Xerox 2003 Annual Report Download - page 75

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by our products or solutions. These indemnifications
usually do not include limits on the claims, provided
the claim is made pursuant to the procedures required
in the sales contract. For the indemnification agree-
ments discussed above, it is not possible to predict the
maximum potential amount of future payments under
these or similar agreements due to the conditional
nature of our obligations and the unique facts and cir-
cumstances involved in each agreement. Historically,
payments we have made under these agreements did
not have a material effect on our business, financial
condition or results of operations.
Indemnification of Officers and Directors – Our
corporate by-laws require that, except to the extent
expressly prohibited by law, we must indemnify Xerox
Corporation’s officers and directors against judgments,
fines, penalties and amounts paid in settlement, includ-
ing legal fees and all appeals, incurred in connection
with civil or criminal action or proceedings, as it relates
to their services to Xerox Corporation and our sub-
sidiaries. The by-laws provide no limit on the amount
of indemnification. The current policy provides $105 of
coverage and has no deductible. The litigation matters
and regulatory actions described below involve certain
of our current and former directors and officers, all of
whom are covered by the aforementioned indemnity
and if applicable, the current and prior period insur-
ance policies. However, certain indemnification pay-
ments may not be covered under our directors’ and
officers’ insurance coverage. In addition, we indemnify
certain fiduciaries of our employee benefit plans for lia-
bilities incurred in their service as fiduciary whether or
not they are officers of the Company.
The Securities and Exchange Commission (“SEC”)
announced on June 5, 2003 that it had reached a set-
tlement with several individuals who are former offi-
cers of Xerox Corporation regarding the same
accounting and disclosure matters which were
involved in its investigation of Xerox Corporation.
These individuals neither admitted nor denied wrong-
doing and agreed to pay fines, disgorgement and
interest. These individuals are responsible for paying
their own fines. However, because all of the individu-
als who settled were officers of Xerox Corporation, we
were required under our by-laws to reimburse the
individuals for the disgorgement, interest and legal
fees of $19.
Product Warranty Liabilities: In connection with our
normal sales of equipment, including those under
sales-type leases, we generally do not issue product
warranties. Our arrangements typically involve a sepa-
rate full service maintenance agreement with the cus-
tomer. The agreements generally extend over a period
equivalent to the lease term or the expected useful life
under a cash sale. The service agreements involve the
payment of fees in return for our performance of
repairs and maintenance. As a consequence, we do
not have any significant product warranty obligations
including any obligations under customer satisfaction
programs. In a few circumstances, particularly in cer-
tain cash sales, we may issue a limited product war-
ranty if negotiated by the customer. We also issue
warranties for certain of our lower-end products in the
Office segment, where full service maintenance agree-
ments are not available. In these instances, we record
warranty obligations at the time of the sale. The fol-
lowing table summarizes product warranty activity for
the two years ended December 31, 2003:
2003 2002
Balance as of January 1 $ 25 $ 46
Provisions and adjustments 47 51
Payments (53) (72)
Balance as of December 31 $ 19 $ 25
Tax related contingencies: At December 31, 2003, our
Brazilian operations had received assessments levied
against it for indirect and other taxes which, inclusive
of interest, were approximately $449. The increase
since the December 31, 2002 disclosed amount of
$260 is primarily due to currency changes, indexation,
interest and additional assessments. The assessments
principally relate to the internal transfer of inventory.
We are disputing these assessments and intend to vig-
orously defend our position. Based on the opinion of
legal counsel, we do not believe that the ultimate reso-
lution of these assessments will materially impact our
results of operations, financial position or cash flows.
In connection with these proceedings, we may be
required to make cash deposits of up to half of the
total amount in dispute. Generally, any such amounts
would be refundable to the extent the matter is
resolved in our favor.
We are subject to ongoing tax examinations and
assessments in various jurisdictions. Accordingly, we
may record incremental tax expense based upon the
probable outcomes of such matters. In addition, when
applicable, we adjust the previously recorded tax
expense to reflect examination results. Our ongoing
assessments of the probable outcomes of the exami-
nations and related tax positions require judgment
and can materially increase or decrease our effective
tax rate, as well as impact our operating results.
Legal Matters: As more fully discussed below, we are
a defendant in numerous litigation and regulatory
matters involving securities law, patent law, environ-
mental law, employment law and the Employee
Retirement Income Security Act (“ERISA”). We deter-
mine whether an estimated loss from a contingency
should be accrued by assessing whether a loss is
deemed probable and can be reasonably estimated.
We assess our potential liability by analyzing our liti-
gation and regulatory matters using available informa-
tion. We develop our views on estimated losses in