Xerox 2006 Annual Report Download

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ANNUAL REPORT 2006

Table of contents

  • Page 1
    ANNUAL REPORT 2006

  • Page 2
    ... one or many millions. 01 Financial Overview 02 Chairman's Letter 08 Citizenship 09 Customer Features 12 Board of Directors 15 Description of Business 26 Management's Discussion and Analysis of Results of Operations and Financial Condition Inside Back Cover Corporate Information and Officers

  • Page 3
    06 Financial Overview ($ millions, except EPS) Total Revenue 2006 2005 $ 15,895 4,457 11,438 1,210 1.22 1,617 $ 15,701 4,519 11,182 978 0.94 1,420 Equipment Sales Post Sale, Finance Income and Other Revenue Net Income Diluted Earnings Per Share Net Cash Provided by Operating Activities XEROX ANNUAL ...

  • Page 4
    ... percent from full-year 2005 adjusted EPS of 90 cents.* Total revenue of $15.9 billion, an increase of 1 percent or $194 million from full-year 2005. Operating cash flow of $1.6 billion. Year-end cash and short-term investments balance of $1.5 billion. • • XEROX ANNUAL REPORT 2006 • • 2

  • Page 5
    ... revenue and profit than black-and-white pages. We're already seeing this benefit flow through to our annuity. Post-sale revenue from color was up 16 percent in 2006. Much of that is due to the 38 percent increase in color pages. More than 30 billion color pages were printed on Xerox color systems...

  • Page 6
    .... XEROX ANNUAL REPORT 2006 These marketing campaigns cut through the clutter. They're personalized, colorful and most likely printed on Xerox color systems using XMPie software. The market for variable data jobs that capture individual information such as name, address, account information and...

  • Page 7
    ... from paper or electronic documents, such as e-mail, text files, memos, databases, presentations and spreadsheets. Projected to grow at an annual compounded rate of close to 40 percent, e-discovery services could be a nearly $2.5 billion market in the United States alone by 2009. Now a part of Xerox...

  • Page 8
    ... our value proposition - painkiller and steroid, streamlining document processes to reduce costs and leveraging documents to grow revenue. No one does that better than Xerox - no one. • • XEROX ANNUAL REPORT 2006 Our operations We also have a business model that works - in part because...

  • Page 9
    ... activity that strengthens our leadership in color, accelerates the New Business of Printing, expands our offerings in services, and broadens our offerings and distribution in the small and medium business market. All this fuels our profitable annuity stream, which accounts for more than 70 percent...

  • Page 10
    ... its base of funding and volunteers to support more educational programs. 2006 Some highlights from 2006 include: Launched the company's first Report on Global Citizenship, which includes information on ethics and governance, customer privacy and satisfaction, employee diversity and development...

  • Page 11
    ... from the existing method, the initiative immediately delivered cost savings of 25-30 percent, with recent savings approaching 45 percent. Just as significant has been the nonexistent disruption to customer satisfaction. Those are results worth noting. In any language. XEROX ANNUAL REPORT 2006 9

  • Page 12
    ... to find that water and mold had damaged virtually all of the equipment that it had placed. The University print shop managed by Xerox was a total loss. Again Xerox went to work. It conducted an inventory to assess the status of all equipment throughout the campus, ordered replacements, and by early...

  • Page 13
    ... stories, told perfectly every time. In 1999, they started as an online resource to help photography enthusiasts print the photos from their new digital cameras. They have become the preeminent Internet-based service for social expression and personal publishing. They're Shutterfly. And every year...

  • Page 14
    ... and Chief Executive Officer Johnson & Johnson New Brunswick, NJ 6. N. J. Nicholas, Jr. Investor New York, NY B, D Dean, Tippie College of Business University of Iowa Iowa City, IA Ursula M. Burns** President Xerox Corporation Stamford, CT XEROX ANNUAL REPORT 2006 7. Ann N. Reese C, D Executive...

  • Page 15
    ...in Net Income of Unconsolidated Affiliates Income from Discontinued Operations Recent Accounting Pronouncements Capital Resources and Liquidity Cash Flow Analysis Customer Financing Activities and Secured Debt Liquidity, Financial Flexibility and Other Financing Activity Contractual Cash Obligations...

