Xerox 2002 Annual Report Download - page 84

claims. BERTL’s counterclaims against Xerox principal-
ly allege infringement of copyrights, appropriation of
trade secrets, defamation and breach of contract. The
Company and XCL deny any wrongdoing and intend to
vigorously pursue the Company’s claims and defend
the counterclaims. Based on the stage of the litigation,
it is not possible to assess the probable outcome of the
litigation, including the amount of any loss or range of
possible loss that might result from an adverse ruling
on the counterclaim in this matter.
U.S. Attorney’s Office Investigation: As we announced
on September 23, 2002, we learned that the U.S. attor-
ney’s office in Bridgeport, Conn., is conducting an
investigation into matters relating to Xerox. We have
not been advised by the U.S. attorney’s office regard-
ing the nature, scope or timing of the investigation.
We are cooperating and providing documents, as
requested.
Securities and Exchange Commission Investigation
and Review: On April 1, 2002, we announced that we
had reached a settlement with the SEC on the previously
disclosed proposed allegations related to matters that
had been under investigation since June 2000. As a
result, on April 11, 2002, the SEC filed a complaint,
which we simultaneously settled by consenting to the
entry of an Order enjoining us from future violations
of Section 17(a) of the Securities Act of 1933, Sections
10(b), 13(a) and 13(b) of the 1934 Act and Rules 10b-5,
12b-20, 13a-1, 13a-13 and 13b2-1 thereunder, requiring
payment of a civil penalty of $10, and imposing other
ancillary relief. We neither admitted nor denied the
allegations of the complaint. The $10 civil penalty is
included in Other expenses, net in 2002 in the
Consolidated Statement of Income. Under the terms
of the settlement, in 2001 we restated our financial
statements for the years 1997 through 2000.
As part of the settlement, a special committee of
our Board of Directors has retained Michael H. Sutton,
former Chief Accountant of the SEC, as an independent
consultant to review our material accounting controls
and policies. Mr. Sutton commenced his review in
July 2002. On February 21, 2003, Mr. Sutton delivered
his final report, together with observations and recom-
mendations, to members of the special committee.
According to the terms of the settlement, the special
committee has 60 days to review the report and submit
it to our full Board of Directors and the SEC. Within 60
days of that submission, the Board of Directors must
report to the SEC the decisions taken as a result of the
recommendations.
Other Matters: It is our policy to carefully investigate,
often with the assistance of outside advisers,
allegations of impropriety that may come to our atten-
tion. If the allegations are substantiated, appropriate
prompt remedial action is taken, and where appropri-
ate, public disclosure is made. In India, we have
learned of certain improper payments made over a
period of years in connection with sales to government
customers by employees of our now majority-owned
subsidiary in that country. This activity was terminated
when we became aware of it. We have investigated the
activity and reported it to the staff of the SEC and the
Department of Justice, and are cooperating with their
follow-up inquiries. In addition, various agencies of the
Indian government are also investigating the issue. We
do not believe that this matter will have any material
impact on our consolidated financial statements.
Separately, we learned that less than $200 thousand
was misappropriated from our Indian subsidiary dur-
ing early 2002 which was not properly reflected in our
subsidiary’s books. The matter is currently being inves-
tigated. Certain transactions of our unconsolidated
South African affiliate that appear to have been
improperly recorded as part of an effort to sell supplies
outside of its authorized territory have been investigat-
ed and a report of the results has been received by the
Board of Directors of the South African affiliate.
Disciplinary actions have been taken, and the adjust-
ments to our financial statements were not material.
Following an investigation we have determined that
certain inter-company and other balances in the local
books and records of our majority-owned affiliate in
Nigeria could not be substantiated. The Company’s
records did not reflect these amounts and the local
books have been adjusted to be consistent with them.
This adjustment has had no effect on our financial
statements. This matter has been reported to the SEC
and the Department of Justice. We are in the process of
liquidating (“winding-up”) this company in connection
with the December 2002 sale of our interest in the
Nigerian business to our local partner.
Note 16 — Preferred Securities
As of December 31, 2002, we have four series of out-
standing preferred securities. In total we are authorized
to issue 22 million shares of cumulative preferred
stock, $1 par value.
Convertible Preferred Stock: As more fully discussed
in Note 13 to the Consolidated Financial Statements,
in 1989 we sold 10 million shares of our Series B
Convertible Preferred Stock (“ESOP Shares”) for
$785 in connection with the establishment of our ESOP.
This debt was repaid in 2002. As employees with vest-
ed ESOP shares leave the Company, we redeem those
shares. We have the option to settle such redemptions
with either shares of common stock or cash, but have
historically settled in common stock.
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