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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-K

 

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(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2006

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from:                                 to                                 

1-4471 (Commission File Number)

 

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XEROX CORPORATION

(Exact name of registrant as specified in its charter)

 

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New York		16-0468020
(State of incorporation)		(I.R.S. Employer Identification No.)

P.O. Box 1600, Stamford, Connecticut

(Address of principal executive offices)

06904

(Zip Code)

Registrant’s telephone number, including area code: (203) 968-3000

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

 

Title of each Class		Name of Each Exchange on Which Registered
Common Stock, $1 par value		New York Stock Exchange Chicago Stock Exchange

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

None

 

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes:    x    No:  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes:  ¨    No:  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:  x    No:  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act Rule

Large accelerated filer:    x                        Accelerated filer:    ¨                        Non-accelerated filer:    ¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes:  ¨    No:  x

The aggregate market value of the voting stock of the registrant held by non-affiliates as of June 30, 2006 was: $12,566,538,733.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

 

Class		Outstanding at January 31, 2007
Common Stock, $1 par value		948,573,044 Shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated herein by reference:

 

Document		Part of Form 10-K in Which Incorporated
Xerox Corporation 2006 Annual Report to Shareholders		I & II
Xerox Corporation Notice of 2007 Annual Meeting of Shareholders and Proxy Statement (to be filed not later than 120 days after the close of the fiscal year covered by this report on Form 10-K)		III

 

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Forward-Looking Statements

From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K, which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. We do not intend to update these forward-looking statements, except as required by law.

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Such factors include, but are not limited to: the outcome of litigation and regulatory proceedings to which we may be a party; actions of competitors; changes and developments affecting our industry; quarterly or cyclical variations in financial results; development of new products and services; interest rates and cost of borrowing; our ability to maintain and improve cost efficiency of operations; changes in foreign currency exchange rates; changes in economic conditions, political conditions, trade protection measures, licensing requirements and tax matters in the foreign countries in which we do business; reliance on third parties for manufacturing of products and provision of services; and other factors that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

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Acquisitions

 

Segment Information

 

 

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Production

 

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Our 2006 Production Goals

Our 2006 goals for our Production segment were to continue strengthening our leadership position in monochrome and color and to build on the power of digital printing in the Eligible Offset market. Our “New Business of Printing^®” strategy complements the traditional offset market with digital printing and workflow capabilities, which include the introduction of innovative production systems and development of applications and solutions to expand our leadership position and focus on the higher growth applications and digital color opportunities. Here are the accomplishments that enabled us to reach our 2006 goals.

Our 2006 Production Accomplishments

We continued to build on our unmatched product breadth, world class market and business development tools and integrated end-to-end applications.

 

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Xerox iGen3 90: We expanded our offerings within the color print on-demand market with the April launch of our iGen3 90 Digital Press, a 90 ppm full-color production system with improved productivity, image quality, personalization and running cost.

 

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Xerox DocuColor® 5000: In June, we launched the DocuColor 5000 Digital Press, a 50 ppm full-color production system, which provides excellent print resolution, color reproduction, and reliability for a wide range of applications.

 

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Xerox 4590 EPS and 4110® EPS: In April, we expanded our presence in light production with the launch of our 4590 and 4110 Enterprise Printing Systems, two robust digital production monochrome systems at 90 ppm and 110 ppm, respectively.

 

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Xerox DocuTech® Highlight Color 180 Publishing System: In October, we launched our DocuTech Highlight Color 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.

 

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Highlight Custom Blended Color Program: In October, we announced additional standard colors for a total of eight. We also expanded the range of colors with Custom Colors, enabling customers to match their company logos for brand identity applications.

 

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Applications: We continued to increase installations of our flagship Digital Color Production Presses. In addition to the launch of the iGen3 90, in June we launched Auto Image Enhancement Software, which intelligently adjusts images to improve photo submission problems. We followed this with an October announcement of another release that improves photo rendering, color profiling and color checking. In October, we also introduced a series of solutions that included workflow and marketing support to enable such applications as teacher edition books, photo memory books and greeting cards. In July, we launched FreeFlow Web Services 5.0, which makes it simpler for our customers to procure, print, access or order documents. We continued to build our marketplace

 

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leading Profit Accelerator Program, which helps customers get the most from their digital technology investments. We offer over 50 tools for graphic communication and in-plant environments to help our customers increase and improve their digital business.

 

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XMPie Acquisition: In November, we acquired XMPie, a leading provider of variable information software with which users can create cross media, personalized marketing programs. With this acquisition we can provide complete, measurable solutions for multi-media marketing campaigns.

 

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Xerox Nuvera™ 288 Digital Perfecting System: In October at Graph Expo, we demonstrated a tandem engine architecture Xerox Nuvera 288 Digital Perfecting System. This high-end, cut sheet printer will be the fastest on the market at 288 ppm. The quality, productivity, and ability to run two engines in parallel, as well as run one engine while the other is idle, is the result of a unique tandem architecture developed by Xerox research and engineering. This product will be available in 2007.

 

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Office

 

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Our 2006 Office Goals

Our 2006 Office goals were to drive the transition to color in the office and to build on our 2005 product launches, to extend our reach in the market and increase our capture of pages. Our objective was to complement our broadened product line with expanded distribution capacity to increase our population of systems, building the foundation for future post sale revenue growth. Here are the accomplishments that enabled us to reach our 2006 goals.

Our 2006 Office Accomplishments

We continued to drive color by making it more affordable, easier to use, faster and more reliable. Our color-capable laser devices provide an attractive entry point into color. Our patented solid ink technology offers unmatched ease of use, vibrant color image quality and economic color run costs.

 

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Phaser™ 7760: With the May introduction of the Phaser 7760, we further strengthened our position in the graphics art segment. A 35 ppm color printer, the Phaser 7760, delivers the color output and media handling and finishing options required by this market segment.

 

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WorkCentre 7132: In May, we introduced the WorkCentre 7132, an eight ppm (32 ppm black-and-white) color-capable multi-function printer.

 

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WorkCentre 7128/7135/7145: In May, we introduced the restriction on the use of hazardous substances (“ROHS”) compliant product family in Europe. Offering 28, 35 or 45 ppm, these color-capable MFDs expand our reach into a rapidly growing market segment.

 

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WorkCentre 7655/7665: In May, we introduced the WorkCentre 7655 and 7665 color capable MFDs, offering color pages at 40 and 50 ppm, respectively, along with superior image quality, excellent productivity, extensive media handling and professional in-line finishing capabilities.

 

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We also extended our black-and-white MFD series, broadening our already extensive product line.

 

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WorkCentre 4118: Introduced in June, the 4118 is designed for small workgroups and has the strongest set of features that we offer on a low-end, black-and-white desktop MFD.

 

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WorkCentre 4150: With the introduction in September of this 50 ppm A4 monochrome MFD, we entered a new, rapidly growing market segment, offering an economical alternative to large enterprises interested in replacing their printer fleet.

 

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WorkCentre 4590: Introduced in January, the 4590, which runs at 90 ppm, rounds out the high-end of our office monochrome fleet.

 

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Extensible Interface Platform: In October, we introduced our Extensible Interface Platform (“EIP”) with a configurable user interface. With EIP, customers can access document-related software applications on a Xerox MFD user interface, improving workflow and productivity.

 

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DMO

Other

 

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Item 1A. Risk Factors

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

We operate in an environment of significant competition, driven by rapid technological advances and the 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 document processing products and services in each of the markets we serve. 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 and to expand into additional market segments. To remain competitive, we must develop new products, services, and applications and periodically enhance our existing offerings. 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.

We need to develop and expand the use of color printing and copying.

Increasing the proportion of pages which are printed in color and transitioning color pages currently produced on offset devices to Xerox technology represent key growth opportunities. A significant part of our strategy and ultimate success in this changing market is our ability to develop and market technology that produces color prints and copies quickly, easily, with high quality and at reduced cost. Our continuing success in this strategy depends on our ability to make the investments and commit the necessary resources in this highly competitive market, as well as the pace of color adoption by our existing and prospective customers. If we are unable to develop and market advanced and competitive color technologies or the pace of color adoption by our existing and prospective customers is less than anticipated, or the price of color pages declines at a greater rate and faster pace than we anticipate, we may be unable to capture these opportunities and it could materially adversely affect our results of operations and financial condition.

If we fail to successfully develop new products and technologies, we may be unable to retain current customers and gain new customers and our revenues would be reduced.

The process of developing new high technology products and solutions 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 products that achieve customer acceptance and generate the revenues required to provide desired returns. We also must ensure that all of our products comply with existing and newly enacted applicable regulatory requirements in the countries in which they are sold, particularly European Union environmental directives. If we fail to accurately anticipate and meet our customers’ needs through the development of new products or if our new products are not widely accepted or if our current or future products 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.

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

Our success depends on our ability to obtain adequate pricing for our products and services which provides a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to offset further devaluations or may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, it could materially adversely affect our results of operations and financial condition.

Since 2000, we have engaged in a series of restructuring programs related to downsizing our employee base, exiting certain businesses, outsourcing some internal functions and engaging in other actions designed to reduce our cost structure. 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 the restructuring actions, it could materially adversely affect our results of operations and financial condition.

 

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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 Lean Six Sigma, the level of pricing pressures on our products and services, the proportion of high-end as opposed to low-end equipment sales, the trend in our post-sale revenue growth, and, our ability to successfully complete information technology initiatives. If any of these factors adversely materialize or if we are unable to achieve productivity improvements through design efficiency, supplier and manufacturing cost improvements and information technology initiatives, our ability to offset labor cost inflation, potential materials cost increases and competitive price pressures would be impaired, all of which could materially adversely affect our results of operations and financial condition.

We have outsourced a significant portion of our overall worldwide manufacturing operations and face the risks associated with relying on third party manufacturers and external suppliers.

We have outsourced a significant portion of our overall worldwide manufacturing operations to third parties and various service providers. To the extent that we rely on third party manufacturing relationships, we face the risk that those manufacturers may not be able to develop manufacturing methods appropriate for our products, they may not be able to quickly respond to changes in customer demand for our products, they may not be able to obtain supplies and materials necessary for the manufacturing process, they may experience labor shortages and/or disruptions, manufacturing costs could be higher than planned and the reliability of our products could decline. If any of these risks were to be realized, and assuming similar third-party manufacturing relationships could not be established, we could experience interruptions in supply or increases in costs that might result in our being unable to meet customer demand for our products, damage our relationships with our customers, and reduce our market share, all of which could materially adversely affect our results of operations and financial condition.

Our business, results of operations and financial condition may be negatively impacted by economic conditions abroad, including fluctuating foreign currencies and shifting regulatory schemes.

Approximately half of our revenue is generated from operations outside the United States. In addition, we manufacture or acquire many of our products and/or their components from, and maintain significant operations, outside the United States. Our future revenues, costs and results of operations could be significantly affected by changes in foreign currency exchange rates, as well as by a number of other factors, including 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 consolidated financial statements.

Our operating results may be negatively impacted by lower equipment placements and revenue trends.

Our ability to return to and maintain a consistent trend of revenue growth over the intermediate to longer term is largely dependent upon expansion of our worldwide equipment placements, as well as sales of services and supplies occurring after the initial equipment placement (post sale revenue) in the key growth markets of digital printing, color and multifunction systems. We expect that revenue growth can be further enhanced through our document management and consulting services in the areas of personalized and product life cycle communications, office and production services and document content and imaging. The ability to achieve growth in our equipment placements is subject to the successful implementation of our initiatives to provide advanced systems, industry-oriented global solutions and services for major customers, improve direct sales productivity and expand our indirect distribution channels in our developing markets operations and other geographic areas in the face of global competition and pricing pressures. Our ability to increase post sale revenue is largely dependent on our ability to increase the volume of pages printed, the mix of color pages, equipment utilization and color adoption. Equipment placements typically occur through leases with original terms of three to five years. There will be a lag between the increase in equipment placement and an increase in post sale revenues. The ability to grow our customers’ usage of our products may continue to be adversely impacted by the movement toward distributed printing and electronic substitutes and the impact of lower equipment placements in prior periods. If we are unable to maintain a consistent trend of revenue growth, it could materially adversely affect our results of operations and financial condition.

 

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Our ability to fund our customer financing activities at economically competitive levels depends on our ability to borrow and the cost of borrowing in the credit market.

The long-term viability and profitability of our customer financing activities is dependent, in part, on our ability to borrow and the cost of borrowing in the credit markets. This ability and cost, in turn, is dependent on our credit ratings. We are currently funding our customer financing activity through a combination of capital market offerings, cash generated from operations, cash on hand, other secured and unsecured borrowings and, to a lesser degree, third-party funding arrangements. Our ability to continue to offer customer financing and be successful in the placement of equipment with customers is largely dependent on our ability to obtain funding at a reasonable cost. If we are unable to continue to offer customer financing, it could materially adversely affect our results of operations and financial condition.

Our significant debt could adversely affect our financial health and pose challenges for conducting our business.

We have and will continue to have a significant amount of debt and other obligations, primarily to support our customer financing activities. As of December 31, 2006, we had $7.1 billion of total debt ($2.1 billion of which is secured by finance receivables) and $624 million of liabilities to trusts issuing preferred securities. The total value of financing activities, shown on the balance sheet as Finance Receivables and On-Lease equipment, was $8.3 billion at December 31, 2006. The total cash, cash equivalents and short-term investments balance was $1.5 billion at December 31, 2006. Our substantial debt and other obligations could have important consequences. For example, it could (i) increase our vulnerability to general adverse economic and industry conditions; (ii) limit our ability to obtain additional financing for future working capital, capital expenditures, acquisitions and other general corporate requirements; (iii) increase our vulnerability to interest rate fluctuations because a portion of our debt has variable interest rates; (iv) require us to dedicate a substantial portion of our cash flows from operations to service debt and other obligations thereby reducing the availability of our cash flows from operations for other purposes; (v) limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; (vi) place us at a competitive disadvantage compared to our competitors that have less debt; and (vii) become due and payable upon a change in control. If new debt is added to our current debt levels, these related risks could increase.

We need to maintain adequate liquidity in order to have sufficient cash to meet operating cash flow requirements and to repay maturing debt and other obligations. If we fail to comply with the covenants contained in our various borrowing agreements, it may adversely affect our liquidity, results of operations and financial condition.

Our liquidity is a function of our ability to successfully generate cash flows from a combination of efficient operations and improvement therein, access to capital markets, securitizations, funding from third parties and borrowings secured by our finance receivables portfolios. As of December 31, 2006, total cash, cash equivalents and short-term investments was $1.5 billion, and our borrowing capacity under our 2006 Credit Facility was $1.235 billion, reflecting no outstanding borrowings and $15 million of letters of credit that have been utilized. We also have funding available through various secured borrowing arrangements. We believe our liquidity (including operating and other cash flows that we expect to generate) will be sufficient to meet operating requirements as they occur; however, our ability to maintain sufficient liquidity going forward depends on our ability to generate cash from operations and access to the capital markets, secured borrowings, securitizations and funding from third parties, all of which are subject to general economic, financial, competitive, legislative, regulatory and other market factors that are beyond our control.

The 2006 Credit Facility contains affirmative and negative covenants including limitations on: (i) liens of Xerox and certain of our subsidiaries securing debt, (ii) certain fundamental changes to corporate structure, (iii) changes in nature of business and (iv) limitations on debt incurred by certain subsidiaries. The 2006 Credit Facility contains financial maintenance covenants, including maximum leverage (debt for borrowed money divided by consolidated EBITDA, as defined) and a minimum interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined). The indentures governing our outstanding senior notes contain affirmative and negative covenants including limitations on: issuance of secured debt and preferred stock; investments and acquisitions; mergers; certain transactions with affiliates; creation of liens; asset transfers; hedging transactions; payment of dividends and certain other payments. They do not, however, contain any financial maintenance covenants, except the fixed charge coverage ratio applicable to certain types of payments. Our U.S. Loan Agreement with General Electric Capital Corporation (“GECC”) (effective through 2010) relating to our customer financing program (the “Loan

 

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Agreement”) provides for loans secured by eligible finance receivables up to $5 billion outstanding at any one time. As of December 31, 2006, $1.5 billion was outstanding under the Loan Agreement, including similar loan agreements with GE in the U.K. and Canada. These agreements incorporate the financial maintenance covenants contained in the 2006 Credit Facility and contains other affirmative and negative covenants.

At December 31, 2006, we were in full compliance with the covenants and other provisions of the 2006 Credit Facility, the senior notes and the Loan Agreement. Any failure to be in compliance with any material provision or covenant of the 2006 Credit Facility or the senior notes could have a material adverse effect on our liquidity, results of operations and financial condition. 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 GECC would not be required to make further loans to us. If GECC were to make no further loans to us, and assuming a similar facility was not established and that we were unable to obtain replacement financing in the public debt markets, it could materially adversely affect our liquidity and our ability to fund our customers’ purchases of our equipment and this could materially adversely affect our results of operations.

Our business, results of operations and financial condition may be negatively impacted by legal and regulatory matters.

We have 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, intellectual property law, environmental law, employment law and the Employee Retirement Income Security Act (“ERISA”), as discussed in the “Contingencies” note to the Consolidated Financial Statements. 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. We assess potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with legal counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of our legal matters 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.

Our operations are subject to environmental regulations in each of the jurisdictions in which we conduct our business. Some of our manufacturing operations use, and some of our products contain, substances that are regulated in various jurisdictions. For example, the European Union Directive known as the Restriction on the Use of Hazardous Substances (“RoHS”), effective in July 2006, requires the removal of lead, cadmium and certain other substances from product designs put on the market in the European Union beginning in July 2006. We continue RoHS compliance activities with respect to our products. The RoHS directive does not have a material impact on our product lines. In addition, various other countries and jurisdictions have proposed and/or are expected to adopt restrictions similar to RoHS. If we do not comply with applicable rules and regulations in connection with the use of such substances and the sale of products containing such substances, then we could be subject to liability and could be prevented from selling our products, which could have a material adverse effect on our results of operations and financial condition. Further, we could also face substantial costs and liabilities in connection with product take-back legislation. Beginning in 2005, we became subject to the European Union Directive on Waste Electrical and Electronic Equipment (“WEEE”) as enacted by individual European Union countries (“WEEE Legislation”), which makes producers of electrical goods, including computers and printers, responsible for collection, recycling, treatment and disposal of recovered products. We continue to conduct WEEE compliance activities and continue to evaluate the impact of specific registration and compliance activities required by WEEE Legislation. Other jurisdictions throughout the United States and the world have also proposed, or may adopt, product take-back regulations. If we are unable to collect, recycle, treat and dispose of our products in a cost-effective manner and in accordance with applicable requirements, it could materially adversely affect our results of operations and financial condition. Other potentially relevant initiatives throughout the world include proposals for more extensive chemical registration requirements, various efforts to limit energy use in products, and other environmentally related product programs. As these initiatives and programs become regulatory requirements and/or are adopted as public or private procurement requirements, we must comply or potentially face market access limitations that could have a material adverse affect on our operations and financial condition.

Item 1B. Unresolved Staff Comments

None

 

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Item 2. Properties

We own several manufacturing, engineering and research facilities and lease additional facilities. The principal manufacturing and engineering facilities, located in California, New York, Oklahoma, Canada, U.K., Ireland and the Netherlands, are used jointly by the Production and Office Segments, those in Oregon by the Office Segment, and those in Brazil for both the Office and the DMO Segment, as well as India for the DMO Segment. In 2006, we commenced construction of a new color toner plant on our manufacturing campus in Webster, NY. We expect to complete construction of this plant in 2007. Our principal research facilities are located in California, New York, Canada, France and the U.K. The research activities in our principal research centers benefit all our operating segments.

As we implemented our restructuring programs (discussed in the “Restructuring and Asset Impairment Charges” note in the Consolidated Financial Statements in our Annual Report, incorporated by reference), several leased properties became surplus. The surplus properties have leases that we are obligated to maintain through required contractual periods. We have disposed or subleased certain of these properties and are aggressively pursuing the successful disposition and subleasing of all remaining surplus properties anticipating the majority to be disposed by 2009. With respect to United States properties, at year-end 2006 there were approximately 23 surplus facilities totaling approximately 1 million square feet.

We continue to implement our Virtual Office Program for the United States sales force locations. As part of this program, approximately 3,100 employees are working virtually. In combination with other initiatives, this program has reduced our real estate portfolio by approximately 0.8 million square feet. Overall, this program has been a success and is generally well received.

In December 2006, we sold our Corporate headquarters facility. In connection with the sale, we entered into a two-year lease agreement for the facility, which is cancelable upon 90 days notice. We intend to relocate our Corporate headquarters facility within the surrounding area, when a suitable replacement facility is identified.

As a result of the acquisition of Amici and XMPie, we acquired a few leased facilities which have been incorporated into the portfolio and rationalized as appropriate.

In addition, we have numerous facilities, which encompass general offices, sales offices, service locations and distribution centers. The principal owned facilities are located in the United States, Ireland, Brazil and India. The principal leased facilities are located in the United States, Brazil, Canada, U.K., Mexico, France and Germany. In 2002, we entered into a joint venture (Xerox Capital Services) with General Electric to manage our administrative billing, credit and collection function. Xerox Capital Services licenses several of our owned and leased facilities totaling approximately 500,000 square feet for their use. The two principal Xerox Capital Services administrative facilities are located in Illinois and Texas. A third administrative facility, located in Florida, is in the process of being closed. We also lease a portion of a training facility, located in Virginia. It is our opinion that our properties have been well maintained, are in sound operating condition and contain all the necessary equipment and facilities to perform our functions.

Item 3. Legal Proceedings

The information set forth under the “Contingencies” note in the Consolidated Financial Statements, of the Xerox Corporation 2006 Annual Report is hereby incorporated by reference.

Item 4. Submission of Matters to a Vote of Security Holders

None

 

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information, Holders and Dividends

The information set forth under the following captions of the Xerox Corporation 2006 Annual Report to Shareholders is hereby incorporated by reference:

 

Caption
Stock Listed and Traded
Xerox Common Stock Prices and Dividends
Five Years in Review – Common Shareholders of Record at Year-End

(b) Sales of Unregistered Securities During the Quarter ended December 31, 2006

During the quarter ended December 31, 2006, registrant issued no securities in transactions which were not registered under the Securities Act of 1993, as amended.

(c) Issuer Purchases of Equity Securities during the Quarter ended December 31, 2006

Repurchases of Xerox Common Stock, par value $1.00 per Share

 

		Total Number of Shares Purchased		Average Price Paid per Share(1)			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)		Approximate Dollar Value of Shares That May Yet Be Purchased under the Plans or Programs(2)
October 1 through 31		1,642,100		$	15.9248		1,642,100		$	354,186,434
November 1 through 30		12,658,800			16.8293		12,658,800			641,147,923
December 1 through 31		8,363,000		$	16.7826		8,363,000		$	500,795,281
Total		22,663,900					22,663,900

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(1)	Exclusive of fees and costs.

(2)

The original $500 million Stock Repurchase Program was authorized by our Board of Directors in October, 2005. In each of January 2006, July 2006 and November 2006, our Board of Directors authorized additional $500 million Stock Repurchase Programs covering the aggregate repurchase of up to $2 billion of our common stock, par value $1.00 per share. The most recently adopted program covers purchases through the period ending October 31, 2007. The $2 billion is exclusive of fees and expenses. The repurchases under these programs may be made on the open market, or through derivative or negotiated transactions. Open-market repurchases will be made in compliance with the Securities and Exchange Commission’s Rule 10b-18, and are subject to market conditions as well as applicable legal and other considerations.

 

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(d) Performance Graph

COMPARISON OF FIVE-YEAR CUMULATIVE

TOTAL RETURN AMONG XEROX CORP, S&P 500,

AND BUSINESS WEEK’S COMPUTERS & PERIPHERALS INDUSTRY GROUP

 

SOURCE:		Standard & Poor’s Research Insight
NOTES:		Assumes $100 invested on 12/31/2001 in Xerox Corp, in S&P 500, and in Business Week’s Computers & Peripherals Industry Group All dividends are reinvested on a monthly basis and the peer group is weighted by market capitalization The companies included in the Computers & Peripherals Industry Group for 2006 are as of 12/31/06: Apple Computer, Dell, Diebold, EMC, Gateway, Hewlett-Packard, International Business Machines, Lexmark International, NCR, Network Appliance, Palm, SanDisk, Seagate Technology, Sun Microsystems, and Western Digital

 

		Dec01		Dec02		Dec03		Dec04		Dec05		Dec06
Xerox Corp		100		77		132		163		141		163
S&P 500		100		78		100		111		117		135
Business Week Index		100		76		104		124		202		238

The graph and other information furnished under this Part II Item 5 (d) of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.