  • Page 16
    ... Consolidated Financial Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Summary of Significant Accounting Policies Segment Reporting Short-Term Investments Receivables, Net Inventories and Equipment on Operating Leases, Net Land, Buildings and Equipment, Net...

  • Page 17
    ... Our value-added services deliver solutions, which not only optimize enterprise output spend and infrastructure, but also streamline, simplify and digitize our customers' document-intensive business processes. $17 Eligible Offset We are creating new market opportunities with digital printing as...

  • Page 18
    ... online document repositories. Our products include high-end printing and publishing systems; digital multifunctional devices ("MFDs") which can print, copy, scan and fax; digital copiers; laser and solid ink printers; fax machines; document-management software; and supplies such as toner, paper...

  • Page 19
    ...cross-media marketing campaigns involving digital printing, e-mail and customized websites. XMPie helps graphic designers, marketing companies and print providers develop creative, customized marketing programs. XMPie provides software for variable data publishing ranging from the desktop to servers...

  • Page 20
    ... 180 Publishing System for print on-demand applications. This system prints both black-and-white, as well as highlight color, at the rated speed of 180 ppm. Highlight Custom Blended Color Program: In October, we announced additional standard colors for a total of eight. We also expanded the range...

  • Page 21
    ... and other public sector customers. Office systems and services, which include monochrome devices at speeds up to 90 ppm and color devices up to 50 ppm, include our family of CopyCentre®, WorkCentre® and WorkCentre® Pro digital multifunction systems; DocuColor printer/copiers; color laser, LED...

  • Page 22
    ...-related software applications on a Xerox MFD user interface, improving workflow and productivity. - - - DMO DMO includes the marketing, sales and servicing of Xerox products, supplies, and services in Latin America, Brazil, the Middle East, India, Eurasia and CentralEastern Europe and Africa...

  • Page 23
    ... services. 2006 R&D spending focused primarily on the development of high-end business applications to drive the "New Business of Printing", on extending our color capabilities, and on lower-cost platforms and customer productivity enablers that drive the digitization of the office. The Xerox iGen3...

  • Page 24
    ... $704 million in 2004. Patents, Trademarks and Licenses We are a technology company. With our Xerox Palo Alto Research Center ("PARC") subsidiary, we were awarded nearly 560 U.S. utility patents in 2006. We were ranked 39th on the list of companies that were awarded the most U.S. patents during the...

  • Page 25
    ..., we use our direct sales force to address our customers' more advanced technology, solutions and services requirements, while expanding our use of cost-effective, indirect distribution channels, for basic product offerings. We market our Phaser line of color and monochrome laser-class and solid ink...

  • Page 26
    ... operations are primarily located in Rochester, New York and Dundalk, Ireland for our high-end production products and consumables, and in Wilsonville, Oregon for solid ink products, consumable supplies, and components for our Office segment products. Contract Signings We believe that contract...

  • Page 27
    ... Xerox is a New York corporation, organized in 1906, and our principal executive offices are located at 800 Long Ridge Road, P. O. Box 1600, Stamford, Connecticut 06904-1600. Our telephone number is (203) 968-3000. On the Investor Information section of our Internet website, you will find our annual...

  • Page 28
    ... of our cost base. The majority of our revenue is recurring revenue (supplies, service, paper, outsourcing and rentals), which we collectively refer to as post sale revenue. Post sale revenue is heavily dependent on the amount of equipment installed at customer locations and the utilization of those...

  • Page 29
    ... classifications included in our Consolidated Statements of Income: (in millions) Year Ended December 31, 2006 2005 2004 Sales ...Less: Supplies, paper and other sales ...Equipment sales ...Service, outsourcing and rentals ...Add: Supplies, paper and other sales ...Post sale and other revenue ...27...

  • Page 30
    ... total revenue for the year ended December 31, 2006 as compared to the prior year. Total revenue included the following: • 1% decline in equipment sales, including a benefit from currency of 1-percentage point, primarily reflecting revenue declines in Office and Production black-and-white products...

  • Page 31
    ... accounting are the determination of the economic life and the fair value of equipment, including the residual value. For purposes of determining the economic life, we consider the most objective measure to be the original contract term, since most equipment is returned by lessees at or near the end...

  • Page 32
    ... be reasonably consistent with the lease selling prices, taking into account residual values that accrue to our benefit, in order for us to determine that such lease prices are indicative of fair value. Our pricing interest rates, which are used in determining customer payments, are developed based...

