		As of December 31,																				As of June 30, 2016
		2015				2014				2013				2012				2011
										(unaudited)				(unaudited)				(unaudited)				(unaudited)
($ in millions)
Selected Combined and Condensed Combined Balance Sheets Data:
Total Assets		$	9,058			$	10,954			$	11,205			$	11,217			$	10,764			$	9,017
Long-term debt			37				43				310				292				293				29

 

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BUSINESS

Our Company

Conduent is a leading provider of business process services with expertise in transaction-intensive processing, analytics and automation. We serve as a trusted business partner in both the front office and back office, enabling personalized, seamless interactions on a massive scale that improve end-user experiences.

We create value for our commercial and government clients by applying our expertise, technology and innovation to help them drive customer and constituent satisfaction and loyalty, increase process efficiency and respond rapidly to changing market dynamics.

Our portfolio includes industry-focused service offerings in attractive growth markets such as healthcare and transportation, as well as multi-industry service offerings such as transaction processing, customer care and payment services.

We believe our addressable market size in the global business process service industry is estimated at nearly $260 billion in 2016, with expected growth rates in the mid-single digits through 2019. We have leadership positions in key market segments, including healthcare and transportation, which are expected to grow at 8% and 5% on a compounded annual basis through 2019, respectively. In addition, we are well positioned to capitalize on key industry trends such as increased demand for productivity, automation, personalization and innovation to capture growth.

Our strategy is to drive portfolio focus, operational discipline, sales and delivery excellence and innovation, complemented by tightly aligned investments. As a result, we aim to generate sustainable value for our shareholders by delivering profitable growth and margin expansion and deploying a disciplined capital allocation strategy.

With approximately 93,000 employees globally, we provide differentiated services to clients spanning small, medium and large businesses and to governments of all sizes in 42 countries. In 2015, we generated $6,662 million in total revenues, 90% of which was recurring.

Our Transformation

We have a track-record of active portfolio management with an ongoing focus on optimizing our capabilities and effectively targeting attractive growth areas in a rapidly evolving business process services industry. In recent years, we have taken significant actions to improve our profitability and drive growth with a more focused portfolio of services. These include the divestiture of our Information Technology Outsourcing (“ITO”) business, the refocusing of our Government Healthcare business, the re-organization of our delivery operations, as well as acquisitions and organic investments in key growth markets to expand our capabilities and client reach. We plan to continue enhancing our operational and portfolio focus as a standalone company.

Recently completed initiatives include:

 

•

Consolidated Delivery Operations. In late 2014, we re-organized and consolidated our delivery operations based on our services capabilities to enable greater productivity and improved global delivery consistency.

 

•

Divested Non-Core Assets: We completed the sale of our ITO business on June 30, 2015 to Atos SE. The sale enabled us to increase our focus on areas where we have a competitive advantage.

 

•

Refocused our Government Healthcare Business. In 2015, we refocused our Government Healthcare business on higher margin, growing segments such as medical and pharmacy benefits management and fraud and abuse detection. We also reduced our participation in certain Medicaid platform implementations that were presenting unattractive levels of risk and exposure.

 

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•

Increased Use of Automation. We have developed and deployed a set of advanced software-based automation tools as part of our service delivery operations. These tools reduce the amount of repetitive, manual labor required to deliver many of our services and improve service quality through lower error rates and faster processing times.

We are also in the process of a strategic transformation program to deliver cost savings through infrastructure optimization, labor productivity and automation initiatives, restructuring of unprofitable contracts and other efficiencies. As an independent company, we will be able to better capitalize on our differentiated service offerings, industry expertise and global delivery excellence to position us for long-term shareholder value creation.

Our Industry

We believe our addressable market size in the global business process service industry is estimated at nearly $260 billion in 2016 and we are a leader across several segments of this large, diverse and growing market. Providing business process services today is complex and multi-faceted with services that span many industries.

Ongoing competitive pressures and increasing demand for further productivity gains have motivated businesses to outsource elements of their day-to-day operations to accelerate performance and innovation. As a result, our clients have become more focused on their core businesses and the range of outsourced activities has expanded greatly. Increasing globalization has also required many companies to optimize cost structures to retain competitiveness and increase shareholder value. Business process services have become a key component of this strategy.

The ongoing shift to new generation software and automation technologies is driving greater demand for, and expectation of, efficiency and personalization by the constituents and customers of the businesses and governments we serve. Addressing these business and operational challenges is necessary for business process services companies to capitalize on these trends. In addition, business process services have the potential to meaningfully enhance productivity for businesses and governments and satisfaction for their constituents and customers.

Our Segments

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate: Healthcare, Public Sector and Commercial Industries.

 

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Our Healthcare segment provides industry-centric business process services to clients across the healthcare industry, including providers, payers, employers, pharmaceutical and life science companies and government agencies.

 

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Our Public Sector segment provides government-centric business process services to U.S. federal, state and local and foreign governments.

 

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Our Commercial Industries segment provides business process services and customized solutions to clients in a variety of industries (other than healthcare).

Our Government Health Enterprise (“HE”) Medicaid Platform and Student Loan businesses, as well as non-allocated expenses and inter-segment eliminations, are included in Other.

We present segment financial information in Note 2 to our historical Combined Financial Statements included elsewhere in this Information Statement. The figure below illustrates the breakdown of our segment revenues for the year ended December 31, 2015.

 

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Healthcare Segment

Our Healthcare segment generated revenues of $1,750 million in 2015, representing 26% of our total 2015 revenues. Through this segment we offer innovative services and subject matter expertise to clients across the healthcare industry, including providers, payers, employers, pharmaceutical and life science companies and government agencies. We strive to enable our healthcare clients to focus on improving the patient care experience, lowering total costs and enabling better long-term health outcomes. Our Healthcare segment primarily serves the following types of clients:

 

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Healthcare Payer. We deliver administrative efficiency services and customer experience services to 19 of the top 20 commercial payers. Our services include payment integrity solutions, the full spectrum of provider support services, member engagement services, health risk assessment, claims processing, mailroom services and outbound printing. Our broad set of services help healthcare payers to optimize costs by streamlining business processes and recovering incorrectly attributed liabilities. In addition, our services assist with member risk assessment and improve member experience through enhanced engagement tools.

 

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Healthcare Provider Solutions. We provide care and quality analytics and software adoption services to hospitals, doctors and other healthcare providers, including large healthcare systems, with contracts in 49 of the 50 states. Our healthcare provider services include a care and quality platform (Midas+), system integration and advisory services to support electronic health record system implementations, software adoption services and community health population analytics. Our services help our clients obtain enhanced access to patient data to improve quality of care, achieve better regulatory compliance by meeting accurate and timely reporting needs and improve their return on technology investments through simulation-based software adoption.

 

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Government Healthcare. We provide administrative and care management services to Medicaid programs and federally-funded U.S. government healthcare programs in 29 states, Puerto Rico and the District of Columbia. Our services include a range of innovative solutions such as Medicaid management fiscal agent, pharmacy benefits management and clinical program management. These services help states optimize their costs by streamlining access to care and improve patient health outcomes through population health management and help families in need by improving enrollment and claims processing.

 

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Pharmaceuticals & Life Sciences. We provide services to 9 of the top 10 global pharmaceutical and life science companies to support their revenue generation and clinical services. Our services include inside sales for drug detailing, clinical trial recruitment, patient access and medication adherence and compliance solutions. These services help generate incremental revenue by driving increased adoption of both mature and new drugs by clinicians and improve patient health outcomes by facilitating access to drugs and driving medication adherence.

 

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Public Sector Segment

Our Public Sector segment generated revenues of $1,727 million in 2015, representing 26% of our total 2015 revenues. This segment provides government-centric business process services to U.S. federal, state and local and foreign governments for transportation, public assistance program administration, transaction processing and payment services. In order to provide targeted support to our government clients, our Public Sector segment is organized into two primary businesses:

 

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Transportation. We provide revenue-generating transportation services to government clients in over 25 countries. Our services include support for electronic toll collection, public transit, parking, photo enforcement and commercial vehicle operations. These innovative services significantly improve individual travel experiences, optimize how vehicles and goods move efficiently within cities, digitize integrated modes of transportation and help our government clients to better serve their constituents.

 

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Federal, State and Local Government. We support our government clients with services targeting key civilian agencies within federal, state and local governments, as well as government administrative offices. Our depth of agency-specific expertise combined with our scale allows us to deliver and manage programs at all levels of government. Our services include support for government benefit programs such as child support, electronic benefits, eligibility and payment cards and unclaimed property, among others.

Commercial Industries Segment

Our Commercial Industries segment is our largest segment, with $2,896 million in revenues in 2015, representing 44% of our total 2015 revenues. Across the Commercial Industries segment, we deliver end-to-end business-to-business and business-to-customer services that enable our clients to optimize their key processes. Our multi-industry competencies include customer care, human resource management and finance and accounting services. These services are complemented by innovative industry-specific services such as personalized product information for clients in the automotive industry, digitized source-to-pay solutions for clients in the manufacturing industry, customer experience and marketing services for clients in the retail industry, mortgage and consumer loan processing for clients in the financial services industry and customized workforce learning solutions for clients in the aerospace industry.

Other

Other includes our Government HE Medicaid Platform business, where we are limiting our focus to implementing and maintaining systems for our current clients, and our Student Loan business, which is in run-off, as well as non-allocated expenses and inter-segment eliminations. In 2015, Other accounted for $289 million of revenues, representing 4% of our total 2015 revenues.

Our Service Offerings

Our portfolio of business process services includes a combination of industry-specific services and multi-industry services. We have subject matter experts who are responsible for implementing each of these services, delivering service excellence to clients, ensuring best practices to improve cost competitiveness, innovating our next generation offerings and supporting worldwide sales.

 

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The figure below depicts the services we offer:

 

 

Industry-Specific Services

 

 

Multi-Industry Services

 

 

 

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Industry-Specific Services

Healthcare Industry-Specific Services

Our healthcare services include care integration and coordination, member health risk assessments, payment integrity (e.g., recovering claims from the appropriate payers), fiscal agent administrative services and providing management information systems in support of Medicaid programs, pharmacy benefits management, clinical trial recruitment and care and quality analytics.

Public Sector-Specific Services

Transportation Services. The transportation services we offer include support for electronic toll collection, public transit, parking, photo enforcement and commercial vehicle operations. Across these offerings, we manage key processes on behalf of our clients including fee collection, compliance and violation management, notifications, statements and reporting.

Other Public Sector Services. Our broad set of public sector services includes public assistance program administration, pension administration, records management, disease management and software offerings in support of federal, state and local government agencies.

Commercial Industry-Specific Services

Examples of the services we offer include personalized product information for automotive clients, digitized source to pay solutions for manufacturing clients, customer experience and marketing services for retail clients, mortgage and consumer loan processing for financial institution clients and customized workforce learning solutions for aerospace clients.

Multi-Industry Services

Transaction Processing Services

We help our clients to improve communications with their customers and constituents, whether it is on paper, on-line or through other communication channels. By supporting our clients’ customer communication processes, we help our clients deliver a better experience to their customers and operate with improved efficiency and greater effectiveness.

We offer a broad array of flexible transaction processing services that include data entry, scanning, image processing, enrollment processing, claims processing, high volume offsite print and mail services and file indexing. Our multi-channel communication capabilities (including secure print, email, text and web) enable the delivery of personalized and targeted communications that are designed to elicit the desired response from customers or other end-users (e.g., on-time bill payment, increased marketing response rates). Our service offerings utilize both proprietary and commercially available third-party technologies, combined with our expertise to ensure continued quality and innovation for our clients.

Payment Services

Prepaid Cards. We are an extensive provider of VISA and MasterCard prepaid debit cards, as well as other electronic payment cards. We are a leading provider of prepaid payment card services in support of U.S. government benefit programs including Social Security, Supplemental Nutrition Assistance Program (formerly known as food stamps), Special Supplemental Nutrition Program for Women, Infants, and Children and other specialized Electronic Benefits Transfer programs. Our secure payment services reduce fraud and eliminate paper checks by disbursing electronic payments directly to end users, even those without bank accounts. Our proprietary processing platform, significant operational expertise, advanced fraud analytics and adoption of Europay, MasterCard and Visa chip-enabled technology put us in the forefront of the prepaid card industry.

 

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Health Savings Accounts. We provide clients with a simplified approach to help their employees manage their health care costs and accumulate wealth with tax-advantaged accounts. We consolidate administration of all health spending accounts onto one common platform, including Health Savings Accounts, Health Reimbursement Arrangements, Flexible Spending Accounts and Health Incentive Accounts. By consolidating and integrating the management of health spending accounts, we help our clients improve benefit enrollment and account opening, consolidate customer service, simplify communications and streamline account funding and management.

Child Support Payments. We are an industry leader of U.S. State Government Disbursement Units for child support payments. We collect payments from non-custodial parents via check, credit card and transfers from employee payroll systems and disburse payments to the beneficiaries.

Customer Care Services

We offer customer care services that help our clients provide their own customers with a superior experience. Our service offerings range from answering simple billing questions to providing complex technical and customer support. We also offer both inbound and outbound sales and cross-selling programs through our contact center operations. We provide these services through multiple channels, including phone, SMS, chat, interactive voice response, social networks and email. We augment our customer care agents’ efficiency and effectiveness with advanced technologies that help them resolve customer needs quickly and with consistently high quality.

Human Resources Services

We help our clients to support their employees at all stages of employment from initial onboarding through retirement. We offer clients customized advisory, technology and administrative services that help them more effectively involve employees in their health insurance, retirement plan and compensation programs. We design and administer employee benefit programs that attract, reward and retain workforce talent through engaging technologies and decision support tools. Our service offerings include global health and retirement plan consultation and administration; cloud-based HR outsourcing; payroll and benefits administration; health savings and tax efficient account administration; and administration of, and consultation regarding, our proprietary private health care exchange, which allows employees to select from a set of pre-defined providers and also provides market-leading health and benefit decision support tools and ongoing health and wellness management.

Finance and Accounting Services

We serve clients by managing their critical finance, accounting and procurement processes. Our services include general accounting and reporting, billing and accounts receivable and purchasing, accounts payable and expense management services. We also offer wholesale and retail lockbox services and process auto and mortgage loans in the United States. With a global, dedicated team, we manage the core, end-to-end process areas of finance, accounting and procurement for some of the world’s most recognized brands.

Legal Business Services

We have been providing client support to law firms and corporate legal departments for over 20 years. We work across the litigation lifecycle, with particular focus on the legal discovery and review process. Our offerings include litigation support services, compliance and risk review and managed services support.

Workforce Learning Services

We are a provider of end-to-end learning services, designed to accelerate the productivity and development of our clients’ employees and extended work forces. Our global presence, superior innovation and expertise allow us to deliver performance-based learning services tailored to our clients’ unique strategic business goals. Our offerings include learning strategy and assessment, instructor management and learning administration.

 

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Applied Automation and Analytics Solutions

Many of our service offerings described above incorporate our applied automation and analytics solutions to increase their value and effectiveness to clients across all industries. We deploy these solutions to personalize millions of interactions, optimize service delivery and simplify complex processes. For example, our customer care services harness the power of applied analytics and automation to help our customer service agents work more efficiently across different communication channels. Our applied automation solutions track and learn the most efficient means to address common customer service needs as they occur in real time so that we can solve the same problem faster the next time around. The combination of applied automation and analytics allows us to identify new service demand patterns and opportunities quickly so that we can proactively address them on behalf of our clients.

Our Competitive Strengths

We possess a number of competitive strengths that distinguish us from our competitors, including:

Leadership in attractive growth markets. We are a leader in business process services with deep expertise in attractive industries, including healthcare and transportation. Our strong client relationships, deep industry expertise and differentiated, industry-specific solutions are competitive advantages that enable us to compete and grow in these attractive markets.

 

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Healthcare. U.S. healthcare spending is estimated to have represented greater than 15% of GDP in 2015 and is continuing to grow. As one of the most regulated industries, healthcare providers must balance increased utilization with heightened complexity and new financial pressures such as government budget challenges to significantly reduce reimbursements, reimbursement penalties for hospital readmissions and a shift from fee-for-service to “value-based” population health management. We are widely recognized by industry analysts as a leader in healthcare payer operations, serving 18 of the top 20 U.S. managed healthcare plans and we provide administrative and care management solutions to Medicaid programs and federally funded U.S. government healthcare programs in 29 states, Puerto Rico and the District of Columbia.

 

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Transportation. Traffic congestion continues to increase as urbanization and changing demographics take hold globally. As a result, optimized transportation systems are becoming critical to increase efficiency while maintaining strict safety requirements. Electronic toll collection, public transit and parking all represent key growth drivers as governments at all levels increasingly focus on transportation infrastructure. We are the second largest electronic toll collection service provider in the United States based on toll revenues collected through our systems in 2015, the largest U.S.-based commercial vehicle operations service provider in the United States with a 40% market share based on 2015 revenues and we are an award-winning innovator in parking management.

Differentiated suite of multi-industry service offerings at scale. We are experts in managing transaction-intensive processes and working directly with end-users to meet their needs in real-time. We are unique in our ability to offer our clients these business process services on a large scale and with high quality. Additionally, we are able to leverage our multi-industry services to bring the same scale and quality to our portfolio of industry-specific service offerings, such as healthcare claims management, employee benefits management and public transit fare collection.