 

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Item 6. Selected Financial Data

The following selected financial data for the five years ended December 31, 2006, as set forth and included under the caption “Five Years in Review,” of the Xerox Corporation 2006 Annual Report to Shareholders, is incorporated by reference in this Form 10-K.

Revenues

Income from continuing operations before cumulative effect of change in accounting principle

Per-Share Data

Income from continuing operations, before discontinued operations and cumulative effect of change in accounting principle – Basic and Diluted

Earnings – Basic and Diluted

Total Assets

Long-term debt

Liabilities to subsidiary trusts issuing preferred securities

Series B convertible preferred stock

Series C mandatory convertible preferred stock

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information set forth under the caption “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” of the Xerox Corporation 2006 Annual Report is hereby incorporated by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information set forth under the caption “Financial Risk Management”, in the Xerox Corporation 2006 Annual Report is hereby incorporated by reference.

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP, included in the Xerox Corporation 2006 Annual Report, are incorporated by reference in this Form 10-K. With the exception of the aforementioned information and the information incorporated in Items 1, 3, 5, 6, 7, 7A and 8, the Xerox Corporation 2006 Annual Report is not to be deemed filed as part of this Form 10-K.

The quarterly financial data included under the caption “Quarterly Results of Operations (Unaudited)” of the Xerox Corporation 2006 Annual Report is incorporated by reference in this Annual Report on Form 10-K.

The financial statement schedule required herein is filed as referenced in Item 15 of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

Management’s Responsibility for Financial Statements

Our management is responsible for the integrity and objectivity of all information presented in this annual report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management

 

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believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations.

The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent auditors, PricewaterhouseCoopers LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors and internal auditors have free access to the Audit Committee.

Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors. Based on their evaluation as of December 31, 2006, our principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive, financial and accounting officers, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control –  Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on the above evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in the Xerox Corporation 2006 Annual Report to Shareholders, which is incorporated by reference in this Form 10-K.

Changes in Internal Control over Financial Reporting

In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Executive Compensation

On February 15, 2007, the Compensation Committee of the Board of Directors of the Company took the following actions:

Amendment of 2004 Performance Incentive Plan (“2004 PIP”)

As part of its periodic review of the Company’s executive compensation program, the Compensation Committee approved certain changes to the provisions of the 2004 PIP relating to a change in control, the definition of fair market value and certain clarifying changes that the Company does not believe to be material. The Company does not believe these changes in the aggregate require shareholder approval under the New York Stock Exchange Corporate Governance Rules. These changes are included in the Amended and Restated 2004 PIP, a copy of which has been filed as Exhibit 10(e)(10) to this Form 10-K and is incorporated herein by reference.

 

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2006 and 2007 Annual Performance Incentive Plan (“APIP”):

The Compensation Committee approved the payments of cash awards under the Xerox 2004 PIP as may be amended. The measures on which awards are based for the 2006 fiscal year are set out on Exhibit 10(e)(5) attached hereto and the measures for awards for fiscal year 2007 are set out on Exhibit 10(e)(11) attached hereto. The Compensation Committee approved cash awards under the 2004 PIP for fiscal year 2006 to Anne M. Mulcahy, Chairman and Chief Executive Officer of the Company, Lawrence A. Zimmerman, Chief Financial Officer and certain other officers, including Ursula M. Burns, James A. Firestone and Jean-Noel Machon, our other three most highly compensated executive officers for fiscal year 2006 (collectively with Mrs. Mulcahy, the “Named Executive Officers”). The Compensation Committee approved a cash award of $2,178,000 to Mrs. Mulcahy, $660,000 to Mr. Zimmerman, $704,000 to Ms. Burns, $660,000 to Mr. Firestone and $531,754 to Mr. Machon.

2005 E-LTIP Awards:

The Compensation Committee determined that one-third of the performance shares granted under the 2005 Executive Long-Term Incentive Program (“2005 E-LTIP”) were earned based on the Company’s 2006 performance against the annual targets established for Diluted Earnings Per Share from Continuing Operations (“EPS”) and Net Cash provided by Operating Activities. A description of the targets is set out on Exhibit 10(e)(4). The number of shares earned for 2006 for each Named Officer is as follows: Mrs. Mulcahy, 98,033 shares; Mr. Zimmerman, 31,367 shares; Ms. Burns, 35,300 shares; Mr. Firestone, 31,367 shares; and Mr. Machon, 19,633 shares. Earned shares vest three years from their grant date.

The Compensation Committee approved a modification to the EPS definition as previously established to exclude any gains/losses resulting from the settlement of tax audits. This modification was made to align the 2005 EPS definition with the 2006 E-LTIP EPS definition and to exclude the significant tax gains that occurred in 2006. As a result, the cumulative EPS result will be lower than it otherwise would have been absent the modification.

2006 E-LTIP Awards:

The Compensation Committee determined that one-third of the performance shares granted under the 2006 Executive Long-Term Incentive Program (“2006 E-LTIP”) were earned based on the Company’s 2006 performance against the annual targets established for Earnings Per Share and Core Cash Flow from Operations. A description of the targets is set out on Exhibit 10(e)(6). The number of shares earned for 2006 for each Named Executive Officer is as follows: Mrs. Mulcahy, 148,000 shares; Mr. Zimmerman, 36,433 shares; Ms. Burns, 56,933 shares; Mr. Firestone, 45,567 shares; and Mr. Machon, 22,800 shares. Earned shares vest three years from their grant date.

2007 E-LTIP Awards:

2007 E-LTIP awards made to officers reflect their leadership role in the Company, their individual performance, and competitive award levels. The purpose of the 2007 E-LTIP is to provide the necessary incentives to retain and reward executives for sustained performance improvements over the next three-year period. Awards under the 2007 E-LTIP for officers are comprised entirely of performance shares that may be earned based on achieving annual performance targets and three-year cumulative performance between threshold and maximum as determined by the Committee. All performance shares that are earned vest in 2010. Executives who retire, are involuntarily terminated (without cause) or voluntarily terminate due to a reduction in force prior to the end of the three-year performance cycle will vest in a portion of the performance shares earned on a pro rata basis.

Performance metrics for the 2007 E-LTIP are Earnings Per Share (weighted 60%) and Core Cash Flow from Operations (weighted 40%). Earnings Per Share and Core Cash Flow from Operations are defined in Exhibit 10(e)(12) attached hereto. The Committee has established annual and cumulative targets. Based on annual or cumulative performance versus targets, the number of performance shares earned by officers under the 2007 E-LTIP may vary from 0% to 150% of the initial number of shares subject to the grant. The form of award agreement pursuant to which such grants were made is attached hereto as Exhibit 10(e)(14).

Participants in the 2007 E-LTIP are subject to meaningful ownership requirements and mandatory share holding requirements of 50% of the net vested shares until their ownership requirements have been met.

 

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PART III

Item 10. Directors and Executive Officers of the Registrant

The information regarding directors is incorporated herein by reference from the section entitled “Proposal 1 – Election of Directors” in our definitive Proxy Statement (“2007 Proxy Statement”) to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, for our Annual Meeting of Stockholders to be held on May 24, 2007. The Proxy Statement will be filed within 120 days after the end of our fiscal year ended December 31, 2006.

The information regarding compliance with Section 16(a) of the Securities and Exchange Act of 1934 is incorporated herein by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” of our 2007 Proxy Statement.

The information regarding the audit committee, its members and the audit committee financial experts is incorporated by reference herein from the subsection entitled “Committee Functions, Membership and Meetings” in the section entitled “Proposal 1 – Election of Directors” in our 2007 Proxy Statement.

We have adopted a code of ethics applicable to our principal executive officer, principal financial officer and principal accounting officer. The Finance Code of Conduct can be found on our website at: http://www.xerox.com/investor and then clicking on Corporate Governance.

 

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Executive Officers of Xerox

The following is a list of the executive officers of Xerox, their current ages, their present positions and the year appointed to their present positions. Anne M. Mulcahy, Chairman of the Board and CEO and Thomas J. Dolan, Senior Vice President, are sister and brother. There are no other family relationships between any of the executive officers named.

Each officer is elected to hold office until the meeting of the Board of Directors held on the day of the next annual meeting of shareholders, subject to the provisions of the By-Laws.

 

Name		Age		Present Position		Year Appointed to Present Position		Officer Since
Anne M. Mulcahy*		54		Chairman of the Board and Chief Executive Officer		2002		1992
Lawrence A. Zimmerman		64		Senior Vice President and Chief Financial Officer		2002		2002
Ursula M. Burns		48		Senior Vice President President Business Group Operations		2002		1997
Thomas J. Dolan		62		Senior Vice President President, Xerox Global Services		2001		1997
James A. Firestone		52		Senior Vice President President, Xerox North America		2004		1998
Michael C. Mac Donald		53		Senior Vice President President, Global Accounts and Marketing Operations		2004		1997
Hector J. Motroni		63		Senior Vice President, Chief Staff Officer and Chief Ethics Officer		2003		1994
Jean-Noel Machon		54		Senior Vice President President, Developing Markets Operations		2004		2000
Armando Zagalo de Lima		48		Senior Vice President President Xerox Europe		2004		2000
J. Michael Farren		54		Vice President, External and Legal Affairs, General Counsel and Corporate Secretary		2004		1994
Gary R. Kabureck		53		Vice President and Chief Accounting Officer		2003		2000
James H. Lesko		55		Vice President, Investor Relations		2004		1993
John E. McDermott		53		Vice President, Chief Information Officer and Corporate Strategy and Alliances		2004		2004
Rhonda L. Seegal		56		Vice President and Treasurer		2003		2003
Leslie F. Varon		50		Vice President and Controller		2006		2001

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*	Member of Xerox Board of Directors

Each officer named above, with the exception of Lawrence A. Zimmerman, Rhonda L. Seegal and John E. McDermott, has been an officer or an executive of Xerox or its subsidiaries for at least the past five years.

 

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Prior to joining Xerox in 2002, Mr. Zimmerman had been with System Software Associates, Inc. where he was Executive Vice President and Chief Financial Officer from 1998–1999. Prior to that, he retired from International Business Machines Corporation (“IBM”), where he was Senior Finance Executive for IBM’s Server group from 1996–1998, Vice President of Finance for Europe, Middle East and Africa Operations from 1994–1996 and IBM Corporate Controller from 1991–1994. He held various other positions at IBM from 1967–1991.

Prior to joining Xerox in 2002, Mr. McDermott had been a partner at Marakon Associates, a management-consulting firm, from 1996-2002 and had been a consultant at that firm from 1988-1996. He worked on issues of business strategy, operations improvement and organizational design.

Prior to joining Xerox in 2003, Ms. Seegal had been with Avaya Inc., where she was Vice President and Treasurer from 2000–2003. Prior to that, she was Deputy Treasurer at General Electric Company from 1996–2000.

Item 11. Executive Compensation

The information included under the following captions in our 2007 Proxy Statement is incorporated herein by reference: “Compensation Discussion and Analysis”, “Summary Compensation Table”, “Grants of Plan-Based Awards in 2006”, “Outstanding Equity Awards at 2006 Fiscal Year-End”, “Option Exercises and Stock Vested in 2006”, “Pension Benefits for the 2006 Fiscal Year”, “Nonqualified Deferred Compensation”, “Potential Payments upon Termination or Change in Control”, “Director Compensation” and “Compensation Committee Interlocks and Insider Participation”. The information included under the heading “Compensation Committee Report” in our 2007 Proxy Statement is incorporated herein by reference; however, this information shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information regarding security ownership of certain beneficial owners and management and securities authorized for issuance under equity compensation plans is incorporated herein by reference from the sections entitled “Ownership of Company Securities,” “Equity Compensation Plan Information” and “Securities Authorized for Issuance Under Equity Compensation Plans” in our 2007 Proxy Statement.

Item 13. Certain Relationships, Related Transactions and Director Independence

Information regarding certain relationships and related transactions is incorporated herein by reference from the section entitled “Certain Transactions” in our 2007 Proxy Statement. The information regarding director independence is incorporated herein by reference from the subsection entitled “Corporate Governance” in the section entitled “Proposal 1 – Election of Directors” in our 2007 Proxy Statement.

Item 14. Principal Auditor Fees and Services

The information regarding principal auditor fees and services is incorporated herein by reference from the section entitled “Proposal 2 – Ratification of Election of Independent Registered Public Accounting Firm” in our 2007 Proxy Statement.

 

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PART IV

Item 15. Exhibits and Financial Statement Schedules

 

(a)		(1)		Index to Financial Statements and Financial Statement Schedule, incorporated by reference or filed as part of this report:
				Report of Independent Registered Public Accounting Firm
				Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2006
				Consolidated Balance Sheets as of December 31, 2006 and 2005
				Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2006
				Consolidated Statements of Common Shareholders’ Equity for each of the years in the three-year period ended December 31, 2006
				Notes to Consolidated Financial Statements
				Report of Independent Registered Public Accounting Firm on Financial Statement Schedule
				Schedule II – Valuation and qualifying accounts
				All other schedules are omitted as they are not applicable, or the information required is included in the financial statements or notes thereto.
		(2)		Supplementary Data:
				Quarterly Results of Operations (unaudited)
				Five Years in Review
		(3)		The exhibits filed herewith or incorporated herein by reference are set forth in the Index of Exhibits included herein.

(b)		The management contracts or compensatory plans or arrangements listed in the Index of Exhibits that are applicable to the executive officers named in the Summary Compensation Table which appears in Registrant’s 2007 Proxy Statement are preceded by an asterisk (*).
(c)		Financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b), including schedules filed under Item 15(a) of this Report which is incorporated herein by reference.

 

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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

February 16, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

February 16, 2007

 

Signature		Title
Principal Executive Officer:
/S/    ANNE M. MULCAHY         Anne M. Mulcahy		Chairman of the Board, Chief Executive Officer and Director
Principal Financial Officer:
/S/    LAWRENCE A. ZIMMERMAN         Lawrence A. Zimmerman		Senior Vice President and Chief Financial Officer
Principal Accounting Officer:
/S/    GARY R. KABURECK         Gary R. Kabureck		Vice President and Chief Accounting Officer
/S/    GLENN A. BRITT         Glenn A. Britt		Director
/S/    RICHARD J. HARRINGTON         Richard J. Harrington		Director
/S/    WILLIAM CURT HUNTER         William Curt Hunter		Director
/S/    VERNON E. JORDAN, JR.         Vernon E. Jordan, Jr.		Director
/S/    HILMAR KOPPER         Hilmar Kopper		Director
/S/    RALPH S. LARSEN         Ralph S. Larsen		Director
/S/    ROBERT A. MCDONALD         Robert A. McDonald		Director
/S/    N. J. NICHOLAS, JR.         N. J. Nicholas, Jr.		Director
/S/    ANN N. REESE         Ann N. Reese		Director
/S/    MARY AGNES WILDEROTTER         Mary Agnes Wilderotter		Director

 

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Report of Independent Registered Public Accounting Firm

on Financial Statement Schedule

To the Board of Directors of Xerox Corporation:

Our audits of the consolidated financial statements, of management’s assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated February 16, 2007, appearing in the 2006 Annual Report to Shareholders of Xerox Corporation (which report and consolidated financial statements and assessment are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(1) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

As discussed in Note 1 to the consolidated financial statements, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” as of December 31, 2006.

 

/s/    PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

Stamford, Connecticut

February 16, 2007

 

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SCHEDULE II

Valuation and Qualifying Accounts

Year ended December 31, 2006, 2005 and 2004

 

(in millions)		Balance at beginning of period			Additions charged to bad debt provision(1)			Amounts (credited) charged to other income statement accounts(1)				Deductions and other, net of recoveries(2)				Balance at end of period
2006
Allowance for Losses on:
Accounts Receivable		$	136		$	36		$	(9	)		$	(47	)		$	116
Finance Receivables			229			51			(2	)			(80	)			198
		$	365		$	87		$	(11	)		$	(127	)		$	314
2005
Allowance for Losses on:
Accounts Receivable		$	183		$	36		$	(14	)		$	(69	)		$	136
Finance Receivables			276			36			(8	)			(75	)			229
		$	459		$	72		$	(22	)		$	(144	)		$	365
2004
Allowance for Losses on:
Accounts Receivable		$	218		$	68		$	(27	)		$	(76	)		$	183
Finance Receivables			315			42			3				(84	)			276
		$	533		$	110		$	(24	)		$	(160	)		$	459

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(1)	Bad debt provisions relate to estimated losses due to credit and similar collectability issues. Other charges (credits) relate to adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.

(2)	Deductions and other, net of recoveries primarily relates to receivable write-offs, but also includes the impact of foreign currency translation adjustments and recoveries of previously written off receivables.

 

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INDEX OF EXHIBITS

Document and Location

 

(3)(a)		Restated Certificate of Incorporation of Registrant filed with the Department of State of New York on November 7, 2003, as amended by Certificate of Amendment to Certificate of Incorporation filed with the Department of State of New York on August 19, 2004.
		Incorporated by reference to Exhibit 3(a) to Registrant’s Annual Report on Form 10-K for the Year Ended December 31, 2004.
(b)		By-Laws of Registrant, as amended through December 10, 2003.
		Incorporated by reference to Exhibit 4(a)(2) to Registrant’s Registration Statement No. 333-111623.
(4)(a)(1)		Indenture dated as of December 1, 1991, between Registrant and Citibank, N.A., as trustee, relating to unlimited amounts of debt securities, which may be issued from time to time by Registrant when and as authorized by or pursuant to a resolution of Registrant’s Board of Directors (the “December 1991 Indenture”).
		Incorporated by reference to Exhibit 4(a) to Registrant’s Registration Statement Nos. 33-44597, 33-49177 and 33-54629.
(2)		Instrument of Resignation, Appointment and Acceptance dated as of February 1, 2001, among Registrant, Citibank, N.A., as resigning trustee, and Wilmington Trust Company, as successor trustee, relating to the December 1991 Indenture.
		Incorporated by reference to Exhibit 4(a)(2) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 filed on June 7, 2001.
(b)(1)		Indenture dated as of September 20, 1996, between Registrant and Citibank, N.A., as trustee, relating to unlimited amounts of debt securities, which may be issued from time to time by Registrant when and as authorized by or pursuant to a resolution of Registrant’s Board of Directors (the “September 1996 Indenture”).
		Incorporated by reference to Exhibit 4(a) to Registration Statement No. 333-13179.
(2)		Instrument of Resignation, Appointment and Acceptance dated as of February 1, 2001, among Registrant, Citibank, N.A., as resigning trustee, and Wilmington Trust Company, as successor trustee, relating to the September 1996 Indenture.
		Incorporated by reference to Exhibit 4(b)(2) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 filed on June 7, 2001.
(c)(1)		Indenture dated as of January 29, 1997, between Registrant and Bank One, National Association (as successor by merger with The First National Bank of Chicago) (“Bank One”), as trustee (the “January 1997 Indenture”), relating to Registrant’s Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debentures”).
		Incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-24193.
(2)		Form of Certificate of Exchange relating to Junior Subordinated Debentures.
		Incorporated by reference to Exhibit A to Exhibit 4.1 to Registration Statement No. 333-24193.
(3)		Certificate of Trust of Xerox Capital Trust I executed as of January 23, 1997.
		Incorporated by reference to Exhibit 4.3 to Registration Statement No. 333-24193.
(4)		Amended and Restated Declaration of Trust of Xerox Capital Trust I dated as of January 29, 1997.
		Incorporated by reference to Exhibit 4.4 to Registration Statement No. 333-24193.

 

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(5)		Form of Exchange Capital Security Certificate for Xerox Capital Trust I.
		Incorporated by reference to Exhibit A-1 to Exhibit 4.4 to Registration Statement No. 333-24193.
(6)		Series A Capital Securities Guarantee Agreement of Registrant dated as of January 29, 1997, relating to Series A Capital Securities of Xerox Capital Trust I.
		Incorporated by reference to Exhibit 4.6 to Registration Statement No. 333-24193.
(7)		Registration Rights Agreement dated January 29, 1997, among Registrant, Xerox Capital Trust I and the initial purchasers named therein.
		Incorporated by reference to Exhibit 4.7 to Registration Statement No. 333-24193.
(8)		Instrument of Resignation, Appointment and Acceptance dated as of November 30, 2001, among Registrant, Bank One as resigning trustee, and Wells Fargo Bank Minnesota, National Association (“Wells Fargo”), as successor Trustee, relating to the January 1997 Indenture.
		Incorporated by reference to Exhibit (c)(8) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(d)(1)		Indenture dated as of October 21, 1997, among Registrant, Xerox Overseas Holding Limited (formerly Xerox Overseas Holding PLC), Xerox Capital (Europe) plc (formerly Rank Xerox Capital (Europe) plc) and Citibank, N.A., as trustee, relating to unlimited amounts of debt securities which may be issued from time to time by Registrant and unlimited amounts of guaranteed debt securities which may be issued from time to time by the other issuers when and as authorized by or pursuant to a resolution or resolutions of the Board of Directors of Registrant or the other issuers, as applicable (the “October 1997 Indenture”).
		Incorporated by reference to Exhibit 4(b) to Registrant’s Registration Statement No. 333-34333.
(2)		Instrument of Resignation, Appointment and Acceptance dated as of February 1, 2001, among Registrant, the other issuers under the October 1997 Indenture, Citibank, N.A., as resigning trustee, and Wilmington Trust Company, as successor trustee, relating to the October 1997 Indenture.
		Incorporated by reference to Exhibit 4(d)(2) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 filed on June 7, 2001.
(e)(1)		Indenture dated as of April 21, 1998, between Registrant and Bank One, as trustee, relating to $1,012,198,000 principal amount at maturity of Registrant’s Convertible Subordinated Debentures due 2018 (the “April 1998 Indenture”).
		Incorporated by reference to Exhibit 4(b) to Registrant’s Registration Statement No. 333-59355.
(2)		Instrument of Resignation, Appointment and Acceptance dated as of July 26, 2001, among Registrant, Bank One as resigning trustee, and Wells Fargo, as successor Trustee, relating to the April 1998 Indenture (the “April 1998 Indenture Trustee Assignment”).
		Incorporated by reference to Exhibit 4(e)(2) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(3)		Amendment to Instrument of Resignation, Appointment and Acceptance dated as of October 22, 2001, among Registrant, Bank One as resigning trustee, and Wells Fargo, as successor Trustee, relating to the April 1998 Indenture Trustee Assignment.
		Incorporated by reference to Exhibit 4(e)(3) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(f)(1)		Indenture, dated as of January 17, 2002, between Registrant and Wells Fargo, as trustee, relating to Registrant’s 9 3/4% Senior Notes due 2009 (Denominated in U.S. Dollars) (the “January 17, 2002 U.S. Dollar Indenture”).
		Incorporated by reference to Exhibit 4(h)(1) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

 

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(2)		Indenture, dated as of January 17, 2002, between Registrant and Wells Fargo, as trustee, relating to Registrant’s 9 3/4% Senior Notes due 2009 (Denominated in Euros) (the “January 17, 2002 Euro Indenture”).
		Incorporated by reference to Exhibit 4(h)(2) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(3)		Registration Rights Agreement, dated as of January 17, 2002, among Registrant and the initial purchasers named therein, relating to Registrant’s $600,000,000 9 3/4% Senior Notes due 2009.
		Incorporated by reference to Exhibit 4(h)(3) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(4)		Registration Rights Agreement, dated as of January 17, 2002, among Registrant and the initial purchasers named therein, relating to Registrant’s (euro) 225,000,000 9 3/4% Senior Notes due 2009.
		Incorporated by reference to Exhibit 4(h)(4) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(5)		First Supplemental Indenture dated as of June 21, 2002 between Registrant and Wells Fargo, as trustee, to the January 17, 2002 U.S. Dollar Indenture.
		Incorporated by reference to Exhibit (4)(h)(5) to Registrant’s Current Report on Form 8-K dated June 21, 2002.
(6)		First Supplemental Indenture dated as of June 21, 2002 between Registrant and Wells Fargo, as trustee, to the January 17, 2002 Euro Indenture.
		Incorporated by reference to Exhibit (4)(h)(6) to Registrant’s Current Report on Form 8-K dated June 21, 2002.
(7)		Second Supplemental Indenture dated as of July 30, 2002 between Registrant, the guarantors named therein and Wells Fargo, as trustee, to the January 17, 2002 U.S. Dollar Indenture.
		Incorporated by reference to Exhibit 4 (h)(7) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(8)		Second Supplemental Indenture dated as of July 30, 2002 between Registrant, the guarantors named therein and Wells Fargo, as trustee, to the January 17, 2002 Euro Indenture.
		Incorporated by reference to Exhibit 4 (h)(8) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(9)		Third Supplemental Indenture, dated June 25, 2003 among Registrant, the guarantors named therein and Wells Fargo, as trustee, to the January 17, 2002 U.S. Dollar Indenture.
		Incorporated by reference to Exhibit 4.11 to Registrant’s Current Report on Form 8-K dated June 25, 2003.
(10)		Third Supplemental Indenture, dated June 25, 2003 among Registrant, the guarantors named therein and Wells Fargo, as trustee, to the January 17, 2002 U.S. Euro Indenture.
		Incorporated by reference to Exhibit 4.12 to Registrant’s Current Report on Form 8-K dated June 25, 2003.
(g)		Indenture dated as of October 2, 1995, between Xerox Credit Corporation (“XCC”) and State Street Bank and Trust Company (“State Street”), as trustee, relating to unlimited amounts of debt securities which may be issued from time to time by XCC when and as authorized by XCC’s Board of Directors or Executive Committee of the Board of Directors.
		Incorporated by reference to Exhibit 4(a) to XCC’s Registration Statement Nos. 33-61481 and 333-29677.
(h)		Rights Agreement dated as of April 7, 1997 between Registrant and The First National Bank of Boston, as Rights Agent as amended February 7, 2000.
		Incorporated by reference to Exhibit 4(h) to Registrant’s Annual Report on Form 10-K for the Year Ended December 31, 2004.

