Xerox 2005 Annual Report Download - page 94

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
86
India: In recent years we have become aware of a number of
matters at our Indian subsidiary, Xerox Modicorp Ltd., that
occurred over a period of several years, much of which occurred
before we obtained majority ownership of these operations in
mid-1999. These matters include misappropriations of funds and
payments to other companies that may have been inaccurately
recorded on the subsidiary’s books and certain improper pay-
ments in connection with sales to government customers.
These transactions were not material to the Company’s financial
statements. We have reported these transactions to the Indian
authorities, the U.S. Department of Justice and to the SEC. The
private Indian investigator engaged by the Indian Ministry of
Company Affairs has completed an investigation of these matters.
In February 2005, the Indian Ministry of Company Affairs provided
our Indian subsidiary with the investigator’s report which addresses
the previously disclosed misappropriation of funds and improper
payments and requested comments. The report included allega-
tions that Xerox Modicorp Ltd.’ssenior officials and the Company
were aware of such activities. The report also asserted the need
for further investigation into potential criminal acts related to the
improper activities addressed by the report. The matter is now
pending in the Indian Ministry of Company Affairs. The Company
reported these developments and made a copy of the report
received by Xerox Modicorp Ltd. available to the U.S. Department
of Justice and the SEC.
On November 17, 2005, Xerox filed its 40-page Reply (plus
attachments) with the DCA. Xerox has sent copies of the Xerox
Reply to the SEC and DOJ in the United States. In our Reply,we
argue that the alleged violations of Indian Company Law by means
of alleged improper payments and alleged defaults/failures of
the Xerox Modicorp Ltd. Board of Directors were generally unsub-
stantiated and without any basis in law. Further, we stated that the
Report’s findings of other alleged violations were unsubstantiated
and unproven. The DCA (now called the “Ministry of Company
Affairs” or “MCA”) will consider our Reply and will let us know their
conclusions in the coming months. Thereis the possibility of fines
or criminal penalties if conclusive proof of wrongdoing is found. We
have told the DCA that Xerox’s conduct in voluntarily disclosing
the initial information and readily and willingly submitting to investi-
gation, coupled with the non-availability of earlier records, warrants
complete closureand early settlement. In January 2006, we
learned that the DCA has issued a “Show Cause Notice” to certain
former executives of Xerox Modicorp Ltd. seeking a response to
allegations of potential violations of the Indian Companies Act.
In March 2005, following the completion of a sharebuy-back
program that increased our controlling ownership interest in our
Indian subsidiary to approximately 89 percent from approximately
86 percent at year-end 2004, we changed the name of our Indian
subsidiary to Xerox India Ltd.
Note 17 – Preferred Stock
As of December 31, 2005, we had one class of preferred stock
outstanding as well as one class of preferred stock purchase
rights. In total, we are authorized to issue approximately 22
million shares of cumulative preferred stock, $1.00 par value.
Series C Mandatory Convertible Preferred Stock: In 2003, we
issued 9.2 million shares of 6.25% Series C Mandatory Convertible
Preferred Stock with a stated liquidation value of $100 per share
for net proceeds of $889. The proceeds from these securities
were used to repay a portion of our indebtedness. Annual dividends
of $6.25 per share are cumulative and payable quarterly in cash,
shares of our common stock or a combination thereof.
On July 1, 2006, each share of Series C Mandatory Convertible
Preferred Stock will automatically convert into between 8.1301
and 9.7561 shares of our common stock, depending on the then
20-day average market price of our common stock. At any time
prior to July 1, 2006, holders may elect to convert each share
of Series C Mandatory Convertible Preferred Stock into 8.1301
shares of our common stock. If at any time prior to July 1, 2006,
the closing price per shareof our common stock exceeds $18.45
for at least 20 trading days within a period of 30 consecutive
trading days, we may elect, subject to certain limitations, to
cause the conversion of all, but not less than all, the shares of
Series C Mandatory Convertible Preferred Stock then outstanding
for shares of our common stock at a conversion rate of 8.1301
shares of our common stock for each share of Series C Mandatory
Convertible Preferred Stock.
Preferred Stock Purchase Rights: Wehave a shareholder rights
plan designed to deter coercive or unfair takeover tactics and to
prevent a person or persons from gaining control of us without
offering a fair price to all shareholders. Under the terms of this
plan, one-half of one preferred stock purchase right (“Right”)
accompanies each share of outstanding common stock. Each full
Right entitles the holder to purchase from us one three-hundredth
of a new series of preferred stock at an exercise price of $250.
Within the time limits and under the circumstances specified in the
plan, the Rights entitle the holder to acquire either our common
stock, the stock of the surviving Company in a business combi-
nation, or the stock of the purchaser of our assets, having a value
of two times the exercise price. The Rights, which expire in April
2007, may be redeemed prior to becoming exercisable by action
of the Board of Directors at a redemption price of $.01 per Right.
The Rights are non-voting and, until they become exercisable,
have no dilutive effect on the earnings per share or book value
per share of our common stock.
Xerox Annual Report 2005