  • Page 33
    ... future events are used in calculating the expense, liability and asset values related to our pension and post-retirement benefit plans. These factors include assumptions we make about the discount rate, expected return on plan assets, rate of increase in healthcare costs, the rate of future...

  • Page 34
    ... the markets we serve. Our reportable segments are Production, Office, DMO and Other. Our offerings include hardware, services, solutions 32 and consumable supplies. The Production segment includes black-and-white products, which operate at speeds over 90 pages per minute ("ppm") and color products...

  • Page 35
    ...® families, as well as older technology light-lens products. These products are sold predominantly through direct sales channels in North America and Europe to Fortune 1000, graphic arts, government, education and other public sector customers. The Office segment includes black-and-white products...

  • Page 36
    ...of Office equipment installed under operating lease contracts are recognized in post sale revenue. Office product install activity for 2006 included the following: • 35% install growth in office color multifunction systems. • 8% install growth in black-and-white digital copiers and multifunction...

  • Page 37
    ...customer locations, the volume of prints and copies that our customers make on that equipment and the mix of color pages, as well as associated services. 2006 Post sale and other revenues of $10,598 million grew 3% from 2005, with our growth areas ("digital office, digital production and value-added...

  • Page 38
    ... of our equipment at customer locations, the volume of pages and mix of color pages generated on that equipment, as well as growth in document management services. Segment Operating Profit Segment Operating profit and operating margin for the three years ended December 31, 2006 were as follows...

  • Page 39
    ... margins, including office printers and light production systems, and a lower proportion of sales of products with higher gross margins such as higher end office black-and-white multifunction devices and high-end production black-and-white systems. 2006 Service, outsourcing and rentals margin of 43...

  • Page 40
    ... technical service; service infrastructure and global back-office optimization; continued R&D efficiencies and productivity improvements; supply chain optimization to ensure, for example, alignment to our global two-tier model implementation; and selected off-shoring opportunities. Lease termination...

  • Page 41
    ...of businesses and assets: 2006 gain on sales of businesses and assets primarily consisted of the following: • $15 million on the sale of our Corporate headquarters. (Refer to Note 6 - Land, buildings and equipment, net in the Consolidated Financial Statements for further information.) 39 $239 (69...

  • Page 42
    .... • $26 million charge related to the European Union Waste Directive. Income tax (benefits) expenses were as follows (in millions): Year Ended December 31, 2006 2005 2004 Pre-tax income ...Income tax (benefits) expenses ...Effective tax rate ...The 2006 effective tax rate of (35.6%) was lower...

  • Page 43
    ...of adoption and the effects on results of operations and financial condition. Capital Resources and Liquidity Cash Flow Analysis: The following summarizes our cash flows for each of the three years ended December 31, 2006, as reported in our Consolidated Statements of Cash Flows in the accompanying...

  • Page 44
    ... short-term investments in 2006 of $107 million, as compared to the net purchases of $247 million in 2005, as 2005 represented the initial year we purchased short-term investments to supplement our investment income. • $77 million due to higher proceeds from the sale of our Corporate headquarters...

  • Page 45
    ... customers to pay for equipment over time rather than at the date of installation, we maintain a certain level of debt to support our investment in these customer finance leases. We currently fund our customer financing activity through cash generated from operations, cash on hand, capital markets...

  • Page 46
    ... the equipment subsequent to its sale, as such the related receivable and debt are not included in our Consolidated Financial Statements. The following represents our total finance assets associated with our lease or finance operations as of December 31, 2006 and 2005, respectively: 2006 2005 Total...

  • Page 47
    ... and operations. Failure to be in compliance with the covenants in the Loan Agreement, including the financial maintenance covenants incorporated from the 2006 Credit Facility, would result in an event of termination under the Loan Agreement and in such case General Electric Capital Corporation...

  • Page 48
    ... without penalty any loans outstanding under or terminate the 2006 Credit Facility. Financial Instruments: Refer to Note 13 - Financial Instruments in the Consolidated Financial Statements for additional information regarding our derivative financial instruments. Capital Markets Offerings and Other...

  • Page 49
    ... as for additional information related to long-term debt (amounts above include principal portion only). (2) Refer to Note 6 - Land, Buildings and Equipment, net to our Consolidated Financial Statements for additional information related to minimum operating lease commitments. (3) Refer to Note 12...