 

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(i)(1)		Indenture, dated as of June 25, 2003, between Registrant and Wells Fargo, as trustee, relating to unlimited amounts of debt securities which may be issued from time to time by Registrant when and as authorized by or pursuant to a resolution of Registrant’s Board of Directors (the “June 25, 2003 Indenture”).
		Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 25, 2003.
(2)		First Supplemental Indenture, dated June 25, 2003 among Registrant, the guarantors named therein and Wells Fargo, as trustee, to the June 25, 2003 Indenture.
		Incorporated by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated June 25, 2003.
(3)		Form of Second Supplemental Indenture to the June 25, 2003 Indenture.
		Incorporated by reference to Exhibit (4)(b)(3) to Registrant’s Registration Statement No. 333-111623.
(4)		Form of Third Supplemental Indenture, dated as of March 20, 2006, to the June 25, 2003 Indenture.
		Incorporated by reference to Exhibit 4(b)(6) to Registrant’s Current Report on Form 8-K dated March 20, 2006.
(5)		Form of Fourth Supplemental Indenture, dated as of August 18, 2006, to the June 25, 2003 Indenture.
		Incorporated by reference to Exhibit 4(b)(7) to Registrant’s Current Report on Form 8-K dated August 18, 2006.
(6)		Form of Fifth Supplemental Indenture, dated as of August 18, 2006, to the June 25, 2003 Indenture.
		Incorporated by reference to Exhibit 4(b)(8) to Registrant’s Current Report on Form 8-K dated August 18, 2006.
(j)		Form of Credit Agreement dated as of April 7, 2006 between Registrant and the Initial Lenders, the Initial Issuing Banks, Citibank, N.A., as administrative agent, and Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as Joint Lead Arrangers and Bookrunners.
		Incorporated by reference to Exhibit 4(j) to Registrant’s Current Report on Form 8-K dated April 7, 2006.
(k)		Master Demand Note dated December 10, 2003 between Registrant and Xerox Credit Corporation.
		Incorporated by reference to Exhibit 4(m) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
(l)		Instruments with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of Registrant and its subsidiaries on a consolidated basis have not been filed. Registrant agrees to furnish to the Commission a copy of each such instrument upon request.
(10)		The management contracts or compensatory plans or arrangements listed below that are applicable to the executive officers named in the Summary Compensation Table which appears in Registrant’s 2007 Proxy Statement are preceded by an asterisk (*).
*(a)		Registrant’s Form of Salary Continuance Agreement.
		Incorporated by reference to Exhibit 10(a) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as amended.
*(b)(1)		Registrant’s 1991 Long-Term Incentive Plan, as amended through October 9, 2000 (“1991 LTIP”).
		Incorporated by reference to Exhibit 10(b) to Registrants’ Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
(2)		Form of Amendment to Agreements under 1991 LTIP.
		Incorporated by reference to Exhibit 10(b)(2) to Registrant’s Current Report on Form 8-K dated May 19, 2005.

 

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(3)		Amendment No. 1 to 1991 LTIP.
		Incorporated by reference to Exhibit 10(b)(3) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2006.
(c)		Registrant’s 1996 Non-employee Director Stock Option Plan, as amended through May 20, 1999.
		Incorporated by reference to Exhibit 10(c) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005
(d)(1)		Registrant’s 2004 Equity Compensation Plan for Non-Employee Directors, as amended through October 12, 2006 (“2004 ECPNED”).
		Incorporated by reference to Exhibit 10(d)(1) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2006.
(2)		Form of Agreement under 2004 ECPNED.
		Incorporated by reference to Exhibit 10(d)(2) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005.
(3)		Form of Grant Summary under 2004 ECPNED.
		Incorporated by reference to Exhibit 10(d)(3) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005.
(4)		Form of DSU Deferral under 2004 ECPNED.
		Incorporated by reference to Exhibit 10(d)(4) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005.
*(e)(1)		Registrant’s 2004 Performance Incentive Plan, as amended and restated as of December 6, 2005 (“2004 PIP”).
		Incorporated by reference to Exhibit 10(e)(1) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
(2)		Form of 2005 Executive Long-Term Incentive Program Award Agreement under the 2004 PIP.
		Incorporated by reference to Exhibit 10(e)(2) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
(3)		Form of 2005 Executive Long-Term Incentive Program Award Summary under the 2004 PIP.
		Incorporated by reference to Exhibit 10(e)(3) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
(4)		Performance Elements for 2005 Executive Long-Term Incentive Program.
		Incorporated by reference to Exhibit 10(e)(6) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
(5)		Annual Performance Incentive Plan for 2006.
(6)		Performance Elements for 2006 Executive Long-Term Incentive Program (“2006 ELTIP”).
		Incorporated by reference to Exhibit 10(e)(6) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
(7)		Form of Amendment to Agreements under 2004 PIP.
		Incorporated by reference to Exhibit 10(e)(7) to Registrant’s Current Report on Form 8-K dated May 19, 2005.
(8)		Form of 2006 Executive Long-Term Incentive Program Award Summary under 2006 ELTIP.
		Incorporated by reference to Exhibit 10(e)(8) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

 

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(9)		2006 Form of Executive Long-Term Incentive Program Award Agreement under the 2004 PIP.
		Incorporated by reference to Exhibit 10(e)(9) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
(10)		Registrant’s 2004 Performance Incentive Plan, as amended and restated as of February 15, 2007 (“2007 Restatement of 2004 PIP”).
(11)		Annual Performance Incentive Plan for 2007.
(12)		Performance Elements for 2007 Executive Long-Term Incentive Program (“2007 ELTIP”).
(13)		Form of Executive Long-Term Incentive Program Award Summary under 2007 ELTIP.
(14)		2007 Form of Executive Long-Term Incentive Program Award Agreement under the 2007 Restatement of the 2004 PIP.
*(f)(1)		2004 Restatement of Registrant’s Unfunded Retirement Income Guarantee Plan, as amended through December 7, 2004 (“2004 URIGP”).
		Incorporated by reference to Exhibit 10(F) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
(2)		Amendment No. 1 to 2004 URIGP.
		Incorporated by reference to Exhibit 10(f)(2) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2005.
(3)		Amendment No. 2 to 2004 URIGP.
		Incorporated by reference to Exhibit 10(f)(3) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2006.
*(g)(1)		2004 Restatement of Registrant’s Unfunded Supplemental Executive Retirement Plan, as amended through December 7, 2004 (“2004 USERP”).
		Incorporated by reference to Exhibit 10(g) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
(2)		Amendment No. 2 to Registrant’s 2004 USERP.
		Incorporated by reference to Exhibit 10(g)(2) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2005.
(3)		Amendment No. 3 to Registrant’s 2004 USERP.
		Incorporated by reference to Exhibit 10(g)(3) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2006.
(4)		Amendment No. 4 to Registrant’s 2004 USERP.
		Incorporated by reference to Exhibit 10(g)(4) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2006.
(h)		1996 Amendment and Restatement of Registrant’s Restricted Stock Plan for Directors, as amended through February 4, 2002.
		Incorporated by reference to Exhibit 10(h) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
*(i)		Form of Amended and Restated Severance Letter Agreement entered into with various executive officers, effective July 11, 2005.
		Incorporated by reference to Exhibit 10(i) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

 

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*(j)(1)		Registrant’s Universal Life Plan effective July 1, 2003.
		Incorporated by reference to Exhibit 10(j) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
(2)		Amendment No. 3 to Registrant’s Universal Life Plan.
		Incorporated by reference to Exhibit 10(j)(2) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2006.
(k)		Registrant’s Deferred Compensation Plan for Directors, 1997 Amendment and Restatement, as amended through December 7, 2004.
		Incorporated by reference to Exhibit 10(k) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
*(l)		Registrant’s Deferred Compensation Plan for Executives, 2004 Restatement, as amended through August 11, 2004.
		Incorporated by reference to Exhibit 10(l) to Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2004.
*(m)		Registrant’s 1998 Employee Stock Option Plan, as amended through October 9, 2000.
		Incorporated by reference to Exhibit 10(n) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 filed on June 7, 2001.
(n)		Separation Agreement dated May 11, 2000 between Registrant and G. Richard Thoman, former President and Chief Executive Officer of Registrant.
		Incorporated by reference to Exhibit 10(n) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
(o) (1)		Master Supply Agreement, dated as of November 30, 2001, between Registrant and Flextronics International Ltd. (“Master Supply Agreement”).**
		Incorporated by reference to Exhibit 10(t)(1) to Registrant’s Current Report on Form 8-K dated June 2, 2003.
(2)		Amended and Restated Letter Agreement dated as of November 30, 2001 between Registrant and Flextronics International Ltd. regarding collateral matters relating to the relationship between Registrant and Flextronics.**
		Incorporated by reference to Exhibit 10(t)(2) to Registrant’s Current Report on Form 8-K dated June 2, 2003.
*(p)		Letter Agreement dated May 20, 2002 between Registrant and Lawrence A. Zimmerman, Senior Vice President and Chief Financial Officer of Registrant.
		Incorporated by reference to Exhibit 10(u) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(q)		Amended and Restated Loan Agreement dated as of October 21, 2002 between Xerox Lease Funding LLC and General Electric Capital Corporation.
		Incorporated by reference to Exhibit 10(v) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
*(r)		Form of Cash Retention Agreement entered into with various executive officers during 2003.
		Incorporated by reference to Exhibit 10(w) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

 

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(s)		2006 Technology Agreement, effective as of April 1, 2006, by and between Registrant and Fuji Xerox Co., Ltd.
		Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K dated March 9, 2006.**
(12)		Computation of Ratio of Earnings to Fixed charges and the Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
(13)		Registrant’s 2006 Annual Report to Shareholders.
(21)		Subsidiaries of Registrant.
(23)		Consent of PricewaterhouseCoopers LLP.
(31)(a)		Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
(b)		Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a).
(32)		Certification of CEO and CFO pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
(99.1)		Order under Section 36 of the Securities Exchange Act of 1934 Granting Exemptions from Certain Provisions of the Act and Rules Thereunder, dated April 11, 2002 (Release No. 45730).
		Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K dated April 11, 2002.

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**

Pursuant to the Freedom of Information Act and/or a request for confidential treatment filed with the Securities and Exchange Commission under Rule 24b-2 of the Securities Exchange Act of 1934, as amended, the confidential portion of this material has been omitted and filed separately with the Securities and Exchange Commission.

 

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Exhibit 10(e)(5)

Annual Performance Incentive Plan for 2006 (“2006 APIP”)

Under the 2006 APIP, executive officers of the Company are eligible to receive performance related cash payments. Payments are, in general, only made if annual performance objectives established by the Compensation Committee of the Board of Directors (the “Committee”) are met.

The Committee approved an annual incentive target and maximum opportunity for 2006, expressed as a percentage of base salary for each participating officer. Certain additional goals were established for some officers based on business unit goals and/or individual performance goals and objectives. The Committee also established overall threshold, target and maximum measures of performance for the 2006 APIP. The performance measures and weightings for 2006 were total revenue (30%), earnings per share (40%) and core cash flow from operations (30%).

For 2006, the performance against the 2006 APIP goals was as follows: Total revenue was below threshold, earnings per share was at maximum and core cash flow from operations exceeded maximum.

Exhibit 10(e)(10)

AS AMENDED AND RESTATED FEBRUARY 15, 2007

2007 AMENDMENT AND RESTATEMENT

OF

XEROX CORPORATION

2004 PERFORMANCE INCENTIVE PLAN

1. Purpose

The purpose of the Xerox Corporation 2004 Performance Incentive Plan as set forth herein or in any amendments hereto (the “2004 Plan” or the “Plan”) is to advance the interests of Xerox Corporation (the “Company”) and to increase shareholder value by providing officers and employees of the Company, its subsidiaries and its Affiliates (as hereinafter defined) with a proprietary interest in the growth and performance of the Company and with incentives for current or future service with the Company, its subsidiaries and Affiliates. The Plan is a successor plan to (i) the Xerox Corporation 1991 Long-Term Incentive Plan, (ii) the Xerox Corporation 1998 Employee Stock Option Plan, (iii) the Xerox Executive Performance Incentive Insurance Plan, (iv) the Xerox Mexicana, S.A. de C.V. Executive Rights Plan and (v) the Xerox Canada Inc. Executive Rights Plan, any or all of which may be referred to as a “Predecessor Plan”.

2. Effective Date and Term

The Plan shall be effective as of May 20, 2004, subject to the approval of the Company’s shareholders at the 2004 annual meeting. No awards or grants can be made after January 1, 2008 unless terminated sooner pursuant to Section 13 by the Company’s Board of Directors (the “Board”). Effective May 20, 2004, no further awards shall be made under a Predecessor Plan, but outstanding awards under any Predecessor Plan shall remain outstanding in accordance with their applicable terms and conditions.

3. Plan Administration

(a) The independent Compensation Committee of the Board, or such other independent committee as the Board shall determine, comprised of not less than three members, shall be responsible for administering the Plan (the “Compensation Committee”). To the extent specified by the Compensation Committee, it may delegate its administrative responsibilities to a subcommittee of the Compensation Committee comprised of not less than three members (the Compensation Committee, such subcommittee, and any individual to whom powers are delegated pursuant to subsection (c), being hereinafter referred to as the “Committee”). The Committee shall be qualified to administer the Plan as contemplated by (i) Rule 16b-3 under the Securities Exchange Act of 1934 (the “1934 Act”) or any successor rule, (ii) Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations thereunder, and (c) any rules and regulations of a stock exchange on which Common Stock (as defined in Section 5) of the Company is listed.

(b) The Committee shall have full and exclusive power to interpret, construe and implement the Plan and any rules, regulations, guidelines or agreements adopted hereunder and to adopt such rules, regulations and guidelines for carrying out the Plan as it may deem necessary or proper. These powers shall include, but not be limited to, (i) determination of the type or types of awards to be granted under the Plan; (ii) determination of the terms and conditions of any awards under the Plan; (iii) determination of whether, to what extent and under what circumstances awards may be settled, paid or exercised in cash, shares, other securities, or other awards, or other property, or cancelled, forfeited or suspended; (iv) adoption of such modifications, amendments, procedures, subplans and the like as are necessary to enable participants employed in other countries in which the Company may operate to receive advantages and benefits under the Plan consistent with the laws of such countries, and consistent with the rules of the Plan; (v) subject to the rights of participants, modification, change, amendment or cancellation of any award to correct an administrative error and (vi) taking any other action the Committee

 

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deems necessary or desirable for the administration of the Plan. All determinations, interpretations, and other decisions under or with respect to the Plan or any award by the Committee shall be final, conclusive and binding upon the Company, any participant, any holder or beneficiary of any award under the Plan and any employee of the Company.

(c) Except for the power to amend the Plan as provided in Section 13 and except for determinations regarding employees who are subject to Section 16 of the 1934 Act or certain key employees who are, or may become, as determined by the Committee, subject to the Code Section 162(m) compensation deductibility limit (the “Covered Employees”), and except as may otherwise be required under applicable New York Stock Exchange rules, the Committee may delegate any or all of its duties, powers and authority under the Plan pursuant to such conditions or limitations as the Committee may establish to any officer or officers of the Company. The term “Committee” herein shall include any individual exercising powers to the extent delegated pursuant to the preceding sentence.

4. Eligibility

Any employee of the Company shall be eligible to receive an award under the Plan. For purposes of this Section 4, “Company” shall include any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant equity interest, as determined by the Committee (“Affiliate”). If a participant who is an employee or former employee of the Company is determined, such determination made prior to a Change in Control, not to have satisfied any of the conditions set forth in the Award Agreement the awards granted shall be cancelled as set forth in the Award Agreement. If a participant who is an employee or former employee of the Company is deemed by the Committee, in the Committee’s sole discretion exercised prior to a Change in Control, to have engaged in detrimental activity against the Company, any awards granted to such employee or former employee on or after January 1, 2006, whether or not Nonforfeitable as hereinafter defined, shall be canceled and be of no further force or effect and any payment or delivery of an award within six months prior to such detrimental activity may be rescinded. In the event of any such rescission, the participant shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required by the Committee.

5. Shares of Stock Subject to the Plan

(a) A total number of 10.0 million (10,000,000) shares of common stock¹, par value $1.00 per share, of the Company (“Common Stock”) shall become available for issuance under the Plan, provided that any shares issued in connection with options or SARs shall be counted against this limit as 0.6 shares for each one (1) share issued. Any shares available for grant under any Predecessor Plan on the Effective Date not subject to outstanding awards shall become available for issuance under the Plan. (As of May 20, 2004, approximately 15.7 million shares² are expected to be available for issuance under Predecessor Plans.) Thus, the total number available for grant under the 2004 Plan is expected to be 25.7 million (25,700,000)^3. In addition, any shares underlying awards outstanding on May 20, 2004 under any Predecessor Plan that are cancelled, are forfeited, or lapse shall become available for issuance under the Plan.

 

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1	10.0 million reflects the number of shares if all grants were made in “whole value” shares (e.g., restricted stock or performance shares). If all grants were made in the form of options or SARs, the number available is 16.7 million.

 

2	15.7 million reflects the number of shares if all grants were made in “whole value” shares (e.g., restricted stock or performance shares). If all grants were made in the form of options or SARs, the number available is 26.1 million.

 

3	25.7 million reflects the number of shares if all grants were made in “whole value” shares (e.g., restricted stock or performance shares). If all grants were made in the form of options or SARs, the number available is 42.8 million.

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(b) For purposes of the preceding paragraph, the following shall not be counted against shares available for issuance under the Plan: (i) payment of stock appreciation rights (“SAR”) in cash or any form other than shares and (ii) payment in shares of dividends and dividend equivalents in conjunction with outstanding awards. Any shares that are issued by the Company, and any awards that are granted by, or become obligations of, the Company, through the assumption by the Company or an affiliate of, or in substitution for, outstanding awards previously granted by an acquired company shall not be counted against the shares available for issuance under the Plan.

 

(c) In determining shares available for issuance under the Plan, any awards granted under the Plan that are cancelled, are forfeited, or lapse shall become eligible again for issuance under the Plan. In addition, shares withheld to pay taxes pursuant to Section 14, and shares tendered to exercise stock options, shall be treated as shares again eligible for issuance under the Plan.

(d) In no event, however, except as subject to adjustment as provided in Section 6, shall more than (i) 10.0 million (10,000,000) shares of Common Stock be available for issuance pursuant to the exercise of incentive stock options (“ISOs”) awarded under the Plan; and (ii) 15.0 million (15,000,000) shares of Common Stock be made the subject of awards under any combination of awards under Sections 7(b), 7(c) or 7(d) of the Plan to any single individual, of which no more than 10.0 million (10,000,000) may be shares of restricted stock. SARs whether paid in cash or shares of Common Stock shall be counted against the limit set forth in (ii).

(e) Any shares issued under the Plan may consist in whole or in part, of authorized and unissued shares or of treasury shares, and no fractional shares shall be issued under the Plan. Cash may be paid in lieu of any fractional shares in payment of awards under the Plan.

6. Adjustments and Reorganizations

(a) If the Company shall at any time change the number of issued shares without new consideration to the Company (such as by stock dividend, stock split, recapitalization, reorganization, exchange of shares, liquidation, combination or other change in corporate structure affecting the shares) or make a distribution of cash or property which has a substantial impact on the value of issued shares (other than by normal cash dividends), such change shall be made with respect to (i) the aggregate number of shares that may be issued under the Plan; (ii) the number of shares subject to awards of a specified type or to any individual under the Plan; and/or (iii) the price per share for any outstanding stock options, SARs and other awards under the Plan.

(b) Except as otherwise provided in subsection 6(a) above, notwithstanding any other provision of the Plan, and without affecting the number of shares reserved or available hereunder, the Committee shall authorize the issuance, continuation or assumption of outstanding stock options, SARs and other awards under the Plan or provide for other equitable adjustments after changes in the shares resulting from any merger, consolidation, sale of all or substantially all assets, acquisition of property or stock, recapitalization, reorganization or similar occurrence in which the Company is the continuing or surviving corporation, upon such terms and conditions as it may deem necessary to preserve the rights of the holders of awards under the Plan.

(c) In the case of any sale of all or substantially all assets, merger, consolidation or combination of the Company with or into another corporation other than a transaction in which the Company is the continuing or surviving corporation and which does not result in the outstanding shares being converted into or exchanged for different securities, cash or other property, or any combination thereof (an “Acquisition”), any individual holding an outstanding award under the Plan, including any Optionee who holds an outstanding Option, shall have the right (subject to the provisions of the Plan and any limitation applicable to the award) thereafter, and for Optionees during the term of the Option upon the exercise thereof, to receive the Acquisition Consideration (as defined below) receivable upon the Acquisition by a holder of the number of applicable shares which would have been obtained upon exercise of the Option or portion thereof or obtained pursuant to the terms of the applicable award, as the case may be, immediately prior to the Acquisition. The term “Acquisition Consideration” shall

 

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mean the kind and amount of shares of the surviving or new corporation, cash, securities, evidence of indebtedness, other property or any combination thereof receivable in respect of one share of the Company upon consummation of an Acquisition.

7. Awards

(a) The Committee shall determine the type or types of award(s) to be made to each participant under the Plan and shall approve the terms and conditions governing such awards in accordance with Section 12. Awards may include but are not limited to those listed in this Section 7. Awards may be granted singly, in combination or in tandem so that the settlement or payment of one automatically reduces or cancels the other. Awards may also be made in combination or in tandem with, in replacement of, as alternatives to, or as the payment form for, grants or rights under any other employee or compensation plan of the Company, including the plan of any acquired entity. However, under no circumstances may stock option awards be made which provide by their terms for the automatic award of additional stock options upon the exercise of such awards, including, without limitation, “reload options”.