Global delivery expertise. Our scale and global delivery network enables us to deliver our proprietary technology, differentiated service offerings and service capabilities expertly to clients around the world. We have approximately 290 delivery centers, including operations in India, the Philippines, Jamaica, Guatemala, Mexico, Romania, the Dominican Republic and the United States. Our global delivery model enables us to leverage lower-cost production locations, consistent methodologies and processes, time zone advantages and business continuity plans.

 

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Innovation and development. We innovate by developing and acquiring new technologies and capabilities that improve business processes. We are constantly creating the next generation of simple, automated and touch-less business processes to drive lower costs, higher quality and increased end-user satisfaction. Analytics allow us to transform big data into useful information that helps identify operational improvements and constituent insights. Additionally, we leverage robotic process automation and predictive analytics, combined with our deep subject matter expertise, to create intelligent services that improve security, increase speed, improve accuracy, quality and regulatory compliance and uncover insights that support better decision making and outcomes for our clients.

Stable recurring revenue model supported by a loyal, diverse client base. In 2015, 90% of our total revenues were recurring, and our contract renewal rate was 86%. We have a broad and diverse base of clients across geographies and industries, including Fortune 1000 companies and small and midsize businesses as well as governmental entities, in 42 countries. Our close client relationships and successful client execution support our stable recurring revenue model and high renewal rates.

Our Strategies

Our strategy is to drive leadership in attractive markets by leveraging and building on our competitive strengths. We intend to execute our strategy through increased business portfolio focus and operating discipline, enhanced sales and delivery capabilities and tightly aligned investments. Our strategy is designed to deliver value for our shareholders by delivering profitable growth, expanding operating margins and deploying a disciplined capital allocation strategy.

Specific elements of our strategy include the following:

Expand within attractive industries. The industries in which we operate have attractive revenue growth rates, generally in the mid-single digits. We intend to sharpen our focus and expand our business in industries with strong growth and profitability characteristics. We will employ a disciplined approach to portfolio management to complement our competitive strengths and build depth and breadth in our core businesses. Within the healthcare industry, we intend to leverage our data analytics, differentiated service offerings and industry know-how to continue to service payer, provider and core government healthcare clients. Within the transportation industry, we will leverage our global, end-to-end platforms to continue to deliver seamless travel experiences while providing back-end transaction processing and call center services for government clients globally.

Optimize and strengthen our services capabilities. We plan to optimize our services capabilities and strengthen several core areas, including transaction processing, customer care and prepaid card services. Within transaction processing, we intend to continue to build industry-specific service offerings and advance inbound and outbound processing capabilities. Within customer care, we intend to capitalize on our global scale, cost efficiencies and our ability to provide seamless communications between our clients and their end-users through traditional (e.g., voice) and digital (e.g., web, mobile, Internet of Things) channels. In prepaid cards, we plan to continue to leverage our scalable platform to help our clients simplify their payment disbursement processes.

Drive operational and delivery excellence. We intend to improve our margins through an ongoing focus on operational and delivery excellence and cost efficiency. In January 2016, we initiated a three-year strategic transformation program to support margin expansion through productivity enhancements and cost reductions, which we plan to continue following the completion of the Spin-Off. In particular, we plan to drive operational excellence through further automation and standardization of internal processes and with a continued focus on providing quality services.

Continue to advance next-generation platforms and capabilities. We intend to maintain our focus on innovation to create next-generation solutions aligned with our clients’ future needs and our growth strategies. We plan to advance our current platforms, further automate and personalize business processes and enhance data analytics capabilities to deliver value-added services for our clients.

 

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Engage, develop and support our people. We intend to continue to develop our employees by investing in training, processes and systems to equip them with modern tools that enable them to perform their jobs more efficiently. Further, we plan to strengthen our sales teams with improved and optimized coverage and effective talent management.

Sales and Marketing

We market our business process services to both potential and existing clients through our worldwide sales force and our business development team. Additionally, we have dedicated “solution architects” who work with clients to better understand their situation and develop a custom-tailored solution to meet their unique needs.

Our sales and marketing strategy is to go to market by industry to deliver key industry-specific and multi-industry service offerings to our clients. We focus on developing new prospects through market research and analysis, renewing expiring contracts and leveraging existing client relationships to offer additional services. We leverage our broad, multi-industry service offerings to package solutions through enterprise selling, while maintaining a disciplined approach to pricing and contracting. Our sales efforts typically involve extended selling cycles and our expertise in specific industries is critical to winning new business.

Our Geographies

We provide services globally and we have a diversified geographic delivery network. In 2015, approximately 22% of our revenues were generated by clients outside the United States. In 2015, our revenues by geography were as follows: $5,166 million in the United States (78% of total revenues), $797 million in Europe (12% of total revenues) and $699 million from the rest of the world (10% of total revenues).

Innovation and Research and Development

Our innovation and research and development (R&D) capabilities are critical to our client value proposition and competitive positioning. Our investments in innovation align with our growth strategies and are driven by a view of future needs and required competencies developed in close partnership with our clients and R&D partners. We are investing in attractive markets, such as healthcare and transportation, and building on proven platforms to create services that distinguish us from our competitors. In addition, we expand our innovation capabilities through acquisitions that offer new capabilities and access to complementary services and technologies.

Our innovation and R&D are focused on three key areas: automation, personalization and analytics.

Automation—Create simple, automated and touch-less business processes to drive lower cost, higher quality and increased agility. Businesses require agility to quickly respond to market changes and new customer requirements. To enable greater business process agility, our R&D goals are to simplify, automate and enable business processes via flexible platforms that run on robust and scalable infrastructures. Automation of business processes benefits from our strong image, video and natural language processing, as well as our machine learning capabilities. Application of these methods to business processes enables technology to perform tasks that today are performed manually such as providing automation solutions in transportation by aggregating and automatically applying business rules to simplify toll payments and by using our state of the art video and image analytics to reduce the need for manual review of license plates in tolling and toll adjustment scenarios; analyzing data on eligibility claims and checking for correctness on applications. The scope of automation is applied across our portfolio of services and is a key element of our ongoing strategy of modern, efficient services.

Personalization—Augment humans by providing secure, real-time, context-aware personalized products and services. Whether business correspondence, personal communication, manufactured items or an information

 

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service, personalization increases the value to the recipient. Our R&D investments lead to technologies that improve the efficiency, economics and relevance of business services, such as customer care and health and welfare services. In our current customer care service offerings, the human touch is seamlessly added as our software automatically takes telephony data and merges it with customer records pulled from multiple sources to seamlessly create customized scripts and flows. This allows the agent to have the caller’s data at their fingertips and provide a more personal experience to the customer—whether on the phone or online. In toll systems, our systems automatically pull up a customer’s name, verify their information and prompt them for unpaid tolls. In transportation, our mobile app aggregates and calculates the time, cost, carbon footprint and health benefits from walking, biking, driving, parking and taking public transit, as well as the emerging private transportation options, such as app-based taxi alternatives and car sharing, and presents commuters with the shortest, cheapest and most sustainable way to get to a destination. For health and welfare, our systems provide state of the art personalized delivery to insure the best utilization of funds for the neediest populations.

Analytics—Transform big data into useful information to support better decision making. Competitive advantage can be achieved by better utilizing available and real-time information. Today, information resides in an ever increasing universe of servers, repositories and formats. The vast majority of information is unstructured, including text, images, voice and videos. We are using natural language processing and semantic analysis to make sense of unstructured information and we are developing proprietary methods for prescriptive analytics applied to business processes. Here, we seek to better manage large data systems in order to extract business insights to provide our clients with actionable recommendations. Tailoring these methods to various industry applications leads to new customer value propositions. In hospitals, we mine usage and clinical indicators to improve patient experiences. We also help our healthcare clients identify waste and fraud by identifying networks of providers and patients with suspicious behavior, such as sudden and dramatic increases in a provider’s level of business or unusual or illogical patient treatment sequences. In transportation, we enable transport and parking operators to better understand and predict commuter needs, including adherence to schedules, passenger loading levels, car park utilization rates and the impact of varying factors such as weather and schedule variations. In customer care, we identify vital business patterns and trends for our customers to improve their businesses and meet their customer needs.

Intellectual Property

Our general policy is to seek patent protection for those inventions likely to be incorporated into our products and services or where obtaining such proprietary rights will improve our competitive position. We own approximately 600 patents and pending applications. Our patent portfolio evolves as new patents are awarded to us and as older patents expire. These patents expire at various dates, generally 20 years from their original filing dates. While we believe that our portfolio of patents and applications has value, in general no single patent is essential to our business or any individual segment. In addition, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide significant competitive advantages.

Our business relies on software, provided to an approximately equal extent by both internal development and external sourcing, to deliver our services in our businesses. We both develop our own software for inclusion in our products and services, and incorporate externally sourced software into our products and services. We also partner with third-party software providers to develop software. With respect to internally developed software, we claim copyright on all such software, registering works which may be accessible to third parties. In addition, we rely on maintaining source code confidentiality to assure our market competitiveness. With respect to externally sourced software, we rely on contracts assuring our continued access for our business usage.

In the United States, we own more than 240 trademarks, which are either registered or applied for, reflecting the many businesses we participate in. These trademarks may have a perpetual life, subject to renewal every 10 years and may be subject to cancellation or invalidation based on certain use requirements and third-party challenges, or on other grounds. We vigorously enforce and protect our trademarks.

 

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People and Culture

We draw on the business and technical expertise of our talented and diverse global workforce to provide our clients with high-quality services. Our business leaders bring a strong diversity of experience in our industry and a track record of successful performance and execution.

We have historically operated according to the human resource policies and programs of Xerox, which are designed to meet general governance and regulatory requirements. Xerox has a diversity and inclusion program, which is overseen by Xerox’s human resources department. Xerox promotes understanding and inclusion through a comprehensive set of diversity initiatives and strategies, including addressing under-representation by identifying shortfalls and developing action plans to close those gaps and through work-life programs that assist employees in many aspects of their personal lives. Additionally, Xerox informs and educates all employees on diversity programs, policies and achievements. As an independent company, we intend to continue our commitment to diversity and inclusion and implement similar policies and programs.

In the United States, Conduent will comply with Equal Employment Opportunity guidelines and all applicable federal, state and local laws that govern the hiring and treatment of its employees.

As of June 30, 2016, we had approximately 93,000 employees globally, with just over 50% located in the United States and the remainder located primarily in India, the Philippines, Guatemala and Mexico.

Training and Talent Development

We believe our people are our most important asset, which is why we invest in employee growth and development programs. We are focused on building a workplace where our people can do their best work and have access to the tools and resources they need to perform their jobs more effectively. We are building a culture of learning and have shifted from delivering training to incorporating learning into day-to-day work.

In 2014 we launched an industry-leading, innovative virtual learning platform for our employees. It includes custom created content, curated content from third-party sources and a social learning platform that allows employees to share their experiences with their colleagues worldwide. Since its launch, the platform has connected more than 20,000 employees and helped them to develop the skills and knowledge needed to create and deliver best-in-class client solutions.

We also provide tuition assistance to employees to work toward obtaining degrees through accredited institutions. In addition, we have a unique partnership with a distinctive grant program which allows employees pursuing a degree to take courses free of charge.

We have a strong performance management system in place that requires all employees to engage with their managers on goal-setting and performance feedback, enabling personal and professional development. There is a strong emphasis on mentorship and coaching, both formal and informal, to help employees get to the next level in their careers. We enable this by developing management capability for our front line leaders to ensure they are able to coach and mentor their teams and engage in constructive and continuous two-way dialogue.

Corporate Ethics

Our commitment to business ethics represents more than a declaration to do the right thing. It has become an integral part of the way we do business. We have historically operated according to the ethics and compliance program of Xerox, which is designed to meet general governance and specific industry and regulatory requirements with a focus on values, culture and performance with integrity. Xerox has a business ethics program, which is overseen by a business ethics office, and a code of business conduct, which will serve as the foundation of our business ethics program. The code of business conduct makes clear Xerox’s expectations for ethical leadership, performance with integrity and compliance with company policies and the law. In addition, the code of business conduct embodies and reinforces Xerox’s commitment to integrity and helps employees

 

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resolve ethics and compliance concerns consistent with our core values and legal and policy controls. In addition, as Xerox employees, our employees are required to complete business ethics training annually and Xerox regularly solicits their input to gauge the state of Xerox’s ethical culture and help identify areas for improvement. As an independent company, we intend to continue our commitment to business ethics and implement similar policies and programs.

Competition

Although we encounter competition in all areas of our portfolio, we lead across many areas of our principal businesses. We compete on the basis of technology, performance, price, quality, reliability and customer service and support. We participate in a highly competitive and rapidly evolving market, driven by changes in industry standards and demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. Our competitors include:

 

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Large multinational service providers, such as Accenture, Aon Hewitt, Hewlett-Packard Enterprise, Cognizant and IBM;

 

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Primarily business process outsourcing service providers, such as Convergys, Genpact, Teletech and Teleperformance; and

 

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Smaller niche business processing service providers and in-house departments that perform functions that could be outsourced to us.

Backlog

Backlog, or the value of the remaining term of our service contracts, is not a metric that we regularly use to measure our business. However, approximately 90% of our revenues in 2015 were tied to recurring revenue contracts.

Seasonality

Our revenues can be affected by various factors such as our clients’ demand pattern for our services. These factors have historically resulted in higher revenues and profits in the fourth quarter.

Facilities

We lease and own numerous facilities worldwide with larger concentrations of space in Kentucky, New Jersey, California, Mexico, Guatemala, the Philippines, Jamaica, Romania and India. Our owned and leased facilities house general offices, sales offices, service locations, call centers and distribution centers. The size of our property portfolio as of June 1, 2016 was approximately 12.5 million square feet at an annual operating cost of approximately $299 million and comprised 520 leased properties and 8 owned properties. We believe that our current facilities are suitable and adequate for our current businesses. Because of the interrelation of our business segments, each of the segments use substantially all of these properties at least in part.

As a result of implementing our strategic transformation program as well as various productivity initiatives, several leased and owned properties may become surplus over the next three years. We are obligated to maintain our leased surplus properties through required contractual lease periods and plan to dispose of or sublease these properties.

Regulatory

We are subject to a variety of laws and regulations in both the United States and in many other jurisdictions around the world. As a result of the complexity of our operations and services we are subject to regulation at the U.S. federal, state and local level and at the various levels of government in the countries where we have operations and deliver services. We are also subject to regulation by regional bodies such as the European Union.

 

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In addition, the terms of our service contracts with our customers commonly require that we comply with applicable laws and regulations. In certain contracts, we are required to comply even if such laws and regulations apply to our clients but not to us. Also, in some instances our client engagements may expose us to laws and regulations in jurisdictions in which they are located.

If we fail to comply with any applicable laws and regulations, we may be restricted in our ability to provide services, and may also be subject to legal actions and penalties, any of which could materially adversely affect our operations.

In the United States, given the nature of our services in finance, healthcare, customer care, government contracting, human resources and other industries, we are subject to a wide-ranging set of laws and regulations, such as the Gramm-Leach-Bliley Act (also known as the Financial Modernization Act of 1999), as amended, the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended, and anti-money laundering compliance programs, the Fair Credit Reporting Act, as amended, the Fair and Accurate Credit Transactions Act of 2003, as amended, the Right to Financial Privacy Act of 1978, as amended, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended, the Fair Debt Collections Practices Act, as amended, the Truth in Lending Act, as amended, the Home Owners Loan Act, as amended, the Electronic Fund Transfer Act, as amended, the Equal Credit Opportunity Act, as amended, and the Real Estate Settlement Procedures Act of 1974, as amended, the Telemarketing Consumer Fraud and Abuse Prevention Act, as amended, and the Telemarketing Sales Rule, the Telephone Consumer Protection Act of 1991, as amended, and rules promulgated by the Federal Communications Commission, the CAN-SPAM Act of 2003, as amended, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended, the Federal Trade Commission Act, as amended, the False Claims Act, as amended, the Family Educational Rights and Privacy Act, as amended, the Communications Act of 1934, as amended, the Electronic Communications Privacy Act of 1986, as amended, the Patient Protection and Affordable Care Act, as amended, and rules promulgated by the Department of Health and Human Services’ Centers for Medicare and Medicaid Services and other applicable regulations in these areas, as well as regulation by U.S. agencies such as the SEC, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Commodity Futures Trading Commission, the Federal Financial Institutions Examination Council, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

We obtain, process, transmit and store information relating to identifiable individuals, both in our role as a service and technology provider and as an employer. As a result, we are subject to numerous U.S. (both federal and state) and foreign jurisdiction laws and regulations designed to protect individually identifiable information, including HIPAA and the HIPAA regulations governing, among other things, the privacy, security and electronic transmission of individually identifiable health information, and the European Union Directive on Data Protection (Directive 95/46/EC).