  • Page 50
    ... assessments related to indirect and other taxes as well as disputes associated with former employees and contract labor. The tax matters, which comprise a significant portion of the total contingencies, principally relate to claims for taxes on the internal transfer of inventory, municipal service...

  • Page 51
    ... rates. At December 31, 2006, a 10% change in market interest rates would change the fair values of such financial instruments by approximately $233 million. Forward-Looking Statements This Annual Report contains forward-looking statements as defined in the Private Securities Litigation Reform Act...

  • Page 52
    ...(in millions, except per-share data) Year ended December 31, 2006 2005 2004 Revenues Sales ...Service, outsourcing and rentals ...Finance income ...Total Revenues ...Costs and Expenses Cost of sales ...Cost of service, outsourcing and rentals ...Equipment financing interest ...Research, development...

  • Page 53
    ... and short-term investments ...Accounts receivable, net ...Billed portion of finance receivables, net ...Finance receivables, net ...Inventories ...Other current assets ...Total current assets ...Finance receivables due after one year, net ...Equipment on operating leases, net ...Land, buildings and...

  • Page 54
    ... by operating activities ...Cash Flows from Investing Activities: Purchases of short-term investments ...Proceeds from sales of short-term investments ...Cost of additions to land, buildings and equipment ...Proceeds from sales of land, buildings and equipment ...Cost of additions to internal use...

  • Page 55
    ... option and incentive plans, net ...Series C mandatory convertible preferred stock dividends ($6.25 per share) ...Series C mandatory convertible preferred stock conversion ...Payments to acquire treasury stock ...Cancellation of treasury stock ...Other ... Balance at December 31, 2006 ...954,568...

  • Page 56
    ... a complete range of document equipment, solutions and services. Certain reclassifications have been made to prior year financial information to conform to the current year presentation. Basis of Consolidation: The Consolidated Financial Statements include the accounts of Xerox Corporation and all...

  • Page 57
    ... for obsolete and excess inventory ...Provisions for litigation and regulatory matters ...Depreciation and obsolescence of equipment on operating leases ...Depreciation of buildings and equipment ...Amortization of capitalized software ...Pension benefits - net periodic benefit cost ...Other...

  • Page 58
    ... Fuji Xerox until its annual year-end of March 31, 2007. Upon Fuji Xerox's adoption, we will record our share of their after-tax charge to equity which we currently estimate at $60. The adoption of this standard is not expected to impact financial covenant compliance included in our debt agreements...

  • Page 59
    ... at lease termination. Stock-Based Compensation: In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" ("FAS 123(R)"), which requires companies to recognize compensation expense using a fair value based method for costs related to all share-based payments, including stock options...

  • Page 60
    ... accounted for by the operating lease method and are recognized as earned over the lease term, which is generally on a straight-line basis. Service: Service revenues are derived primarily from maintenance contracts on our equipment sold to customers and are recognized over the term of the contracts...

  • Page 61
    ... accounting are the determination of the economic life and the fair value of equipment, including the residual value. For purposes of determining the economic life, we consider the most objective measure to be the original contract term, since most equipment is returned by lessees at or near the end...

  • Page 62
    ... law. Where such contract terms are not legally required, we consider the arrangement to be cancelable and account for it as an operating lease. After the initial lease of equipment to our customers, we may enter subsequent transactions with the same customer whereby we extend the term. Revenue from...

  • Page 63
    ... residual value over the lease term. Depreciation is computed using the straight-line method. Significant improvements are capitalized and maintenance and repairs are expensed. Refer to Note 5 - Inventories and Equipment on Operating Leases, Net and Note 6 - Land, Buildings and Equipment, Net...

  • Page 64
    ... accounted for based on specific plan terms). For purposes of determining the expected return on plan assets, we utilize a calculated value approach in determining the value of the pension plan assets, as opposed to a fair market value approach. The primary difference between the two methods relates...

  • Page 65
    ... families, as well as older technology light-lens products. These products are sold predominantly through direct sales channels in North America and Europe to Fortune 1000, graphic arts, government, education and other public sector customers. The Office segment includes black-and-white products...

