Xerox 2003 Annual Report Download - page 73

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tax liabilities and projected income from operating
activities. The amount of the net deferred tax assets
considered realizable, however, could be reduced in the
near term if actual future income or income tax rates
are lower than estimated, or if there are differences in
the timing or amount of future reversals of existing tax-
able or deductible temporary differences.
At December 31, 2003, we had tax credit carryfor-
wards of $237 available to offset future income taxes,
of which $158 is available to carryforward indefinitely
while the remaining $79 will begin to expire, if not uti-
lized, in 2004. We also had net operating loss carryfor-
wards for income tax purposes of $186 that will expire
in 2004 through 2023, if not utilized, and $2.2 billion
available to offset future taxable income indefinitely.
From 1995 through 1998, we incurred capital loss-
es from the disposition of our insurance group opera-
tions. Such losses were disallowed under the tax law
existing at the time of the respective dispositions. As a
result of IRS regulations issued in 2002, some portion
of the losses may now be claimed subject to certain
limitations. We have filed amended tax returns for
1995 through 1998 reporting $1.2 billion of additional
capital losses. As of December 31, 2003, we have
$465 of capital gains available to be offset by the capi-
tal losses during the relevant periods and anticipate
a potential tax benefit of approximately $160 to be
recognized in a future period. The additional losses
claimed and related tax benefits are subject to formal
review by the U.S. government, which is currently in
process. We will not recognize any tax benefit of these
losses until this review has reached a stage where we
can estimate the probability of a favorable outcome.
All remaining capital loss carryforwards from this
matter expired December 31, 2003.
Note 14 – Liability to Subsidiary Trusts
Issuing Preferred Securities
The Liability to Subsidiary Trusts Issuing Preferred
Securities included in our Consolidated Balance
Sheets reflects the obligations to our subsidiaries that
have issued preferred securities. These subsidiaries
are not consolidated in our financial statements
because it was determined that we are not the primary
beneficiary of the trusts and, therefore, are not permit-
ted to consolidate them in accordance with FIN 46R
(refer to Note 1 for further discussion). As of
December 31, 2003 and 2002, the components of our
liabilities to the trusts were as follows:
2003 2002
Trust II $1,067 $1,067
Trust I 665 665
Deferred Preferred Stock 77 61
$1,809 $1,793
Trust II: In 2001, Xerox Capital Trust II (“Trust II”)
issued 20.7 million of 7.5 percent convertible trust pre-
ferred securities (the “Trust Preferred Securities”) to
investors for $1,035 and 0.6 million shares of common
securities to us for $32. With the proceeds from these
securities, Trust II purchased $1,067 of 7.5 percent con-
vertible junior subordinated debentures due 2021 of
one of our wholly-owned consolidated subsidiaries.
The subsidiary purchased $1,067 aggregate principal
amount of 7.5 percent convertible junior subordinated
debentures due 2021 of the Company. Trust II’s assets
consist principally of our subsidiary’s debentures and
our subsidiary’s assets consist principally of our
debentures. On a consolidated basis, we received net
proceeds of $1,004. Fees of $31 capitalized as debt
issuance costs and are being amortized to interest
expense over three years to the earliest put date.
Interest expense was $89 in 2003 and 2002. We have
effectively guaranteed, fully and unconditionally, on a
subordinated basis, the payment and delivery by our
subsidiary, of all amounts due on our subsidiary
debentures and the payment and delivery by Trust 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 year
of the stated amount of fifty dollars per security.
Concurrently, with the initial issuance of the Trust
Preferred Securities, our subsidiary used part of the
proceeds received from the Company of $229 to pur-
chase U.S. treasuries in order to secure its obligations
under its debentures through the distribution payment
date (November 27, 2004). 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 (equivalent share price of
$9.125 per common share) (“the Conversion Ratio”).
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 distributions.
Investors may require us to cause Trust 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 distributions. In
addition, if we undergo a change in control on or
before December 4, 2004, investors may require us to
cause Trust II to purchase all or a portion of the Trust
Preferred Securities. In either case, the purchase price
for such Trust Preferred Securities may be paid in cash
or our common stock, or a combination thereof.
However, our liability to the trust is classified as long-
term in our financial statements as we have the intent
and ability to convert the obligations to equity through
the issuance of common shares if put to us in 2004. If
the purchase price or any portion thereof consists of