Xerox 2002 Annual Report Download - page 75

A corresponding and offsetting amount was classified
as Deferred ESOP benefits and represented our com-
mitment to future compensation expense related to
the ESOP benefits as well as an offset to the preferred
shares included in equity. In the second quarter of
2002, we repaid the outstanding balance of ESOP debt
of $135. We recorded an intercompany receivable from
the ESOP trust, in connection with our repayment of
the ESOP debt, which eliminates in consolidation.
Accordingly, the repayment of the ESOP debt effectively
represents a retirement of third party debt and therefore
such debt is no longer included in our Consolidated
Balance Sheets. The repayment of debt did not affect
the recognition of compensation expense associated
with the ESOP; however, interest expense was lower
in 2002.
In connection with our decision in 2001 to eliminate
the quarterly dividends on our common stock, dividends
on the Convertible Preferred were suspended in July
2001. The ESOP requires predetermined debt service
obligations for each period to be funded by a combina-
tion of dividends and employee contributions over
the term of the plan. The dividends do not affect our
Consolidated Statements of Income, while the contri-
butions are recorded as expense in such statements.
As a result of the suspension of dividends, we were
required, under the terms of the plan, to increase our
contributions to the ESOP trust in order to meet the
predetermined amount of debt service obligations.
In addition, since the dividend requirement on the
Convertible Preferred is cumulative, dividends contin-
ued to accumulate in arrears until dividends were rein-
stated. As of the end of the third quarter of 2002, the
cumulative dividend amounted to $67, including $11
representing the third quarter 2002 dividend require-
ment. In September 2002, the payment of Cumulative
Preferred dividends was reinstated by our Board of
Directors and $67 of Convertible Preferred dividends
were declared. This resulted in a reversal of the previ-
ously accrued incremental compensation expense of
$67 ($32 of which related to 2001). During the fourth
quarter of 2002, dividends of $11 were declared.
These were paid in January 2003. There was no corre-
sponding earnings per share improvement in 2002
since the EPS calculation requires deduction of
dividends declared from reported net income in arriv-
ing at net income available to common shareholders.
Information relating to the ESOP trust for the three
years ended December 31, 2002 follows:
2002 2001 2000
Interest on ESOP Borrowings $ 5 $15 $24
Dividends declared on Convertible
Preferred Stock 78 13 53
Cash contribution to the ESOP 31 88 49
Compensation expense 10 89 48
We recognize ESOP costs based on the amount
committed to be contributed to the ESOP plus related
trustee, finance and other charges.
Note 14 — Income and Other Taxes
Income (loss) before income taxes for the three years
ended December 31, 2002 was as follows:
2002 2001 2000
Domestic income (loss) $ 167 $(126) $ 76
Foreign income (loss) 85 520 (443)
Income (loss) before income taxes $ 252 $ 394 $ (367)
Provisions (benefits) for income taxes for the three
years ended December 31, 2002 were as follows:
2002 2001 2000
Federal income taxes
Current $86 $ 31 $(18)
Deferred (35) (117) (95)
Foreign income taxes
Current 145 474 73
Deferred (141) 114 (45)
State income taxes
Current 725
Deferred (2) (7) 10
Income taxes $60 $ 497 $(70)
A reconciliation of the U.S. federal statutory income
tax rate to the effective income tax rate for the three
years ended December 31, 2002 follows:
2002 2001 2000
U.S. federal statutory income
tax rate 35.0% 35.0% 35.0%
Foreign earnings taxed at
different rates 22.3 41.0 (48.3)
Sale of partial ownership interest
in Fuji Xerox –29.5 –
Goodwill amortization –2.6 (3.0)
Tax-exempt income (3.8) (3.3) 4.3
State taxes, net of federal benefit 1.3 (0.8) (1.1)
Audit resolutions and other
examination items – net (22.1) (35.6) 34.1
Dividends on Employee Stock
Ownership Plan shares (9.3) (1.0) 3.7
Effect of tax law change (6.3) (2.7) –
Change in valuation allowance
for deferred tax assets 5.8 62.9 (3.2)
Other 0.9 (1.5) (2.4)
Effective income tax rate 23.8% 126.1% 19.1%
The difference between the 2002 effective tax rate of
23.8 percent and the U.S. federal statutory income tax
rate relates primarily to the recognition of tax benefits
from the favorable resolution of a foreign tax audit, tax
law changes as well as the retroactive declaration of
ESOP dividends. Such benefits are offset, in part, by
73