  • Page 66
    ... Technology Enterprises, royalty and licensing revenues, equity net income and non-allocated Corporate items. Value-added services includes the results of our 2006 acquisition of Amici LLC. (Refer to Note 20 - Acquisitions for further information.) Other segment profit (loss) includes the operating...

  • Page 67
    ... (1) Long-lived assets are comprised of (i) land, buildings and equipment, net, (ii) equipment on operating leases, net, (iii) internal use software, net and (iv) capitalized software costs, net. Note 3 - Short-Term Investments As of December 31, 2006 and 2005, respectively, we held $137 and $244...

  • Page 68
    ... TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) The following table summarizes the maturities and fair market values of our Short-term investments as of December 31, 2006 and 2005, respectively (in millions): 2006 Due In 1 Year...

  • Page 69
    ... could be replaced as the maintenance service provider for the associated equipment under lease. We have similar long-term lease funding arrangements with GE in both the U.K. and Canada. These agreements contain similar terms and conditions as those contained in the U.S. Loan Agreement with respect...

  • Page 70
    ..., net, (ii) finance receivables, net and (iii) finance receivables due after one year, net as included in the Consolidated Balance Sheets as of December 31, 2006 and 2005. Accounts Receivable Funding Arrangement: We have a $400 revolving credit facility with GE expiring in 2007, secured by our...

  • Page 71
    ... and similar arrangements consists of our equipment rented to customers and depreciated to estimated residual value at the end of the lease term. The transfer of equipment from our inventories to equipment subject to an operating lease is presented in our Consolidated Statements of Cash Flows in the...

  • Page 72
    ...not currently required in operations. Future minimum sublease income under leases with non-cancelable terms in excess of one year amounted to $30 at December 31, 2006. We have an information technology contract with Electronic Data Systems Corp. ("EDS") through June 30, 2009. Services to be provided...

  • Page 73
    ... revenues under this agreement of $117, $123 and $119, respectively, which are included in Service, outsourcing and rental revenues in the Consolidated Statements of Income. We also have arrangements with Fuji Xerox whereby we purchase inventory from and sell inventory to Fuji Xerox. Pricing of the...

  • Page 74
    ... due to Fuji Xerox were $169 and $157, respectively. Note 8 - Goodwill and Intangible Assets, Net Goodwill: The following table presents the changes in the carrying amount of goodwill, by operating segment, for the three years ended December 31, 2006 (in millions): Production Office DMO Other...

  • Page 75
    .... Detailed information related to restructuring program activity during the three years ended December 31, 2006 is outlined below (in millions): Lease Cancellation and Other Costs Asset Impairments(1) Legacy Programs(2) Restructuring Activity Severance and Related Costs Total Ending Balance...

  • Page 76
    ...lease and December 31, 2006 (in millions): contract terminations and $30 for asset Years Ended December 31, 2006 2005 2004 impairments. The charges primarily relate to the elimination of approximately 3,400 positions Production ...$142 $150 $ 27 primarily in North America and Europe. The 2006 Office...

  • Page 77
    ... in 2006 as part of an agreement to transfer its remaining reinsurance obligation together with related investments to another insurance company. Refer to Note 21 - Divestitures and Other Sales for further information. Liability to Xerox Capital LLC: Liability was settled in February 2006 as part of...

  • Page 78
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) Internal Use Software: Capitalized direct costs associated with developing, purchasing or otherwise acquiring software for internal use are amortized on a straight-line basis ...

  • Page 79
    ... FINANCIAL STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) Long-term debt, including debt secured by finance receivables at December 31, 2006 and 2005 was as follows (in millions): Weighted Average Interest Rates at December 31, 2006 2006 2005 U.S. Operations...

  • Page 80
    ... changes to corporate structure, (iii) changes in nature of business and (iv) limitations on debt incurred by certain subsidiaries. The 2006 Credit Facility also contains various events of default, the occurrence of which could result in a termination by the lenders and the acceleration of all...

  • Page 81
    ... CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) Termination of 2003 Credit Facility In connection with the effectiveness of the 2006 Credit Facility, we terminated the 2003 Credit Facility in April 2006 and repaid all advances and loans...

  • Page 82
    ... are not consolidated in our financial statements because we are not the primary beneficiary of the trusts. As of December 31, 2006 and 2005, the components of our liabilities to the trusts were as follows (in millions): 2006 2005 Trust I ...Xerox Capital LLC(1) ...Total ... $624 - $624 $626 98...