Additionally, the global nature of our business exposes us to various anti-bribery and anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, the UK Bribery Act 2010, as amended, and other similar laws and regulations. For the same reason we are subject to laws and regulations governing foreign trade, such as the Arms Export Control Act, as amended, as well as by government bodies such as the Commerce Department’s Bureau of Industry and Security, the State Department’s Directorate of Defense Trade Controls and the Treasury Department’s Office of Foreign Assets Control.

We are also subject to laws in the United States, the United Kingdom and the European Union that are intended to limit the impact of outsourcing on employees in those countries.

 

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Legal Proceedings

There are no legal proceedings pending against us or legal matters of significance, other than the four mentioned below, which are likely to have a material adverse effect on our business, results of operations and financial conditions. The Company believes it has recorded adequate provisions for any such matters and, as of June 30, 2016, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.

State of Texas v. Xerox Corporation, Xerox State Healthcare, LLC and ACS State Healthcare, LLC: On May 9, 2014, the State of Texas, via the Texas Office of Attorney General (the “State”), filed a lawsuit in the 53rd Judicial District Court of Travis County, Texas. The lawsuit alleges that Xerox Corporation, Xerox State Healthcare, LLC and ACS State Healthcare (collectively, the “Xerox Defendants”) violated the Texas Medicaid Fraud Prevention Act in the administration of its contract with the Texas Department of Health and Human Services (“HHSC”). The State alleges that the Xerox Defendants made false representations of material facts regarding the processes, procedures, implementation and results regarding the prior authorization of orthodontic claims. The State seeks recovery of actual damages, two times the amount of any overpayments made as a result of unlawful acts, civil penalties, pre- and post-judgment interest and all costs and attorneys’ fees. The State references the amount in controversy as exceeding hundreds of millions of dollars. The Xerox Defendants filed their Answer in June, 2014 denying all allegations. The Xerox Defendants will continue to vigorously defend themselves in this matter. We do not believe it is probable that we will incur a material loss in excess of the amount accrued for this matter. In the course of litigation, we periodically engage in discussions with plaintiff’s counsel for possible resolution of the matter. Should developments cause a change in our determination as to an unfavorable outcome, or result in a final adverse judgment or settlement for a significant amount, there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in determination, judgment or settlement occurs.

Dennis Nasrawi v. Buck Consultants et al.: On October 8, 2009, plaintiffs filed a lawsuit in the Superior Court of California, Stanislaus County and on November 24, 2009, the case was removed to the U.S. Court for the Eastern District of California, Fresno Division. Plaintiffs allege actuarial negligence against Buck Consultants, LLC (“Buck”) for the use of faulty actuarial assumptions in connection with the 2007 actuarial valuation for the Stanislaus County Employees Retirement Association (“StanCERA”). Plaintiffs allege that the employer contribution rate adopted by StanCERA based on Buck’s valuation was insufficient to fund the benefits promised by the County. On July 13, 2014, the Court entered its ruling that the plaintiffs lacked standing to sue in a representative capacity on behalf of all plan participants. The Court also ruled that plaintiffs had adequately pleaded their claim that Buck allegedly aided and abetted StanCERA in breaching its fiduciary duty. Plaintiffs then filed their Fifth Amended Complaint and added StanCERA to the litigation. Buck and StanCERA filed demurrers to the amended complaint. On September 13, 2012, the Court sustained both demurrers with prejudice, completely dismissing the matter and barring plaintiffs from refiling their claims. Plaintiffs appealed and ultimately the California Court of Appeals (Sixth District) reversed the trial court’s ruling and remanded the case back to the trial court. Buck entered into a stay agreement with plaintiffs that essentially postpones this litigation pending the outcome of parallel litigation between plaintiffs and StanCERA. Buck will continue to aggressively defend these lawsuits.

U.S. Equal Employment Opportunity Commission (“EEOC”) v. Baltimore County, Maryland: On January 1, 2007, the EEOC filed suit against Baltimore County (“County”) alleging that the County’s employer pension plan is age discriminatory under the federal Age Discrimination in Employment Act (“ADEA”) on the grounds that older employees were required to pay higher contributions to the plan than younger employees. Buck Consultants, LLC (“Buck”) is not a party to the lawsuit, but Buck provided administrative services to the plan and the County has asserted indemnity rights against Buck in the event that liability is found. On October 17, 2012, the trial court issued summary judgment finding the plan discriminatory but leaving for trial the question of damages. This decision has been affirmed on appeal and the matter is back before the trial court for trial on all remaining fact issues and damages. On April 24, 2015, the County filed for leave to add Buck as a third party to

 

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the lawsuit between the County and the EEOC. Buck has filed opposition papers. On January 22, 2015, the County served Buck with a declaratory judgment lawsuit seeking an affirmative determination that Buck owes the County defense and indemnity in the EEOC’s lawsuit against the County. Buck filed its motion to dismiss, which the court granted in part and dismissed the County’s claim for indemnity. The court declined, at this time, to dismiss the County’s claim related to Buck’s alleged duty to defend. This case will now go forward to assess whether Buck owes a duty to defend the County in the action with the EEOC. Buck will continue to aggressively defend these matters.

On January 5, 2016, the Consumer Financial Protection Bureau (the “CFPB”) notified Xerox Education Services, Inc. (“XES”) that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement is considering recommending that the CFPB take legal action against XES, alleging that XES violated the Consumer Financial Protection Act’s prohibition of unfair practices. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief or other corrective action. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action is recommended or commenced. This notice stems from an inquiry that commenced in 2014 when XES received and responded to a Civil Investigative Demand containing a broad request for information. During this process, XES self-disclosed to the Department of Education and the CFPB certain adjustments of which it had become aware that had not been timely made relating to its servicing of a small percentage of third-party student loans under outsourcing arrangements for various financial institutions. The CFPB and the Department of Education, as well as certain states’ attorney general offices and other regulatory agencies, began similar reviews. XES has cooperated and continues to fully cooperate with all regulatory agencies, and XES has submitted its NORA response. We cannot provide assurance that the CFPB or another party will not ultimately commence a legal action against XES in this matter nor are we able to predict the likely outcome of the investigations into this matter. We could in future periods incur judgments or enter into settlements in connection with this matter and there could be a material adverse effect on our results of operations, cash flows and financial position in the period in which such change in judgment or settlement occurs.

Other

Conduent Incorporated is a New York corporation, organized in 2016. Our principal executive offices are located at             . Our telephone number is             . Our website address is             . Information contained on, or connected to, our website or Xerox’s website does not and will not constitute part of this Information Statement or the Registration Statement on Form 10 of which this Information Statement is a part.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our accompanying historical Combined and Condensed Combined Financial Statements and the notes thereto included elsewhere in this Information Statement as well as the discussion in the section of this Information Statement entitled “Business.” This discussion contains forward-looking statements that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about the business process outsourcing industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Information Statement entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”

Introduction

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the financial condition and results of operations of the BPO Business. MD&A is provided as a supplement to, and should be read in conjunction with, our accompanying historical Combined and Condensed Combined Financial Statements and the notes thereto. MD&A provides additional information about our operations, current developments, financial condition, cash flows and results of operations. MD&A is organized as follows:

 

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Overview. This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends.

 

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Critical Accounting Policies. This section identifies and summarizes those accounting policies that we consider important to our results of operations and financial condition, require significant judgment and require estimates on the part of management in application.

 

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Results of Operations. This section provides an analysis of our results of operations for the three years ended December 31, 2015 and the six months ended June 30, 2016 and June 30, 2015.

 

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Capital Resources and Liquidity. This section provides a discussion of our current financial condition and an analysis of our cash flows for the three years ended December 31, 2015 and the six months ended June 30, 2016 and June 30, 2015. This section also provides a discussion of our contractual obligations and commitments and off-balance sheet arrangements. Included in this section is a discussion of the amount of financial capacity available to fund our future commitments and ongoing operating activities.

 

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Market Risk Management. This section presents information about our market sensitive financial instruments and exposure to market risk as of December 31, 2015.

For purposes of this MD&A section, we use the terms “Conduent Incorporated,” “Conduent,” “the Company,” “we,” “us” and “our” to refer to Xerox’s business process outsourcing business and related operations. References in this MD&A section to “Xerox” refer to Xerox Corporation, collectively with its consolidated subsidiaries other than, for all periods following the Spin-Off, Conduent.

 

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OVERVIEW

Spin-off Transaction

On January 29, 2016, Xerox announced plans for the complete legal and structural separation of the BPO Business from Xerox. To effect the separation, Xerox will complete the Internal Transactions described under “Certain Relationships and Related Party Transactions—Agreements with Xerox—Separation and Distribution Agreement.” Following the Internal Transactions, Conduent will hold the BPO Business. The Spin-Off will be completed by way of a pro rata dividend of Conduent shares held by Xerox to its stockholders of record as of the Record Date. Following the Spin-Off, Xerox stockholders will own 100% of the outstanding shares of common stock of Conduent and Conduent will operate as an independent, publicly traded company.

Our Business

With revenues of nearly $7.0 billion in 2015, we are a leading provider of business process services with expertise in transaction-intensive processing, analytics and automation. We serve as a trusted business partner in both the front office and back office, enabling personalized, seamless interactions on a massive scale that improve end-user experience.

We believe our addressable market size in the global business process service industry is estimated at nearly $260 billion in 2016, with expected growth rates in the mid-single digits through 2019. We have leadership positions in key market segments, including healthcare and transportation, which are expected to grow at 8% and 5% on a compounded annual basis through 2019, respectively.

We organize our business around three main reportable segments, Healthcare, Public Sector and Commercial Industries:

 

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Healthcare: We provide industry-centric business process services to clients across the healthcare industry, including providers, payers, employers, pharmaceutical and life science companies and government agencies.

 

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Public Sector: We provide government-centric business process services to U.S. federal, state and local and foreign governments.

 

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Commercial Industries: We provide business process services and customized solutions to clients in a variety of industries (other than healthcare).

Our Government Health Enterprise (“HE”) Medicaid Platform business, where we are limiting our focus to implementing and maintaining systems for our current clients, and our Student Loan business, which is in run-off, as well as non-allocated expenses and inter-segment eliminations, are included in Other in our segment reporting.

Recent Developments

Refocusing of Government Healthcare Business

Late in the third quarter of 2015, we determined that we would not fully complete the HE Medicaid platform implementation projects in California and Montana. However, we would continue to process Medicaid claims using existing legacy systems in those states, thus providing uninterrupted service for the states’ healthcare providers and constituents.

As a result of the determination that we would not fully complete those two platform implementations, we recorded a pre-tax charge (the “HE charge”) of $389 million ($237 million after-tax). The charge included $116 million for the write-off of contract receivables (primarily non-current), $34 million related to the non-cash

 

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impairment of the HE software and deferred contract set-up and transition costs and $23 million for other related assets and liabilities. The remainder of the charge was primarily related to settlement costs including payments to subcontractors and would result in cash outflows in future quarters. Of the $389 million charge, $116 million was recorded as a reduction to revenues, while the remaining $273 million was recorded to costs of outsourcing.

We have finalized negotiations with both California and Montana, and we are currently negotiating with our various third-party subcontractors on a final settlement. At this time, we believe we have recorded our best estimate of our liabilities associated with these settlements; however, this estimate is subject to change when negotiations are finalized.

The above noted developments followed the change in strategy in our Government Healthcare business announced in July 2015, to focus our future HE platform implementations on current Medicaid customers and to discontinue investment in and sales of the Xerox Integrated Eligibility System (“IES”). This change in strategy resulted in a pre-tax non-cash software impairment charge of $146 million ($89 million after-tax) in the second quarter of 2015 associated with our HE and IES software platforms.

We remain committed to the implementation and ongoing operation of the HE platform for our other state clients. These HE platform implementations are reported in Other.

As a result of the significant impact of the HE charge and the software impairment charge on our reported revenues, earnings and key metrics for the period, we also discuss our results excluding the impact of these charges. These adjusted results are noted as “adjusted” in the discussion below. Refer to the “Non-GAAP Financial Measures” section for an explanation of these non-GAAP financial measures.

Acquisitions and Divestitures

Consistent with our strategy to enhance our service offerings, we completed several acquisitions during 2015. Refer to Note 3—Acquisitions in our Combined Financial Statements for additional information regarding our 2015 acquisitions.

In December 2014, we announced an agreement to sell our Information Technology Outsourcing (“ITO”) business to Atos SE and began reporting it as a Discontinued Operation. The sale was completed on June 30, 2015. Refer to Note 4—Divestitures in our Combined Financial Statements for additional information.

Currency Impact

To understand the trends in our business, we believe that it is helpful to analyze the impact of changes in the translation of foreign currencies into U.S. Dollars on revenue and expenses. We refer to this analysis as “currency impact” or “the impact from currency” or “constant currency”. In 2016, 2015 and 2014, this impact is calculated by translating current period activity in local currency using the comparable prior-year period’s currency translation rate.

Key Trends and Drivers

Six Months ended June 30, 2016

Total revenues in the first half of 2016 of $3.3 billion decreased 2% compared to the prior-year period with a 1-percentage point negative impact from currency, as growth in Healthcare was more than offset by declines in Commercial Industries. Operating margin for the first half of 2016 of 4.5% improved 0.6-percentage points as compared to the first half of 2015, reflecting cost and productivity improvements, including benefits from our strategic transformation program, as well as lower expenses from our determination to refocus our Government Healthcare business, especially our HE platform implementations.

 

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Year ended December 31, 2015

Total revenues of $6.7 billion in 2015 declined 4% compared to the prior year with a 2-percentage point negative impact from currency. On an adjusted¹ basis, excluding the HE charge, total revenues of $6.8 billion declined 2% from the prior year and were flat at constant currency. Our decision to not fully complete the HE platform implementations in California and Montana and a few specific contracts contributed to revenue declines, which were offset by moderate inorganic and organic contributions. 2015 full-year operating margin of 4.8% decreased 1.4-percentage points from 2014. The decline was driven by targeted resource and other investments and increased expenses for our HE platform implementations prior to the refocusing of that business as described above.

(1) Refer to the Operating income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Combined Financial Statements and notes thereto. In preparing these Combined Financial Statements, we have made our best estimates and judgments of certain amounts included in the Combined Financial Statements giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Although we have listed a number of accounting policies below which we believe to be most critical, we also believe that all of our accounting policies are important to the reader. Therefore, please also refer to the Notes to the Audited Combined Financial Statements and Notes to the Unaudited Condensed Combined Financial Statements for a more detailed description of these and other accounting policies of the BPO Business.

Revenue Recognition

Application of the various accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Refer to Note 1—Basis of Presentation and Summary of Significant Accounting Policies—New Accounting Standards and Accounting Changes—Revenue Recognition in the Combined Financial Statements for additional information regarding our revenue recognition policies.

A significant portion of the BPO Business revenue is recognized based on objective criteria that do not require significant estimates or uncertainties. For example, transaction volumes, time and material and cost reimbursable arrangements are based on specific, objective criteria under the contracts. Accordingly, revenues recognized under these contracts do not require the use of significant estimates that are susceptible to change. Revenue recognized using the percentage-of-completion (“POC”) accounting method does require the use of estimates and judgment as discussed below.

We recognize revenues when we have persuasive evidence of an arrangement, the services have been provided, the transaction price is fixed or determinable and collectability is reasonably assured. During fiscal year 2015, approximately 81% of our revenue was recognized based on transaction volumes, approximately 8% was fixed fee based, wherein our revenue is earned as we fulfill our performance obligations under the arrangement, approximately 2% was related to cost reimbursable contracts, approximately 3% of our revenue was recognized using POC accounting and the remaining 6% was related to time and material contracts. Our revenue mix is subject to change due to the impact of changing customer requirements, acquisitions, divestitures, new business and lost business.

As noted above, a portion of our revenue (approximately 3%) is recognized using the POC accounting method. This method requires the use of significant estimates and judgment. The POC methodology is normally applied to certain of our larger, more complex, and longer term outsourcing contracts involving system development and implementation services, primarily in government healthcare and certain government

 

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transportation contracts. In addition, we had unbilled receivables totaling $224 million and $351 million at December 31, 2015 and 2014, respectively, representing revenues recognized but not yet billable under the terms of our POC contracts. The decrease in unbilled revenues in 2015 is primarily due to developments in certain implementations of our HE Medicaid platform. See “—Overview – Recent Developments—Refocusing of Government Healthcare Business” for additional information on the developments in certain implementations of our HE Medicaid platform.

The POC accounting methodology involves recognizing probable and reasonably estimable revenue using the percentage of services completed based on a current cumulative cost incurred to estimated total cost basis and a reasonably consistent profit margin over the period. Due to the long-term nature of these arrangements, developing the estimates of cost often requires significant judgment. Factors that must be considered in estimating the progress of work completed and ultimate cost of the projects include, but are not limited to, the availability of labor and labor productivity, the nature and complexity of the work to be performed and the impact of delayed performance. If changes occur in delivery, productivity or other factors used in developing the estimates of costs or revenues, we revise our cost and revenue estimates, which may result in increases or decreases in revenues and costs. Such revisions are reflected in income in the period in which the facts that give rise to that revision become known. We perform ongoing profitability analysis of our POC services contracts in order to determine whether the latest estimates require updating. Key factors reviewed by the company to estimate the future costs to complete each contract are future labor costs, future product costs, expected productivity efficiencies, achievement of contracted milestones and performance goals as well as potential penalties for milestone and system implementation delays.

