Xerox 2004 Annual Report Download - page 73

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limit on the amount of indemnification, we may have
recourse against our insurance carriers for certain
payments made by us. 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, current and prior period insurance
policies. However, certain indemnification payments
may not be covered under our directors’ and officers’
insurance coverage. In addition, we indemnify certain
fiduciaries of our employee benefit plans for liabilities
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 settlement with several individuals who
are former officers 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 individuals
who settled were officers of Xerox Corporation, we
were required under our by-lawsto reimburse the
individuals for the disgorgement, interest and legal
fees of $19. This amount was accrued in 2002.
Product Warranty Liabilities: In connection with
our normal sales of equipment, including those under
sales-type leases, wegenerally do not issue product
warranties. Our arrangements typically involve a
separate full service maintenance agreement with the
customer.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 perform-
ance 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 certain cash sales, we may issue
alimited product warranty if negotiated by the
customer. We also issue warranties for certain of our
lower-end products in the Office segment, where full
service maintenance agreements are not available.
In these instances, we record warranty obligations at
the time of the sale. The following table summarizes
product warranty activity for the three years ended
December 31, 2004:
2004 2003 2002
Balance as of January 1 $19 $ 25 $ 46
Provisions and adjustments 45 47 51
Payments (41) (53) (72)
Balance as of December 31 $23 $19 $25
Tax Related Contingencies: AtDecember 31, 2004,
our Brazilian operations had received assessments
levied against it for indirect and other taxes which,
inclusive of interest, were approximately $559. The
change since the December 31, 2003 disclosed amount
of $449 is primarily due to indexation and interest,
additional assessments and currency. The assessments
principally relate to the internal transfer of inventory.
We are disputing these assessments and intend to
vigorously defend our position. Based on the opinion
of legal counsel, we do not believe that the ultimate
resolution 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 and other security
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.
Weare 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, weadjust the previously recorded tax
expense to reflect examination results. Our ongoing
assessments of the probable outcomes of the examina-
tions 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,
weare involved in a variety of claims, lawsuits,
investigations and proceedings concerning securities
law, intellectual property law, environmental law,
employment law and the Employee Retirement Income
Security Act (“ERISA”). We determine whether an
estimated loss from a contingency should be accrued
by assessing whether a loss is deemed probable and
can be reasonably estimated. Weassess our potential
liability by analyzing our litigation and regulatory
matters using available information. We develop our
views on estimated losses in consultation with outside
counsel handling our defense in these matters, which
involves an analysis of potential results, assuming a
combination of litigation and settlement strategies.
Should developments in any of these matters cause
achange in our determination as to an unfavorable
outcome and result in the need to recognize a material
accrual, or should any of these matters result in a
final adverse judgment or be settled for significant
amounts, they could have a material adverse effect
on our results of operations, cash flows and financial
position in the period or periods in which such change
in determination, judgment or settlement occurs.
In 2002, we reached a settlement with the SEC, in
which we neither admitted nor denied wrongdoing,
with respect to previously disclosed allegations relat-