  • Page 83
    ... Accounting Policies to the Consolidated Financial Statements. Interest Rate Risk Management: We use interest rate swap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges...

  • Page 84
    ... FINANCIAL STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) Fair Value Hedges: As of December 31, 2006 and 2005, pay variable/receive fixed interest rate swaps with notional amounts of $1.4 billion and $1.8 billion were designated and accounted for as fair value...

  • Page 85
    ... ...Total ... $ 119 228 23 173 101 151 152 86 85 334 124 157 $1,733 $ 2 (5) - - - (1) 4 (1) - 1 (2) 1 $ (1) At December 31, 2006 and 2005, we had outstanding cross-currency interest rate swap agreements with aggregate notional amounts of $126 and $127, respectively. The net liability fair values...

  • Page 86
    ..., was estimated based on quoted market prices for publicly traded securities or on the current rates offered to us for debt of similar maturities. The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all...

  • Page 87
    ...513 (418) - - Transfers/divestitures ...- 38 - - Benefits paid/settlements ...(1,067) (618) (117) (127) Fair value of plan assets, December 31 ...Funded status (including under-funded and non-funded plans) at the end of year ...Unamortized transition obligations ...Unrecognized prior service credit...

  • Page 88
    ... pay and years of service formula, (ii) the benefit calculated under a formula that provides for the accumulation of salary and interest credits during an employee's work life, or (iii) the individual account balance from the Company's prior defined contribution plan (Transitional Retirement Account...

  • Page 89
    ... investment results relate to TRA, such results are charged directly to these accounts as a component of interest cost. Plan Amendment During 2006 we amended one of our domestic defined benefit pension plans. The amendment changed the process of calculating benefits for certain employees who retire...

  • Page 90
    ... "building block" approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term relationships between equities and fixed income are assessed. Current market factors such as inflation and interest rates are evaluated before long-term capital market...

  • Page 91
    ... except per-share data and unless otherwise indicated) 2007 Pension Benefits 2006 2005 2004 2007 Retiree Health 2006 2005 2004 Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 Discount rate ...Expected return on plan assets ...Rate of compensation...

  • Page 92
    ...and tax refund, but we expect it to increase tax credit benefits related to stock option and incentive plans. carryforwards and reduce taxes otherwise potentially due. 2006 includes the effects of the adoption of FAS 158-See Note 1 for further information. 2005: In June 2005, the 1996-1998 IRS audit...

  • Page 93
    ... STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) The $343 benefit also includes after-tax benefits of $83 related to the favorable resolution of certain other tax matters. Of this amount, $53 was related to previously discontinued operations and is reported...

  • Page 94
    ... our subsidiaries with respect to real estate leases. These lease guarantees may remain in effect subsequent to the sale of the subsidiary. 92 • • Agreements to indemnify various service providers, trustees and bank agents from any third party claims related to their performance on our behalf...

  • Page 95
    ... assessments related to indirect and other taxes as well as disputes associated with former employees and contract labor. The tax matters, which comprise a significant portion of the total contingencies, principally relate to claims for taxes on the internal transfer of inventory, municipal service...

  • Page 96
    ...growth, operations and the intrinsic value of the Company's common stock; (ii) allowed several corporate insiders, such as the named individual defendants, to sell shares of privately held common stock of the Company while in possession of materially adverse, non-public information; and (iii) caused...

  • Page 97
    ... public regarding the true state of the Company's financial condition and caused 95 the plaintiffs and other members of the alleged Class to purchase the Company's common stock and bonds at artificially inflated prices, and prompted a SEC investigation that led to the April 11, 2002 settlement...

  • Page 98
    ... adverse facts relating to the Company's financial condition and accounting and reporting practices. The plaintiffs contend that in relying on false and misleading statements allegedly made by the defendants, at various times from 1997 through 2000 they bought shares of the Company's common stock at...

  • Page 99
    ... range of possible loss that might result from an adverse judgment or a settlement of this matter. Digwamaje et al. v. IBM et al: A purported class action was filed in the United States District Court for the Southern District of New York on September 27, 2002. Service of the First Amended Complaint...

  • Page 100
    ... TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per-share data and unless otherwise indicated) National Union Fire Insurance Company v. Xerox Corporation, et al.: On October 24, 2003, a declaratory judgment action was filed in the Supreme Court of the State of New York, County...