If at any time our estimates indicate the POC contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost of services. This results in the contract being recorded at a zero profit margin going forward with recognition of an equal amount of revenues and costs over the remaining contract term. A zero profit margin may also be applied when it is impractical to estimate specific amounts or ranges of contract revenues and costs; however, we can at least determine that we will not incur a loss on a particular contract.

Additionally, as noted previously, we apply the POC accounting method for our larger, more complex and longer term outsourcing contracts. The POC accounting process is particularly complex and challenging for these arrangements due to their significant scope and duration, the highly technical nature of the implementations, the potential for additional costs related to productivity and performance penalties and other delivery factors. Accordingly, based on the significance of these projects, we continually monitor our progress and consider the potential for increased costs as well as risks and uncertainties in our estimates of revenues and costs under the POC accounting methodology. To the extent possible, we attempt to mitigate these risks through operational changes, project oversight and process improvements.

Allowance for Doubtful Accounts and Credit Losses

We continuously monitor collections and payments from our customers and record a provision for estimated credit losses based on specific customer account analysis as well as changes in client credit-worthiness, payment terms and collection trends. We also regularly review historical experience adjusted for current economic trends and conditions. Any change in the assumptions used in analyzing a specific account receivable may result in additional provisions being recognized in the period in which the change occurs. Although bad debt provisions have not been material over the past three years, due to the level of accounts receivables including the portion that is unbilled, we critically review accounts to ensure collectability.

Refer to Note 5—Accounts Receivables, Net in the Combined Financial Statements for additional information regarding our allowance for doubtful accounts.

 

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Capitalization of Outsourcing Contract Costs

In connection with our services arrangements, we incur and capitalize costs to originate these long-term contracts and to perform the migration, transition and setup activities necessary to enable us to perform under the terms of the arrangement. Certain initial direct costs of an arrangement are capitalized and amortized over the contractual service period of the arrangement to cost of services. From time to time, we also provide inducements to customers in various forms, including contractual credits, which are capitalized and amortized as a reduction of revenue over the term of the contract. We regularly review costs to determine appropriateness for deferral in accordance with the relevant accounting guidance. Key estimates and assumptions that we must make include projecting future cash flows in order to assess the recoverability of deferred costs. To assess recoverability, undiscounted estimated cash flows of the contract are projected over its remaining life and compared to the carrying amount of contract related assets, including the unamortized deferred cost balance. Such estimates require judgment and assumptions, which are based upon the professional knowledge and experience of our personnel. Key factors that are considered in estimating the undiscounted cash flows include projected labor costs and productivity efficiencies. A significant change in an estimate or assumption on one or more contracts could have a material effect on our results of operations.

Capitalization of Software Development Costs

We capitalize certain costs incurred to develop commercial software products to be sold, leased or otherwise marketed after establishing technological feasibility, and we capitalize costs to develop or purchase internal-use software. Significant estimates and assumptions include: determining the appropriate period over which to amortize the capitalized costs based on estimated useful lives, estimating the marketability of the commercial software products and related future revenues and assessing the unamortized cost balances for impairment. For commercial software products, determining the appropriate amortization period is based on estimates of future revenues from sales of the products. We consider various factors to project marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete. For internal-use software, the appropriate amortization period is based on estimates of our ability to utilize the software on an ongoing basis. To assess the recoverability of capitalized software costs, we consider estimates of future revenue, costs and cash flows. Such estimates require assumptions about future cash inflows and outflows, and are primarily based on the historical experience and expectations regarding future revenues. A significant change in an estimate related to one or more software products could result in a material change to our results of operations.

Refer to Note 6—Land, Buildings, Equipment and Software, Net in the Combined Financial Statements for additional information regarding capitalized software costs including a discussion of related impairments recorded in 2015.

Business Combinations

The accounting for business combinations requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate the purchase price consideration between assets that are depreciated and amortized from goodwill. Our estimates of the fair values of assets and liabilities acquired are based upon assumptions believed to be reasonable and, when appropriate, include assistance from independent third-party valuation firms. Refer to Note 3—Acquisitions in the Combined Financial Statements for additional information regarding the allocation of the purchase price consideration for our acquisitions.

Because we are primarily a services business, which normally has a lower level of tangible assets, our acquisitions typically result in significant amounts of goodwill and other intangible assets. These assets affect the amount of future period amortization expense and possible expense we could incur as a result of an impairment. Acquired intangible assets are primarily related to customer relationships. As a result of the acquisition of

 

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Affiliated Computer Services, Inc. (“ACS”) by Xerox in 2010, as well as other subsequent acquisitions, we have a significant amount of acquired intangible assets and goodwill. Acquired intangible assets and goodwill were $1.4 billion and $4.9 billion at December 31, 2015, respectively.

Intangible Assets

The fair values of identifiable intangible assets are primarily estimated using an income approach. These estimates include market participant assumptions and require projected financial information, including assumptions about future revenue growth and costs necessary to facilitate the projected growth. Other key inputs include assumptions about technological obsolescence, customer attrition rates, brand recognition, the allocation of projected cash flows to identifiable intangible assets and discount rates. We regularly review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

 

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significant underperformance relative to historical or projected future operating results;

 

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significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and

 

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significant negative industry or economic trends.

When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of potential impairment, we assess whether an impairment has occurred based on whether net book value of the assets exceeds the related projected undiscounted cash flows from these assets. We consider a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles in estimating future cash flows. Differing estimates and assumptions as to any of the factors described above could result in a materially different impairment charge, if any, and thus materially different results of operations. In the three-year period ended December 31, 2015, we did not record any material impairments of acquired intangible assets except those related to the sales or shutdown of businesses.

Goodwill

Goodwill is not amortized but rather is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment may have been incurred. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities and acts by governments and courts.

Application of the annual goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and the assessment—qualitatively or quantitatively—of the fair value of each reporting unit against its carrying value. We determined that our reporting units were the same as our operating segments and, therefore, the BPO Business is comprised of three reporting units with goodwill balances. Our annual impairment test of goodwill was performed in the fourth quarter of 2015. We elected to utilize a quantitative assessment of the recoverability of our goodwill balances for each of our reporting units.

In our quantitative test, we estimate the fair value of each reporting unit by weighting the results from the income approach (discounted cash flow methodology) and market approach. These valuation approaches require significant judgment and consider a number of factors that include, but are not limited to, expected future cash flows, growth rates and discount rates, and comparable multiples from publicly traded companies in our industry. In addition, we are required to make certain assumptions and estimates regarding the current economic environment, industry factors and the future profitability of our businesses.

 

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When performing our discounted cash flow analysis for each reporting unit, we incorporate the use of projected financial information and discount rates that are developed using market participant-based assumptions. The cash-flow projections are based on three-year financial forecasts developed by management that include revenue and expense projections, restructuring and strategic transformation activities, capital spending trends and investment in working capital to support anticipated revenue growth or other changes in the business. The selected discount rates consider the risk and nature of the respective reporting units’ cash flows and an appropriate capital structure and rates of return that market participants would require to invest their capital in our reporting units.

We believe our assumptions are appropriate and reflect our forecasted long-term business model, and give appropriate consideration to our historical results as well as the current economic environment and markets that we serve. The average discount rate applied to our projected cash flows was approximately 9.0%, which we considered reasonable based on the estimated capital costs of applicable market participants.

Our impairment assessment methodology includes the use of outside valuation experts and the inclusion of factors and assumptions related to third-party market participants. When performing our market approach for each reporting unit, we rely specifically on the guideline public company method. Our guideline public company method incorporates revenues and earnings multiples from publicly traded companies with operations and other characteristics similar to each reporting unit. The selected multiples consider each reporting unit’s relative growth, profitability, size and risk relative to the selected publicly traded companies.

After completing our annual impairment reviews for each reporting unit in the fourth quarter of 2015 and 2014, we concluded that goodwill was not impaired in either of these years. Although we experienced a decline in the fair values of our reporting units in 2015 as compared to 2014, with the exception of the Commercial Industries reporting unit, no reporting unit had an excess of fair value over carrying value of less than 20%.

The excess of reporting unit fair values over carrying values for our Commercial Industries reporting unit (which has approximately $1.9 billion of goodwill) was significantly less than in prior years with an excess of fair value over carrying value of approximately 17%. The decrease in fair values for this reporting unit was largely due to the mix of services and pricing pressures not being matched with cost reductions from productivity and restructuring actions. However, this reporting unit continues to operate in key areas of the business process services market, and the 2016 expectation is that through an increased focus on revenue and cost management, including expected benefits from our strategic transformation program, the business will reflect improved performance and a corresponding increase in fair value. We will continue to monitor the impact of economic, market and industry factors impacting this reporting unit in 2016.

Refer to Note 7—Goodwill and Intangible Assets, Net in the Combined Financial Statements for additional information regarding goodwill by reportable segment.

Restructuring and Asset Impairments

We have engaged in restructuring actions, which require management to estimate the timing and amount of severance and other employee separation costs for workforce reduction, the fair value of assets made redundant or obsolete and the fair value of lease cancellation and other exit costs. We accrue for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences and negotiated settlements.

For a full description of our restructuring actions, refer to our discussions of restructuring in MD&A and in Note 8—Restructuring and Asset Impairment Charges in the Combined Financial Statements.

Income Taxes

Income tax expense and other income tax related information contained in the Combined Financial Statements are presented on a separate return basis as if the BPO Business filed its own tax returns. The BPO

 

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Business is subject to income taxes in the United States and numerous foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision is based on nonrecurring events as well as recurring factors, including the taxation of foreign income. In addition, our provision will change based on discrete or other nonrecurring events such as audit settlements, tax law changes, changes in valuation allowances, etc., that may not be predictable. In the event that there is a significant unusual or one-time item recognized in our operating results, the taxes attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item.

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Combined Balance Sheets, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded in our Combined Balance Sheets and provide valuation allowances as required. We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Gross deferred tax assets of $414 million and $359 million had valuation allowances of $38 million and $35 million at December 31, 2015 and 2014, respectively.

We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon our assessment of the more-likely-than-not outcomes of such matters. In addition, when applicable, we adjust the previously recorded tax expense to reflect examination results. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can materially increase or decrease our effective tax rate, as well as impact our operating results. Unrecognized tax benefits were $24 million, $32 million and $41 million at December 31, 2015, 2014 and 2013, respectively.

Refer to Note 14—Income and Other Taxes in the Combined Financial Statements for additional information regarding deferred income taxes and unrecognized tax benefits.

Loss Contingencies

The BPO Business is currently involved in various claims and legal proceedings. At least quarterly, we review the status of each significant matter and assess its potential financial exposure considering all available information including, but not limited to, the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to its pending claims and litigation, and may revise its estimates. These revisions in the estimates of the potential liabilities could have a material impact on the BPO Business results of operations and financial position.

Refer to Note 15—Contingencies and Litigation in the Combined Financial Statements for additional information regarding loss contingencies.

RESULTS OF OPERATIONS

Basis of Presentation

The accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement of the BPO Business have been derived from the Consolidated Financial Statements and accounting records of Xerox, as if the BPO Business operated on a standalone basis during the periods presented, and were prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC.

 

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Historically, the BPO Business consisted of the Business Process Outsourcing operating segment within Xerox’s reportable Services segment and did not operate as a separate, standalone entity. Accordingly, Xerox has reported the financial position and the related results of operations, cash flows and changes in equity of the BPO Business in Xerox’s Consolidated Financial Statements.

As the separate legal entities that make up the BPO Business were not historically held by a single legal entity, Total Net Parent Equity is shown in lieu of shareholder’s equity in the accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement. Balances between the BPO Business and Xerox that were not historically settled in cash are included in Net Parent Investment. Net Parent Investment represents Xerox’s interest in the recorded assets of the BPO Business and represents the cumulative investment by Xerox in the BPO Business through the dates presented, inclusive of operating results.

The accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement include the historical basis of assets, liabilities, revenues and expenses of the individual businesses of Xerox’s historical BPO Business, including the joint ventures and partnerships over which the BPO Business has a controlling financial interest. The BPO Business uses the equity method to account for investments in business entities that it does not control if it is otherwise able to exercise significant influence over the entities operating and financial policies (generally 20% to 50% ownership). The accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement include certain assets and liabilities that are held by Xerox that are specifically identifiable or otherwise attributable to the BPO Business. All intercompany transactions and balances within the BPO Business have been eliminated.

Cash is managed centrally through bank accounts controlled and maintained by Xerox. Accordingly, cash and cash equivalents held by Xerox at the corporate level were not attributable to the BPO Business for any of the periods presented. Only cash amounts specifically attributable to the BPO Business are reflected in the accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement. Transfers of cash, both to and from Xerox’s centralized cash management system, are reflected as a component of Net Parent Investment in the accompanying Combined and Condensed Combined Balance Sheets and as a financing activity on the accompanying Combined and Condensed Combined Statements of Cash Flows. Historically, the BPO Business received or provided funding as part of Xerox’s centralized treasury program.

Third-party debt obligations of Xerox and the corresponding financing costs related to those debt obligations, specifically those that relate to senior notes, term loans, commercial paper obligations and revolving credit facilities, have not been attributed to the BPO Business, as the BPO Business was not the legal obligor on the debt. The only third-party debt obligations included in the Combined and Condensed Combined Financial Statements are those for which the legal obligor is a legal entity within the BPO Business.

During the periods presented, the BPO Business functioned as part of the larger group of companies controlled by Xerox. Accordingly, Xerox performed certain corporate overhead functions for the BPO Business. Therefore, certain corporate costs, including compensation costs for corporate employees supporting the BPO Business, have been allocated from Xerox. These allocated costs are for corporate functions including, but not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology, marketing and communications, internal audit and other shared services, which are not provided at the business level. Where possible, these costs were allocated based on direct usage, with the remainder allocated on a basis of cost, headcount or other measures we have determined as reasonable. The Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement do not necessarily include all the expenses that would have been incurred or held by the BPO Business had it been a separate, standalone company. We expect to incur additional expenses as well as gain incremental productivity as a separate, standalone publicly-traded company. It is not practicable to estimate actual costs that would have been incurred had the BPO Business been a separate, standalone company during the periods presented. Allocations for management costs and corporate support services provided to the BPO Business totaled $84 million and $87 million for the six months ended June 30, 2016 and 2015, respectively, and $170 million, $175 million and $173 million for the three years ended December 31, 2015, respectively.

 

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The management of the BPO Business believes the assumptions underlying the accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement, including the assumptions regarding the allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by the BPO Business during the periods presented. Nevertheless, the accompanying Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement may not be indicative of the BPO Business’s future performance, do not necessarily include the actual expenses that would have been incurred by the BPO Business and may not reflect the results of operations, financial position and cash flows of the BPO Business had the BPO Business been a separate, standalone company during the periods presented.

The operations of the BPO Business are included in the consolidated U.S. federal, and certain state and local and foreign income tax returns filed by Xerox, where applicable. The BPO Business also files certain separate state and local and foreign income tax returns. Income tax expense and other income tax related information contained in the Combined and Condensed Combined Financial Statements are presented on a separate return basis as if the BPO Business filed its own tax returns. The income taxes of the BPO Business as presented in the Combined and Condensed Combined Financial Statements may not be indicative of the income taxes that the BPO Business will generate in the future. In jurisdictions where the BPO Business has been included in the tax returns filed by Xerox, any income taxes payable resulting from the related income tax provisions have been reflected in the balance sheet within “Net Parent Investment.”

For convenience and ease of reference, we refer to the financial statement caption “(Loss) Income before Income Taxes” as “pre-tax (loss) income” throughout the Combined and Condensed Combined Financial Statements included elsewhere in this Information Statement.

During the second quarter closing process, we determined that the first quarter 2016 income tax benefit of $25 million should have been $6 million higher. This additional income tax benefit was adjusted for and included in the six month results ended June 30, 2016. We will revise the first quarter 2016 financial statements in future filings. The Company concluded that this correction was not material to the condensed combined financial statements for the three months ended March 31, 2016.

Results of Operations—Six Months ended June 30, 2016 and 2015

Revenue Results Summary

Total Revenues

 

		Six Months Ended June 30,
(in millions)		2016				2015				% Change				CC % Change
Total Revenues		$	3,298			$	3,361				(2	)%			(1	)%

 

CC – See “Non-GAAP Financial Measures” section for description of constant currency.

Total revenues for the first half of 2016 decreased 2% compared to the first half of 2015, with a 1-percentage point negative impact from currency. Overall non-U.S. revenues represented approximately 20% of total revenues (Pound Sterling-denominated revenues represented approximately 2% of total revenues).

The decline was partially driven by our third quarter 2015 decision to not fully complete the HE platform implementations in California and Montana and the run-off of the Student Loan business, which combined had approximately a 1.0-percentage point impact. In addition, revenues decreased due to lower volumes and lost business, particularly in Commercial Industries, as well as overall price declines that were consistent with prior-period trends. Partially offsetting these declines were moderate growth from acquisitions and ramping of new contracts, primarily in some areas of Healthcare and Public Sector.

