Xerox 2002 Annual Report Download - page 25

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$36 million, a $17 million exchange loss resulting
from the peso devaluation in Argentina and other cur-
rency exchange losses of $25 million. In 2000, large
gains on both the yen and Euro loans contributed to
the $103 million gain. The 2001 and 2000 currency
gains and losses were the result of net unhedged
positions largely caused by our restricted access to
the derivatives markets beginning in the fourth quar-
ter 2000. Despite restoration of hedging capability in
our key markets in the latter half of 2002, we are
unable to predict the amount of the re-measurement
gains or losses in future periods resulting from our
remaining unhedged positions, due to the inherent
volatility in the foreign currency markets. Such gains
or losses could be material to the financial statements
in any future reporting period.
Legal and regulatory matters includes $27 million
of expenses related to certain litigation, indemnifica-
tions and associated claims, as well as the $10 million
penalty incurred in connection with our settlement
with the SEC. See Note 15 to the Consolidated
Financial Statements for additional information.
Prior to 2002, goodwill and other intangible asset
amortization related primarily to our acquisitions of
the remaining minority interest in Xerox Limited in
1995 and 1997, XL Connect in 1998 and Color Printing
and Imaging Division of Tektronix, Inc. in 2000.
Effective January 1, 2002 and in connection with the
adoption of SFAS No. 142, we no longer record amor-
tization of goodwill. Intangible assets continue to be
amortized over their useful lives. Further discussion is
provided in Note 1 to the Consolidated Financial
Statements.
Interest income is derived primarily from our signifi-
cant invested cash balances since the latter part of
2000. 2002 interest income was lower than 2001 due to
lower invested cash balances in the second half of
2002, resulting from the pay-down of the Old Revolver,
as well as lower interest rates. 2001 interest income
was $24 million higher than 2000 due to higher interest
income resulting from a full year of invested cash bal-
ances in 2001, partially offset by lower interest from tax
audit refunds. We expect 2003 interest income to be
lower than 2002 based on projected lower average
cash balances.
In 2002, we retired $52 million of long-term debt
through the exchange of 6.4 million shares of com-
mon stock valued at $51 million. In 2001, we retired
$374 million of long-term debt through the exchange
of 41 million shares of common stock valued at
$311 million. The shares were valued using the daily
volume weighted average price of our common
stock over a specified number of days prior to the
exchange, based on contractual terms. These transac-
tions resulted in gains of $1 million and $63 million
in 2002 and 2001, respectively.
(Gains) losses on business divestitures and asset
sales include the sales of our leasing business in Italy,
our investment in Prudential Insurance Company
common stock and our equity investment in Katun
Corporation all in 2002, the sale of our Nordic leasing
business in 2001 and the sale of our North American
paper product line and a 25 percent interest in
ContentGuard in 2000, as well as miscellaneous land,
buildings and equipment in all years. Further discus-
sion of our divestitures follows and is also contained
in Note 4 to the Consolidated Financial Statements.
Purchased in-process research and development
related to a 2000 acquisition. The charge represented
the fair value of acquired research and development
projects that were determined not to have reached tech-
nological feasibility as of the date of the acquisition.
Gain on Affiliate’s Sale of Stock: In 2001 and 2000,
gain on affiliate’s sale of stock of $4 million and
$21 million, respectively, reflects our proportionate
share of the increase in equity of ScanSoft Inc., result-
ing from issuance of their stock in connection with
one of their acquisitions. The 2000 gain was partially
offset by a $5 million charge reflecting our share of
in-process research and development associated with
one of their acquisitions, which is included in Equity
in net income of unconsolidated affiliates. ScanSoft,
an equity affiliate, is a developer of digital imaging
software that enables users to leverage the power of
their scanners, digital cameras and other electronic
devices.
Income Taxes: The following table summarizes our
consolidated income tax (benefits) and the related
effective tax rate for each respective period:
Year Ended December 31,
2002 2001 2000
Pre-tax income (loss) $252 $394 $(367)
Income taxes (benefits) 60 497 (70)
Effective tax rate 23.8% 126.1% 19.1%
The difference between the 2002 consolidated
effective tax rate of 23.8 percent and the U.S. federal
statutory income tax rate of 35 percent relates prima-
rily to the recognition of tax benefits resulting from
the favorable resolution of a foreign tax audit of
approximately $79 million, tax law changes of
approximately $26 million, as well as the impact of
ESOP dividends. Such benefits were offset, in part, by
tax expense recorded for the on-going examination in
India, the sale of our interest in Katun Corporation, as