Xerox 2006 Annual Report Download - page 102

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
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 unsubstantiated 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. There is 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
investigation, coupled with the non-availability of earlier
records, warrants complete closure and 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. We
have also learned that Xerox Modicorp Ltd. has received
a formal Notice of Enquiry from the Indian
Monopolies & Restrictive Trade Practices Commission
(“MRTP Commission”) alleging that Xerox Modicorp
Ltd. committed unfair trading practices arising from the
events described in the DCA investigator’s Report.
Following a hearing on August 29, 2006, the MRTP
Commission ordered a process with deadlines between
Xerox Modicorp Ltd. and the investigating officer for
provision of relevant documents to Xerox Modicorp Ltd.,
after which Xerox Modicorp Ltd. will have four weeks to
file its reply. The MRTP Commission had scheduled a
hearing for framing of the issues on January 9, 2007, but
this hearing has been delayed. A new hearing was
scheduled for January 29, 2007 for consideration of
Xerox Modicorp Ltd.’s motion for the MRTP
Commission to direct the investigating officer to supply
us the relevant documents. At the hearing on January
29th, no additional documents were supplied to us. The
MRTP Commission directed us to file our reply to the
original Notice of Enquiry within four weeks. Our Indian
subsidiary plans to contest the Notice of Enquiry and has
been fully cooperating with the authorities.
In March 2005, following the completion 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 school district has raised questions
regarding the enforceability of their contracts, which may
have implications for contracts with similar customers.
We have reviewed this matter internally and have worked
with the appropriate state agencies in an effort to bring it
to a satisfactory resolution. We have received state
agency approval for a proposed resolution and are in the
process of implementing that resolution with the school
district that raised these questions as well as other
affected customers. Until this resolution is fully
implemented, it is not possible to estimate the amount of
loss, if any, or range of possible loss that might result
from this matter.
Note 17 – Preferred Stock
As of December 31, 2006, we had no preferred stock
shares outstanding and one class of preferred stock
purchase rights. We are authorized to issue approximately
22 million shares of cumulative preferred stock, $1.00 par
value.
Series C Mandatory Convertible Preferred Stock
Automatic Conversion: In July 2006, 9.2 million shares
of 6.25% Series C Mandatory Convertible Preferred
Stock were converted at a rate of 8.1301 shares of our
common stock, or 74.8 million common stock shares. The
recorded value of outstanding shares at the time of
conversion was $889. The conversion occurred pursuant
to the mandatory automatic conversion provisions set at
original issuance of the Series C Preferred Stock. As a
result of the automatic conversion, there are no remaining
outstanding shares of our Series C Mandatory
Convertible Preferred Stock.
Series B Convertible Preferred Stock Conversion:
In May 2004, all 6.2 million of our Convertible Preferred
shares were redeemed for 37 million common shares in
accordance with the original conversion provisions of the
100