 

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Costs, Expenses and Other Income

Summary of Key Financial Ratios

The following is a summary of key financial ratios used to assess our performance:

 

		Six Months Ended June 30,
		2016				2015				B/(W)
Total Gross Margin			15.7	%			15.1	%			0.6 pts.
R&D as a % of Revenue			0.5	%			0.8	%			0.3 pts.
SAG as a % of Revenue			10.7	%			10.5	%			(0.2) pts.
Pre-tax Margin			(2.7	)%			(5.7	)%			3.0 pts.
Operating Margin(1)			4.5	%			3.9	%			0.6 pts.

 

(1)	Refer to the Operating Income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Pre-tax Margin

Pre-tax margin of (2.7)% increased 3.0-percentage points as compared to the six months ended June 30, 2015. The increase was primarily driven by the previously discussed $146 million pre-tax software impairment charge recorded in the second quarter of 2015 related to the change in strategy in our Government Healthcare business, as well as an improvement in gross margin due to reduced expenses in our HE platform implementations, favorable line-of-business mix and greater cost productivity.

Pre-tax margin includes the Amortization of intangible assets, Related party interest, net, Other expenses, net, Restructuring and related costs and Separation costs, all of which are separately discussed in subsequent sections. Operating margin excludes these items.

Operating Margin

Operating margin¹ of 4.5% increased 0.6-percentage points as compared to the six months ended June 30, 2015. The increase was driven by an improvement in gross margin due to reduced costs in our HE platform implementations as well as more favorable line-of-business mix and greater cost productivity, including benefits from our strategic transformation program. As noted above, the BPO Business operating margin contains an allocation for management cost and corporate support services totaling $84 million and $87 million for the six months ended June 30, 2016 and 2015, respectively.

 

(1)	Refer to the Operating Income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Gross Margin

Gross margin of 15.7% increased 0.6-percentage points as compared to the six months ended June 30, 2015. The increase reflected restructuring and productivity improvements benefits from lower expenses associated with our HE platform implementations (a result of decisions we made in 2015 to curtail the Government HE Medicaid Platform business) and favorable line-of-business mix. These benefits were partially offset by continued margin pressures in our customer care service offerings, lower profitability in our Student Loan business and price declines.

Additional analysis of the change in gross margin for each business segment is included under “Operations Review of Segment Revenue and Profit” below.

 

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Research and Development Expenses (R&D)

 

		Six Months Ended June 30,
(in millions)		2016				2015				Change
Total R&D Expenses		$	18			$	27			$	(9	)

R&D as a percentage of revenue of 0.5% decreased 0.3-percentage points from the six months ended June 30, 2015. The decrease was primarily due to lower R&D program spending and the benefits from ongoing restructuring.

R&D of $18 million decreased by $9 million compared to the prior-year period.

Selling, Administrative and General Expenses (SAG)

SAG as a percentage of revenue of 10.7% increased by 0.2-percentage points from the six months ended June 30, 2015, as benefits from restructuring and cost initiatives only partially offset the decline in total revenues.

SAG of $353 million was $1 million higher than the six months ended June 30, 2015 and reflected the following:

 

•

$1 million decrease in selling expenses; and

 

•

$2 million increase in bad debt expense.

Restructuring and Related Costs

Restructuring and related costs of $49 million include restructuring and asset impairment charges of $45 million as well as $4 million of additional costs primarily related to professional support services associated with the implementation of the strategic transformation program.

During the first half of 2016, we recorded net restructuring and asset impairment charges of $45 million, which included approximately $48 million of severance costs related to headcount reductions of approximately 3,850 employees worldwide, $2 million of lease cancellation costs and $2 million in asset impairments. These costs were offset by $7 million of net reversals, primarily resulting from changes in estimated reserves from prior-period initiatives.

During the six months ended June 30, 2015, we recorded net restructuring and asset impairment charges of $151 million. Net restructuring charges of $5 million included $8 million of severance costs related to headcount reduction of approximately 460 employees worldwide and $1 million of lease cancellation costs, partially offset by $4 million of net reversals for changes in estimated reserves from prior period initiatives. Asset impairment charges of $146 million were associated with software asset impairments resulting from the change in strategy in our Government Healthcare business, discussed above.

The restructuring reserve balance as of June 30, 2016 for all programs was $27 million, all of which is expected to be spent over the next twelve months.

Refer to Note 6—Restructuring Programs in the Condensed Combined Financial Statements for additional information regarding our restructuring programs.

Worldwide Employment

Worldwide employment of approximately 93,000 as of June 30, 2016 decreased by 10,800 from December 31, 2015, due primarily to the impact of seasonal reductions as well as restructuring and productivity reductions, partially offset by additions from ramping new business.

 

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Amortization of Intangible Assets

Amortization of intangible assets of $137 million increased $12 million compared to the first half of 2015 primarily due to the impairment of a customer relationship asset in the first quarter of 2016 as a result of a lost contract.

Separation Costs

Separation costs are primarily for third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies, such as those related to human resources, brand management, real estate and information management to the extent not capitalized. Separation costs also include the costs associated with bonuses and restricted stock grants awarded to employees for retention through the separation.

During the first half of 2016, we recorded separation costs of $19 million, which excluded tax-related separation costs discussed below in Income Taxes.

Related-Party Interest Expense, Net

Related-party interest expense for the first half of 2016 of $20 million was $16 million lower than the prior year primarily due to the capitalization of certain related party notes payable in 2015 as a result of the proceeds received from the sale of the ITO business.

Refer to Note 12—Related Party Transactions and Parent Company Investment in the Condensed Combined Financial Statements for additional information regarding Related-party interest expense, net.

Other Expenses, Net

 

		Six Months Ended June 30,
(in millions)		2016				2015
Third-party interest expense		$	2			$	6
Losses (gains) on sales of businesses and assets			1				(1	)
Currency (gains) losses, net			(2	)			2
Litigation matters			11				4
Deferred compensation investment gains			(3	)			(4	)
All other expenses, net			2				3
Total Other Expenses, Net		$	11			$	10

Third-Party Interest Expense: Third-party interest expense of $2 million was $4 million lower than the first half of 2015, driven by repayment of a $250 million senior note in the second quarter of 2015.

Litigation Matters: Litigation matters for the first half of 2016 reflect probable losses and reserves for various legal matters.

Income Taxes

The reported tax benefit for the first half of 2016 resulted in an effective tax rate of 62.5%. This rate was higher than the U.S. statutory tax rate primarily as a result of pre-tax losses in the United States due to the following charges: Restructuring and related costs, Amortization of intangible assets and Separation costs, including Tax-related separation costs, discussed below. The U.S. pre-tax losses are taxed at a higher rate than our foreign pre-tax income, which has the effect of increasing the overall effective tax rate above the statutory

 

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tax rate. The adjusted¹ tax expense for the first half of 2016, which excludes the tax effects of the previously noted charges, resulted in an effective tax rate of 9.4%. This rate was lower than the U.S. statutory tax rate primarily due to the geographical mix of profits.

The reported tax benefit for the first half of 2015 resulted in an effective tax rate of 43.2%. This rate was higher than the U.S. statutory tax rate primarily as a result of pre-tax losses in the United States due to the following charges: Restructuring and related costs and Amortization of intangible assets. The U.S. pre-tax losses are taxed at a higher rate than our foreign pre-tax income, which has the effect of increasing the overall effective tax rate above the statutory tax rate. The adjusted¹ tax expense for the first half of 2015, which excludes the tax effects of the previously noted charges, resulted in an effective tax rate of 27.4%, which was lower than the U.S. statutory tax rate primarily due to the geographical mix of profits.

Tax-related Separation Costs

We recorded a deferred tax benefit/asset of $7 million on our separation costs for the year-to-date period of 2016. We expect a portion of this deferred tax asset will be eliminated at the time the separation is executed, as certain separation costs will be non-deductible.

In connection with the Spin-Off, Xerox will undertake the Internal Transactions, which we expect to include internal reorganizations of, and transactions among, our wholly-owned subsidiaries and operating activities. Although we believe that, for the most part, the Internal Transactions can be completed in a tax-free manner, we do expect to incur incremental income tax expense associated with certain elements of the Internal Transactions. Accordingly, in second quarter 2016, we recorded $10 million for the estimated income tax on the book/tax basis differences currently associated with our investments in certain subsidiaries that are expected to be impacted by the Internal Transactions. Upon the completion of the Spin-Off, we also expect to recognize additional income tax expense in certain state and international jurisdictions primarily related to the change in realizability of certain deferred tax assets.

 

(1)

Refer to the Effective Tax Rate reconciliation table in the “Non-GAAP Financial Measures” section.

Net Loss from Continuing Operations

Net loss from continuing operations for the six months ended June 30, 2016 was $33 million. On an adjusted¹ basis, net income from continuing operations was $106 million. Adjustments to net income include the Amortization of intangible assets, Restructuring and related costs and Separation costs.

Net loss from continuing operations for the six months ended June 30, 2015 was $109 million. On an adjusted¹ basis, net income from continuing operations was $61 million. Adjustments to net income include the Amortization of intangible assets and Restructuring charges.

 

(1)

Refer to the “Non-GAAP Financial Measures” section for a reconciliation of reported net income from continuing operations to adjusted net income.

Discontinued Operations

There were no Discontinued Operations as of June 30, 2016.

Refer to Note 4—Divestitures in the Condensed Combined Financial Statements for additional information regarding Discontinued Operations.

Other Comprehensive Loss

Other comprehensive loss in the first half of 2016 was $13 million as compared to a loss of $17 million in the first half of 2015. The change of $4 million is primarily due to a $4 million change from the translation of our foreign currency denominated net assets.

 

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Both the first half of 2016 and the first half of 2015 reflect translation losses as a result of the weakening of our major foreign currencies as compared to the U.S. Dollar at quarter-end spot rates.

Operations Review of Segment Revenue and Profit

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate: Commercial Industries, Healthcare and Public Sector. Revenues by segment for the six months ended June 30, 2016 and 2015 were as follows:

 

		Six Months Ended June 30,
(in millions)		Total Revenue				% of Total Revenue				Segment Profit (Loss)				Segment Margin
2016
Commercial Industries		$	1,366				41	%		$	23				1.7	%
Healthcare			880				27	%			74				8.4	%
Public Sector			847				26	%			104				12.3	%
Other			205				6	%			(53	)			(25.9	)%
Total		$	3,298				100	%		$	148				4.5	%
2015
Commercial Industries		$	1,441				43	%		$	37				2.6	%
Healthcare			871				26	%			81				9.3	%
Public Sector			854				25	%			94				11.0	%
Other			195				6	%			(79	)			(40.5	)%
Total		$	3,361				100	%		$	133				4.0	%

Commercial Industries Segment

Revenue

Commercial Industries revenue of $1,366 million was 41% of total revenues and decreased 5% from the first half of 2015. The decline was driven by lost business, due in part to actions we have taken to improve profitability in under-performing areas, a lower level of project work year-over-year as a result of fewer large cases in our litigation services offering, as well as negative impacts from currency. Partially offsetting the decline were benefits from ramping new contracts, primarily in our high-tech business area.

Segment Margin

Commercial Industries segment margin of 1.7% decreased 0.9-percentage points from the prior-year period primarily due to margin pressure in our customer care services offering and reduced project work in our litigation services offering. During the first half of 2016, margin improved sequentially from 1.0% in the first quarter of 2016 to 2.4% in the second quarter of 2016 as we focus on improving under-performing areas and gaining efficiencies from cost initiatives, including benefits from our strategic transformation program.

Commercial Industries has a higher proportion of multi-industry service offerings, particularly customer care that naturally has a lower margin, as opposed to higher-value, industry-specific service offerings. Accordingly, overall margins in this segment are expected to be below the margins of the Healthcare and Public Sector segments where industry-specific service offerings are more prominent. In addition, during 2015 we began to experience cost and productivity challenges in our customer care service offering which further pressured margins and which are being addressed by new customer care leadership.

 

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Healthcare Segment

Revenue

Healthcare revenue of $880 million was 27% of total revenues and increased 1% from the first half of 2015. Growth was driven by acquisitions and ramping new business with commercial payer, government healthcare and pharmaceutical clients. These areas of growth were partially offset by lost business and lower volumes in some areas.

Segment Margin

Healthcare segment margin of 8.4% decreased 0.9-percentage points from the prior year primarily due to margin pressures in customer care service offering partially offset by margin improvement in government healthcare. During the first half of 2016, margin improved sequentially from 8.0% in the first quarter to 8.9% in the second quarter reflecting increased efficiencies from cost actions.

Public Sector Segment

Revenue

Public Sector revenue of $847 million was 26% of total revenues and decreased 1% compared to the first half of 2015. Growth in transportation was offset by lower volumes and lost business in state government services.

Segment Margin

Public Sector segment margin of 12.3% increased 1.3-percentage points from the prior year as cost and productivity improvements and improved performance in transportation were partially offset by lost business in state government services. During the first half of 2016, margin improved sequentially from 10.4% in the first quarter to 14.1% in the second quarter reflecting gains in efficiencies from cost actions as well as progress ramping new business.

Other

Revenue

Other revenue of $205 million was 6% of total revenues and increased 5% from the first half of 2015. Growth was driven by the ramp of the New York HE platform implementation contract partially offset by our prior year decision not to complete the HE platform implementations in California and Montana and the run-off of the Student Loan business.

Other Loss

Other loss of $53 million improved $26 million from the prior-year period driven by improvements in HE platform implementation expenses resulting from the refocusing of our Government Healthcare business in 2015 and the decision to not fully complete the HE platform implementations in California and Montana, which more than offset lower profitability in the Student Loan business.

 

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Results of Operations—Years ended December 31, 2015, 2014 and 2013

Revenue Results Summary

Total Revenues

 

		Revenues												% Change								CC % Change
(in millions)		2015				2014				2013				2015				2014				2015				2014
Total Revenues		$	6,662			$	6,938			$	6,879				(4	)%			1	%			(2	)%			1	%
Adjusted Total Revenues(1)		$	6,778			$	6,938			$	6,879				(2	)%							—	%

 

CC – See “Non-GAAP Financial Measures” section for description of constant currency.

 

(1)	Refer to the Operating Income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Total Revenues 2015

Total revenues for the year ended 2015 decreased 4% compared to the prior year with a 2-percentage point negative impact from currency. On an adjusted¹ basis, excluding the HE charge, total revenues decreased 2%, with a 2-percentage point negative impact from currency. The negative impact from currency reflects the significant weakening of our major foreign currencies against the U.S. Dollar as compared to the prior year. Overall non-U.S. revenues represented 22% of total revenues.

The decline in total revenues was primarily driven by the run-off of the Student Loan business, the termination of the Texas Medicaid contract and the impact of our determination in the third quarter of 2015 to not fully complete the HE platform implementations in California and Montana, which combined had a 4.8-percentage point negative impact on revenue growth. Offsetting this decline was moderate acquisition contribution and organic growth in several lines of business net of the impacts from lost business and lower pricing that were consistent with prior trends.

Total Revenues 2014

Total revenues during 2014 increased 1% compared to the prior year with no impact from currency. Growth from acquisitions along with organic growth in certain areas of healthcare and litigation services as well as growth internationally were partially offset by declines in portions of customer care. In addition, the declines in the Student Loan business and the Texas Medicaid contract termination had a combined 2.7-percentage point negative impact on revenue growth.

An analysis of the change in revenue for each business segment is included under “Operations Review of Segment Revenue and Profit” below.

 

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Costs, Expenses and Other Income

Summary of Key Financial Ratios

The following is a summary of key financial ratios used to assess our performance:

 

		Year Ended December 31,												Change
		2015				2014				2013				2015 B/(W)				2014 B/(W)				2015 Adjusted(1)				2015 Adjusted(1) B/(W) 2014
Total Gross Margin			10.3	%			16.4	%			18.0	%			(6.1	) pts			(1.6	) pts			15.8	%			(0.6	) pts
R&D as a % of Revenue			0.8	%			0.7	%			0.6	%			(0.1	) pts			(0.1	) pts			0.8	%			(0.1	) pts
SAG as a % of Revenue			10.5	%			9.5	%			9.6	%			(1.0	) pts			0.1	pts			10.3	%			(0.8	) pts
Pre-tax Margin			(8.6	)%			0.1	%			3.0	%			(8.7	) pts			(2.9	) pts			N/A				N/A
Operating Margin(1)			NM				6.2	%			7.8	%			NM				(1.6	) pts			4.8	%			(1.4	) pts

 

(1)	Refer to Operating Income / Margin reconciliation table in the “Non-GAAP Financial Measures” section.

Pre-tax Margin

The pre-tax margin for the year ended December 31, 2015 of (8.6)% declined by 8.7-percentage points primarily due to the HE charge of $389 million, previously discussed, as well as higher Restructuring and asset impairment charges primarily as a result of the software impairment charge in our Government Healthcare business of $146 million. In addition, a 0.6-percentage point decrease in gross margin and a 0.8-percentage point increase in SAG as a percent of revenue reflecting targeted resource and other investments as well as higher costs associated with our HE platform implementations, prior to the implementation of the government healthcare strategy change noted above, also contributed to decline. These negative impacts were partially offset by restructuring savings and productivity improvements as well as lower related party interest expense and lower other expenses, net. The pre-tax margin for the year ended December 31, 2014 of 0.1% decreased 2.9 percentage points as compared to 2013. The decrease was primarily due to an $81 million increase in other expenses, net, as well as higher government healthcare platform expenses, reflecting the impairment associated with the loss of the Nevada Health Insurance Exchange (“HIX”) contract, resource investments across all segments and the run-off of the Student Loan business.