(b) A Stock Option is a grant of a right to purchase a specified number of shares of Common Stock during a specified period. The purchase price of each option shall be not less than 100% of Fair Market Value (as defined in Section 10) on the effective date of grant. A Stock Option may be exercised in whole or in installments, which may be cumulative. A Stock Option may be in the form of an ISO which complies with Section 422 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder at the time of grant. The price at which shares of Common Stock may be purchased under a Stock Option shall be paid in full at the time of the exercise in cash or such other method as provided by the Committee at the time of grant or as provided in the form of agreement approved in accordance herewith, including tendering (either constructively or by attestation) Common Stock, surrendering a stock award valued at market value at the time of surrender, surrendering a cash award, or any combination thereof. Notwithstanding any provision of the Plan, a repricing of a Stock Option shall be allowed by the Committee only with the approval of the Company’s shareholders to the extent required under the rules of the New York Stock Exchange. For this purpose, a “repricing” shall be defined as described in the New York Stock Exchange rules.

(c) A Stock Appreciation Right (“SAR”) is a right to receive a payment, in cash and/or Common Stock, as determined by the Committee, equal to the excess of the market value of a specified number of shares of Common Stock at the time the SAR is exercised over the Fair Market Value on the effective date of grant of the SAR as set forth in the applicable award agreement.

(d) Stock Award is an award made in stock or denominated in units of stock. All or part of any Stock Award may be subject to conditions established by the Committee, and set forth in the award agreement, which may include, but are not limited to, continuous service with the Company, achievement of specific business objectives, and other measurements of individual, business unit or Company performance. A restricted stock award made pursuant to this Section 7(d) shall be subject to a vesting schedule of no less than three (3) years unless such award is performance based, in which case vesting shall be no less than one (1) year.

(e) Cash Award may be any of the following:

(i) an annual incentive award in connection with which the Committee will establish specific performance periods (not to exceed twelve months) to provide cash awards for the purpose of motivating participants to achieve goals for the performance period. An annual incentive award shall specify the minimum, target and maximum amounts of awards for a performance period for a participant or any groups of participants, and, to the extent applicable to Covered Employees, comply with the requirements of Section 23; or

(ii) a long-term award denominated in cash with the eventual payment amount subject to future service and such other restrictions and conditions as may be established by the Committee, and as set forth in the award agreement, including, but not limited to, continuous service with the Company, achievement of specific business objectives, and other measurement of individual, business unit or Company performance; or

 

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(iii) Cash Awards under this Section 7(e) to any single Covered Employee, including dividend equivalents in cash or shares of Common Stock payable based upon attainment of specific performance goals, may not exceed in the aggregate $10,000,000 in the case of the Chief Executive Officer and $5,000,000 in the case of any other participant, such limits being applicable to each twelve-month performance period established by the Committee under this Section 7(e) or under Section 23.

(f) The Committee shall have the discretion with respect to any award granted under the Plan to establish upon its grant conditions under which (i) the award may be later forfeited, cancelled, rescinded, suspended, withheld or otherwise limited or restricted; or (ii) gains realized by the grantee in connection with an award or an award’s exercise may be recovered; provided that such conditions and their consequences are clearly set forth in the grant agreement or other grant document and fully comply with applicable laws. These conditions may include, without limitation, actions by the participant which constitute a conflict of interest with the Company, are prejudicial to the Company’s interests, or are in violation of any non-compete agreement or obligation, any confidentiality agreement or obligation, the Company’s applicable policies, its Code of Business Conduct and Ethics, or the participant’s terms and conditions of employment.

8. Dividends and Dividend Equivalents

The Committee may provide that awards denominated in stock earn dividends or dividend equivalents. Such dividend equivalents may be paid currently in cash or shares of Common Stock or may be credited to an account established by the Committee under the Plan in the name of the participant. In addition, dividends or dividend equivalents paid on outstanding awards or issued shares may be credited to such account rather than paid currently. Any crediting of dividends or dividend equivalents may be subject to such restrictions and conditions as the Committee may establish, including reinvestment in additional shares or share equivalents.

9. Deferrals and Settlements

Payment of awards may be in the form of cash, stock, other awards, or in such combinations thereof as the Committee shall determine at the time of grant, and with such restrictions as it may impose. Except as provided in Section 24 herein, the Committee may also require or permit participants to elect to defer the issuance of shares or the payment of awards in cash under such rules and procedures as it may establish under the Plan. It may also provide that deferred payments include the payment or crediting of interest on the deferral amounts or the payment or crediting of dividend equivalents on deferred payments denominated in shares.

10. Fair Market Value

Fair Market Value for all purposes under the Plan shall mean, effective February 15, 2007, the closing price of Common Stock as reported in The Wall Street Journal in the New York Stock Exchange Composite Transactions or similar successor consolidated transactions reports for the relevant date, or if no sales of Common Stock were made on said exchange on that date, the closing price of Common Stock as reported in said composite transaction report for the preceding day on which sales of Common Stock were made on said exchange. Under no circumstances shall Fair Market Value be less than the par value of the Common Stock.

11. Transferability and Exercisability

Except as otherwise provided in this Section 11, all awards under the Plan shall be nontransferable and shall not be assignable, alienable, saleable or otherwise transferable by the participant other than by will or the laws of descent and distribution except pursuant to a domestic relations order entered by a court of competent jurisdiction. Notwithstanding the preceding sentence, the Committee may provide that any award of non-qualified Stock Options may be transferable by the recipient to family members or family trusts established by the recipient. The Committee may also provide that, in the event that a participant terminates employment with the Company to assume a position with a governmental, charitable, educational or similar non-profit

 

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institution, a third party, including but not limited to a “blind” trust, may be authorized by the Committee to act on behalf of and for the benefit of the respective participant with respect to any outstanding awards. Except as otherwise provided in this Section 11, during the life of the participant, awards under the Plan shall be exercisable only by him or her except as otherwise determined by the Committee. In addition, if so permitted by the Committee, a participant may designate a beneficiary or beneficiaries to exercise the rights of the participant and receive any distributions under the Plan upon the death of the participant.

12. Award Agreements; Notification of Award

Awards under the Plan (other than annual incentive awards described in Section 7(e)(i)) shall be evidenced by one or more agreements approved by the Committee that set forth the terms and conditions of and limitations on an award, except that in no event shall the term of any Stock Option exceed a period of ten years from the date of its grant. The Committee need not require the execution of any such agreement by a participant in which case acceptance of the award by the respective participant will constitute agreement to the terms of the award. In the case of an annual incentive cash award, the participant shall receive notification of such award in such form as the Committee may determine.

13. Plan Amendment and Termination

(a) The Compensation Committee may amend the Plan as it deems necessary or appropriate, except that no such amendment which would cause the Plan not to comply with the requirements of (i) Code Section 162(m) with respect to performance-based compensation, (ii) the Code with respect to ISOs or (iii) the New York Business Corporation Law as in effect at the time of such amendment shall be made without the approval of the Company’s shareholders. No such amendment shall adversely affect any outstanding awards under the Plan without the consent of all of the holders thereof.

(b) Notwithstanding the foregoing, an amendment that constitutes a “material revision”, as defined by the rules of the New York Stock Exchange, shall be submitted to the Company’s shareholders for approval. In addition, any revision that deletes or limits the scope of the provision in Section 7 prohibiting repricing of options without shareholder approval will be considered a material revision.

(c) The Board may terminate the Plan at any time. Upon termination of the Plan, no future awards may be granted, but previously-made awards shall remain outstanding in accordance with their applicable terms and conditions, and the terms of the Plan.

14. Tax Withholding

The Company shall have the right to deduct from any payment of an award made under the Plan, including the delivery or vesting of shares, an amount sufficient to cover withholding required by law for any federal, state or local taxes or to take such other action as may be necessary to satisfy any such withholding obligations. The Committee may permit shares to be used to satisfy required tax withholding and such shares shall be valued at the fair market value as of the payment date of the applicable award.

15. Other Company Benefit and Compensation Programs

Unless otherwise determined by the Committee, payments of awards received by participants under the Plan shall not be deemed a part of a participant’s regular, recurring compensation for purposes of calculating payments or benefits from any Company benefit plan, severance program or severance pay law of any country.

16. Unfunded Plan

Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship

 

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between the Company and any participant or other person. To the extent any person holds any rights by virtue of a grant awarded under the Plan, such right (unless otherwise determined by the Committee) shall be no greater than the right of an unsecured general creditor of the Company.

17. Future Rights

No person shall have any claim or right to be granted an award under the Plan, and no participant shall have any right by reason of the grant of any award under the Plan to continued employment by the Company or any subsidiary of the Company.

18. General Restriction

Each award shall be subject to the requirement that, if at any time the Committee shall determine, in its sole discretion, that the listing, registration or qualification of any award under the Plan upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such award or the exercise payment thereof, such award may not be granted, exercised or paid in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee.

19. Governing Law

The validity, construction and effect of the Plan and any actions taken or relating to the Plan shall be determined in accordance with the laws of the state of New York and applicable Federal law.

20. Successors and Assigns

The Plan shall be binding on all successors and permitted assigns of a participant, including, without limitation, the estate of such participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of such participant’s creditors.

21. Rights as a Shareholder

A participant shall have no rights as a shareholder until he or she becomes the holder of record of Common Stock.

22. Change in Control

Notwithstanding anything to the contrary in the Plan, the following shall apply to all awards granted and outstanding under the Plan:

(a) Definitions. Unless otherwise defined by the Compensation Committee and set forth in the award agreement at the time of the grant, the following definitions shall apply to this Section 22:

(i) A “Change in Control” shall be deemed to have occurred if (aa) any “Person” is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing 20 percent or more of the combined voting power of the Company’s then outstanding voting securities; (bb) the following individuals (referred to herein as the “Incumbent Board”) cease for any reason to constitute a majority of the directors then serving; individuals who on May 24, 2007 constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election

 

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by the Board or nomination for election by the Company’s shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who were directors on May 24, 2007, or whose appointment, election or nomination for election was previously so approved or recommended; (cc) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (1) a merger or consolidation which results in the directors of the Company who were members of the Incumbent Board immediately before such merger or consolidation continuing to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20 percent or more of the combined voting power of the Company’s then outstanding voting securities; or (dd) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. For purposes of the definition of Change in Control, Person shall have the meaning given in Section 3(a)(9) of the 1934 Act, as modified and used in Section 13(d) and 14(d) of the 1934 Act, except that such term shall not include Excluded Persons. “Excluded Persons” shall mean (1) the Company and its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, (3) any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, (4) any person who becomes a beneficial owner in connection with a transaction described in sub clause (1) of clause (cc) above, (5) an underwriter temporarily holding securities of the Company pursuant to an offering of such securities, or (6) an individual, entity or group who is permitted to, and actually does, report its beneficial ownership on Schedule 13G (or any successor Schedule), provided that if any Excluded Person described in clause (6) subsequently becomes required to or does report its beneficial ownership on Schedule 13D (or any successor Schedule), then, for purposes of this definition, such individual, entity or group shall no longer be considered an Excluded Person and shall be deemed to have first acquired beneficial ownership of securities of the Company on the first date on which such individual, entity or group becomes required to or does so report on such Schedule.

(ii) “CIC Price” (aa) in the case of an award granted before February 15, 2007, shall mean the higher of (1) the highest price paid for a share of the Company’s Common Stock in the transaction or series of transactions pursuant to which a Change in Control of the Company shall have occurred, or (2) the highest price paid for a share of the Company’s Common Stock during the 60-day period immediately preceding the date upon which the event constituting a Change in Control shall have occurred as reported in The Wall Street Journal in the New York Stock Exchange Composite Transactions or similar successor consolidated transactions reports; and (bb) in the case of an award granted on or after February 15, 2007, shall mean either (1) the highest price paid for a share of the Company’s Common Stock in the transaction or series of transactions pursuant to which a Change in Control of the Company shall have occurred, or (2) if the Change in Control occurs without such a transaction or series of transactions, the closing price for a share of the Company’s Common Stock on the date immediately preceding the date upon which the event constituting a Change in Control shall have occurred as reported in The Wall Street Journal in the New York Stock Exchange Composite Transactions or similar successor consolidated transactions reports.

(iii) An award is “Nonforfeitable” in whole or in part to the extent that, under the terms of the Plan or the award agreement or summary under the Plan, (aa) the award is vested in whole or part, or (bb) an entitlement to present or future payment of such award in whole or part has otherwise arisen.

(iv) A “Key Employee” is identified in the following manner: There shall be identified every employee who, at any time during a 12-month period ending December 31, is one of the 50 highest paid officers of the

 

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Company (or any member of its controlled group, as defined by Code Section 414(b)) having compensation in excess of the amount specified in Code Section 416(i)(1)(A) as indexed by Treasury guidance. Every individual so identified for any period ending December 31 is a Key Employee for the 12-month period beginning on the first April 1 following such December 31, and ending on the next March 31.

(v) A “Section 409A-Conforming Change in Control” is a Change in Control that conforms to the definition under Code Section 409A of a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, as such definition is set forth in Treasury guidance.

(vi) A “Termination for Good Reason” by a participant shall mean the termination of employment of a participant upon any of the following circumstances, if such circumstance occurs without the participant’s express written consent after a Change in Control:

(aa) The assignment of any participant’s duties inconsistent with the participant’s job status or a substantial adverse alteration in the nature or status of a participant’s responsibilities from those in effect immediately prior to a Change in Control of the Company (including, in the case of awards granted before February 15, 2007, without limitation, if the participant is an executive officer of the Company prior to a Change in Control, ceasing to be an executive officer of a public company);

(bb) Any of the following: (1) A reduction in a participant’s annual base salary and/or annual target bonus, (2) a failure by the Company to increase a participant’s annual base salary following a Change in Control at such periodic intervals consistent with the Company’s practice prior thereto by at least a percentage equal to the average of the percentage increases in a participant’s base salary for the three merit pay periods immediately preceding such Change in Control, or (3) the failure to increase a participant’s salary as the same may be increased from time to time for similarly situated individuals, except that this clause (bb) shall not apply to across-the-board salary reductions similarly affecting all similarly situated employees of the Company and all similarly situated employees of any person in control of the Company;

(cc) The Company’s requiring a participant to be based anywhere other than in the metropolitan area in which a participant was based immediately before the Change in Control, except for required travel on the Company’s business to an extent substantially consistent with a participant’s present business travel obligations;

(dd) The failure by the Company to continue in effect any compensation or benefit plan, vacation policy or any material perquisites in which a participant participates immediately before the Change in Control, (except to the extent such plan terminates in accordance with its terms), unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the Change in Control, or the failure by the Company to continue a participant’s participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of a participant’s participation relative to other participants, than existed at the time of the Change in Control; or

(ee) The failure of the Company to obtain a satisfactory agreement from any successor to assume responsibility to perform under this Plan.

(ff) A termination by a participant of employment shall not fail to be a Termination For Good Reason by participant merely because of a participant’s incapacity due to physical or mental illness, or because a participant’s employment continued after the occurrence of any of the events listed in this subsection.

(b) Acceleration of Nonforfeitability of SARs, Stock Awards, Cash Awards, and Dividends and Dividend Equivalents.

(i) In the case of an award granted on or after February 15, 2007, all SARs, stock awards, stock options (to the extent the CIC Price exceeds the exercise price), cash awards, dividends and dividend equivalents

 

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outstanding shall become 100% Nonforfeitable with respect to a participant upon a Termination for Good Reason or an involuntary termination of employment (other than a termination For Cause, as defined in the award agreement, according to a determination made before the Change in Control) that occurs after a Change in Control.

(ii) In the case of an award granted before February 15, 2007, upon the occurrence of a Change in Control , all SARs, stock awards, stock options (to the extent the CIC Price exceeds the exercise price), cash awards, dividends and dividend equivalents outstanding on such date shall become 100% Nonforfeitable.

(c) Payment Schedule. In accordance with the uniform payment rule set forth in subsection (c) of Section 24 hereof,

(i) Following a Change In Control that is not a Section 409A-Conforming Change in Control, awards (to the extent Nonforfeitable) shall be paid on the Vesting Date specified in the award summary, and

(ii) Following a Section 409A-Conforming Change in Control, awards to the extent Nonforfeitable) shall be paid on the earlier of (aa) termination of employment (in the case of a Key Employee, to the extent required by Section 409A, the date that is 6 months after termination of employment) or (bb) the Vesting Date specified in the award summary.

(iii) If a participant has made a valid election under Code Section 409A to defer payment beyond the Vesting Date specified in the award summary, such award shall be paid pursuant to clauses (i) and (ii) by substituting the date so elected for the Vesting Date specified in the award summary.

(d) Cancellation. Upon payment under this Section, such awards and any related stock options shall be cancelled.

(e) Discretionary Awards. Upon or in anticipation of the occurrence of a Change in Control, the Committee may grant additional awards (e.g., above-target awards for performance-based Stock Awards) at its sole discretion. Any such discretionary grants shall be paid on the date specified by the terms of such grant.

(f) The amount of cash to be paid shall be determined by multiplying the number of such awards, as the case may be, by: (i) in the case of stock awards, the CIC Price; (ii) in the case of SARs, the difference between the per share strike price of the SAR and the CIC Price; (iii) in the case of cash awards where the award period, if any, has not been completed upon the occurrence of a Change in Control, the pro-rata target value of such awards or such higher amount as determined by the Committee, without regard to the performance criteria, if any, applicable to such award; (iv) in the case of stock options, the difference between the exercise price of the option and the CIC Price; and (v) in the case of cash awards where the award period, if any, has been completed on or prior to the occurrence of a Change in Control: (aa) where the cash award is payable in cash, the value of such award as determined in accordance with the award agreement, and (bb) where the cash award is payable in shares of Common Stock, the CIC Price.

(g) Notwithstanding the foregoing, any SARs and any stock-based award held by an officer or director subject to Section 16 of the 1934 Act which have been outstanding less than six months (or such other period as may be required by the 1934 Act) upon the occurrence of an event constituting a Change in Control shall not be paid in cash until the expiration of such period, if any, as shall be required pursuant to such Section, and the amount to be paid shall be determined by multiplying the number of SARs, stock awards, or unexercised shares under such stock options, as the case may be, by the CIC Price determined as though the event constituting the Change in Control had occurred on the first day following the end of such period.

23. Certain Provisions Applicable to Awards to Covered Employees

Performance-based awards made to Covered Employees shall be made by the Committee within the time period required under Section 162(m) for the establishment of performance goals and shall specify, among other things, the performance period(s) for such award (which shall be not less than one year), the performance criteria and the performance targets. The performance criteria shall be any one or more of the following as determined by the Committee and may differ as to type of award and from one performance period to another: earnings per

 

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share, cash flow, document processing profit, cost reduction, days sales outstanding, cash conversion cycle, cash management (including, without limitation, inventory and/or capital expenditures), total shareholder return, return on shareholders’ equity, economic value added measures, return on assets, pre-or post-currency revenue, pre-or post-currency performance profit, profit before tax, profit after tax, revenues, stock price and return on sales. Payment or vesting of awards to Covered Employees shall be contingent upon satisfaction of the performance criteria and targets as certified by the Committee by resolution of the Committee. To the extent provided at the time of an award, the Committee may in its sole discretion reduce any award to any Covered Employee to any amount, including zero. Any performance-based awards made pursuant to this Section 23 may include annual incentive awards and long-term awards.

24. Section 409A Compliance

(a) No Taxation Under Code Section 409A. It is intended that no awards under the Plan shall cause any amount to be taxable under Code Section 409A with respect to any individual. All provisions of this Plan and of any agreement, award or award summary thereunder shall be construed in a manner consistent with this intent. Any provision of and amendment to this Plan, or of any agreement, award or award summary thereunder, that would cause any amount to be taxable under Section 409A of the Internal Revenue Code with respect to any individual is void and without effect. Any election by any participant, and any administrative action by the Committee that would cause any amount to be taxable under Section 409A of the Code with respect to any individual is void and without effect under the Plan.

(b) Election Rule. A participant may elect to defer awards under the Plan only if the election is made not later than December 31 of the year preceding the year in which the award is granted, except to the extent otherwise permitted by Section 409A and Treasury guidance thereunder (where such exceptions include but are not limited to initial deferral elections with respect to Nonforfeitable rights, deferral elections in the first year in which an employee becomes eligible to participate, and deferral elections with respect to performance-based compensation).

(c) Uniform Payment Rule

(i) All awards shall be paid on the date that is the earlier of (1) or (2) below, where

(1) is the later of (A) a Section 409A-Conforming Change in Control or (B) termination of employment (in the case of a Key Employee, to the extent required by Section 409A, the date that is 6 months after termination of employment); and

(2) is the Vesting Date specified in the award summary.

(ii) If a participant has made a valid election under Code Section 409A to defer payment beyond the Vesting Date specified in the award summary, such award shall be settled pursuant to clause (i) by substituting the date so elected for the Vesting Date specified in the award summary.

(iii) Payment pursuant to the death or disability of a participant is governed by the award agreement.

(d) Accelerations. In the case of an award that is deferred compensation for purposes of Code Section 409A, acceleration of payment is not permitted, except that, if permitted by the Committee, acceleration of payment is permitted in order to (i) allow the participant to comply with a certificate of divestiture (within the meaning of Code Section 1043); (ii) pay payroll and withholding taxes with respect to amounts deferred, to the extent permitted by Treasury guidance; or (iii) effect any other purpose that is a permitted Code Section 409A acceleration event under Treasury guidance.

(e) Permitted Payment Delays. At the Committee’s sole discretion, payment of awards may be delayed beyond the date specified in subsection (c) under the following circumstance. The Committee reserves the right to amend an award granted on or after January 1, 2006 if the Committee determines that the deduction for such payment would be limited by Code Section 162(m), except that such payment will be made on the earliest date on which the Committee determines that such limitation no longer exists.

 

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IN WITNESS WHEREOF, the Company has caused this Restatement to be signed as of the 15^th day of February, 2007.

 

 

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Exhibit 10(e)(11)

Annual Performance Incentive Plan for 2007 (“2007 APIP”)

Under the 2007 APIP, executive officers of the Company are eligible to receive performance related cash payments. Payments are, in general, only made if annual performance objectives established by the Compensation Committee of the Board of Directors (the “Committee”) are met.

The Committee approved annual incentive opportunities for 2007, expressed as a percentage of base salary for each participating officer. Certain additional goals were established for some officers based on business unit goals and/or individual performance goals and objectives. The Committee also established overall threshold, target and maximum measures of performance for the 2007 APIP. The performance measures and weightings for 2007 are total revenue (30%), earnings per share (40%) and core cash flow from operations (30%).

Individual payments will be subject to the review and approval of the Committee following the completion of the 2007 fiscal year.

Exhibit 10(e)(12)

2007 Executive Long-Term Incentive Program (“2007 E-LTIP”)

Under the 2007 E-LTIP, executive officers of the Company are eligible to receive performance shares based on certain performance measures established by the Compensation Committee of the Board of Directors (the “Committee”).

The performance elements and corresponding weights for the 2007 E-LTIP are: (i) (60%) Earnings Per Share: Diluted Earnings Per Share from Continuing Operations as reported in the Company’s audited financial statements, as adjusted on an after-tax basis for the following discretely disclosed (in either Management’s Discussion and Analysis/MD&A or the footnotes to the financial statements) items (if equal to or greater than $50 million pre-tax on an individual basis, or in the aggregate per item): gains/(losses) from litigation, regulatory matters or any changes in enacted law (including tax law); gains/(losses) from asset sales or business divestitures; restructuring and asset impairment charges; gains/(losses) resulting from acts of war, terrorism or natural disasters; the initial effect of changes in accounting principles that are included within Income from Continuing Operations; impairment of goodwill and other intangibles; gains/(losses) from the settlement of tax audits; gains/(losses) on early extinguishment of debt; non-restructuring related impairments of long-lived assets; acquisition related expenses including, but not limited to, acquired in-process research and development and integration costs; and (ii) (40%) Core Cash Flow from Operations: Net Cash provided by (used for) Operating Activities as reported in the Company’s audited financial statements, as adjusted for the following items: exclusion of net changes in finance receivables and on-lease equipment; cash flow impacts (inflows and outflows) resulting from the EPS adjustments as identified above, with the exception of cash payments for restructurings; cash payments for restructurings in excess of the amount reported as current restructuring reserves in the preceding years Annual Report; special discretionary pension fundings in excess of $50 million to prior year shall be excluded. Any other items approved by the Committee for adjustment of EPS or Core Cash Flow from Operations will be considered a modification of the award.

