Xerox 2002 Annual Report Download - page 85

Outstanding preferred stock related to our ESOP
at December 31, 2002 and 2001 follows (shares in
thousands):
2002 2001
Shares Amount Shares Amount
Convertible
Preferred Stock 7,023 $550 7,730 $605
Preferred Stock Purchase Rights: We have a share-
holder rights plan designed to deter coercive or unfair
takeover tactics and to prevent a person or persons
from gaining control of us without offering a fair price to
all shareholders. Under the terms of the plan, one-half
of one preferred stock purchase right (“Right”) accom-
panies each share of outstanding common stock. Each
full Right entitles the holder to purchase from us one
three-hundredth of a new series of preferred stock at
an exercise price of 250 dollars. Within the time limits
and under the circumstances specified in the plan, the
Rights entitle the holder to acquire either our common
stock, the stock of the surviving company in a business
combination, or the stock of the purchaser of our assets,
having a value of two times the exercise price. The
Rights, which expire in April 2007, may be redeemed
prior to becoming exercisable by action of the Board of
Directors at a redemption price of $.01 per Right. The
Rights are non-voting and, until they become exercis-
able, have no dilutive effect on the earnings per share
or book value per share of our common stock.
Company-obligated, Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts Holding
Solely Subordinated Debentures of the Company:
The components of Company-obligated, mandatorily
redeemable preferred securities of subsidiary trusts
holding solely subordinated debentures of the
Company at December 31, 2002 and 2001 follow:
2002 2001
Trust II $1,016 $1,005
Trust I 640 639
Deferred Preferred Stock 45 43
Total $1,701 $1,687
Trust II: In 2001, Xerox Capital Trust II (“Capital II”), a
trust sponsored and wholly-owned by us, issued 20.7
million 7.5 percent convertible trust preferred securities
(the “Trust Preferred Securities”) to investors for an
aggregate liquidation amount of $1,035 and 0.6 million
shares of common securities to us for an aggregate
liquidation amount of $32. With the proceeds from
these securities, Capital II purchased $1,067 aggregate
principal amount of 7.5 percent convertible junior sub-
ordinated debentures due 2021 of Xerox Funding LLC II
(“Funding”), a wholly-owned subsidiary of ours. With
the proceeds from these securities, Funding purchased
$1,067 aggregate principal amount of 7.5 percent con-
vertible junior subordinated debentures due 2021 of
the Company. Capital II’s assets consist principally of
Funding’s debentures, and Funding’s assets consist
principally of our debentures. On a consolidated basis,
we received net proceeds of $1,004, which was net of
$31 of fees and expenses. The initial carrying value is
being accreted to liquidation value through Minorities’
interests in earnings of subsidiaries over three years to
the earliest redemption date. As of December 31, 2002,
the carrying value had accreted to $1,016. We used the
net proceeds from the issuance of our debentures for
general corporate purposes, including the payment of
our indebtedness. Our debentures, along with those
of Funding, and related income statement effects are
eliminated in our consolidated financial statements.
Distributions on the Trust Preferred Securities are
charged, net of tax, to Minorities’ interests in earnings
of subsidiaries and, together with the accretion noted
above, amounted to $54 after-tax ($89 pre-tax) and $2
after-tax ($4 pre-tax) in 2002 and 2001, respectively. We
have effectively guaranteed, fully and unconditionally,
on a subordinated basis, the payment and delivery by
Funding, of all amounts due on the Funding debentures
and the payment and delivery by Capital II of all amounts
due on the Trust Preferred Securities, in each case to
the extent required under the terms of the securities.
The Trust Preferred Securities accrue and pay cash
distributions quarterly at a rate of 7.5 percent per
annum of the stated liquidation amount of fifty dollars
per trust preferred security. Concurrently, with the initial
issuance of the Trust Preferred Securities, Funding
issued 0.2 million common securities to us, for an
aggregate liquidation amount of $229. Funding used
the proceeds to purchase, and deposit with a pledge,
trustee U.S. treasuries in order to secure Funding’s
obligations under its debentures through the distribu-
tion payment date (November 27, 2004). As of
December 31, 2002 and 2001, the balance of these
securities was $151 and $229, respectively, and is
included in both Other current assets and Other long-
term assets in the Consolidated Balance Sheets. The
Trust Preferred Securities are convertible at any time,
at the option of the investors, into 5.4795 shares of
our common stock per Trust Preferred Security, sub-
ject to adjustment. The Trust Preferred Securities are
mandatorily redeemable upon the maturity of the
debentures on November 27, 2021 at fifty dollars per
Trust Preferred Security plus accrued and unpaid distri-
butions. Investors may require us to cause Capital II
to purchase all or a portion of the Trust Preferred
Securities on December 4, 2004, and November 27,
2006, 2008, 2011 and 2016 at a price of fifty dollars per
Trust Preferred Security, plus accrued and unpaid distri-
butions. In addition, if we undergo a change in control
on or before December 4, 2004, investors may require
us to cause Capital II to purchase all or a portion of the
Trust Preferred Securities. In either case, the purchase
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