Pre-tax margin includes the amortization of intangible assets, restructuring and asset impairment charges, related party interest and other expenses, net, all of which are separately discussed in subsequent sections. Operating margin, discussed below, excludes these items.

Operating Margin

Operating margin¹ for the year ended December 31, 2015 of 4.8% decreased 1.4-percentage points as compared to 2014. This decline was driven by a 0.6-percentage point decrease in gross margin and a 0.8-percentage point increase in SAG as a percent of revenue. The operating margin decline was driven by targeted resource and other investments as well as higher costs associated with our HE platform implementations, prior to the implementation of the change in strategy in our Government Healthcare business noted above. These negative impacts were partially offset by restructuring savings and productivity improvements. As noted above, the BPO Business operating margin contains an allocation for management cost and corporate support services totaling $170 million, $175 million and $173 million for the three years ended December 31, 2015, respectively.

Operating margin¹ for the year ended December 31, 2014 of 6.2% decreased 1.6-percentage points as compared to 2013. The decrease was driven primarily by a 1.6-percentage point decline in gross margin. The operating margin decline reflected higher government healthcare platform expenses, including the impairment

 

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associated with the loss of the Nevada Health Insurance Exchange (“HIX”) contract, as well as resource investments across segments and the run-off of the Student Loan business.

 

(1)	Refer to Operating Income / Margin reconciliation table and the Key Financial Ratios reconciliation table in the “Non-GAAP Financial Measures” section.

Gross Margins

Gross margin for the year ended December 31, 2015 of 10.3% decreased 6.1-percentage points as compared to 2014. On an adjusted¹ basis, gross margin of 15.8% decreased by 0.6-percentage points as compared to 2014. Targeted resource and other investments, impacts from unfavorable line-of-business mix, increased expenses associated with our HE platform implementations, prior to the change in strategy in our Government Healthcare business noted above, and price declines were partially offset by productivity improvements and restructuring benefits.

Gross margin for year ended December 31, 2014 of 16.4% decreased 1.6-percentage points as compared to 2013. The decrease was primarily due to higher expenses associated with our HE and HIX platforms and certain platforms in our Public Sector business, the run-off of our Student Loan business and price declines that were consistent with prior periods. These impacts were only partially offset by productivity improvements and restructuring benefits.

Additional analysis of the change in gross margin for each business segment is included under “Operations Review of Segment Revenue and Profit” below.

Research and Development Expenses (R&D)

 

		Year Ended December 31,												Change
(in millions)		2015				2014				2013				2015				2014
Total R&D Expenses		$	52			$	46			$	40			$	6			$	6

R&D as a percent of revenue for the year ended December 31, 2015 of 0.8% increased 0.1-percentage points on an actual and adjusted¹ basis, and R&D of $52 million for the year ended December 31, 2015 was $6 million higher than 2014, both driven by investments in new offerings and capabilities.

R&D as a percent of revenue for the year ended December 31, 2014 of 0.7% increased 0.1-percentage points, and R&D of $46 million for the year ended December 31, 2014 was $6 million higher than 2013, both driven by investments in new offerings and capabilities.

Selling, Administrative and General Expenses (SAG)

SAG as a percent of revenue of 10.5% increased 1.0-percentage point for the year ended December 31, 2015 as compared to 2014. On an adjusted¹ basis, SAG as a percentage of revenue of 10.3% increased 0.8-percentage points from 2014. The increase was driven by revenue declines and targeted resource and other investments partially offset by productivity improvement.

SAG expenses of $699 million for the year ended December 31, 2015 were $40 million higher than the prior-year period. The increase in SAG expense reflected the following:

 

•

$14 million increase in selling expenses; and

 

•

$26 million increase in general and administrative expenses.

 

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SAG as a percent of revenue of 9.5% decreased 0.1-percentage point for the year ended December 31, 2014 as compared to 2013. The decrease was driven by an increase in revenue combined with lower SAG expenses reflecting productivity improvements.

SAG expenses of $659 million for the year ended December 31, 2014 were $2 million lower than the prior-year period. The decrease in SAG expense reflects the following:

 

•

$18 million decrease in selling expenses;

 

•

$14 million increase in general and administrative expenses; and

 

•

$2 million increase in bad debt expense.

Restructuring and Asset Impairment Charges

During the year ended December 31, 2015, we recorded net restructuring and asset impairment charges of $159 million and included the following:

 

•

$20 million of severance costs related to headcount reductions of approximately 1,000 employees globally. The actions impacted several functional areas and focused on gross margin improvements;

 

•

$1 million for lease termination costs, primarily reflecting continued optimization of our worldwide operating locations; and

 

•

$146 million of asset impairment charges associated with software asset impairments resulting from the change in strategy in our Government Healthcare business in the second quarter of 2015.

The above charges were partially offset by $8 million of net reversals for changes in estimated reserves from prior period initiatives.

We expect 2016 year-over-year pre-tax savings of approximately $20 million from our 2015 restructuring actions.

During the year ended December 31, 2014, we recorded net restructuring and asset impairment charges of $21 million and included the following:

 

•

$28 million of severance costs related to headcount reductions of approximately 2,600 employees globally. The actions impacted several functional areas and were focused on gross margin improvements;

 

•

$2 million for lease termination costs primarily reflecting continued optimization of our worldwide operating locations; and

 

•

$2 million of asset impairment charges.

The above charges were partially offset by $11 million of net reversals for changes in estimated reserves from prior period initiatives.

Restructuring Summary

The restructuring reserve balance as of December 31, 2015 for all programs was $4 million, all of which is expected to be spent over the next twelve months.

Refer to Note 8—Restructuring and Asset Impairment Charges in the Combined Financial Statements for additional information regarding our restructuring programs.

 

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Worldwide Employment

Worldwide employment of approximately 103,800 as of December 31, 2015 increased by approximately 6,600 from December 31, 2014, due primarily to the impact of ramping new business and acquisitions partially offset by restructuring reductions and productivity improvements. Worldwide employment was approximately 97,200 and 91,600 as of December 31, 2014 and 2013, respectively (note that prior year employment amounts are adjusted to exclude employees associated with the divested ITO business).

Amortization of Intangible Assets

During the year ended December 31, 2015, we recorded $250 million of expense related to the amortization of intangible assets, which was flat from the prior year.

During the year ended December 31, 2014, we recorded $250 million of expense related to the amortization of intangible assets, which was $10 million higher than the prior year reflecting the increase in acquisitions in 2014.

Refer to Note 7—Goodwill and Intangible Assets, Net in the Combined Financial Statements for additional information regarding our intangible assets.

Related-Party Interest Expense, Net

Related-party interest expense for the year ended December 31, 2015 of $61 million was $46 million lower than the prior year due to the capitalization of certain related party notes payable in 2015 as a result of the proceeds received from the sale of the ITO business.

Refer to Note 18—Related Party Transactions and Parent Company Investment in the Combined Financial Statements for additional information regarding Related-party interest expense, net.

Other Expenses, Net

 

		Year Ended December 31,
(in millions)		2015				2014				2013
Third-party interest expense			8				11				8
Gains on sales of businesses and assets(1)			(1	)			(1	)			(23	)
Currency losses (gains), net			4				(1	)			(3	)
Litigation matters			18				38				—
Deferred compensation investment losses (gains)			1				(7	)			(15	)
All other expenses, net			8				5				(3	)
Total Other Expenses, Net		$	38			$	45			$	(36	)

 

(1)	Excludes the loss on sale of the ITO business reported in Discontinued Operations. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Third-Party Interest Expense: Represents interest on senior notes and capital lease obligations.

Refer to Note 10—Debt in the Combined Financial Statements for additional information regarding third-party interest expense.

Gains on Sales of Businesses and Assets: The 2013 gain on sale of businesses and assets was primarily related to the sale of a portion of our Dallas facility.

 

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Currency Losses (Gains), Net: Currency losses (gains) primarily result from the re-measurement of foreign currency-denominated assets and liabilities, the cost of hedging foreign currency-denominated assets and liabilities and the mark-to-market of foreign exchange contracts utilized to hedge those foreign currency-denominated assets and liabilities.

Litigation Matters: Litigation matters in 2015 and 2014 reflect probable losses and reserves for various legal matters.

Refer to Note 15—Contingencies and Litigation, in the Combined Financial Statements for additional information regarding litigation against the Company.

Deferred Compensation Investment Losses (Gains): Represents losses (gains) on investments supporting certain of our deferred compensation arrangements. These gains or losses are offset by an increase or decrease in compensation expense recorded in SAG as a result of the increase or decrease in the liability associated with these arrangements, respectively.

Income Taxes

The 2015 effective tax rate was 41.5% which includes the discrete tax benefit associated with the HE charge in the third quarter of 2015 and the software impairment charge in the second quarter of 2015. On an adjusted¹ basis, the 2015 effective tax rate was 32.2%, which was lower than the U.S. statutory tax rate primarily due to the retroactive impact of the Protecting Americans from Tax Hikes Act of 2015 and the redetermination of certain unrecognized tax positions partially offset by the geographical mix of profits.

The 2014 effective tax rate was (240.0)% primarily due to the tax impact of certain discrete benefits as well as the low level of pre-tax income after the amortization of intangibles. On an adjusted¹ basis, the 2014 effective tax rate was 28.1%, which was lower than the U.S. statutory tax rate primarily due to the redetermination of certain unrecognized tax positions and the retroactive impact from the U.S. Tax Increase Prevention Act of 2014.

The 2013 effective tax rate was 34.8%, or 36.9% on an adjusted¹ basis. The adjusted tax rate for 2013 was higher than the U.S. statutory tax rate primarily due to the geographical mix of profits, partially offset by the retroactive tax benefits from the American Taxpayer Relief Act of 2012 tax law change and the redetermination of certain unrecognized tax positions.

 

(1)	See the “Non-GAAP Financial Measures” section for an explanation of the adjusted effective tax rate non-GAAP financial measure.

Net (Loss) Income From Continuing Operations

Net loss from continuing operations for the year ended December 31, 2015 was $336 million. On an adjusted¹ basis, net income was $143 million, reflecting the adjustments for the amortization of intangible assets as well as the software impairment charge and the HE charge.

Net income from continuing operations for the year ended December 31, 2014 was $34 million. On an adjusted¹ basis, net income was $187 million and included adjustments for the amortization of intangible assets.

Net income from continuing operations for the year ended December 31, 2013 was $135 million. On an adjusted¹ basis, net income was $282 million and included adjustments for the amortization of intangible assets.

 

(1)	See the “Non-GAAP Financial Measures” section for a reconciliation of reported net income from continuing operations to adjusted net income.

 

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Discontinued Operations

Discontinued Operations are primarily related to our sale of the ITO business. In the fourth quarter of 2014, we announced an agreement to sell the ITO business to Atos SE and began reporting it as a Discontinued Operation. The sale was completed on June 30, 2015.

Refer to Note 4—Divestitures in the Combined Financial Statements for additional information regarding Discontinued Operations.

Other Comprehensive Loss

Other comprehensive loss was $52 million in 2015 as compared to a loss of $71 million in 2014. The reduction in the loss of $19 million was primarily due to net gains from changes in defined benefit plans of $7 million in 2015 as compared to losses of $25 million in 2014. This change is largely due to an increase in discount rates in 2015 versus a decrease in discount rates in 2014 and the corresponding impact on our defined benefit obligation (decrease in 2015 versus an increase in 2014). The improvement in defined benefit plans was offset by increased losses from translation adjustments of $16 million in 2015. Translation losses in both 2015 and 2014 reflect the weakening of our major foreign currencies as compared to the U.S. Dollar.

Other comprehensive loss was $71 million in 2014 as compared to a loss of $27 million in 2013. The increase in the loss of $44 million was primarily due to losses in our defined benefit plans due to a decrease in discount rates and the corresponding increase in our defined benefit obligation. In addition, losses from translation adjustments increased $15 million a result of the increased weakening of our major foreign currencies as compared to the U.S. Dollar in 2014.

Refer Note 13—Employee Benefit Plans in the Combined Financial Statements for additional information regarding changes in defined benefit plans.

Recent Accounting Pronouncements

Refer to Note 1—Basis of Presentation and Summary of Significant Accounting Policies in the Combined Financial Statements for a description of recent accounting pronouncements including the respective dates of adoption and the effects on results of operations and financial condition.

 

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Operations Review of Segment Revenue and Profit

Our reportable segments correspond to how we organize and manage the business and are aligned to the industries in which our clients operate: Commercial Industries, Healthcare and Public Sector. Revenues by segment for the three years ended December 31, 2015 were as follows:

 

(in millions)		Total Revenue				% of Total Revenue				Segment Profit (Loss)				Segment Margin
2015
Commercial Industries		$	2,896				44	%		$	69				2.4	%
Healthcare			1,750				26	%			157				9.0	%
Public Sector			1,727				26	%			200				11.6	%
Other			289				4	%			(489	)			*
Total		$	6,662				100	%		$	(63	)			(0.9	)%
Adjusted:(1)
Other		$	405				6	%		$	(100	)			(24.7	)%
Total			6,778				100	%			326				4.8	%
2014
Commercial Industries		$	2,953				43	%		$	152				5.1	%
Healthcare			1,743				25	%			138				7.9	%
Public Sector			1,767				25	%			206				11.7	%
Other			475				7	%			(49	)			(10.3	)%
Total		$	6,938				100	%		$	447				6.4	%
2013
Commercial Industries		$	2,871				42	%		$	168				5.9	%
Healthcare			1,709				25	%			122				7.1	%
Public Sector			1,780				26	%			225				12.6	%
Other			519				7	%			23				4.4	%
Total		$	6,879				100	%		$	538				7.8	%

 

*	Percentage not meaningful

(1)	Refer to the Other Segment Revenue / Margin and Operating Income / Margin reconciliations table in the “Non-GAAP Financial Measures” section.

Commercial Industries Segment

Revenue 2015

Commercial Industries revenue of $2,896 million was 44% of total revenues and decreased 2% from 2014. The year-over-year decline was driven by the negative impacts from currency and price declines. The decline was partially offset by revenues from acquisitions as well as increased project-related work in our litigation services offering. In addition, within our customer care services offering, lost business was offset by ramping new contracts.

Segment Margin 2015

Commercial Industries segment margin of 2.4% decreased by 2.7-percentage points from the prior year primarily due to margin pressure in our customer care offering, investments in sales and managerial resources to improve our operating performance over time, as well as the impacts of price declines.

Revenue 2014

Commercial Industries revenue of $2,953 million increased 3% from 2013. The revenue increase was driven by customer care growth, particularly in high tech and industrial, retail and hospitality businesses and by project-related growth in our litigation services offering.

 

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Segment Margin 2014

Commercial Industries segment margin of 5.1% decreased by 0.8-percentage points from the prior year primarily due to investments in customer care, particularly in recruiting and platforms, and an increase in lower-margin litigation services projects.

Healthcare Segment

Revenue 2015

Healthcare revenue of $1,750 million was 26% of total revenues and remained flat from the prior year with a negligible impact from currency. Moderate acquisition contribution and organic growth in commercial payers offset the impacts from the loss of the Texas Medicaid contract and lower project-related work in commercial providers.

Segment Margin 2015

Healthcare segment margin of 9.0% increased 1.1-percentage points from the prior year as improvements in government healthcare, including the prior year Nevada HIX impairment, more than offset margin declines on the commercial side driven in part by line of business mix and investments.

Revenue 2014

Healthcare revenue of $1,743 million increased 2% from 2013, with negligible impact from currency. The increase was primarily driven by growth in commercial payers and providers partially offset by the loss of the Texas Medicaid contract in government healthcare.

Segment Margin 2014

Healthcare segment margin of 7.9% increased 0.8-percentage points from the prior year primarily due to productivity and restructuring benefits partially offset by the Nevada HIX impairment.

Public Sector Segment

Revenue 2015

Public Sector revenue of $1,727 million was 26% of total revenues and decreased 2% from 2014. Negative impacts from currency and declines in federal services more than offset growth in state and transportation services.

Segment Margin 2015

Public Sector segment margin of 11.6% decreased 0.1-percentage point from the prior year as improvements in federal and state services were more than offset by modest declines in transportation services.

Revenue 2014

Public Sector revenue of $1,767 million decreased 1% from 2013. The decline was primarily driven by our public transit offerings in transportation services and local government.

Segment Margin 2014

Public Sector segment margin of 11.7% decreased by 0.9-percentage points from the prior year primarily due to higher costs and investments related to the development of a public transit fare collection platform.

 

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Other

Revenue 2015

Other revenue of $289 million decreased 39% from 2014, with no impact from currency. On an adjusted¹ basis, Other revenue of $405 million was 6% of total revenue and decreased 15% compared to 2014. The decline was primarily driven by the Student Loan business run-off and the impact of our determination in the third quarter of 2015 to not fully complete the HE platform implementations in California and Montana.