  • Page 101
    ...the subsidiary's books and certain improper payments in connection with sales to government customers. These transactions were not material to the Company's financial statements. We have reported these transactions to the Indian authorities, the U.S. Department of Justice and to the SEC. The private...

  • Page 102
    ... of a share buy-back program that increased our controlling ownership interest in our Indian subsidiary to approximately 89% from approximately 86% at year-end 2004, we changed the name of our Indian subsidiary to Xerox India Ltd. New York State School District Contracts: A local New York State...

  • Page 103
    ... of awards. Total compensation related to these programs was $64, $40 and $22 for the years ended December 31, 2006, 2005 and 2004, respectively. The related income tax benefit recognized was $25, $16 and $8 for 2006, 2005 and 2004, respectively. A description of each of our stock-based compensation...

  • Page 104
    ... was $78. For 2005, the PSs were accounted for as variable awards requiring that the shares be adjusted to market value at each reporting period. Effective January 1, 2006, upon the adoption of FAS 123(R), PSs were recorded prospectively using fair value determined as of the grant 2,052 2,588...

  • Page 105
    ... relating to stock option exercises for the three years ended December 31, 2006: (in millions) 2006 2005 2004 Total Intrinsic Value ...Cash Received ...Tax Benefit Realized for Tax Deductions ... $72 82 25 $36 41 12 $67 67 23 Treasury Stock: The Board of Directors has authorized programs...

  • Page 106
    ...01) 0.94 $ The 2006, 2005 and 2004 computation of diluted earnings per share did not include the effects of 27 million, 36 million and 38 million stock options, respectively, because their respective exercise prices were greater than the corresponding market value per share of our common stock. 104

  • Page 107
    ...Total Purchase price ...XMPie, Inc: In November 2006, we acquired the stock of XMPie, Inc. ("XMPie"), a provider of variable information software, for $54 in cash, including transaction costs. XMPie's software enables printers and marketers to create and print personalized and customized marketing...

  • Page 108
    ... as a gain in Income from discounted operations, net of tax. The gain on sale has been presented within the accompanying Consolidated Statements of Income considering the reporting requirements related to discontinued operations of SFAS No. 144, "Accounting for the Impairment or Disposal of...

  • Page 109
    ...Exchange Act of 1934. Under the management's assessment of the effectiveness of our supervision and with the participation of our internal control over financial reporting as of management, including our principal executive, financial December 31, 2006 has been audited by and accounting officers, we...

  • Page 110
    ... and Shareholders of Xerox Corporation: We have completed integrated audits of Xerox Corporation's consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United...

  • Page 111
    ... and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may...

  • Page 112
    ... Third Quarter Fourth Quarter Full Year 2006 Revenues ...Costs and Expenses(1) ...Income from Continuing Operations before Income Taxes, Equity Income, Discontinued Operations and Cumulative Effect of Change in Accounting Principle ...Income tax expenses (benefits)(2) ...Equity in net income of...

  • Page 113
    ...-end ...Book value per common share ...Year-end common stock market price ...Employees at year-end ...Gross margin ...Sales gross margin ...Service, outsourcing and rentals gross margin ...Finance gross margin ...Working capital ...Current ratio ...Cost of additions to land, buildings and equipment...

  • Page 114
    ... on the common stock. Certifications We have filed with the SEC the certification required by Section 302 of the Sarbanes-Oxley Act as an exhibit to our 2006 Annual Report on Form 10-K, and have submitted to the NYSE in 2006 the CEO certification required by the NYSE corporate governance rules. 16...

  • Page 115
    ... DocuTech, New Business of Printing, ® ™ Phaser,® Smarter Document Management, WorkCentre, iGen3,® Xerox Nuvera® and 2101® are trademarks of Xerox Corporation in the U.S. and/or other countries. DocuColor® is used under license. XMPie® is a trademark of XMPie Inc. OFFICERS Armando Zagalo...

  • Page 116
    ... Independent Auditors PricewaterhouseCoopers LLP 300 Atlantic Street Stamford, CT 06901 203 539-3000 Xerox Europe Riverview Oxford Road Uxbridge Middlesex United Kingdom UB8 1HS 44 1895 251133 © 2007 Xerox Corporation. All rights reserved. A portion of this report is printed on paper made using...