Exhibit 10(e)(13)

 

«First_Name» «Last_Name»

Date of Agreement and Award: July 1, 2007

 

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Value on February 15, 2007:		«Approved_Value_»

 

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Performance Shares
Number of Performance Shares:		«Performance_Shares_»

Vesting Date of All Performance Shares Earned:

- on 07/01/10

Performance Shares Earned if Annual Target Performance is Achieved:

- 1/3 of grant on: 7/1/08, 7/1/09 and 7/1/10

Performance Shares Earned if Three-Year Cumulative Performance between

Threshold and Maximum is Achieved:

- 25% - 150% of grant (net of shares earned for Annual Achievement) on 07/01/10

Automatic Deferral: If the deduction for delivery of shares would be limited by section 162(m) of the Internal Revenue Code (“Code”), shares will automatically be deferred until the Committee reasonably believes that the deduction will no longer be limited by section 162(m), unless otherwise required under Code section 409A. Notwithstanding the above, in no event shall shares of Common Stock be delivered prior to the Vesting Date set forth above.

 

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*Notwithstanding the above, at the Company’s discretion, Employee may irrevocably elect, on or before June 30, 2007, to defer receipt of Common Stock in connection with Performance Shares in the manner described to the Employee in writing in the Deferral Form.

*Performance measures which may include, but are not limited to, continuous service with the Company, achievement of specific business objectives, and other measurements of individual, business unit or Company performance shall be determined by the Committee in its sole discretion.

XEROX CONFIDENTIAL

Omnibus Agreement—2007: PIP;ELTIP;PSs		Exhibit 10(e)(14)

AGREEMENT PURSUANT TO

XEROX CORPORATION

2007 AMENDMENT AND RESTATEMENT OF THE 2004 PERFORMANCE INCENTIVE PLAN

AGREEMENT, by Xerox Corporation, a New York corporation (the “Company”), dated as of the date which appears as the “Date of Agreement and Award” in the Award Summary attached hereto (the “Award Summary”) in favor of the individual whose name appears on the Award Summary, an employee of the Company, one of the Company’s subsidiaries or one of its affiliates (the “Employee”).

In accordance with the provisions of the “2004 Performance Incentive Plan” and any amendments and/or restatements thereto (the “Plan”), the Compensation Committee of the Board of Directors of the Company (the “Committee”) or the Chief Executive Officer of the Company (the “CEO”) has authorized the execution and delivery of this Agreement.

Terms used herein that are defined in the Plan or in this Agreement shall have the meanings assigned to them in the Plan or this Agreement, respectively.

The Award Summary contains the details of the awards covered by this Agreement and is incorporated herein in its entirety.

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration the Company agrees as follows:

AWARDS

1. Award of Performance Shares. Subject to all terms and conditions of the Plan and this Agreement, the Company has awarded to the Employee on the date indicated on the Award Summary the number of Performance Shares (individually, the “PS”) as shown on the Award Summary. Notwithstanding anything herein to the contrary, only active Employees and those Employees on Short Term Disability Leave, Social Service Leave, Family Medical Leave or Paid Uniform Services Leave (pursuant to the Company’s Human Resources Policies) on the effective date of the award as shown on the Award Summary shall be eligible to receive the award.

TERMS OF THE PERFORMANCE SHARES

2. Entitlement to Shares. As soon as practicable on or after the Vesting Date indicated on the Award Summary in connection with the PSs (the “Vesting Date”), the Company shall, without transfer or issue tax to the person entitled to receive the shares, deliver to such person a certificate or certificates for a number of shares of Common Stock equal to the number of vested PSs (subject to reduction for payment of withholding taxes as described below). The number of shares to be issued to Employee shall be reduced by the amount of withholding taxes which must be paid under U.S. Federal and, where applicable, state and local law at the time of each distribution. No fractional shares shall be issued. Instead, the Company shall apply the equivalent of any fractional share amount to Federal, and where applicable, state and local, withholding taxes.

The award of PSs covered hereby shall be earned based on achieving one hundred percent (100%) of a target on an annual basis based on certain performance measures as shall be determined from time to time by the Committee. To the extent that performance measures are achieved at or between threshold and maximum levels (as shall be determined by the Committee) on a three-year cumulative basis, an additional award of PSs will be earned, net of shares previously earned for annual achievement. The Vesting Date for earned PS awards granted shall be set forth in the Award Summary.

Upon the occurrence of an event constituting a Change in Control, all PSs and dividend equivalents outstanding on such date shall be treated pursuant to the terms set forth in the Plan. Upon payment pursuant to the terms of the Plan, such awards shall be cancelled.

 

1

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3. Dividend Equivalents. The Employee shall be entitled to receive from the Company cash payments at the same time and in the same amounts that the holder of record of a number of shares of Common Stock equal to the number of PSs covered by this Agreement would be entitled to receive as dividends on such Common Stock. Such right to cash payment on a PS covered hereby shall apply to all dividends the record date for which occurs at any time during the period commencing on the date hereof and ending on the date that the Employee becomes a shareholder of record with respect to such share as a result of (i) the entitlement to shares on or after the Vesting Date as provided under Paragraph 2, or (ii) the date this PS otherwise terminates, whichever occurs first. Payments under this Paragraph shall be net of any required U.S. Federal, state or local withholding taxes.

4. Ownership Guidelines. Guidelines pertaining to the Employee’s required ownership of Common Stock shall be determined by the Committee in its sole discretion at or before the making of the Award as communicated to Employee in writing at the time this Agreement is delivered to Employee.

5. Holding Requirements. The Employee must retain fifty percent (50%) of the net shares of Common Stock acquired in connection with the PSs (net of withholding tax and exercise fees) until ownership guidelines are met under Paragraph 4 hereof. Such shares shall be held in the Employee’s Smith Barney account or at another account acceptable to the Company.

If employment terminates due to the death of the Employee, such holding requirements shall cease at the date of death. If the Employee terminates for any other reason, the holding requirement will be applicable for up to a one year period following termination.

OTHER TERMS

6. Rights of a Shareholder. Employee shall have no rights as a shareholder with respect to any shares covered by this Agreement until the date of issuance of a stock certificate to him for such shares. Except as otherwise provided herein, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued.

7. Non-Assignability. This Agreement shall not be assignable or transferable by Employee except by will or by the laws of descent and distribution.

8. Effect of Termination of Employment or Death.

(a) Effect on PSs. In the event the Employee

(i) voluntarily ceases to be an Employee of the Company or any subsidiary or affiliate for any reason other than retirement, and the PSs have not vested in accordance with Paragraph 2, the PSs shall be cancelled on the date of such voluntary termination of employment.

(ii) involuntarily ceases to be an Employee of the Company or any subsidiary or affiliate for any reason (including Disability), other than death or for Cause, or voluntarily ceases to be an Employee of the Company or any subsidiary or affiliate due to a reduction in workforce, contingent upon Employee executing a general release, which may include an agreement with respect to engagement in detrimental activity, in a form acceptable to the Company, shares will vest on a pro-rata basis for annual and three-year cumulative performance if achieved in accordance with Paragraph 2, based on the Employee’s actual months of service. For the year in which termination occurs, shares earned for that year will be calculated as follows: multiply the total award earned for that year by a fraction, the numerator of which will be the number of months of full service for that year and the denominator will be 12. Any shares earned for annual performance pursuant to this grant for years prior to such involuntary termination of employment and shares earned on a pro-rata basis for annual performance as described herein will be paid out as soon as practicable following the Vesting Date noted in the Award Summary. For three-year cumulative performance, vesting will be calculated as follows: multiply the total three-year cumulative award earned by a fraction, the numerator of which will be the number of

 

2

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months of full service during the three years and the denominator will be 36, and subtract from the sum the number of shares previously earned for annual performance pursuant to this grant. Payout shall occur as soon as practicable following the Vesting Date noted in the Award Summary.

(iii) ceases to be an Employee of the Company or any subsidiary or affiliate by reason of death, 100% of the PSs pursuant to this grant shall vest on the date of death and the certificates for shares shall be delivered in accordance with Paragraph 7 to the personal representatives, heirs or legatees of the deceased Employee.

(iv) ceases to be an Employee of the Company or any subsidiary or affiliate by reason of retirement, contingent upon Employee executing a general release, which may include an agreement with respect to engagement in detrimental activity, in a form acceptable to the Company, shares will vest on a pro-rata basis for annual and three-year cumulative performance, if achieved in accordance with Paragraph 2, based on the Employee’s actual months of service. For the year in which retirement occurs, shares earned for that year will be calculated as follows: multiply the total award earned for that year by a fraction, the numerator of which will be the number of months of full service for that year and the denominator will be 12. Any shares earned for annual performance pursuant to this grant for years prior to retirement and shares earned on a pro-rata basis for annual performance as described herein will be paid out as soon as practicable following the Vesting Date noted in the Award Summary. For three-year cumulative performance, vesting will be calculated as follows: multiply the total three-year cumulative award earned by a fraction, the numerator of which will be the number of months of full service during the three years and the denominator will be 36, and subtract from the sum the number of shares previously earned for annual performance pursuant to this grant. Payout shall occur as soon as practicable following the Vesting Date noted in the Award Summary; and

(v) ceases to be an Employee of the Company or any subsidiary or affiliate due to termination for Cause, the PSs shall be cancelled as provided under the Plan.

(b) Disability. Cessation of active employment due to commencement of long-term disability under the Company’s long-term disability plan shall not be deemed to constitute a termination of employment for purposes of this Paragraph 8 and during the continuance of such Xerox-sponsored long-term disability plan benefits the Employee shall be deemed to continue active employment with the Company. If the Employee is terminated because the Employee has received the maximum coverage under the Xerox long-term disability plan, the vesting of PSs shall be provided pursuant to Paragraph 8 (a)(ii) above.

(c) Cause. “Cause” means (i) a violation of any of the rules, policies, procedures or guidelines of the Company, including but not limited to the Company’s Business Ethics Policy and the Proprietary Information and Conflict of Interest Agreement (ii) any conduct which qualifies for “immediate discharge” under the Company’s Human Resource Policies as in effect from time to time (iii) rendering services to a firm which engages, or engaging directly or indirectly, in any business that is competitive with the Company or represents a conflict of interest with the interests of the Company; (iv) conviction of, or entering a guilty plea with respect to, a crime whether or not connected with the Company; or (v) any other conduct determined to be injurious, detrimental or prejudicial to any interest of the Company.

9. General Restrictions. If at any time the Committee or CEO, as applicable, shall determine, in its or her discretion, that the listing, registration or qualification of any shares subject to this Agreement upon any securities exchange or under any state or Federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the awarding of the PSs or the issue or purchase of shares hereunder, the certificates for shares may not be issued in respect of PSs in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee or CEO, as applicable, and any delay caused thereby shall in no way affect the date of termination of the PSs.

10. Amendment of This Agreement. With the consent of the Employee, the Committee or CEO, as applicable, may amend this Agreement in a manner not inconsistent with the Plan.

 

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11. Subsidiary. As used herein the term “subsidiary” shall mean any present or future corporation which would be a “subsidiary corporation” of the Company as the term is defined in Section 425 of the Internal Revenue Code of 1986 on the date of award.

12. Affiliate. As used herein the term “affiliate” shall mean any entity in which the Company has a significant equity interest, as determined by the Committee.

13. Non-engagement in Detrimental Activity Against the Company. If an Employee or former Employee of the Company is deemed by the Committee or its authorized delegate, as applicable, in the Committee’s or such delegate’s sole reasonable discretion as provided under the Plan, to have engaged in detrimental activity against the Company, any awards granted to such Employee or former Employee on or after January 1, 2006 shall be canceled and be of no further force or effect and any payment or delivery of an award within six months prior to such detrimental activity may be rescinded. In the event of any such rescission, the Employee shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required by the Committee or its delegate, as applicable.

14. Notices. Notices hereunder shall be in writing and if to the Company shall be mailed to the Company at P.O. Box 1600, 22B, Stamford, Connecticut 06904, addressed to the attention of Stock Plan Administrator, and if to the Employee shall be delivered personally or mailed to the Employee at his address as the same appears on the records of the Company.

15. Interpretation of This Agreement. The Committee or the CEO, as applicable, shall have the authority to interpret the Plan and this Agreement and to take whatever administrative actions, including correction of administrative errors in the awards subject to this Agreement and in this Agreement, as the Committee or the CEO in its or her sole good faith judgment shall be determined to be advisable. All decisions, interpretations and administrative actions made by the Committee or the CEO hereunder or under the Plan shall be binding and conclusive on the Company and the Employee. In the event there is inconsistency between the provisions of this Agreement and of the Plan, the provisions of the Plan shall govern.

16. Successors and Assigns. This Agreement shall be binding and inure to the benefit of the parties hereto and the successors and assigns of the Company and to the extent provided in Paragraph 8 to the personal representatives, legatees and heirs of the Employee.

17. Governing Law. The validity, construction and effect of the Agreement and any actions taken under or relating to this Agreement shall be determined in accordance with the laws of the state of New York and applicable Federal law.

18. Separability. In case any provision in the Agreement, or in any other instrument referred to herein, shall become invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions in the Agreement, or in any other instrument referred to herein, shall not in any way be affected or impaired thereby.

19. Integration of Terms. Except as otherwise provided in this Agreement, this Agreement contains the entire agreement between the parties relating to the subject matter hereof and supersedes any and all oral statements and prior writings with respect thereto.

IN WITNESS WHEREOF, the Company has executed this Agreement as of the day and year set forth on the Award Summary.

 

 

4

Exhibit 12

Xerox Corporation

Computation of Ratio of Earnings to Fixed Charges

The ratio of earnings to fixed charges, the ratio of earnings to combined fixed charges and preferred stock dividends are determined using the following applicable factors:

Earnings available for fixed charges are calculated first, by determining the sum of: (a) income (loss) from continuing operations before income taxes, (b) distributed equity income, (c) fixed charges, as defined below and (d) amortization of capitalized interest, if any. From this total, we subtract capitalized interest, if any.

Fixed charges are calculated as the sum of (a) interest costs (both expensed and capitalized), (b) amortization of debt expense and discount or premium relating to any indebtedness and (c) that portion of rental expense that is representative of the interest factor.

Preferred stock dividends used in the ratio of earnings to combined fixed charges and preferred stock dividends consist of the amount of pre-tax earnings required to cover dividends paid on our Series B convertible preferred stock and our Series C mandatory convertible preferred stock. The Series B dividends were tax deductible and, as such, were equivalent to the pre-tax earnings required to cover such dividends. The Series B convertible preferred stock was redeemed and converted to common stock as of May 27, 2004 and, as such, there were no dividends beyond such date. Series C mandatory convertible preferred stock was redeemed and converted to common stock as of July 3, 2006 and, as such, there were no dividends beyond such date.

 

		Year Ended December 31,
(in millions)		2006				2005				2004				2003				2002
Fixed charges:
Interest expense		$	544			$	557			$	708			$	884			$	896
Portion of rental expense which represents interest factor			90				74				105				77				82
Total Fixed charges		$	634			$	631			$	813			$	961			$	978
Earnings available for fixed charges:
Earnings		$	922			$	928			$	1,116			$	494			$	158
Adjusted for: Undistributed equity in income of affiliated companies			(70	)			(54	)			(89	)			(37	)			(23	)
Add: Fixed charges			634				631				813				961				978
Total Earnings available for fixed charges		$	1,486			$	1,505			$	1,840			$	1,418			$	1,113
Ratio of earnings to fixed charges			2.34				2.39				2.26				1.48				1.14

 

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Xerox Corporation

Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

 

		Year Ended December 31,
(in millions)		2006				2005				2004				2003				2002
Fixed charges:
Interest expense		$	544			$	557			$	708			$	884			$	896
Portion of rental expense which represents interest factor			90				74				105				77				82
Total Fixed charges before preferred stock dividends pre-tax income requirements			634				631				813				961				978
Preferred stock dividends pre-tax income requirements			48				94				110				90				78
Total Combined fixed charges and preferred stock dividends		$	682			$	725			$	923			$	1,051			$	1,056
Earnings available for fixed charges:
Earnings		$	922			$	928			$	1,116			$	494			$	158
Adjusted for: Undistributed equity in income of affiliated companies			(70	)			(54	)			(89	)			(37	)			(23	)
Add: Fixed charges before preferred stock dividends			634				631				813				961				978
Total Earnings available for fixed charges and preferred stock dividends		$	1,486			$	1,505			$	1,840			$	1,418			$	1,113
Ratio of earnings to combined fixed charges and preferred stock dividends			2.18				2.08				1.99				1.35				1.05

 

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EXHIBIT 13

INDEX TO ANNUAL REPORT

 

Management’s Discussion and Analysis of Results of Operations and Financial Condition		3
Executive Overview		3
Financial Overview		3
Currency Impacts		4
Summary Results		4
Application of Critical Accounting Policies		6
Results of Operations		9
Segment Revenue		9
Segment Operating Profit		13
Gross Margins		14
Research, Development and Engineering		14
Selling, Administrative and General Expenses		15
Restructuring and Asset Impairment Charges		15
Other Expenses, Net		16
Income Taxes		17
Equity in Net Income of Unconsolidated Affiliates		18
Income from Discontinued Operations		18
Recent Accounting Pronouncements		18
Capital Resources and Liquidity		18
Cash Flow Analysis		18
Customer Financing Activities and Secured Debt		20
Liquidity, Financial Flexibility and Other Financing Activity		22
Contractual Cash Obligations and Other Commercial Commitments and Contingencies		24
Off-Balance Sheet Arrangements		25
Financial Risk Management		26
Forward-Looking Statements		26
Audited Consolidated Financial Statements		27
Consolidated Statements of Income		27
Consolidated Balance Sheets		28
Consolidated Statements of Cash Flows		29
Consolidated Statements of Common Shareholders’ Equity		30

 

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Notes to Consolidated Financial Statements
1.		Summary of Significant Accounting Policies		31
2.		Segment Reporting		40
3.		Short-Term Investments		42
4.		Receivables, Net		43
5.		Inventories and Equipment on Operating Leases, Net		46
6.		Land, Buildings and Equipment, Net		46
7.		Investments in Affiliates, at Equity		47
8.		Goodwill and Intangible Assets, Net		49
9.		Restructuring and Asset Impairment Charges		50
10.		Supplementary Financial Information		52
11.		Debt		53
12.		Liability to Subsidiary Trusts Issuing Preferred Securities		57
13.		Financial Instruments		57
14.		Employee Benefit Plans		62
15.		Income and Other Taxes		66
16.		Contingencies		69
17.		Preferred Stock		77
18.		Common Stock		78
19.		Earnings Per Share		81
20.		Acquisitions		82
21.		Divestitures and Other Sales		82
22.		Subsequent Event		83
Reports of Management				84
Report of Independent Registered Public Accounting Firm				85
Quarterly Results of Operations				87
Five Years in Review				88
Certifications Pursuant to Rule 13a - 14 under the Securities Exchange Act of 1934, as amended				89

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

Executive Overview

 

Financial Overview

 

 

3

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Currency Impacts

 

Summary Results:

Revenues for the three years ended December 31, 2006 were as follows:

 

(in millions)		Year Ended December 31,									Percent Change
		2006			2005			2004			2006			2005
Equipment sales		$	4,457		$	4,519		$	4,480		(1	)%		1	%
Post sale and other revenue			10,598			10,307			10,308		3	%		—
Finance income			840			875			934		(4	)%		(6	)%
Total Revenue		$	15,895		$	15,701		$	15,722		1	%		—
Total Color revenue included in total revenue		$	5,578		$	4,928		$	4,188		13	%		18	%

The following presentation reconciles the above information to the revenue classifications included in our Consolidated Statements of Income:

 

(in millions)		Year Ended December 31,
		2006				2005				2004
Sales		$	7,464			$	7,400			$	7,259
Less: Supplies, paper and other sales			(3,007	)			(2,881	)			(2,779	)
Equipment sales		$	4,457			$	4,519			$	4,480
Service, outsourcing and rentals		$	7,591			$	7,426			$	7,529
Add: Supplies, paper and other sales			3,007				2,881				2,779
Post sale and other revenue		$	10,598			$	10,307			$	10,308

 

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Net income and diluted earnings per share for the three years ended December 31, 2006 were as follows:

 

(in millions, except share amounts)		Year Ended December 31,
		2006			2005			2004
Net income		$	1,210		$	978		$	859
Diluted earnings per share		$	1.22		$	0.94		$	0.86

 

 

5

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Application of Critical Accounting Policies

 

 

6

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7

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8

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Results of Operations

Segment Revenue

 

 

9

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Revenue by segment for the years ended 2006, 2005 and 2004 were as follows:

 

(in millions)		Production			Office			DMO			Other			Total
2006
Equipment sales		$	1,343		$	2,368		$	605		$	141		$	4,457
Post sale and other revenue			2,913			4,760			1,327			1,598			10,598
Finance income			323			497			6			14			840
Total Revenue		$	4,579		$	7,625		$	1,938		$	1,753		$	15,895
2005
Equipment sales		$	1,368		$	2,436		$	558		$	157		$	4,519
Post sale and other revenue			2,830			4,670			1,245			1,562			10,307
Finance income			342			512			9			12			875
Total Revenue		$	4,540		$	7,618		$	1,812		$	1,731		$	15,701
2004
Equipment sales		$	1,358		$	2,431		$	503		$	188		$	4,480
Post sale and other revenue			2,880			4,644			1,194			1,590			10,308
Finance income			352			552			10			20			934
Total Revenue		$	4,590		$	7,627		$	1,707		$	1,798		$	15,722

Equipment Sales

 

 

10

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Production

Office

 

11

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DMO

Other

Post Sale and Other Revenue

 

2007 Projected Revenues

 

12

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Segment Operating Profit

Segment Operating profit and operating margin for the three years ended December 31, 2006 were as follows:

 

(in millions)		Production				Office				DMO				Other				Total
2006
Operating Profit		$	403			$	832			$	124			$	31			$	1,390
Operating Margin			8.8	%			10.9	%			6.4	%			1.8	%			8.7	%
2005
Operating Profit		$	427			$	819			$	64			$	151			$	1,461
Operating Margin			9.4	%			10.8	%			3.5	%			8.7	%			9.3	%
2004
Operating Profit		$	511			$	779			$	35			$	(125	)		$	1,200
Operating Margin			11.1	%			10.2	%			2.1	%			(7.0	)%			7.6	%

 

 

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14

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Other Expenses, Net: Other expenses, net for the three years ended December 31, 2006 consisted of the following:

 

		Year Ended December 31,
(in millions)		2006				2005				2004
Non-financing interest expense		$	239			$	231			$	363
Interest income			(69	)			(138	)			(75	)
Gain on sales of businesses and assets			(44	)			(97	)			(61	)
Currency losses, net			39				5				73
Amortization of intangible assets			41				38				37
Legal matters			89				115				9
Minorities’ interests in earnings of subsidiaries			22				15				8
Loss on extinguishment of debt			15				—				—
All other expenses, net			4				55				15
Total Other expenses, net		$	336			$	224			$	369

 

 

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Income tax (benefits) expenses were as follows (in millions):

 

		Year Ended December 31,
		2006				2005				2004
Pre-tax income		$	808			$	830			$	965
Income tax (benefits) expenses			(288	)			(5	)			340
Effective tax rate			(35.6	)%			(0.6	)%			35.2	%

 

 

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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 Consolidated Financial Statements:

 

														Amount Change
(in millions)		2006				2005				2004				2006				2005
Net cash provided by operating activities		$	1,617			$	1,420			$	1,750			$	197			$	(330	)
Net cash (used in) provided by investing activities			(143	)			(295	)			203				152				(498	)
Net cash used in financing activities			(1,428	)			(2,962	)			(1,293	)			1,534				(1,669	)
Effect of exchange rate changes on cash and cash equivalents			31				(59	)			81				90				(140	)
Increase (decrease) in cash and cash equivalents			77				(1,896	)			741				1,973				(2,637	)
Cash and cash equivalents at beginning of period			1,322				3,218				2,477				(1,896	)			741
Cash and cash equivalents at end of period		$	1,399			$	1,322			$	3,218			$	77			$	(1,896	)

 

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Cash, cash equivalents and Short-term investments reported in our Consolidated Financial Statements were as follows:

 

		2006			2005
Cash and cash equivalents		$	1,399		$	1,322
Short-term investments			137			244
Total Cash, cash equivalents and Short-term investments		$	1,536		$	1,566

 

 

19

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Financing Activity

 

 

20

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The following represents our aggregate debt maturity schedule as of December 31, 2006:

 

(in millions)		Unsecured Debt			Debt Secured by Finance Receivables			Other Secured Debt			Total Debt
2007		$	295		$	1,178		$	12		$	1,485	(1)
2008			9			722			5			736
2009			1,055			109			5			1,169
2010			687			44			2			733
2011			800			6			—			806
Thereafter			2,212			—			4			2,216
Total		$	5,058		$	2,059		$	28		$	7,145

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(1)	Quarterly secured and unsecured total debt maturities for 2007 are $215 million, $421 million, $626 million and $223 million for the first, second, third and fourth quarters, respectively.