Other Loss 2015

Other loss of $489 million increased $440 million from the prior year. On an adjusted¹ basis, Other loss of $100 million increased $51 million from the prior year primarily due to higher losses in our HE platform implementations, prior to the refocusing of our Government Healthcare business, and lower profit from the declining Student Loan business.

Revenue 2014

Other revenue of $475 million decreased 8% from 2013, with no impact from currency, due primarily to education services, including the exit from the federal Student Loan business and run-off of the commercial Student Loan business.

Other Loss 2014

Other profit declined by $72 million from the prior year to a loss of $49 million driven primarily by increased expenses in our HE platform implementations.

Metrics

Signings

Signings are defined as estimated future revenues from contracts signed during the period, including renewals of existing contracts. Total Contract Value (“TCV”) is the estimated total contractual revenue related to signed contracts.

Six Months ended June 30, 2016

Signings in the first half of 2016 were as follows:

 

(in billions)		Six Months Ended June 30, 2016
Total Signings		$	3.7

Signings were an estimated $3.7 billion in TCV and declined 10% from the prior-year period, primarily reflecting lower contribution from new business and the prior year large New York Medicaid Information System new business signing. On a trailing twelve-month (TTM) basis, signings increased 4% versus the comparable prior-year period.

Years ended December 31, 2015, 2014 and 2013

Signings in the years ended December 31, 2015, 2014 and 2013 were as follows:

 

		Year Ended December 31,
(in billions)		2015				2014				2013
Total Signings		$	8.4			$	7.6			$	8.9

 

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Signings were an estimated $8.4 billion in TCV for 2015 and increased 10% as compared to the prior year. Growth in 2015 included a 37% increase in new business TCV, which is inclusive of larger contracts such as the Florida Tolling and New York Medicaid Management Information System, and was partially offset by lower renewal decision opportunities.

Signings were an estimated $7.6 billion in TCV for 2014 and decreased 14% compared to the prior year. The decrease was driven primarily by a 25% decrease in new business TCV and a modestly lower level of renewal decision opportunities.

Renewal Rate

Renewal rate is defined as the annual recurring revenue (“ARR”) on contracts that are renewed during the period as a percentage of ARR on all contracts for which a renewal decision was made during the period. Our renewal rate in the first half of 2016 of 85% was at the low end of our target range of 85%–90%.

Signings and renewal rate reflect, in part, our decision not to pursue opportunities with lower margin and return profiles.

CAPITAL RESOURCES AND LIQUIDITY

As of June 30, 2016 and December 31, 2015, total cash and cash equivalents were $160 million and $140 million, respectively.

Cash Flow Analysis–Six Months ended June 30, 2016 and 2015

The following summarizes our cash flows for the six months ended June 30, 2016 and 2015, as reported in our Condensed Combined Statement of Cash Flows in the accompanying Condensed Combined Financial Statements:

 

		Six Months Ended June 30,								Change
(in millions)		2016				2015
Net cash used in operating activities		$	(178	)		$	(123	)		$	(55	)
Net cash (used in) provided by investing activities			(128	)			773				(901	)
Net cash provided by (used in) financing activities			326				(639	)			965
Effect of exchange rate changes on cash and cash equivalents			—				(4	)			4
Increase in cash and cash equivalents			20				7				13
Cash and cash equivalents at beginning of period			140				159				(19	)
Cash and Cash Equivalents at End of Period		$	160			$	166			$	(6	)

Cash Flows from Operating Activities

Net cash used in operating activities was $178 million for the six months ended June 30, 2016. The $55 million decrease in operating cash from the prior-year period was primarily due to the following:

 

•

$12 million increase in pre-tax income before depreciation and amortization, restructuring and related charges, gains on sales of businesses and assets, litigation and separation-related costs.

 

•

$76 million decrease reflecting settlement payments associated with our third quarter 2015 determination that we would not fully complete the HE implementations in California and Montana.

 

•

$41 million decrease from accounts payable and accrued compensation primarily due to the timing of payments.

 

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•

$39 million decrease due to the prior year source of cash in the discontinued ITO business.

 

•

$28 million decrease from accounts receivable primarily due to the timing of collections.

 

•

$11 million decrease due to payments for separation-related costs.

 

•

$10 million decrease from higher restructuring payments as a result of increased restructuring initiatives in 2016.

 

•

$65 million increase from lower net income tax payments due to refunds of prior year overpayments.

 

•

$16 million increase primarily from lower spending for product software from the refocusing of our Government Healthcare business in 2015.

Cash Flows from Investing Activities

Net cash used in investing activities was $128 million for the six months ended June 30, 2016. The $901 million decrease in cash from the prior-year period was primarily due to the following:

 

•

$986 million decrease in proceeds from sales of businesses. First half 2016 included a $52 million payment to Atos for final post-closing adjustments associated with the 2015 ITO divestiture. First half 2015 included $930 million of net proceeds from the sale of the ITO business.

 

•

$44 million increase due to lower capital expenditures (including internal use software) primarily due to the sale of the ITO business to Atos.

 

•

$42 million increase from lower acquisition spending.

Cash Flows from Financing Activities

Net cash provided by financing activities was $326 million for the six months ended June 30, 2016. The $965 million increase in cash from the prior-year period was primarily due to the following:

 

•

$721 million increase due to net transfers from parent.

 

•

$244 million increase from net debt activity primarily due to a payment of $250 million on Senior Notes in 2015.

Cash Flow Analysis—Years ended December 31, 2015, 2014 and 2013

The following summarizes our cash flows for the three years ended December 31, 2015, as reported in our Combined Statements of Cash Flows in the accompanying Combined Financial Statements:

 

		Year Ended December 31,												Change
(in millions)		2015				2014				2013				2015				2014
Net cash provided by operating activities		$	493			$	665			$	379			$	(172	)		$	286
Net cash provided by (used in) investing activities			514				(547	)			(300	)			1,061				(247	)
Net cash used in financing activities			(1,015	)			(90	)			(66	)			(925	)			(24	)
Effect of exchange rate changes on cash and cash equivalents			(11	)			(8	)			(1	)			(3	)			(7	)
(Decrease) increase in cash and cash equivalents			(19	)			20				12				(39	)			8
Cash and cash equivalents at beginning of year			159				139				127				20				12
Cash and Cash Equivalents at End of Year		$	140			$	159			$	139			$	(19	)		$	20

Cash Flows from Operating Activities

Net cash provided by operating activities was $493 million for the year ended December 31, 2015. The $172 million decrease in operating cash from 2014 was primarily due to the following:

 

•

$149 million decrease in pre-tax income before depreciation and amortization, gain on sales of businesses and assets, restructuring charges and litigation as well as the HE charge.

 

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•

$128 million decrease from higher income tax payments primarily driven by the tax on the sale of the ITO business.

 

•

$105 million decrease due to the loss of cash flow associated with the ITO business, post-divestiture.

 

•

$167 million increase from accounts receivable primarily due to additional sales of accounts receivable under existing programs, select use of prompt pay discounts and lower revenues.

 

•

$36 million increase from lower spending for product software and up-front costs for outsourcing service contracts.

 

•

$22 million increase in accounts payable and accrued compensation primarily related to the timing of accounts payable.

Cash flow from operations in 2015 and 2014 include approximately $40 million and $145 million, respectively, of cash flows from our ITO business, which was held for sale and reported as a Discontinued Operation through its sale on June 30, 2015. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Net cash provided by operating activities was $665 million for the year ended December 31, 2014. The $286 million increase in operating cash from 2013 was primarily due to the following:

 

•

$159 million increase from accounts receivable primarily due to the timing of collections and improved collections.

 

•

$141 million increase due to accounts payable and accrued compensation primarily related to the timing of accounts payable payments and improved payment terms with key suppliers.

 

•

$55 million increase due to lower net income tax payments primarily due to lower U.S. pre-tax income.

 

•

$39 million increase from lower spending for product software and up-front costs for outsourcing service contracts.

 

•

$15 million increase due to the increased cash flow from the ITO business.

 

•

$77 million decrease in pre-tax income before depreciation and amortization, gain on sales of businesses and assets and litigation.

Cash flow from operations in 2014 and 2013 include approximately $145 million and $130 million, respectively, of cash flows from our ITO business, which was held for sale and was reported as a Discontinued Operation through its sale on June 30, 2015. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Cash Flows from Investing Activities

Net cash provided by investing activities was $514 million for the year ended December 31, 2015. The $1,061 million increase in cash from 2014 was primarily due to the following:

 

•

$936 million of net proceeds from the sale of the ITO business. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

 

•

$109 million change from acquisitions. 2015 acquisitions include RSA Medical LLC for $141 million, Intellinex LLC for $28 million, inVentive Patient Access Solutions for $15 million and Healthy Communities Institute Corporation for $13 million. 2014 acquisitions include ISG Holdings, Inc. for $225 million, Invoco Holding GmbH for $54 million and Consilience Software, Inc. for $25 million.

 

•

$82 million change due to lower capital expenditures (including internal use software), primarily due to the sale of the ITO business.

 

•

$59 million change due to higher net payments on related party notes receivable.

Capital expenditures (including internal use software) in 2015 and 2014 include approximately $40 million and $100 million, respectively, of our ITO business, which was held for sale and reported as a Discontinued

 

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Operation through June 30, 2015. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Net cash used in investing activities was $547 million for the year ended December 31, 2014. The $247 million decrease in cash from 2013 was primarily due to the following:

 

•

$275 million increase in acquisitions. 2014 acquisitions include ISG Holdings, Inc. for $225 million, Invoco Holding GmbH for $54 million and Consilience Software, Inc. for $25 million. 2013 acquisitions include LearnSomething, Inc. for $13 million and CPAS Systems, Inc. for $12 million.

 

•

$15 million of net proceeds from the sale of the Truckload Management Services, Inc. business. Refer to Note 4—Divestitures, in the Combined Financial Statements for additional information.

 

•

$42 million increase due to lower net payments on related party notes receivable.

 

•

$12 million increase due to lower capital expenditures (including internal use software).

 

•

$39 million decrease primarily due to lower proceeds from the sale of assets. 2013 includes proceeds from the sale of a U.S. facility of $38 million.

Capital expenditures (including internal use software) in 2014 and 2013 include approximately $100 million in each year associated with our ITO business, which was held for sale and reported as a Discontinued Operation through its sale on June 30, 2015. Refer to Note 4—Divestitures in the Combined Financial Statements for additional information.

Cash Flows from Financing Activities

Net cash used in financing activities was $1,015 million for the year ended December 31, 2015. The $925 million decrease in cash from 2014 was primarily due to the following:

 

•

$636 million decrease due to net transfers from parent.

 

•

$293 million decrease from net debt activity. 2015 reflects payment of $250 million on Senior Notes and net payments of $7 million on capital leases. 2014 reflects net proceeds of $40 million on capital leases offset by net payments of $4 million on other debt.

 

•

$9 million increase from contingent consideration payments for certain acquisitions in 2014.

Net cash used in financing activities was $90 million for the year ended December 31, 2014. The $24 million decrease in cash from 2013 was primarily due to the following:

 

•

$25 million decrease due to net transfers from parent.

 

•

$9 million decrease from contingent consideration payments for certain acquisitions in 2014.

 

•

$10 million increase from net debt activity. 2014 reflects net proceeds of $40 million on capital leases offset by net payments of $4 million on other debt. 2013 reflects net proceeds of $21 million on capital leases and $5 million on other debt.

Sales of Accounts Receivable

Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. We have financial facilities in the United States, Canada and several countries in Europe that enable us to sell certain accounts receivables without recourse to third parties. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days. During 2015 operating cash flows benefited by $58 million from sales of accounts receivable. This level of receivable sales and benefits may not be indicative of what we expect going forward as we evaluate our working capital needs.

 

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Refer to Note 5—Accounts Receivable, Net in the Combined Financial Statements for additional information.

Financial Instruments

Refer to Note 11—Financial Instruments in the Combined Financial Statements for additional information.

Contractual Cash Obligations and Other Commercial Commitments and Contingencies

At December 31, 2015, we had the following contractual cash obligations and other commercial commitments and contingencies:

 

(in millions)		2016				2017				2018				2019				2020				Thereafter
Total debt, including capital lease obligations(1)		$	24			$	20			$	12			$	5			$	—			$	—
Related party notes payable(2)			1,132				—				—				—				—				—
Minimum operating lease commitments(3)			238				171				107				71				43				67
Defined benefit pension plans			6				—				—				—				—				—
Estimated Purchase Commitments(4)			134				112				99				100				59				123
Total		$	1,534			$	303			$	218			$	176			$	102			$	190

 

(1)	Total debt excludes interest, as amounts are immaterial. Refer to Note 10—Debt in the Combined Financial Statements for additional information regarding debt and interest on debt.

(2)	Refer to Note 18—Related Party Transactions and Parent Company Investments for additional information. These notes are expected to be settled in advance of the Spin-Off as part of the initial capitalization of the Company.

(3)	Refer to Note 6—Land, Buildings, Equipment and Software, Net in the Combined Financial Statements for additional information related to minimum operating lease commitments.

(4)

Other purchase commitments: We enter into other purchase commitments with vendors in the ordinary course of business. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We currently do not have, nor do we anticipate, material loss contracts.

Pension Benefit Plans

We sponsor defined benefit pension plans that require periodic cash contributions. Our 2015 cash contributions for these plans were $8 million. In 2016, based on current actuarial calculations, we expect to make contributions of approximately $6 million to our worldwide defined benefit pension plans.

Contributions to our defined benefit pension plans in subsequent years will depend on a number of factors, including the investment performance of plan assets and discount rates as well as potential legislative and plan changes. At December 31, 2015, the unfunded and underfunded balances of our U.S. and Non-U.S. defined benefit pension plans were $27 million and $7 million, respectively, or $34 million in the aggregate.

Refer to Note 13—Employee Benefit Plans in the Combined Financial Statements for additional information regarding contributions to our defined benefit pension and post-retirement plans.

Other Contingencies and Commitments

As more fully discussed in Note 15—Contingencies and Litigation in the Combined Financial Statements, we are involved in a variety of claims, lawsuits, investigations and proceedings concerning securities law; governmental entity contracting, servicing and procurement law; intellectual property law; environmental law; employment law; the Employee Retirement Income Security Act of 1974 (ERISA); and other laws and regulations. In addition, guarantees, indemnifications and claims may arise during the ordinary course of business from relationships with suppliers, customers and non-consolidated affiliates. Nonperformance under a contract, including a guarantee, indemnification or claim, could trigger an obligation of the Company.

 

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We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Should developments in any of these areas cause a change in our determination as to an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on our results of operations, cash flows and financial position in the period or periods in which such change in determination, judgment or settlement occurs.

Off-Balance Sheet Arrangements

We may occasionally utilize off-balance sheet arrangements in our operations (as defined by the SEC Financial Reporting Release 67 (FRR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations”). We enter into the following arrangements that have off-balance sheet elements:

 

•

Operating leases in the normal course of business. The nature of these lease arrangements is discussed in Note 6—Land, Buildings, Equipment and Software, Net in the Combined Financial Statements.

 

•

We have facilities, primarily in the United States and several countries in Europe, that enable us to sell to third-parties certain accounts receivable without recourse. In most instances, a portion of the sales proceeds are held back by the purchaser and payment is deferred until collection of the related sold receivables. Refer to Note 5—Accounts Receivables, Net in the Combined Financial Statements for further information regarding these facilities.

As of December 31, 2015, we do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

In addition, see the preceding table for the contractual cash obligations and other commercial commitments of the BPO Business and Note 15—Contingencies and Litigation in the Combined Financial Statements for additional information regarding contingencies, guarantees, indemnifications and warranty liabilities.

Non-GAAP Financial Measures

We have reported our financial results in accordance with U.S. GAAP. In addition, we have discussed our results using non-GAAP measures.

Management believes that these non-GAAP financial measures provide an additional means of analyzing the current periods’ results against the corresponding prior periods’ results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with U.S. GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable U.S. GAAP measures and should be read only in conjunction with our Combined and Condensed Combined Financial Statements prepared in accordance with U.S. GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.

A reconciliation of these non-GAAP financial measures and the most directly comparable measures calculated and presented in accordance with U.S. GAAP are set forth on the following tables.

These reconciliations also include the income tax effects for our non-GAAP performance measures in total, to the extent applicable. The income tax effects are calculated under the same accounting principles as applied to our reported pre-tax performance measures under ASC 740, which employs an annual effective tax rate method. The noted income tax effect for our non-GAAP performance measures is effectively the difference in income taxes for reported and adjusted pre-tax income calculated under the annual effective tax rate method.

 

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Adjusted Earnings Measures

We adjust the following earnings measures:

 

•

Net income

 

•

Effective tax rate

In the six months ended June 30, 2016 and three years ended December 31, 2015, we adjusted for the amortization of intangible assets. The amortization of intangible assets is driven by our acquisition activity, which can vary in size, nature and timing as compared to other companies within our industry and from period to period. The use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.

