Xerox 2003 Annual Report Download - page 71

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chase of debt did not affect the recognition of compen-
sation expense associated with the ESOP; however, it
resulted in a decrease in interest expense in 2002.
The ESOP required pre-determined debt service
obligations for each period to be funded by a combi-
nation of dividends and employer contributions over
the term of the plan. The dividends do not affect our
Consolidated Statements of Income, while the contri-
butions are recorded as compensation expense in
such statements. We recognize ESOP costs based on
the amount committed to be contributed to the ESOP
plus related trustee, finance and other charges.
In July 2001, dividends on the Convertible
Preferred were suspended. As a result of the suspen-
sion of dividends, under the terms of the ESOP plan,
we were required to increase our contributions to the
ESOP in order to meet the pre-determined amount of
debt service obligations. In addition, since the divi-
dend requirement on the Convertible Preferred is
cumulative, dividends continued to accumulate in
arrears until dividends were reinstated. As of the end
of the third quarter of 2002, the cumulative dividend
amounted to $67. 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 previously accrued incremental compensation
expense of $67. There was no corresponding earnings
per share improvement in 2002 since the EPS calcula-
tion requires deduction of dividends declared from
reported net income in arriving at net income avail-
able to common shareholders.
In the fourth quarter of 2003, the ESOP made its
final payment on the intercompany payable due to us.
This payment released all of the remaining ESOP
shares that were classified as Deferred ESOP Benefits
in our Consolidated Balance Sheets and effectively
ended our obligation to make future employer contri-
butions to the ESOP. However, dividends will continue
to accrue on the Convertible Preferred.
Information relating to the ESOP trust for the three
years ended December 31, 2003 follows:
2003 2002 2001
Interest on ESOP Borrowings $ – $ 5 $15
Dividends declared on
Convertible Preferred Stock 41 78 13
Cash contribution to the ESOP 14 31 88
Compensation expense 810 89
Note 13 – Income and Other Taxes
Income (loss) before income taxes for the three years
ended December 31, 2003 follows:
2003 2002 2001
Domestic (loss) income $(299) $ 15 $(191)
Foreign income 735 89 519
Income before income taxes $ 436 $104 $ 328
Provisions (benefits) for income taxes for the three
years ended December 31, 2003 follow:
2003 2002 2001
Federal income taxes
Current $ 77 $ 39 $ 11
Deferred (132) (35) (117)
Foreign income taxes
Current 144 145 474
Deferred 72 (141) 114
State income taxes
Current (17) (2) (2)
Deferred (10) (2) (7)
$ 134 $ 4 $ 473
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, 2003
follows:
2003 2002 2001
U.S. federal statutory
income tax rate 35.0% 35.0% 35.0%
Audit and other tax
return adjustments 7.6 (53.7) (42.8)
Change in valuation allowance
for deferred tax assets (3.8) 14.0 75.5
Dividends on Series B
convertible preferred stock (3.1) (22.7) (1.2)
State taxes, net of federal benefit (2.7) (2.3) (1.8)
Effect of tax law changes 1.0 (15.3) (3.2)
Tax-exempt income (1.0) (9.3) (4.0)
Sale of partial ownership
interest in Fuji Xerox ––35.5
Goodwill amortization ––3.1
Other foreign, including earnings
taxed at different rates (2.7) 54.3 49.3
Other 0.4 3.8 (1.2)
Effective income tax rate 30.7% 3.8% 144.2%
The difference between the 2003 consolidated
effective income tax rate of 30.7 percent and the U.S.
federal statutory income tax rate relates primarily to
tax benefits arising from the reversal of valuation
allowances on deferred tax assets following a re-
evaluation of their future realization due to improved
financial performance, other foreign adjustments,
including earnings taxed at different rates, the impact