 

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22

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Credit Ratings: During 2006, Moody’s and Fitch upgraded our credit rating to investment grade. Our credit ratings as of January 30, 2007 were as follows:

 

		Senior Unsecured Debt		Outlook		Comments
Moody’s(1)		Baa3		Positive		The Moody’s rating was upgraded from Ba1 in November 2006. The outlook remains positive since being upgraded in November 2006.
Standard & Poors (“S&P”)(2)		BB+		Positive		The S&P rating was upgraded from BB- in March 2006 and the outlook was revised from stable to positive in January 2007.
Fitch(3)		BBB-		Stable		The Fitch rating was upgraded from BB+ in August 2006.

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(1)

In November 2006, Moody’s upgraded the Senior Unsecured rating from Ba1 to Baa3, a one notch upgrade. Moody’s maintains a Positive Outlook on the credit. In conjunction with the upgrade to investment grade ratings for the senior unsecured debt, Moody’s has withdrawn all Loss Given Default assessments and Speculative Grade Liquidity ratings as they are only appropriate for non-investment grade issuers. Moody’s ratings upgrades also included: Senior unsecured shelf registration to Baa3 from Ba1; Trust preferred to Ba1 from Ba2; subordinated shelf registration to Ba1 from Ba2 and preferred shelf registration to Ba1 from Ba2.

(2)

In March 2006, S&P upgraded the Senior Unsecured and Corporate Credit rating from BB- to BB+, a two notch upgrade. At the same time, S&P revised its outlook from Positive to Stable on all associated ratings, affirmed the short-term speculative-grade rating at B-1 and upgraded the ratings on Subordinated debt from B to BB- and Preferred Stock from B- to B+. As a result of the rating change, S&P removed Xerox from Credit Watch in March 2006. In January 2007, S&P revised its outlook from Stable to Positive on all associated ratings.

(3)

In August 2006, Fitch upgraded its debt ratings and assigned a stable outlook on Xerox. Fitch had upgraded the senior unsecured debt of Xerox from BB+ to BBB- and also upgraded the Trust Preferred securities from BB- to BB, both one notch upgrades. In March 2006, Fitch affirmed its ratings and positive outlook on Xerox in conjunction with its 2016 Senior Notes offering. Fitch had upgraded the senior unsecured debt of Xerox from BB to BB+, and also upgraded the Trust Preferred securities from B+ to BB-, both one notch upgrades in August 2005.

 

 

23

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Contractual Cash Obligations and Other Commercial Commitments and Contingencies: At December 31, 2006, we had the following contractual cash obligations and other commercial commitments and contingencies (in millions):

 

		Year 1			Years 2-3						Years 4-5
		2007			2008			2009			2010			2011			Thereafter
Long-term debt, including capital lease obligations(1)		$	1,485		$	736		$	1,169		$	733		$	806		$	2,216
Minimum operating lease commitments(2)			189			161			124			102			84			158
Liabilities to subsidiary trusts issuing preferred securities(3)			—			—			—			—			—			624
Retiree Health Payments			102			115			123			127			128			665
Purchase Commitments
Flextronics(4)			644			—			—			—			—			—
EDS Contracts(5)			277			270			132			—			—			—
Other(6)			39			30			30			—			—			—
Total Contractual Cash Obligations		$	2,736		$	1,312		$	1,578		$	962		$	1,018		$	3,663

---

(1)	Refer to Note 11 – Debt to our Consolidated Financial Statements for interest payments by us as well 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 – Liability to Subsidiary Trusts Issuing Preferred Securities to our Consolidated Financial Statements for interest payments by us as well as for additional information related to liabilities to subsidiary trusts issuing preferred securities (amounts above include principal portion only).

(4)

Flextronics: We outsource certain manufacturing activities to Flextronics and are currently operating under a one-year automatically renewed agreement which may expire on November 30, 2007, but is subject to automatic renewal for an additional one year period. We expect to enter into a negotiated renewal agreement in 2007 which has a term of at least three years.

(5)

EDS Contracts: We have an information management contract with Electronic Data Systems Corp. (“EDS”) to provide services to us for global mainframe system processing, application maintenance and support, desktop services and helpdesk support, voice and data network management, and server management through June 30, 2009. There are no minimum payments required under the contract. We can terminate the current contract for convenience with six months notice, as defined in the contract, with no termination fee and with payment to EDS for costs incurred as of the termination date. Should we terminate the contract for convenience, we have an option to purchase the assets placed in service under the EDS contract.

(6)

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.

Other Commercial Commitments and Contingencies

 

24

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Off-Balance Sheet Arrangements

 

 

25

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Financial Risk Management

 

Forward-Looking Statements

 

 

26

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XEROX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

 

		Year ended December 31,
(in millions, except per-share data)		2006				2005				2004
Revenues
Sales		$	7,464			$	7,400			$	7,259
Service, outsourcing and rentals			7,591				7,426				7,529
Finance income			840				875				934
Total Revenues			15,895				15,701				15,722
Costs and Expenses
Cost of sales			4,803				4,695				4,545
Cost of service, outsourcing and rentals			4,328				4,207				4,295
Equipment financing interest			305				326				345
Research, development and engineering expenses			922				943				914
Selling, administrative and general expenses			4,008				4,110				4,203
Restructuring and asset impairment charges			385				366				86
Other expenses, net			336				224				369
Total Costs and Expenses			15,087				14,871				14,757
Income from Continuing Operations before Income Taxes, Equity Income, Discontinued Operations and Cumulative Effect of Change in Accounting Principle			808				830				965
Income tax (benefits) expenses			(288	)			(5	)			340
Equity in net income of unconsolidated affiliates			114				98				151
Income from Continuing Operations before Discontinued Operations and Cumulative Effect of Change in Accounting Principle			1,210				933				776
Income from Discontinued Operations, net of tax			—				53				83
Cumulative Effect of Change in Accounting Principle, net of tax			—				(8	)			—
Net Income		$	1,210			$	978			$	859
Basic Earnings per Share
Income from Continuing Operations		$	1.25			$	0.91			$	0.84
Basic Earnings per Share		$	1.25			$	0.96			$	0.94
Diluted Earnings per Share
Income from Continuing Operations		$	1.22			$	0.90			$	0.78
Diluted Earnings per Share		$	1.22			$	0.94			$	0.86

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

27

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XEROX CORPORATION

CONSOLIDATED BALANCE SHEETS

 

		December 31,
(in millions, except share data in thousands)		2006				2005
Assets
Cash and cash equivalents		$	1,399			$	1,322
Short-term investments			137				244
Total cash, cash equivalents and short-term investments			1,536				1,566
Accounts receivable, net			2,199				2,037
Billed portion of finance receivables, net			273				296
Finance receivables, net			2,649				2,604
Inventories			1,163				1,201
Other current assets			934				1,032
Total current assets			8,754				8,736
Finance receivables due after one year, net			4,922				4,949
Equipment on operating leases, net			481				431
Land, buildings and equipment, net			1,527				1,627
Investments in affiliates, at equity			874				782
Intangible assets, net			286				289
Goodwill			2,024				1,671
Deferred tax assets, long-term			1,790				1,547
Other long-term assets			1,051				1,921
Total Assets		$	21,709			$	21,953
Liabilities and Equity
Short-term debt and current portion of long-term debt		$	1,485			$	1,139
Accounts payable			1,133				1,043
Accrued compensation and benefits costs			663				621
Other current liabilities			1,417				1,543
Total current liabilities			4,698				4,346
Long-term debt			5,660				6,139
Liabilities to subsidiary trusts issuing preferred securities			624				626
Pension and other benefit liabilities			1,336				1,151
Post-retirement medical benefits			1,490				1,188
Other long-term liabilities			821				1,295
Total liabilities			14,629				14,745
Series C mandatory convertible preferred stock			—				889
Common stock, including additional paid-in-capital			4,666				4,741
Treasury stock, at cost			(141	)			(203	)
Retained earnings			4,202				3,021
Accumulated other comprehensive loss			(1,647	)			(1,240	)
Total Liabilities and Equity		$	21,709			$	21,953
Shares of common stock issued			954,568				945,106
Treasury stock			(8,363	)			(13,917	)
Shares of common stock outstanding			946,205				931,189

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

28

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XEROX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Year ended December 31,
(in millions)		2006				2005				2004
Cash Flows from Operating Activities:
Net income		$	1,210			$	978			$	859
Adjustments required to reconcile net income to cash flows from operating activities:
Depreciation and amortization			636				641				688
Provisions for receivables and inventory			145				107				159
Deferred tax expense (benefit)			99				(15	)			155
Net gain on sales of businesses and assets			(44	)			(97	)			(61	)
Undistributed equity in net income of unconsolidated affiliates			(70	)			(54	)			(89	)
Income from discontinued operations			—				(53	)			(83	)
Stock-based compensation			64				40				22
Restructuring and asset impairment charges			385				366				86
Cash payments for restructurings			(265	)			(214	)			(187	)
Contributions to pension benefit plans			(355	)			(388	)			(409	)
Decrease (increase) in inventories			11				(162	)			(38	)
Increase in equipment on operating leases			(271	)			(248	)			(234	)
Decrease in finance receivables			192				254				337
(Increase) decrease in accounts receivable and billed portion of finance receivables			(30	)			(34	)			224
Decrease in other current and long-term assets			64				160				107
Increase in accounts payable and accrued compensation			330				313				333
Net change in income tax assets and liabilities			(459	)			(211	)			(68	)
Net change in derivative assets and liabilities			9				38				(23	)
(Decrease) increase in other current and long-term liabilities			(70	)			7				(79	)
Other, net			36				(8	)			51
Net cash provided by operating activities			1,617				1,420				1,750
Cash Flows from Investing Activities:
Purchases of short-term investments			(162	)			(386	)			—
Proceeds from sales of short-term investments			269				139				—
Cost of additions to land, buildings and equipment			(215	)			(181	)			(204	)
Proceeds from sales of land, buildings and equipment			82				5				53
Cost of additions to internal use software			(79	)			(56	)			(48	)
Proceeds from divestitures and investments, net			153				105				191
Acquisitions, net of cash acquired			(229	)			(1	)			(12	)
Net change in escrow and other restricted investments			38				80				223
Net cash (used in) provided by investing activities			(143	)			(295	)			203
Cash Flows from Financing Activities:
Cash proceeds from new secured financings			121				557				2,061
Debt payments on secured financings			(1,712	)			(1,879	)			(1,906	)
Net cash proceeds (payments) on other debt			1,276				(1,187	)			(1,422	)
Payments of liability to subsidiary trusts issuing preferred securities			(100	)			—				—
Preferred stock dividends			(43	)			(58	)			(83	)
Proceeds from issuances of common stock			82				40				73
Excess tax benefits from stock-based compensation			25				—				—
Payments to acquire treasury stock			(1,069	)			(433	)			—
Other			(8	)			(2	)			(16	)
Net cash used in financing activities			(1,428	)			(2,962	)			(1,293	)
Effect of exchange rate changes on cash and cash equivalents			31				(59	)			81
Increase (decrease) in cash and cash equivalents			77				(1,896	)			741
Cash and cash equivalents at beginning of year			1,322				3,218				2,477
Cash and cash equivalents at end of year		$	1,399			$	1,322			$	3,218

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

29

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XEROX CORPORATION

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS’ EQUITY

 

(in millions, except share data in thousands)		Common Stock Shares			Common Stock Amount				Additional Paid-In- Capital				Treasury Stock Shares			Treasury Stock Amount				Retained Earnings				Accumulated Other Comprehensive Loss(1)				Total
Balance at December 31, 2003		793,884			$	794			$	2,445			—				—			$	1,315			$	(1,263	)		$	3,291
Net income																					859								859
Translation adjustments																									453				453
Minimum pension liability																									86				86
Other unrealized gains																									4				4
Other realized gains																									(18	)			(18	)
Comprehensive income																												$	1,384
Stock option and incentive plans, net		11,433				11				111																			122
Series B convertible preferred stock conversion		37,040				37				446																			483
Series B convertible preferred stock dividends ($2.54 per share)																					(15	)							(15	)
Series C mandatory convertible preferred stock dividends ($6.25 per share)																					(58	)							(58	)
Conversion of liability to subsidiary trust		113,415				113				922																			1,035
Other		225				1				1																			2
Balance at December 31, 2004		955,997			$	956			$	3,925			—				—			$	2,101			$	(738	)		$	6,244
Net income																					978								978
Translation adjustments																									(493	)			(493	)
Minimum pension liability																									(6	)			(6	)
Other unrealized losses																									(3	)			(3	)
Comprehensive income																												$	476
Stock option and incentive plans, net		5,548				6				84																			90
Series C mandatory convertible preferred stock dividends ($6.25 per share)																					(58	)							(58	)
Payments to acquire treasury stock													(30,502	)			(433	)											(433	)
Cancellation of treasury stock		(16,585	)			(17	)			(213	)		16,585				230												—
Other		146																											—
Balance at December 31, 2005		945,106			$	945			$	3,796			(13,917	)		$	(203	)		$	3,021			$	(1,240	)		$	6,319
Net income																					1,210								1,210
Translation adjustments																									485				485
Minimum pension liability																									131				131
Other unrealized gains																									1				1
Comprehensive income																												$	1,827
Adjustment to initially apply FAS No. 158, net (Refer to Note 1)																									(1,024	)			(1,024	)
Stock option and incentive plans, net		10,256				11				156																			167
Series C mandatory convertible preferred stock dividends ($6.25 per share)																					(29	)							(29	)
Series C mandatory convertible preferred stock conversion		74,797				75				814																			889
Payments to acquire treasury stock													(70,111	)			(1,069	)											(1,069	)
Cancellation of treasury stock		(75,665	)			(75	)			(1,056	)		75,665				1,131												—
Other		74																											—
Balance at December 31, 2006		954,568			$	956			$	3,710			(8,363	)		$	(141	)		$	4,202			$	(1,647	)		$	7,080

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(1)	As of December 31, 2006, Accumulated other comprehensive loss is composed of cumulative translation adjustments of $(532), other unrealized gains of $2, benefit plans net unfunded status of $(1,097) and Fuji Xerox’s minimum pension liabilities of $(20).

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

30

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 1 – Summary of Significant Accounting Policies

 

 

31

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

The following table summarizes certain significant charges that require management estimates:

 

		Year ended December 31,
(in millions)		2006			2005				2004
Restructuring provisions and asset impairments		$	385		$	366			$	86
Amortization of intangible assets			45			42				38
Provisions for receivables			76			51				86
Provisions for obsolete and excess inventory			69			56				73
Provisions for litigation and regulatory matters			89			115				9
Depreciation and obsolescence of equipment on operating leases			230			205				210
Depreciation of buildings and equipment			277			280				305
Amortization of capitalized software			84			114				134
Pension benefits – net periodic benefit cost			355			343				350
Other post-retirement benefits – net periodic benefit cost			117			117				111
Deferred tax asset valuation allowance provisions			12			(38	)			12

 

New Accounting Standards and Accounting Changes:

 

 

32

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

The following represents the effect of FAS 158 adoption within the Consolidated Balance Sheets as of December 31, 2006:

 

		Before Application of FAS 158				Adjustments Increase/(Decrease)				After Application of FAS 158
Other current assets		$	923			$	11			$	934
Total current assets			8,743				11				8,754
Deferred tax assets, long-term			1,446				344				1,790
Other long-term assets			2,048				(997	)			1,051
Total Assets			22,351				(642	)			21,709
Pension and other benefit liabilities			1,120				216				1,336
Post-retirement medical benefits			1,205				285				1,490
Other long-term liabilities			940				(119	)			821
Total Liabilities			14,247				382				14,629
Accumulated other comprehensive loss			(623	)			(1,024	)			(1,647	)
Total Liabilities and Equity			22,351				(642	)			21,709

 

 

33

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

34

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

(in millions, except per share data)		2005				2004
Net income – as reported		$	978			$	859
Add: Stock-based employee compensation expense included in reported net income, net of tax			25				13
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax			(113	)			(82	)
Net income – pro forma		$	890			$	790
Basic EPS – as reported		$	0.96			$	0.94
Basic EPS – pro forma			0.87				0.86
Diluted EPS – as reported		$	0.94			$	0.86
Diluted EPS – pro forma			0.85				0.80

 

Summary of Accounting Policies:

 

 

35

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

36

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

37

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

38

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

39

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 2 – Segment Reporting

 

 

40

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Selected financial information for our operating segments for each of the years ended December 31, 2006, 2005 and 2004, respectively, was as follows (in millions):

 

		Production			Office			DMO			Other				Total
2006(1)
Information about profit or loss:
Revenues		$	4,256		$	7,128		$	1,932		$	1,739			$	15,055
Finance income			323			497			6			14				840
Total Segment revenues		$	4,579		$	7,625		$	1,938		$	1,753			$	15,895
Interest expense(2)		$	120		$	179		$	7		$	238			$	544
Segment profit(3)			403			832			124			31				1,390
Equity in net income of unconsolidated affiliates		$	—		$	—		$	5		$	109			$	114
2005(1)
Information about profit or loss:
Revenues		$	4,198		$	7,106		$	1,803		$	1,719			$	14,826
Finance income			342			512			9			12				875
Total Segment revenues		$	4,540		$	7,618		$	1,812		$	1,731			$	15,701
Interest expense(2)		$	121		$	179		$	8		$	249			$	557
Segment profit(3)			427			819			64			151				1,461
Equity in net income of unconsolidated affiliates		$	—		$	—		$	4		$	94			$	98
2004(1)
Information about profit or loss:
Revenues		$	4,238		$	7,075		$	1,697		$	1,778			$	14,788
Finance income			352			552			10			20				934
Total Segment revenues		$	4,590		$	7,627		$	1,707		$	1,798			$	15,722
Interest expense(2)		$	114		$	176		$	12		$	406			$	708
Segment profit (loss)(3)			511			779			35			(125	)			1,200
Equity in net income of unconsolidated affiliates		$	—		$	—		$	3		$	148			$	151

---

(1)	Asset information on a segment basis is not disclosed as this information is not separately identified and internally reported to our chief executive officer.

(2)	Interest expense includes equipment financing interest as well as non-financing interest, which is a component of Other expenses, net.

(3)

Depreciation and amortization expense is recorded in cost of sales, research, development and engineering expenses and selling, administrative and general expenses and is included in the segment profit (loss) above. This information is neither identified nor internally reported to our chief executive officer. The separate identification of this information for purposes of segment disclosure is impracticable, as it is not readily available and the cost to develop it would be excessive.

 

41

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

The following is a reconciliation of segment profit to pre-tax income (in millions):

 

		Years ended December 31,
		2006				2005				2004
Total Segment profit		$	1,390			$	1,461			$	1,200
Reconciling items:
Restructuring and asset impairment charges			(385	)			(366	)			(86	)
Provisions for litigation matters(1)			(68	)			(114	)			—
Initial provision for WEEE Directive			—				(26	)			—
Hurricane Katrina adjustments (losses)			8				(15	)			—
Other expenses, net			(23	)			(12	)			2
Equity in net income of unconsolidated affiliates			(114	)			(98	)			(151	)
Pre-tax income		$	808			$	830			$	965

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(1)

2006 provision for litigation includes $68 related to probable losses on Brazilian labor-related contingencies. 2005 provision for litigation primarily includes $102 related to MPI arbitration panel ruling. Refer to Note 16 – Contingencies for further discussion relating to the 2006 and 2005 annual periods.

Geographic area data was as follows:

 

		Revenues									Long-Lived Assets(1)
(in millions)		2006			2005			2004			2006			2005			2004
United States		$	8,406		$	8,388		$	8,346		$	1,309		$	1,386		$	1,427
Europe			5,378			5,226			5,281			572			500			585
Other Areas			2,111			2,087			2,095			356			386			434
Total		$	15,895		$	15,701		$	15,722		$	2,237		$	2,272		$	2,446

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(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

 

 

42

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NOTES 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 or Less			Due After 1 Year Through 5 Years			Due After 5 Years Through 10 Years			Due After 10 Years			Total
Description of Securities
Corporate bonds		$	65		$	—		$	—		$	—		$	65
Auction rate municipal bonds			—			—			—			31			31
US government agency securities			23			—			—			—			23
Certificates of deposit			8			—			—			—			8
Total Debt Securities		$	96		$	—		$	—		$	31		$	127
Auction rate preferred securities															10
Total Short-term investments														$	137

 

2005		Due In 1 Year or Less			Due After 1 Year Through 5 Years			Due After 5 Years Through 10 Years			Due After 10 Years			Total
Description of Securities
Corporate bonds		$	93		$	51		$	—		$	—		$	144
Auction rate municipal bonds			—			—			—			45			45
US government agency securities			13			19			—			—			32
Total Debt Securities		$	106		$	70		$	—		$	45		$	221
Auction rate preferred securities															23
Total Short-term investments														$	244

Actual maturities may differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations. These securities are classified within current assets because they are highly liquid, traded in active markets and are available for use, if needed, for current operations.

Note 4 – Receivables, Net

Finance Receivables: Finance receivables result from installment arrangements and sales-type leases arising from the marketing of our equipment. These receivables are typically collateralized by a security interest in the underlying assets. Finance receivables, net at December 31, 2006 and 2005 were as follows (in millions):

 

		2006				2005
Gross receivables		$	9,389			$	9,449
Unearned income			(1,437	)			(1,458	)
Unguaranteed residual values			90				87
Allowance for doubtful accounts			(198	)			(229	)
Finance receivables, net			7,844				7,849
Less: Billed portion of finance receivables, net			(273	)			(296	)
Current portion of finance receivables not billed, net			(2,649	)			(2,604	)
Amounts due after one year, net		$	4,922			$	4,949

 

43

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Contractual maturities of our gross finance receivables as of December 31, 2006 were as follows (including those already billed of $273) (in millions):

 

2007		2008			2009			2010			2011			Thereafter			Total
$3,530		$	2,589		$	1,813		$	1,050		$	362		$	45		$	9,389

Secured Funding Arrangements

 

 

44

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

The following table shows finance receivables and related secured debt as of December 31, 2006 and 2005. Although the finance receivables are consolidated assets they are generally not available to satisfy our other obligations:

 

				December 31, 2006						December 31, 2005
(in millions)		Facility Amount		Finance Receivables, Net			Secured Debt			Finance Receivables, Net			Secured Debt
Finance Receivables Encumbered by Loans:
GE secured loans:
GE Loans – U.S.		$5 billion		$	941		$	782		$	1,888		$	1,701
GE Loans – U.K.		£400 million (U.S. $785)			669			609			637			581
GE Loans – Canada		Cdn. $850 million (U.S. $733)			115			88			258			174
Total GE encumbered finance receivables, net					1,725			1,479			2,783			2,456
Merrill Lynch Loan – France		€420 million (U.S. $552)			501			419			430			342
DLL – Netherlands		N/A			197			161			216			184
Total encumbered finance receivables, net					2,423		$	2,059			3,429		$	2,982
Unencumbered finance receivables, net					5,421						4,420
Total Finance receivables, net(1)				$	7,844					$	7,849

---

(1)	Includes (i) billed portion of finance receivables, 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.