Adjusted Earnings Measures—Six Months ended June 30, 2016

In 2016, we revised our calculation of the above noted Adjusted Earnings Measures to exclude the following items in addition to the amortization of intangibles:

 

•

Restructuring and related costs

 

•

Separation costs

Restructuring and related costs: Restructuring and related costs include restructuring and asset impairment charges as well as costs associated with our strategic transformation program beyond those normally included in restructuring and asset impairment charges. Restructuring consists of costs primarily related to severance and benefits paid to employees pursuant to formal restructuring and workforce reduction plans. Asset impairment includes costs incurred for those assets sold, abandoned or made obsolete as a result of our restructuring actions, exiting from a business or other strategic business changes. Additional costs for our strategic transformation program are primarily related to the implementation of strategic actions and initiatives and include third-party professional service costs as well as one-time incremental costs. All of these costs can vary significantly in terms of amount and frequency based on the nature of the actions as well as the changing needs of the business. Accordingly, due to that significant variability, we exclude these charges since we do not believe they provide meaningful insight into our current or past operating performance nor do we believe they are reflective of our expected future operating expenses as such charges are expected to yield future benefits and savings with respect to our operational performance.

Separation costs: Separation costs are expenses incurred in connection with Xerox’s planned separation into two independent, publicly traded companies. Separation costs are primarily for third-party investment banking, accounting, legal, consulting and other similar types of services related to the separation transaction as well as costs associated with the operational separation of the two companies, such as those related to human resources, brand management, real estate and information management to the extent not capitalized. Separation costs include the costs associated with bonuses and restricted stock grants awarded to employees for retention through the separation as well as incremental income tax expense related to the Internal Transactions. These costs are incremental to normal operating charges and are being incurred solely as a result of the separation transaction. Accordingly, we exclude these expenses from our Adjusted Earnings Measures in order to evaluate our performance on a comparable basis.

The prior year measures will be revised accordingly to conform to the changes made in 2016.

Adjusted Earnings Measures—Years ended December 31, 2015, 2014 and 2013

Adjusted Revenue, Costs and Expenses and Margin

In 2015 in addition to the above noted Adjusted Earnings Measures, we adjusted revenue, costs and expenses and margin.

 

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As previously discussed, during the third quarter of 2015, we recorded a pre-tax HE charge of $389 million ($237 million after-tax), which included a $116 million reduction to revenues. See “—Overview—Recent Developments—Refocusing of Government Healthcare Business” for additional information. As a result of the significant impact of the HE charge on our reported revenues, costs and expenses as well as key metrics for the period, we discussed our 2015 results using non-GAAP measures that excluded the impact of the HE charge. In addition to the magnitude of the charge and its impact on our reported results, we excluded the HE charge due to the fact that it was primarily a unique charge associated with the determination, reached after a series of discussions, that fully completing our HE platform implementations in California and Montana was no longer considered probable.

Net Income and Effective Tax Rate

In addition to the exclusion of the HE charge, in 2015 the above noted Adjusted Earnings Measures (Net Income and Effective Tax Rate) were also adjusted for the following item:

Software impairment charge: The pre-tax software impairment charge in the second quarter of 2015 of $146 million ($89 million after-tax) is excluded due to its non-cash impact and the unique nature of the item both in terms of the amount and the fact that it was the result of a specific management action involving a change in strategy in our Government Healthcare business. See “—Overview—Recent Developments—Refocusing of Government Healthcare Business” for additional information.

Operating Income and Margin

We also calculate and utilize operating income and margin earnings measures by adjusting our pre-tax income and margin amounts to exclude certain items. In addition to the exclusion of the HE charge as well as the amortization of intangible assets, Restructuring and related costs and Separation costs discussed above, operating income and margin also excludes Related Party interest and Other expenses, net. Related Party interest includes net interest cost associated with our Related Party borrowings. Other expenses, net includes third-party interest expense and also includes certain other non-operating costs and expenses. We exclude these amounts in order to evaluate our current and past operating performance and to better understand the expected future trends in our business.

Constant Currency

Refer to “Currency Impact” for a discussion of this measure and its use in our analysis of revenue growth.

Net (Loss) Income reconciliation—Six Months ended June 30, 2016 and 2015:

 

		Six Months Ended June 30,
(in millions)		2016				2015
Reported(1)		$	(33	)		$	(109	)
Adjustments:
Amortization of intangible assets			137				125
Restructuring and related costs			49				151
Separation costs			19				—
Income tax adjustments(2)			(66	)			(106	)
Adjusted		$	106			$	61

 

(1)	Net loss from continuing operations.

(2)	Refer to Effective Tax Rate reconciliation.

 

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Net Income reconciliation—Years ended December 31, 2015, 2014 and 2013:

 

		Year Ended December 31,
(in millions)		2015				2014				2013
Reported(1)		$	(336	)		$	34			$	135
Adjustments(2):
Amortization of intangible assets			153				153				147
Software Impairment			89				—				—
HE Charge			237				—				—
Adjusted		$	143			$	187			$	282

 

(1)	Net (loss) income from continuing operations.

(2)	Represents after-tax adjustments. Refer to “Effective Tax Rate reconciliation—Years ended December 31, 2015, 2014 and 2013” schedule that follows for the breakdown of each adjustment between pre-tax amount and income tax.

Effective Tax Rate reconciliation—Six Months ended June 30, 2016 and 2015:

 

		Six Months Ended June 30, 2016												Six Months Ended June 30, 2015
(in millions)		Pre-Tax Loss				Income Tax (Benefit) Expense(3)				Effective Tax Rate				Pre-Tax Loss				Income Tax (Benefit) Expense				Effective Tax Rate
Reported(1)		$	(88	)		$	(55	)			62.5	%		$	(192	)		$	(83	)			43.2	%
Non-GAAP Adjustments(2)			205				66								276				106
Adjusted		$	117			$	11				9.4	%		$	84			$	23				27.4	%

 

(1)	Pre-Tax Loss and Income Tax Benefit from continuing operations.

(2)	Refer to Net (Loss) Income reconciliation for details.

(3)	The tax impact of Adjusted Pre-Tax Income from continuing operations is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results.

Effective Tax Rate reconciliation—Years ended December 31, 2015, 2014 and 2013:

 

		Year Ended December 31, 2015												Year Ended December 31, 2014												Year Ended December 31, 2013
(in millions)		Pre-Tax (Loss) Income				Income Tax (Benefit) Expense				Effective Tax Rate				Pre-Tax Income				Income Tax (Benefit) Expense				Effective Tax Rate				Pre-Tax Income				Income Tax Expense				Effective Tax Rate
Reported(1)		$	(574	)		$	(238	)			41.5	%		$	10			$	(24	)			(240.0	)%		$	207			$	72				34.8	%
Adjustments:
Amortization of intangible assets			250				97								250				97								240				93
Software Impairment			146				57								—				—								—				—
HE Charge			389				152								—				—								—				—
Adjusted		$	211			$	68				32.2	%		$	260			$	73				28.1	%		$	447			$	165				36.9	%

 

(1)	Pre-tax (loss) income and income tax (benefit) expense from continuing operations.

 

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Operating Income / Margin reconciliation—Six Months ended June 30, 2016 and 2015:

 

		Six Months Ended June 30, 2016												Six Months Ended June 30, 2015
(in millions)		Loss				Revenue				Margin				Loss				Revenue				Margin
Reported Pre-tax Loss(1)		$	(88	)		$	3,298				(2.7	)%		$	(192	)		$	3,361				(5.7	)%
Adjustments:
Amortization of intangible assets			137												125
Restructuring and related costs			49												151
Separation costs			19												—
Related party interest			20												36
Other expenses, net			11												10
Adjusted Operating Income/Margin		$	148			$	3,298				4.5	%		$	130			$	3,361				3.9	%

 

(1)	Pre-Tax Loss and revenue from continuing operations.

Operating Income / Margin reconciliation—Years ended December 31, 2015, 2014 and 2013:

 

		Year Ended December 31, 2015												Year Ended December 31, 2014												Year Ended December 31, 2013
(in millions)		Profit				Revenue				Margin				Profit				Revenue				Margin				Profit				Revenue				Margin
Reported Pre-tax (Loss) Income(1)		$	(574	)		$	6,662				(8.6	)%		$	10			$	6,938				0.1	%		$	207			$	6,879				3.0	%
Adjustments:
Amortization of intangible assets			250												250												240
Restructuring and asset impairment charges			159												21												18
HE Charge			389				116								—				—								—				—
Related party interest			61												107												109
Other expenses, net			38												45												(36	)
Adjusted Operating Income / Margin		$	323			$	6,778				4.8	%		$	433			$	6,938				6.2	%		$	538			$	6,879				7.8	%

 

(1)	(Loss) profit and revenue from continuing operations.

The following non-GAAP reconciliation tables adjust for the HE charge in the third quarter of 2015, which does not impact the years ended December 31, 2014 or 2013 or the six months ended June 30, 2016 or 2015.

Other Segment Revenue / Margin reconciliation:

 

		Year Ended December 31, 2015
(in millions)		Reported(1)				HE Charge				Adjusted
Revenue		$	289			$	116			$	405
Segment (Loss)			(489	)			389				(100	)
Segment Margin			NM								(24.7	)%

 

(1)	Revenue from continuing operations.

 

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Key Financial Ratios reconciliation:

 

		Year Ended December 31, 2015
		Gross Margin				R&D     as % of Revenue				SAG     as % of Revenue
Reported(1)			10.3	%			0.8	%			10.5	%
Adjustment:
HE Charge			5.5				—				(0.2	)
Adjusted			15.8	%			0.8	%			10.3	%

 

(1)	Revenue from continuing operations.

MARKET RISK

We are exposed to market risk from foreign currency exchange rates, which could affect operating results, financial position and cash flows. We manage our exposure to this market risk through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. We utilize derivative financial instruments to hedge economic exposures, as well as reduce earnings and cash flow volatility resulting from shifts in market rates.

Recent market events have not caused us to materially modify or change our financial risk management strategies with respect to our exposure to foreign currency risk. Refer to Note 11—Financial Instruments in the Combined Financial Statements for additional discussion on our financial risk management.

Foreign Exchange Risk

Assuming a 10% appreciation or depreciation in foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2015, the potential change in the fair value of foreign currency-denominated assets and liabilities in each entity would not be significant because all material currency asset and liability exposures were economically hedged as of December 31, 2015. A 10% appreciation or depreciation of the U.S. Dollar against all currencies from the quoted foreign currency exchange rates at December 31, 2015 would have an impact on our cumulative translation adjustment portion of equity of approximately $60 million. The net amount invested in foreign subsidiaries and affiliates, primarily in the U.K. and Europe, and translated into U.S. Dollars using the year-end exchange rates, was approximately $600 million at December 31, 2015.

 

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MANAGEMENT

The following table presents information, as of                     , 2016, concerning our directors and executive officers following the Spin-Off, including a five-year employment history and any directorships held by our directors in public companies. We are in the process of identifying the individuals who will be our directors and other executive officers following the Spin-Off, and we expect to provide details regarding these individuals in an amendment to this Information Statement.

 

Name		Age				Position with Conduent
Ashok Vemuri			48			Chief Executive Officer

Mr. Ashok Vemuri

Ashok Vemuri will join Xerox on July 1, 2016 as the Chief Executive Officer of Xerox Business Services, LLC and an Executive Vice President of Xerox Corporation. Mr. Vemuri previously was President, Chief Executive Officer and a member of the Board of Directors of IGATE Corporation, a New Jersey-based global technology and services company now part of global technology and outsourcing company Capgemini. Before joining IGATE, Mr. Vemuri spent 14 years at Infosys Limited, a multinational consulting and IT services company, in a variety of leadership and business development roles, including Senior Vice President and head of Americas and global head of Manufacturing and Engineering Services. Mr. Vemuri was a member of the Board of Directors of Infosys from 2011 to 2013. Prior to joining Infosys in 1999, Mr. Vemuri worked in the investment banking industry at Deutsche Bank and Bank of America.

Our Board of Directors Following the Spin-Off and Director Independence

Immediately following the Spin-Off, we expect that our Board will comprise 9 directors.                rules require that the board have a majority of independent directors, and we plan for our Board to consist of a majority of independent directors at the time of the Spin-Off. Each of our directors will be elected annually. Our initial directors will each have terms expiring at the first annual meeting of shareholders following the Spin-Off. Commencing with the first annual meeting of shareholders, each of our directors will be elected by our shareholders to serve until the next annual meeting of our shareholders.

The Icahn Agreement provides that our Board immediately following the Spin-Off will consist of nine directors: (i) six of which will be selected by the Xerox Board, (A) two of whom may be, but will not be required to be, members of the Xerox Board, (B) one other of whom is approved by the Icahn Group (such approval not to be unreasonably withheld, conditioned or delayed) and (C) one other of whom will be the Chief Executive Officer of the Company; and (ii) three of which will be selected by the Icahn Group (the “Icahn Designees”), who may be, but will not required to be, employees or affiliates of the Icahn Group, that are approved by the Xerox Board (such approval not to be unreasonably withheld, conditioned or delayed), provided that, in the case of certain agreed to employees of the Icahn Group, the selection of such member has already been approved by the Xerox Board. Our Board shall have no more than (x) two members who are current or former directors, officers or employees of Xerox or any affiliate of Xerox and (y) three members that are employees or affiliates of the Icahn Group. Should any of the Icahn Designees resign from our Board or be rendered unable to, or refuse to be appointed to, or for any other reason fail to serve on, our Board (other than due to the termination of the obligations to nominate and/or appoint under the Icahn Agreement), the Icahn Group shall be entitled to designate, and the Company shall cause to be appointed as a member of our Board, a replacement that is approved by the Company, such approval not to be unreasonably withheld, conditioned or delayed.

Committees of the Board

So long as an Icahn Designee is a member of our Board: (i) our Board will not form an executive committee of the Board or any other committee of the Board with functions similar to those customarily granted to an

 

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executive committee unless, in each case one of the Icahn Designees is a member (if the committee has more than four members then no less than two Icahn Designees shall be appointed members thereof); and (ii) all Board consideration of, and voting with respect to, any tender offer or exchange offer, merger, acquisition, business combination, reorganization, restructuring, recapitalization, sale or acquisition of material assets, liquidation or dissolution, in each case involving the Company or any of its subsidiaries or its or their securities or a material amount of the assets or businesses of the Company or any of its subsidiaries, and any material financing transactions and appointment and employment of executive officers, will take place only at the full Board level or in committees of which one of the Icahn Designees is a member (if the applicable committee has more than four members then no less than two Icahn Designees shall be appointed members thereof).

Effective upon the completion of the Spin-Off, our Board will have the following committees, each of which will operate under a written charter that will be posted on our website prior to the Spin-Off.

Audit Committee

The Audit Committee will be established in accordance with Section 3(a)(58)(A) and Rule 10A-3 under the Exchange Act. The responsibilities of our Audit Committee will be more fully described in our Audit Committee charter. We anticipate that our Audit Committee, among other duties, will:

 

•

oversee the integrity of our financial statements;

 

•

oversee our compliance with legal and regulatory requirements;

 

•

oversee our risk assessment policies and practices, including the Enterprise Risk Management (“ERM”) process and preview the ERM assessment and process for subsequent review by our Board;

 

•

assess independent auditors’ qualifications and independence;

 

•

assess performance of our independent auditors and the internal audit function;

 

•

review our audited financial statements, including our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and recommend to our Board their inclusion in our Annual Report on Form 10-K; and

 

•

review and approve our code of business conduct and ethics.

The Audit Committee will have at least three members and will consist entirely of independent directors, each of whom will meet the independence requirements set forth in the listing standards of                 , Rule 10A-3 under the Exchange Act and our Audit Committee charter. Each member of the Audit Committee will be financially literate, and at least one member of the Audit Committee will have accounting and related financial management expertise and satisfy the criteria to be an “audit committee financial expert” under the rules and regulations of the SEC, as those qualifications are interpreted by our Board in its business judgment. The initial members of the Audit Committee will be determined prior to the Spin-Off.

Compensation Committee

The responsibilities of our Compensation Committee will be more fully described in our Compensation Committee charter. We anticipate that our Compensation Committee, among other duties, will:

 

•

oversee development and administration of our executive compensation plans;

 

•

set the compensation of the CEO and other executive officers;

 

•

review and approve the performance goals and objectives with respect to the compensation of the CEO and other executive officers;

 

•

oversee the evaluation of the CEO and other executive officers;

 

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•

have sole authority to retain and terminate the consulting firms engaged to assist the Compensation Committee in the evaluation of the compensation of the CEO and other executive officers;

 

•

be directly responsible for oversight of the work of the compensation consultants, including determination of compensation to be paid to any such consultant by Conduent;

 

•

conduct an independence assessment of any compensation consultants, including consideration of the six independence factors required under SEC rules and                listing standards; and

 

•

review and approve employment, severance, change-of-control, termination and retirement arrangements for executive officers.

The Compensation Committee will consist entirely of independent directors, each of whom will meet the independence requirements set forth in the listing standards of                 , Rule 10C-1 under the Exchange Act and our Compensation Committee charter. The members of our Compensation Committee will be “non-employee directors” (within the meaning of Rule 16b-3 under the Exchange Act) and “outside directors” (within the meaning of Section 162(m) of the Code). The initial members of our Compensation Committee will be determined prior to the Spin-Off.