Forum Archive Index - June 2002

["Nick Kearney" <nickk@quicksilver.net.nz>]

But wait.......there's more!

 

This from Bloomberg.

 

Xerox Inflated Sales by $1.9 Bln From 1997 to 2001 (Update4)
By Jim Gunsalus

Stamford, Connecticut, June 28 (Bloomberg) -- Xerox Corp., the world's biggest copier maker, said it inflated revenue by $1.9 billion over the past five years by misreporting sales of equipment and service contracts. Xerox's stock and bonds plunged.

Those sales are included in $6.4 billion in revenue Xerox misrepresented from 1997 to 2001, primarily from transactions in Latin America. The company said in a release that it plans to file its 2001 annual report today with the restated numbers.

The accounting manipulations, in which Xerox improperly reported the timing and makeup of sales, helped the company meet earnings forecasts. The U.S. Securities and Exchange Commission fined the company a record $10 million in April because of the false reporting of about $3 billion in sales.

``Prior management was obviously bending the accounting rules, but they were not fabricating revenue,'' said Brian Eisenbarth, who holds 700,000 Xerox shares at Davidson Investment Advisors. ``It's a timing adjustment.''

SEC spokeswoman Christi Harlan declined to comment. Xerox had sales of $92.4 billion from 1997 through 2001. Revenue during the period will be cut by 2 percent and pretax income by $368 million. The $1.9 billion in sales will be recorded in future quarters.

``The restated financial statements defy economic reality,'' KPMG LLP, Xerox's auditor for 30 years, said in a release. ``They apparently give Xerox the benefit of recognizing revenues in 2002 and in future years that it had already recognized.''

KPMG was fired in September after it delayed signing Xerox's most recent annual report because of accounting questions.

Xerox's current auditor, PricewaterhouseCoopers LLP, didn't return calls seeking comment.

Stock and Bonds

``It's still troubling,'' said Jim Benson, who helps manage about 30 million Xerox shares at Harris Associates. ``Did you really get the money, is what you should be 99 percent concerned with and they seem to have.''

Shares of Xerox fell $1.21, or 15 percent, to $6.79 in late trading. Xerox's 9.75 percent coupon notes maturing in 2009 dropped 8 cents to 83 cents on the dollar, traders said. That pushed up the yield on the debt to 13.8 percent from 11.8 percent.

``Coming two days after WorldCom, this has hit a nerve,'' said Helen Rodriguez, head of European high-yield research at Deutsche Bank AG.

Loan Agreements

The restatement also comes a week after Xerox renegotiated a $7 billion revolving credit line. A restatement wouldn't void the loan, according to terms of the agreement disclosed in a filing.

``I would think the banks had some level of understanding of the magnitude of the restatement,'' said attorney Gordon Kaiser, leader of the corporate practice at Squire, Sanders & Dempsey LLP.

J.P. Morgan Chase & Co., Citigroup Inc. and Bank One Corp. led the financing, which was secured by assets. Jack Neal, Bank One's executive vice president in charge of large corporate lending, declined to comment on the Xerox agreement. Citigroup and J.P. Morgan didn't have an immediate comment.

Last week, Xerox completed the renegotiation of a $7 billion revolving credit line, paying off $2.8 billion of the loan. Xerox has received about $2.7 billion in financing from General Electric Co.'s GE Capital since November that is backed by customer bills in the U.K, U.S. and Canada.

``For all of our transactions and agreements with Xerox, we've used our stringent risk and credit approval policies,'' GE Capital spokesman Peter Stack said. ``The lessee obligations aren't affected by the pending restatement.''

SEC Investigation

The SEC in April charged that Xerox prematurely recorded $3 billion in revenue and $1.5 billion in pretax earnings from equipment leases in Europe, Latin America and Canada. The size of the penalty, the largest against a public company for financial fraud, reflected the magnitude of deception, the agency said.

The company, which didn't admit or deny wrongdoing, agreed to restate results and ordered a fresh audit. The errors discovered in the most recent audit center on accounting issues at Xerox's Brazil unit, the Wall Street Journal reported earlier today.

The issue is ``timing and allocation'' of revenue only, spokeswoman Christa Carone said in a telephone interview. ``There is no fraudulent revenue and there is no phony revenue and no fictional transactions.''

Jose Manuel Santos, the treasurer at Xerox's Brazil unit in Rio de Janeiro couldn't be reached to comment.

Increased Scrutiny

Regulators have stepped up scrutiny of corporate accounting since Enron Corp. filed for bankruptcy in December after overstating income by about $1 billion over four years. The accusation by the SEC Wednesday that WorldCom Inc., the No. 2 U.S. long-distance telephone company, committed fraud by hiding $3.9 billion in costs is producing more pressure from investors.

Xerox also has been contending with declining sales and profit because of competition, management changes and soaring borrowing costs. The restatements won't affect cash received or due from the leases, the company has said.

Xerox paid its highest interest rates ever in January to lure buyers to its first bond sale since the copier maker's credit ratings were cut to junk by Moody's Investors Service in December 2000 and Standard & Poor's Corp. in October.

``This company doesn't work,'' said Sean Egan of bond-rating company Egan-Jones Ratings Co. ``They're simply not generating enough cash to cover their debt and there's no prospect of them doing so.''

Lease Sales

Last year Xerox restated profit for the three prior years and the first quarter of 2001, related to accounting irregularities in Mexico. Xerox reported $16.5 billion in revenue last year.

The dispute between the SEC and Xerox centered on a rule that lets companies recognize revenue and income from sales-type leases immediately rather than over the life of the lease.

When Xerox leases a copier, the customer's payment includes a principal payment and a finance charge, and covers costs toward supplies such as toner and maintenance services.

At issue is when and in which quarters and years Xerox recognized certain revenue. Problems in the Mexican operations were cleared up two years ago, Carone said.

Accounting manipulations by Xerox had ``enormous impact'' on its reported financial performance, the SEC said in April. The agency also alleged senior executives quashed objections by KPMG. At the same time, they were making millions of dollars in bonuses and sales of stock at inflated prices resulting from the fraud.

The SEC said at the time that its investigation of Xerox's abuses were continuing. Former Xerox Chairman and Chief Executive Paul Allaire and former Chief Financial Officer Barry Romeril may be among the executives under investigation, analysts said.