 

 

45

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 5 – Inventories and Equipment on Operating Leases, Net

 

Note 6 – Land, Buildings and Equipment, Net

Land, buildings and equipment, net at December 31, 2006 and 2005 were as follows (in millions):

 

		Estimated Useful Lives (Years)		2006				2005
Land				$	46			$	51
Buildings and building equipment		25 to 50			1,120				1,163
Leasehold improvements		Varies			338				326
Plant machinery		5 to 12			1,613				1,637
Office furniture and equipment		3 to 15			949				967
Other		4 to 20			73				76
Construction in progress					125				83
Subtotal					4,264				4,303
Less: Accumulated depreciation					(2,737	)			(2,676	)
Land, buildings and equipment, net				$	1,527			$	1,627

 

46

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Depreciation expense was $277, $280 and $305 for the years ended December 31, 2006, 2005 and 2004, respectively. We lease certain land, buildings and equipment, substantially all of which are accounted for as operating leases. Total rent expense under operating leases for the years ended December 31, 2006, 2005 and 2004 amounted to $269, $267, and $316, respectively. Future minimum operating lease commitments that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2006 were as follows:

 

2007		2008		2009		2010		2011		Thereafter
$  189		$  161		$  124		$  102		$  84		$  158

 

Note 7 – Investments in Affiliates, at Equity

 

 

47

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Condensed financial data of Fuji Xerox for the three calendar years ended December 31, 2006 was as follows (in millions):

 

		2006			2005			2004
Summary of Operations:
Revenues		$	9,859		$	10,009		$	9,450
Costs and expenses			9,119			9,406			8,595
Income before income taxes			740			603			855
Income taxes			281			215			331
Minorities’ interests			5			8			18
Net income		$	454		$	380		$	506
Balance Sheet Data:
Assets:
Current assets		$	3,731		$	3,454		$	3,613
Long-term assets			4,184			4,168			4,606
Total Assets		$	7,915		$	7,622		$	8,219
Liabilities and Shareholders’ Equity:
Current liabilities		$	2,954		$	2,991		$	2,757
Long-term debt			685			434			616
Other long-term liabilities			590			936			1,383
Minorities’ interests in equity of subsidiaries			21			17			104
Shareholders’ equity			3,665			3,244			3,359
Total Liabilities and Shareholders’ Equity		$	7,915		$	7,622		$	8,219

 

 

48

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

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				Total
Balance at January 1, 2004		$	771			$	827			$	—		$	124			$	1,722
Foreign currency translation adjustment			77				54				—			1				132
Other			—				—				—			(6	)			(6	)
Balance at December 31, 2004			848				881				—			119				1,848
Foreign currency translation adjustment			(103	)			(74	)			—			—				(177	)
Balance at December 31, 2005			745				807				—			119				1,671
Foreign currency translation adjustment			99				69				—			1				169
Acquisition of Amici LLC			—				—				—			136				136
Acquisition of XMPie, Inc.			48				—				—			—				48
Balance at December 31, 2006		$	892			$	876			$	—		$	256			$	2,024

Intangible Assets, Net:

Intangible assets primarily relate to the Office operating segment. Intangible assets were comprised of the following as of December 31, 2006 and 2005 (in millions):

 

		Weighted Average Amortization Period		As of December 31, 2006:									As of December 31, 2005:
				Gross Carrying Amount			Accumulated Amortization			Net Amount			Gross Carrying Amount			Accumulated Amortization			Net Amount
Installed customer base		16 years		$	258		$	89		$	169		$	226		$	72		$	154
Distribution network		25 years			123			35			88			123			30			93
Technology and trademarks		7 years			165			136			29			156			114			42
				$	546		$	260		$	286		$	505		$	216		$	289

 

 

49

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

Restructuring Activity		Severance and Related Costs				Lease Cancellation and Other Costs				Asset Impairments(1)				Legacy Programs(2)				Total
Ending Balance December 31, 2003		$	143			$	36			$	—			$	42			$	221
Restructuring Provision			95				8				1				2				106
Reversals of prior accruals			(11	)			—				—				(9	)			(20	)
Net current year charges(3)			84				8				1				(7	)			86
Charges against reserve and currency			(157	)			(21	)			(1	)			(11	)			(190	)
Ending Balance December 31, 2004		$	70			$	23			$	—			$	24			$	117
Restructuring Provision			371				12				15				1				399
Reversals of prior accruals			(21	)			(6	)			—				(6	)			(33	)
Net current year charges(3)			350				6				15				(5	)			366
Charges against reserve and currency			(203	)			(10	)			(15	)			(19	)			(247	)
Ending Balance December 31, 2005		$	217			$	19			$	—			$	—			$	236
Restructuring Provision			351				39				30				—				420
Reversals of prior accruals			(33	)			(2	)			—				—				(35	)
Net current year charges(3)			318				37				30				—				385
Charges against reserve and currency			(242	)			(12	)			(30	)			—				(284	)
Ending Balance December 31, 2006		$	293			$	44			$	—			$	—			$	337

---

(1)	Charges associated with asset impairments represent the write-down of the related assets to their new cost basis and are recorded concurrently with the recognition of the provision.

(2)	Legacy Programs, includes the runoff activity of several predecessor restructuring programs which were initiated between 2000 and 2001.

(3)	Represents amount recognized within the Consolidated Statements of Income for the years shown.

 

50

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

51

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 10 – Supplementary Financial Information

 

 

 

52

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 11 – Debt

 

 

53

---

NOTES TO THE CONSOLIDATED 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
Xerox Corporation
Notes due 2008		5.89	%		$	3			$	27
Senior Notes due 2009(1)		10.75				613				620
Euro Senior Notes due 2009(1)		10.60				290				260
Senior Notes due 2010(1)		7.62				687				688
Notes due 2011		7.01				50				50
Senior Notes due 2011(1)		7.13				750				752
Senior Notes due 2013(1)		7.63				541				542
Convertible Notes due 2014		9.00				19				19
Notes due 2016(1)		7.62				248				251
2003 Credit Facility due 2008		—				—				300
Floating Senior Notes due 2009		6.16				150				—
Senior Notes due 2016(1)		6.48				696				—
Senior Notes due 2017(1)		6.83				497				—
Subtotal					$	4,544			$	3,509
Xerox Credit Corporation
Yen notes due 2007		5.44				252				255
Notes due 2012		7.07				75				75
Notes due 2013		6.49				60				60
Notes due 2014		6.06				50				50
Notes due 2018		7.00				25				25
Subtotal					$	462			$	465
Other U.S. Operations
Borrowings secured by finance receivables(2)		4.95				782				1,701
Borrowings secured by other assets		9.61				10				220
Subtotal					$	792			$	1,921
Total U.S. Operations					$	5,798			$	5,895
International Operations
Pound Sterling secured borrowings due 2008(2)		6.04				609				581
Euro secured borrowings due 2006-2015(2)		4.62				580				526
Canadian dollars secured borrowings due 2006-2008(2)		5.49				88				174
Other debt due 2006-2010		6.32				50				62
Total International Operations						1,327				1,343
Subtotal						7,125				7,238
Less current maturities						(1,465	)			(1,099	)
Total Long-term debt					$	5,660			$	6,139

---

(1)	The principal amounts of these debt instruments have been adjusted for the effects of fair value hedge accounting, as described in Note 13 – Financial Instruments, premiums and discounts.

 

54

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

The following summarizes the principal amounts of those instruments as of December 31, 2006:

 

Senior Notes due 2009		$	600
Euro Senior Notes due 2009			296
Senior Notes due 2010			700
Senior Notes due 2011			750
Senior Notes due 2013			550
Notes due 2016			250
Senior Notes due 2016			700
Senior Notes due 2017			500

 

(2)	Refer to Note 4 – Receivables, Net, for further discussion of borrowings secured by finance receivables, net.

Scheduled payments due on long-term debt for the next five years and thereafter are as follows (in millions):

 

2007		2008		2009		2010		2011		Thereafter		Total
$1,465		$736		$1,169		$733		$806		$2,216		$7,125

2006 Credit Facility

 

55

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Termination of 2003 Credit Facility

Senior Notes Offerings

 

56

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Net cash payments on other debt as shown on the Consolidated Statements of Cash Flows for the three years ended December 31, 2006 was as follows (in millions):

 

		2006				2005				2004
Cash (payments) proceeds on notes payable, net		$	(19	)		$	4			$	(6	)
Net cash proceeds from issuance of long-term debt(1)			1,502				50				974
Cash payments on long-term debt			(207	)			(1,241	)			(2,390	)
Net cash proceeds (payments) on other debt		$	1,276			$	(1,187	)		$	(1,422	)

---

(1)	Includes payment of debt issuance costs.

Note 12 – Liability to Subsidiary Trusts Issuing Preferred Securities

 

Note 13 – Financial Instruments

 

 

57

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

58

---

NOTES TO THE CONSOLIDATED 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 hedges. The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments. No ineffective portion was recorded to earnings during 2006, 2005, or 2004. The following is a summary of our fair value hedges at December 31, 2006:

 

Debt Instrument		Year First Designated		Notional Amount			Net Liability Fair Value			Weighted- average Interest Rate Paid			Interest Rate Received			Basis		Maturity
Senior Notes due 2010		2003/2005		$	400		$	8.3		7.83	%		7.13	%		Libor		2010
Notes due 2016		2004			250			5.7		7.62	%		7.20	%		Libor		2016
Senior Notes due 2011		2004			250			6.9		7.84	%		6.88	%		Libor		2011
Liability to Capital Trust I		2005			450			21.4		7.46	%		8.00	%		Libor		2027
Total				$	1,350		$	42.3

 

 

59

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

60

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Fair Value of Financial Instruments: The estimated fair values of our financial instruments at December 31, 2006 and 2005 were as follows:

 

		2006						2005
(in millions)		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents		$	1,399		$	1,399		$	1,322		$	1,322
Short-term investments			137			137			244			244
Accounts receivable, net			2,199			2,199			2,037			2,037
Short-term debt			1,485			1,487			1,139			1,134
Long-term debt			5,660			5,917			6,139			6,312
Short-term liabilities to trusts issuing preferred securities(1)			—			—			98			96
Long-term liabilities to trusts issuing preferred securities			624			640			626			642

---

(1)	Recognized as a component of Other current liabilities within the Consolidated Balance Sheet.

 

 

61

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 14 – Employee Benefit Plans

We sponsor numerous pension and other post-retirement benefit plans, primarily retiree health, in our U.S. and international operations. September 30 is the measurement date for most of our European plans and December 31 is the measurement date for all of our other post-retirement benefit plans, including all of our domestic plans. Refer to Note 1 – “New Accounting Standards and Accounting Changes” for further information regarding adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).” Information regarding our benefit plans is presented below (in millions):

 

		Pension Benefits								Retiree Health
		2006				2005				2006				2005
Change in Benefit Obligation
Benefit obligation, January 1		$	10,302			$	10,028			$	1,653			$	1,662
Service cost			244				234				19				19
Interest cost			732				581				92				90
Plan participants’ contributions			13				11				19				15
Plan amendments			(234	)			30				31				44
Actuarial (gain) loss			(85	)			527				(105	)			(54	)
Currency exchange rate changes			564				(486	)			—				4
Curtailments			(2	)			(5	)			—				—
Benefits paid/settlements			(1,067	)			(618	)			(117	)			(127	)
Benefit obligation, December 31		$	10,467			$	10,302			$	1,592			$	1,653
Change in Plan Assets
Fair value of plan assets, January 1		$	8,444			$	8,110			$	—			$	—
Actual return on plan assets			959				933				—				—
Employer contribution			355				388				98				112
Plan participants’ contributions			13				11				19				15
Currency exchange rate changes			513				(418	)			—				—
Transfers/divestitures			—				38				—				—
Benefits paid/settlements			(1,067	)			(618	)			(117	)			(127	)
Fair value of plan assets, December 31		$	9,217			$	8,444			$	—			$	—
Funded status (including under-funded and non-funded plans) at the end of year		$	(1,250	)		$	(1,858	)		$	(1,592	)		$	(1,653	)
Unamortized transition obligations							3								—
Unrecognized prior service credit							(28	)							(45	)
Unrecognized net actuarial loss							1,918								410
Net amounts recognized						$	35							$	(1,288	)
Amounts recognized in the Consolidated Balance Sheets:
Other long-term assets		$	19			$	833			$	—			$	—
Intangible asset			—				9				—				—
Accrued compensation and benefit costs			(79	)			—				(102	)			(100	)
Pension and other benefit liabilities			(1,190	)			(1,081	)			—				—
Post-retirement medical benefits			—				—				(1,490	)			(1,188	)
Minimum pension liability included in AOCL			—				274				—				—
Net amounts recognized		$	(1,250	)		$	35			$	(1,592	)		$	(1,288	)

 

62

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Amounts recognized in accumulated other comprehensive loss consist of:

 

		Pension Benefits 2006				Retiree Health 2006
Net actuarial loss		$	1,595			$	286
Prior service credit			(246	)			(1	)
Transition obligation			1				—
Total		$	1,350			$	285

The accumulated benefit obligation for all defined benefit pension plans was $9,589 and $9,248 at December 31, 2006 and 2005, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets is presented below (in millions):

		2006			2005
Aggregate projected benefit obligation		$	5,316		$	6,601
Aggregate accumulated benefit obligation			4,856			5,826
Aggregate fair value of plan assets			4,133			4,845

Our domestic retirement defined benefit plans provide employees a benefit, depending on eligibility, at the greater of (i) the benefit calculated under a highest average 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 or TRA).

 

		Pension Benefits												Retiree Health
(in millions)		2006				2005				2004				2006				2005				2004
Components of Net Periodic Benefit Cost
Defined benefit plans
Service cost		$	244			$	234			$	222			$	19			$	20			$	22
Interest cost(1)			732				581				660				92				90				89
Expected return on plan assets(2)			(802	)			(622	)			(678	)			—				—				—
Recognized net actuarial loss			104				98				104				19				31				24
Amortization of prior service credit			(18	)			(3	)			(1	)			(13	)			(24	)			(24	)
Recognized net transition obligation (asset)			2				1				(1	)			—				—				—
Recognized curtailment/settlement loss			93				54				44				—				—				—
Net periodic benefit cost			355				343				350				117				117				111
Special termination benefits			—				—				2				—				—				—
Defined contribution plans			70				71				69				—				—				—
Total		$	425			$	414			$	421			$	117			$	117			$	111

---

(1)	Interest cost includes interest expense on non-TRA obligations of $340, $328, and $312 and interest expense directly allocated to TRA participant accounts of $392, $253, and $348 for the years ended December 31, 2006, 2005 and 2004, respectively.

(2)	Expected return on plan assets includes expected investment income on non-TRA assets of $410, $369, and $330 and actual investment income on TRA assets of $392, $253, and $348 for the years ended December 31, 2006, 2005 and 2004, respectively.

 

63

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

64

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Assumptions

 

		Pension Benefits									Retiree Health
		2006			2005			2004			2006			2005			2004
Weighted-average assumptions used to determine benefit obligations at the plan measurement dates
Discount rate		5.3	%		5.2	%		5.6	%		5.8	%		5.6	%		5.8	%
Rate of compensation increase		4.1			3.9			4.0			—	(1)		—	(1)		—	(1)

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(1)	Rate of compensation increase is not applicable to our other benefits as compensation levels do not impact earned benefits.

 

65

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

		Pension Benefits												Retiree Health
		2007			2006			2005			2004			2007			2006			2005			2004
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31
Discount rate		5.3	%		5.2	%		5.6	%		5.8	%		5.8	%		5.6	%		5.8	%		6.0	%
Expected return on plan assets		7.6			7.8			8.0			8.1			—	(1)		—	(1)		—	(1)		—	(1)
Rate of compensation increase		4.1			3.9			4.0			3.9			—	(2)		—	(2)		—	(2)		—	(2)

---

(1)	Expected return on plan assets is not applicable to our other benefits as these plans are unfunded.

(2)	Rate of compensation increase is not applicable to our other benefits as compensation levels do not impact earned benefits.

Assumed health care cost trend rates at December 31

 

		2006			2005
Health care cost trend rate assumed for next year		9.9	%		10.9	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		5.2	%		5.2	%
Year that the rate reaches the ultimate trend rate		2011			2011

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in millions):

 

		One-percentage-point increase			One-percentage-point decrease
Effect on total service and interest cost components		$	5		$	(4	)
Effect on post-retirement benefit obligation			77			(68	)

Note 15 – Income and Other Taxes

Income before income taxes for the three years ended December 31, 2006 were as follows (in millions):

 

		2006			2005			2004
Domestic income		$	429		$	386		$	426
Foreign income			379			444			539
Income before income taxes		$	808		$	830		$	965

(Benefits) provisions for income taxes for the three years ended December 31, 2006 were as follows (in millions):

 

		2006				2005				2004
Federal income taxes
Current		$	(448	)		$	(94	)		$	26
Deferred			94				(59	)			114
Foreign income taxes
Current			50				95				178
Deferred			(9	)			37				21
State income taxes
Current			11				9				(19	)
Deferred			14				7				20
Total		$	(288	)		$	(5	)		$	340

 

66

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate for the three years ended December 31, 2006 was as follows:

 

		2006			2005			2004
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Nondeductible expenses		1.4			3.4			3.4
Effect of tax law changes		(1.8	)		0.3			(1.5	)
Change in valuation allowance for deferred tax assets		1.4			(4.6	)		1.3
State taxes, net of federal benefit		1.8			1.6			1.3
Audit and other tax return adjustments		(62.5	)		(25.5	)		0.7
Tax-exempt income		(0.9	)		(0.7	)		(0.7	)
Dividends on Series B convertible preferred stock		—			—			(0.6	)
Other foreign, including earnings taxed at different rates		(10.5	)		(10.3	)		(2.4	)
Other		0.5			0.2			(1.3	)
Effective income tax rate		(35.6	)%		(0.6	)%		35.2	%

 

 

67

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Deferred Income Taxes

 

 

68

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 16 – Contingencies

 

 

69

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Other contingencies

 

 

70

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Legal Matters

 

 

71

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

72

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

73

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

74

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

75

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

 

76

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 17 – Preferred Stock

 

 

77

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 18 – Common Stock

 

Restricted Stock Units: Prior to 2005, the RSUs were generally subject to a three-year ratable vesting period from the date of grant and entitled the holder to one share of common stock. In 2005, the terms of newly-issued RSU’s were changed such that the entire award vests three years from the date of grant. Compensation expense is based upon the grant date market price and is recorded over the vesting period. A summary of the activity for RSUs as of December 31, 2006, 2005 and 2004, and changes during the years then ended, is presented below (shares in thousands):

 

		2006						2005						2004
Nonvested Restricted Stock Units		Shares			Weighted Average Grant Date Fair Value			Shares			Weighted Average Grant Date Fair Value			Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1		5,491			$	15.69		2,804			$	13.86		2,180			$	10.46
Granted		4,256				15.18		3,750				16.89		2,539				13.70
Vested		(686	)			13.70		(977	)			15.01		(1,905	)			9.72
Cancelled		(426	)			13.45		(86	)			16.21		(10	)			19.14
Outstanding at December 31		8,635				15.71		5,491				15.69		2,804				13.86

 

78

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

A summary of the activity for PSs as of December 31, 2006 and 2005, and changes during the years then ended, is presented below (shares in thousands):

 

		2006						2005
Nonvested Performance Shares		Shares			Weighted Average Grant Date Fair Value			Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1		2,052			$	14.87		—			$	—
Granted		2,588				15.17		2,070				14.87
Vested		—				—		—				—
Cancelled		(69	)			14.95		(18	)			14.87
Outstanding at December 31		4,571				15.04		2,052				14.87

 

 

Stock Options: Stock options generally vest over a period of three years and expire between eight and ten years from the date of grant. The following table provides information relating to the status of, and changes in, stock options granted for each of the three years ended December 31, 2006 (stock options in thousands):

 

		2006						2005						2004
Employee Stock Options		Stock Options			Average Option Price			Stock Options			Average Option Price			Stock Options			Average Option Price
Outstanding at January 1		76,307			$	19.40		91,833			$	20.98		97,839			$	21.46
Granted		—				—		—				—		11,216				13.71
Cancelled/Expired		(5,478	)			49.44		(10,291	)			39.41		(8,071	)			32.24
Exercised		(10,349	)			8.46		(5,235	)			7.74		(9,151	)			7.28
Outstanding at December 31		60,480				18.56		76,307				19.40		91,833				20.98
Exercisable at December 31		60,180						66,928						65,199

 

79

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Options outstanding and exercisable at December 31, 2006 were as follows (stock options in thousands):

 

		Options Outstanding							Options Exercisable
		Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price			Number Exercisable		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price
Range of Exercise Prices
$4.75 to $6.98		3,965		3.98		$	4.91		3,665		3.89		$	4.90
7.13 to 10.69		23,864		5.37			9.20		23,864		5.37			9.20
10.70 to 15.27		9,760		4.98			13.66		9,760		4.98			13.66
16.91 to 22.88		11,835		3.00			21.77		11,835		3.00			21.77
25.38 to 32.16		3,735		2.90			26.36		3,735		2.90			26.36
42.83 to 60.95		7,321		2.21			53.78		7,321		2.21			53.78
		60,480							60,180

At December 31, 2006, the aggregate intrinsic value of stock options outstanding and stock options exercisable was $267 and $263, respectively.

The following table provides information relating to stock option exercises for the three years ended December 31, 2006:

 

(in millions)		2006			2005			2004
Total Intrinsic Value		$	72		$	36		$	67
Cash Received			82			41			67
Tax Benefit Realized for Tax Deductions			25			12			23

Treasury Stock: The Board of Directors has authorized programs for the repurchase of the Company’s common stock totaling $2.0 billion as of December 31, 2006. The following is a summary of the purchases of common stock made under our stock repurchase programs (shares in thousands):

 

Authorized Repurchase Programs		Total $2,000 Authorized Programs
		Shares			Amount
As of January 1, 2005		—			$	—
Purchases		30,502				433	*
Less cancellations		(16,585	)			(230	)
As of December 31, 2005		13,917				203
Purchases		70,111				1,069	*
Less cancellations		(75,665	)			(1,131	)
Treasury stock as of December 31, 2006		8,363			$	141

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*	Includes total associated fees of $3.

Subsequent to December 31, 2006 and through February 12, 2007, 7,399,400 shares were repurchased at an aggregate cost of $127, (including associated fees of less than $1). Additionally, in February 2007, 8,813,000 repurchased shares were cancelled upon the approval of the Board of Directors and were recorded as a reduction to both Common stock of $9 and Additional paid-in-capital of $139.

 

80

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 19 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share of common stock (in millions, except shares in thousands):

 

		2006				2005				2004
Basic Earnings per Share:
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle		$	1,210			$	933			$	776
Accrued dividends on:
Series B Convertible Preferred Stock, net			—				—				(16	)
Series C Mandatory Convertible Preferred Stock			(29	)			(58	)			(57	)
Adjusted income from continuing operations before discontinued operations and cumulative effect of change in accounting principle			1,181				875				703
Income from discontinued operations, net			—				53				83
Cumulative effect of change in accounting principle, net			—				(8	)			—
Adjusted net income available to common shareholders		$	1,181			$	920			$	786
Weighted Average Common Shares Outstanding			943,852				957,149				834,321
Basic Earnings per Share:
Earnings from continuing operations		$	1.25			$	0.91			$	0.84
Earnings from discontinued operations			—				0.06				0.10
Loss from cumulative effect of change in accounting principle			—				(0.01	)			—
Basic Earnings per Share		$	1.25			$	0.96			$	0.94
Diluted Earnings per Share:
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle		$	1,210			$	933			$	776
ESOP expense adjustment, net			—				—				(6	)
Interest on Convertible securities, net			1				1				51
Adjusted income from continuing operations before discontinued operations and cumulative effect of change in accounting principle			1,211				934				821
Income from discontinued operations, net			—				53				83
Cumulative effect of change in accounting principle, net			—				(8	)			—
Adjusted net income available to common shareholders		$	1,211			$	979			$	904
Weighted Average Common Shares Outstanding			943,852				957,149				834,321
Common shares issuable with respect to:
Stock options			9,300				10,470				14,198
Restricted stock and performance shares			3,980				945				—
Series B Convertible Preferred Stock			—				—				17,359
Series C Mandatory Convertible Preferred Stock			37,398				74,797				74,797
Convertible securities			1,992				1,992				106,272
Adjusted Weighted Average Shares Outstanding			996,522				1,045,353				1,046,947
Diluted Earnings per Share:
Earnings from continuing operations		$	1.22			$	0.90			$	0.78
Earnings from discontinued operations			—				0.05				0.08
Loss from cumulative effect of change in accounting principle			—				(0.01	)			—
Diluted Earnings per Share		$	1.22			$	0.94			$	0.86

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.

 

81

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 20 – Acquisitions

 

The table below presents the estimated purchase price allocation based upon third-party valuations and management estimates. The Goodwill was assigned to our Other segment. The primary elements that generated the Goodwill are the value of synergies and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset.

 

(in millions)		Amortization Period in Years		Purchase Price Allocation
Net assets, less cash acquired				$	2
Goodwill		N/A			136
Intangible assets:
Customer relationships		13			29
Software		5			8
Total Purchase price				$	175

 

Note 21 – Divestitures and Other Sales

 

 

 

82

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per-share data and unless otherwise indicated)

 

Note 22 – Subsequent Event

 

 

83

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REPORTS OF MANAGEMENT

Management’s Responsibility for Financial Statements

Management’s Report on Internal Control Over Financial Reporting

 

/s/    ANNE M. MULCAHY		/s/    LAWRENCE A. ZIMMERMAN		/s/    GARY R. KABURECK
Chief Executive Officer		Chief Financial Officer		Chief Accounting Officer

 

84

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85

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/s/    PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

Stamford, Connecticut

February 16, 2007

 

86

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QUARTERLY RESULTS OF OPERATIONS (Unaudited) (in millions, except per-share data)

 

		First Quarter			Second Quarter				Third Quarter				Fourth Quarter			Full Year
2006
Revenues		$	3,695		$	3,977			$	3,844			$	4,379		$	15,895
Costs and Expenses(1)			3,487			3,712				3,753				4,135			15,087
Income from Continuing Operations before Income Taxes, Equity Income, Discontinued Operations and Cumulative Effect of Change in Accounting Principle			208			265				91				244			808
Income tax expenses (benefits)(2)			47			22				(416	)			59			(288	)
Equity in net income of unconsolidated affiliates			39			17				29				29			114
Net Income		$	200		$	260			$	536			$	214		$	1,210
Basic Earnings per Share(3)		$	0.20		$	0.27			$	0.55			$	0.22		$	1.25
Diluted Earnings per Share(3)		$	0.20		$	0.26			$	0.54			$	0.22		$	1.22
2005
Revenues		$	3,771		$	3,921			$	3,759			$	4,250		$	15,701
Costs and Expenses(1)			3,482			3,804				3,682				3,903			14,871
Income from Continuing Operations before Income Taxes, Equity Income, Discontinued Operations and Cumulative Effect of Change in Accounting Principle			289			117				77				347			830
Income tax expenses (benefits)(2)			116			(233	)			29				83			(5	)
Equity in net income of unconsolidated affiliates			37			20				23				18			98
Income from discontinued operations, net			—			53				—				—			53
Cumulative effect of change in accounting principle, net			—			—				(8	)			—			(8	)
Net Income		$	210		$	423			$	63			$	282		$	978
Basic Earnings per Share(3)		$	0.20		$	0.43			$	0.05			$	0.28		$	0.96
Diluted Earnings per Share(3)		$	0.20		$	0.40			$	0.05			$	0.27		$	0.94

---

(1)

Costs and expenses include restructuring and asset impairment charges of $36, $110 and $239 for the second, third and fourth quarters of 2006, respectively, and $85, $194, $17 and $70 for the first, second, third and fourth quarters of 2005, respectively. In addition, the third quarter 2006 includes $68 for litigation matters related to probable losses on Brazilian labor-related contingencies (See Note 16). The 2005 first quarter includes a $93 gain from the sale of our equity interest in Integic (See Note 21) and the third quarter 2005 includes $115 of expense from the MPI arbitration panel ruling and probable losses for other legal matters (See Note 16).

(2)

The first and third quarters of 2006 include $24 and $448 of income tax benefits, respectively, related to the favorable resolution of certain tax matters from the 1999-2003 IRS audit. The second quarter of 2006 included $46 of income tax benefits from the resolution of certain tax issues associated with foreign tax audits. The 2005 second quarter included $343 of net income benefits related to the finalization of the 1996-1998 IRS audit, of which $233 was included in income taxes, $57 was included in other expenses, net and $53 was included in discontinued operations (See Note 15).

(3)	The sum of quarterly earnings per share may differ from the full-year amounts due to rounding, or in the case of diluted earnings per share, because securities that are anti-dilutive in certain quarters may not be anti-dilutive on a full-year basis.

 

87

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FIVE YEARS IN REVIEW

 

(in millions, except per-share data)		2006				2005				2004				2003				2002
Per-Share Data
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle
Basic		$	1.25			$	0.91			$	0.84			$	0.38			$	0.11
Diluted			1.22				0.90				0.78				0.36				0.10
Earnings
Basic		$	1.25			$	0.96			$	0.94			$	0.38			$	0.02
Diluted			1.22				0.94				0.86				0.36				0.02
Operations
Revenues		$	15,895			$	15,701			$	15,722			$	15,701			$	15,849
Sales			7,464				7,400				7,259				6,970				6,752
Service, outsourcing and rentals			7,591				7,426				7,529				7,734				8,097
Finance income			840				875				934				997				1,000
Research, development and engineering expenses			922				943				914				962				980
Selling, administrative and general expenses			4,008				4,110				4,203				4,249				4,437
Income from continuing operations before discontinued operations and cumulative effect of change in accounting principle			1,210				933				776				360				154
Net income			1,210				978				859				360				91
Financial Position
Cash, cash equivalents and Short-term investments		$	1,536			$	1,566			$	3,218			$	2,477			$	2,887
Accounts and finance receivables, net			10,043				9,886				10,573				10,972				11,077
Inventories			1,163				1,201				1,143				1,152				1,231
Equipment on operating leases, net			481				431				398				364				450
Land, buildings and equipment, net			1,527				1,627				1,759				1,827				1,757
Investment in discontinued operations			295				420				440				449				728
Total Assets(1)			21,709				21,953				24,884				24,591				25,550
Consolidated Capitalization
Short-term debt and current portion of long-term debt			1,485				1,139				3,074				4,236				4,377
Long-term debt			5,660				6,139				7,050				6,930				9,794
Total Debt			7,145				7,278				10,124				11,166				14,171
Minorities’ interests in equity of subsidiaries			108				90				80				102				73
Liabilities to subsidiary trusts issuing preferred securities(2)			624				724				717				1,809				1,793
Series B convertible preferred stock			—				—				—				499				508
Series C mandatory convertible preferred stock			—				889				889				889				—
Common shareholders’ equity(1)			7,080				6,319				6,244				3,291				1,893
Total Consolidated Capitalization		$	14,957			$	15,300			$	18,054			$	17,756			$	18,438
Selected Data and Ratios
Common shareholders of record at year-end			40,372				53,017				55,152				56,326				57,300
Book value per common share		$	7.48			$	6.79			$	6.53			$	4.15			$	2.56
Year-end common stock market price		$	16.95			$	14.65			$	17.01			$	13.80			$	8.05
Employees at year-end			53,700				55,220				58,100				61,100				67,800
Gross margin			40.6	%			41.2	%			41.6	%			42.6	%			42.8	%
Sales gross margin			35.7	%			36.6	%			37.4	%			37.6	%			38.2	%
Service, outsourcing and rentals gross margin			43.0	%			43.3	%			43.0	%			44.3	%			44.5	%
Finance gross margin			63.7	%			62.7	%			63.1	%			63.7	%			59.9	%
Working capital		$	4,056			$	4,390			$	4,628			$	2,666			$	3,242
Current ratio			1.9				2.0				1.7				1.4				1.4
Cost of additions to land, buildings and equipment		$	215			$	181			$	204			$	197			$	146
Depreciation on buildings and equipment		$	277			$	280			$	305			$	299			$	341

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(1)	Refer to Note 1 – “New Accounting Standards and Accounting Changes” for further information representing the effect of adopting FAS 158.

(2)	In 2005, includes $98 reported in other current liabilities.

 

88

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CORPORATE INFORMATION

Stock Listed and Traded

 

Xerox Common Stock Prices and Dividends:

 

New York Stock Exchange composite prices*		First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2006
High		$	15.34		$	15.10		$	15.71		$	17.22
Low			13.98			13.28			13.31			15.37
2005
High			16.97			15.25			14.12			15.03
Low		$	14.44		$	13.09		$	13.11		$	12.41

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*	Prices as of close of business

At its July 9, 2001 meeting, the company’s Board of Directors eliminated the dividend on the common stock.

Certifications

 

 

89

Exhibit 21

Subsidiaries of Xerox Corporation

The following companies are subsidiaries of Xerox Corporation as of December 31, 2006. Unless otherwise noted, a subsidiary is a company in which Xerox Corporation or a subsidiary of Xerox Corporation holds 50% or more of the voting stock. The names of other subsidiaries have been omitted as they would not, if considered in the aggregate as a single subsidiary, constitute a significant subsidiary:

 

Name of Subsidiary		Incorporated In
AMTX, Inc.		Delaware
Carmel Valley, Inc.		Delaware
Delphax Systems GmbH		Germany
FairCopy Services Inc.		Canada
GroupFire, Inc.		California
Gyricon, LLC		Delaware
Ighi Finland Oy		Finland
Infotonics Technology Center Inc.		New York (15)
Institute for Research on Learning		Delaware
NewPARC LLC		Delaware
Pacific Services and Development Corporation		Delaware
Palo Alto Research Center Incorporated		Delaware
Proyectos Inverdoco, C.A.		Venezuela
Securities Information Center, Inc.		Delaware
SCC Burton Corporation		Delaware
79861 Ontario Inc.		Ontario
STHQ Realty LLC		Delaware
The Xerox Foundation		Delaware
XC Asia, Inc.		Delaware
Xerox Argentina Industrial y Commercial, I.C.S.A.		Argentina (1)
Xerox Canada Capital Ltd.		Canada
Xerox Canada Inc.		Ontario
Xerox (Barbados) SRL		Barbados (14)
Xerox (Barbados) Leasing SRL		Barbados
Xerox Business Centre (Ireland) Limited		Ireland
Xerox Electronic (Ireland) Limited		Ireland
Xerox Finance (Luxembourg) Sarl		Luxembourg
Xerox Hardware (Ireland) Limited		Ireland
Xerox Toner (Ireland) Limited		Ireland
Xerox Canada Facilities Management Ltd.		Ontario
Xerox Canada Finance Inc.		Ontario
Xerox Canada Leasing Partnership		Ontario (16)
Xerox Canada Ltd.		Canada (4)
Ionographic Operations Partnership		Massachusetts (18)
XESystems Canada Inc.		Ontario
Xerox Canada Leasing Company		Nova Scotia
Xerox Canada Realty Inc.		Ontario (3)
Xerox Capital, LLC		Turks & Caicos Islands (9)
Xerox Capital Services LLC		Delaware (17)
Xerox Capital Trust I		Delaware (11)
Xerox de Chile S.A.		Chile
Xerox de Colombia S.A.		Colombia (30)
Xerox Color Printing, Inc.		Delaware

 

1

---

Name of Subsidiary		Incorporated In
Xerox Developing Markets Limited		Bermuda
Sidh Securities Limited		Mauritius
Xerox del Ecuador, S.A.		Ecuador
Xerox Engineering Systems NV		Belgium
Xerox Export, LLC		Delaware
Xerox Finance, Inc.		Delaware
Xerox Investments Holding (Bermuda) Limited		Bermuda
Xerox Financial Services, Inc.		Delaware
Talegen Holdings, Inc.		Delaware
Xerox Credit Corporation		Delaware
Xerox Foreign Sales Corporation		Barbados
Xerox Global Services Limited		United Kingdom
Xerox d’Haiti, S.A.		Haiti
Xerox de Honduras, S.A.		Honduras
Xerox Imaging Systems, Inc.		Delaware
Xerox International Joint Marketing, Inc.		Delaware
Xerox International Partners		California (10)
Xerox Investments Europe B.V.		Netherlands
Xerox Holdings (Ireland) Limited		Ireland
Xerox (Europe) Limited		Ireland
Bipolar Limited		Ireland
Monocolour Limited		Ireland
Xerox Ink Jet Heads (Ireland) Limited		Ireland
Xerox Ink Tanks (Ireland) Limited		Ireland
Xerox XF Holdings (Ireland) Limited		Ireland
Xerox Finance (Ireland) Limited		United Kingdom
Xerox Leasing Ireland Limited		Jersey
Xerox Israel Ltd.		Israel
Xerox UK Holdings Limited		United Kingdom
Triton Business Finance Limited		United Kingdom
Xerox Research (UK) Limited		United Kingdom
Xerox Trading Enterprises Limited		United Kingdom
Xerox Overseas Holdings Limited		United Kingdom
Xerox Business Equipment Limited		United Kingdom
Xerox Computer Services Limited		United Kingdom
Xerox Mailing Systems Limited		United Kingdom
Xerox Capital (Europe) plc		United Kingdom (12)
Xerox Holding (Nederland) B.V.		Netherlands
Xerox Manufacturing (Nederland) B.V.		Netherlands
Xerox Office Printing Distribution B.V.		Netherlands
Xerox Limited		United Kingdom (6)
City Paper Limited		United Kingdom
Continua Limited		United Kingdom
Continua S.A.		France
Continua Sanctum Limited		United Kingdom
NV Xerox Credit S.A.		Belgium
Xerox Financial Services Belux NV		Belgium
NV Xerox Management Services S.A.		Belgium
N.V. Xerox S.A.		Belgium
Xerox Luxembourg S.A.		Luxembourg (28)
The Xerox (UK) Trust		United Kingdom

 

2

---

Name of Subsidiary		Incorporated In
Xerox AG		Switzerland
Xerox Office Supplies AG		Switzerland
Xerox A/S		Denmark
Xerox Financial Services Danmark A/S		Denmark
Xerox AS		Norway
Xerox Austria GmbH		Austria
Xerox Business Services GmbH		Austria
Xerox Leasing GmbH		Austria
Xerox Office Supplies GmbH		Austria
Xerox Bulgaria EOOD		Bulgaria
Xerox Buro Araciari Ticaret ve Servis A.S.		Turkey
Xerox Channels Limited		United Kingdom
Limited Liability Company Xerox (C.I.S.)		Russia
XEROX CZECH Republic s r.o.		Czech Republic
Xerox Direct Rhein-Main GmbH		Germany
Xerox Espana-The Document Company, S.A.U.		Spain
Xerox Fabricacion S.A.U.		Spain
Xerox Renting S.A.U.		Spain
Xerox Financial Services (Espana) SAU		Spain
Xerox Office Supplies S.A.U.		Spain
Xerox Exports Limited		United Kingdom
Xerox Finance AG		Switzerland
Xerox Finance (Nederland) BV		Netherlands
Xerox Financial Services B.V.		Netherlands (20)
Xerox Financial Services Norway AS		Norway
Xerox Financial Services Sverige AB		Sweden
Xerox GmbH		Germany
DS Document Services GmbH		Germany
Xerox Capital Services Verwaltungs GmbH		Germany
Xerox Capital Services GmbH & Co. KG		Germany (19)
Xerox Dienstleistungsgesellschaft GmbH		Germany
Xerox Leasing Deutschland GmbH		Germany
Xerox Reprographische Services GmbH		Germany
Xerox Hellas AEE		Greece
Xerox Hungary Trading Limited		Hungary
Xerox (Ireland) Limited		Ireland
Xerox India Limited		India (8)
Xerox (Nederland) BV		Netherlands
“Veco” Beheer Onroerend Goed BV		Netherlands
Xerox Document Supplies BV		Netherlands
Xerox Rentalease BV		Netherlands
Xerox Services BV		Netherlands
Xerox Oy		Finland
Xerox Financial Services Finland Oy		Finland
Xerox Pensions Limited		United Kingdom
Xerox Polska Sp.zo.o		Poland
Xerox Portugal Equipamentos de Escritorio, Limitada		Portugal (21)
CREDITEX—Aluguer de Equipamentos S.A.		Portugal
Xerox Professional Services Limited		United Kingdom
Xerox Property Services Limited		United Kingdom
Xerox (Romania) Echipmante Si Servici S.A.		Romania

 

3

---

Name of Subsidiary		Incorporated In
Xerox Slovenia d.o.o.		Slovenia
Xerox S.p.A.		Italy
Xerox Italia Rental Services s.r.l.		Italy
Xerox Sverige AB		Sweden
Xerox Telebusiness GmbH		Germany
Xerox (UK) Limited		United Kingdom
Bessemer Trust Limited		United Kingdom
Inserco Manufacturing Limited		United Kingdom
Xerox Finance Limited		United Kingdom
Xerox Office Supplies Limited		United Kingdom
Xerox (R & S) Limited		United Kingdom
Xerox (Ukraine) Ltd LLC		Ukraine
Xerox West Africa Limited		United Kingdom
XESystems UK Limited		United Kingdom
Xerox Engineering Systems Limited		United Kingdom
Xexco Trading Limited		United Kingdom
Xerox S.A.S.		France (22)
Xerobail SAS		France
Xerox Financial Services SAS		France
Xerox Document Services SNC		France (25)
Set Electronique SA		France
Set Belgium (EPC)		Belgium
Set Engineering SA		France
Set R&D Belgium (EES)		Belgium
Xerox Global Services SAS		France (23)
Xerox Document Supplies SNC		France (24)
Xerox XHB Limited		Bermuda (6)
Xerox XIB Limited		Bermuda (6)
XRO Limited		United Kingdom
Nemo (AKS) Limited		United Kingdom
XRI Limited		United Kingdom
RRXH Limited		United Kingdom
RRXO Limited		United Kingdom
RRXIL Limited		United Kingdom (6)
Xerox Latinamerican Holdings, Inc.		Delaware
Xerox Lease Funding LLC		Delaware
Xerox Lease Equipment LLC		Delaware
Xerox Mexicana, S.A. de C.V.		Mexico (29)
Xerox Middle East Investments (Bermuda) Limited		Bermuda
Bessemer Insurance Limited		Bermuda
Reprographics Egypt Limited		Egypt
Xerox Egypt S.A.E.		Egypt
Xerox Finance Leasing S.A.E.		Egypt
Xerox Equipment Limited		Bermuda
Xerox Maroc S.A.		Morocco (2)
Xerox Products Limited		Bermuda
Xerox de Nicaragua, S.A.		Nicaragua
Xerox Serviços e Participacoes Ltda.		Brazil
Xerox Comercio e Industria Ltda		Brazil
Xerox del Peru, S.A.		Peru
Xerox Realty Corporation		Delaware

 

4

---

Name of Subsidiary		Incorporated In
Lansdowne Residential LLC		Virginia
Xerox Trade Receivables LLC		Delaware
Xerox Trinidad Limited		Trinidad
Xerox de Venezuela, C.A.		Venezuela (5)
Xerox XBS Warehouse Holding LLC		Delaware
Xerox XBS Warehouse Funding LLC		Delaware
Xerox XBS Warehouse Funding II LLC		Delaware
XESystems Foreign Sales Corporation		Barbados
XGUA Servicios, Ltda.		Guatemala
XMPie Inc.		Delaware
Nuvisio, Inc.		New York
Nuvisio, Ltd.		Israel
XMPie, Ltd.		Israel

---

(1)	Xerox Corporation owns 90% of the shares of Xerox Argentina; the remaining 10% is owned by Pacific Services and Development Corporation, a wholly-owned subsidiary of Xerox Corporation.

(2)	Owned 99.9% by XMEIBL and .1% by several individuals.

(3)	1,000 shares held by Xerox Canada Inc. and 9,000 shares held by Xerox Corporation.

(4)	Owned 65% by Xerox Canada Inc. and 35% by Xerox Canada Finance Inc.

(5)	Owned 86.75% by Xerox Corporation, and 13.25% by Pacific Services and Development Corporation.

(6)	Includes indirect holdings.

(7)	[Reserved]

(8)	Owned 45.579% by Xerox Limited, 38.871% by Sidh Securities Limited (Mauritius) (a subsidiary of Xerox Developing Markets Limited) and 4.421% through Xerox’s wholly-owned subsidiary, Xerox Developing Markets Limited. The total ownership by Xerox Corporation is 88.871%.

(9)	Owned 99.9% by Xerox Corporation and .1% by Pacific Services and Development Corporation, a wholly-owned subsidiary of Xerox Corporation.

(10)	Xerox International Partners is a California general partnership between FX Global, Inc. (49%) and Xerox International Joint Marketing, Inc. (51%).

(11)	Xerox Capital Trust I is a Delaware statutory business trust which is 100% beneficially owned by Xerox Corporation. The Trust is a special purpose financing vehicle.

(12)	Owned 99% by Xerox Overseas Holdings Limited and 1% by Xerox Property Services Limited as nominee for Xerox Overseas Holdings Limited.

(13)	[Reserved]

(14)	Owned 88.27% by Xerox Canada Inc. and 11.73% by Xerox Corporation.

(15)	This is a not-for-profit corporation which will act as a research and development consortium of businesses and universities. The initial members are Xerox, Corning, Kodak, University of Rochester, RIT and Cornell.

(16)	Xerox Canada Leasing Partnership is an Ontario general partnership between Xerox Canada Inc. (99%) and Xerox Canada Finance Inc. (1%).

(17)	Owned 19% by Xerox Corporation and 81% by GE Capital Information Technology Solutions, Inc. [Included in Xerox Corporation’s consolidated financial statements.]

(18)	Owned 66.995% by Xerox Canada Ltd. and 33.005% by Xerox Canada Inc.

(19)	Owned by Xerox GmbH and Xerox Capital Services Verwaltungs GmbH.

(20)	Xerox Financial Services B.V. is a joint venture between De Lage Landen International B.V. (51%) and Xerox Limited (49%), established on 12/14/01 for the purpose of offering financing for the business of Xerox (Nederland) B.V. [Included in Xerox Corporation’s consolidated financial statements.].

(21)	Owned 76% by Xerox Limited and 24% by Xerox Property Services Limited.

(22)	Remaining shares in Xerox SAS held by Xerox Overseas Holding Limited.

(23)	Owned 99.96% by Xerox Document Services SNC and 0.4% by Xerobail SAS.

(24)	Owned 99.99% by XEROX S.A.S. and .01% by Xerobail SAS.

(25)	Owned 99.96% by XEROX S.A.S. and .04% by Xerobail SAS.

 

5

---

(26)	[Reserved]

(27)	[Reserved]

(28)	Owned 99% by NV Xerox SA and 1% by NV Xerox Credit SA.

(29)	Owned 99.99% by Xerox Corporation and .01% by Pacific Services and Development Corporation.

(30)	Owned 94.24% by Xerox Corporation, 5.56% by Pacific Services and Development Corporation and .20% by a Minority owner.

(31)	Owned 95.73% by Xerox Corporation and 4.27% by Pacific Services and Development Corporation.

 

6

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 33-32215, 333-02187 and 333-111623) and Form S-8 (Nos. 333-125250, 333-93269, 333-09821, 333-22313, 33-65269 and 33-44314) of Xerox Corporation of our report dated February 16, 2007 relating to the financial statements, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 16, 2007 relating to the financial statement schedule, which appears in this Form 10-K.

 

/s/    PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

Stamford, CT

February 16, 2007

Exhibit 31(a)

CEO CERTIFICATIONS

I, Anne M. Mulcahy, Chairman of the Board and Chief Executive Officer, certify that:

 

1.	I have reviewed this Annual Report on Form 10-K of Xerox Corporation;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 16, 2007

 

/s/    ANNE M. MULCAHY

Anne M. Mulcahy Principal Executive Officer

Exhibit 31(b)

CFO CERTIFICATIONS

I, Lawrence A. Zimmerman, Senior Vice President and Chief Financial Officer, certify that:

 

1.	I have reviewed this Annual Report on Form 10-K of Xerox Corporation;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 16, 2007

 

/s/    LAWRENCE A. ZIMMERMAN

Lawrence A. Zimmerman Principal Financial Officer

Exhibit 32

CERTIFICATION OF CEO AND CFO PURSUANT TO

18 U.S.C. § 1350,

AS ADOPTED PURSUANT TO

§ 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Form 10-K of Xerox Corporation, a New York corporation (the “Company”), for the year ending December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Anne M. Mulcahy, Chairman of the Board and Chief Executive Officer of the Company, and Lawrence A. Zimmerman, Senior Vice President and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his/her knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

This certification accompanies this Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by § 906 has been provided to Xerox Corporation and will be retained by Xerox Corporation and furnished to the Securities and Exchange Commission or its staff upon request.