Xerox Investors Look Beyond Fine

Updated from 12:37 p.m. EST

Regulators hit struggling copier giant Xerox (XRX) with a big fine Monday, but investors brushed off the bad news.

Xerox agreed to pay a $10 million civil penalty and restate earnings since 1997 to settle a looming Securities and Exchange Commission suit over accounting practices. The company didn't specify the size of the restatements, though it indicated they could be substantial. But Xerox investors, hoping that the deal marks the end to an ugly chapter in the company's storied history, bid the stock up a quarter to $11.

Xerox said it started settlement talks after the agency's enforcement arm recommended an enforcement action over the company's 1997-2000 financial statements. The deal, which is subject to the full commission's approval, would put to rest an investigation the agency began in 2000 amid allegations that Xerox's Mexican operations had overstated revenue by using improper lease accounting. The SEC told Xerox its revenue-allocation methodology for certain contracts didn't comply with the Statement of Financial Accounting Standards No. 13.

Xerox said Monday that under the proposed settlement, the company "would neither admit nor deny the allegations of the complaint, which would include claims of civil violations of the antifraud, reporting and other provisions of the securities laws." An official from the SEC's enforcement division wouldn't comment on the agreement. The SEC does not, as a rule, comment on ongoing investigations.

The SEC fine would top the $3.5 million America Online paid in May 2000, making Xerox's agreement the costliest settlement ever for a public company. Junk-bond financier Michael Milken still tops the list in outright fines, having paid a total of $447 million in two related settlements.

Xerox said the restatement could involve the "reallocation" of up to $2 billion in equipment sales revenue and "adjustments that could be in excess of $300 million" regarding certain reserves. But "the resulting timing and allocation adjustments cannot be estimated until the restatement process has been completed," Xerox said. Xerox said it would seek an extension of up to 90 days to file its restatement and its 2001 10-K report.

The company also said that "significant progress has been made in Xerox's negotiations with the revolver lenders."

The company's shares plummeted from the high $50s in late 1999 as a broad sales-force reorganization ran aground and worries about the company's accounting practices spread throughout the market. The stock dipped to $5 and below in the spring of 2001 as the cash-strapped company fought to stay out of Chapter 11. But new management under Anne Mulcahy appears to have gained some investor confidence, judging by the stock's ascent since she took the CEO job.

Xerox first disclosed the SEC investigation in June 2000, shortly after warning that it was having difficulty collecting accounts receivable in Mexico. After an internal investigation, Xerox early last year accused managers at its Mexican unit of working to "drive growth at any cost" -- including, apparently, engaging in less-than-savory accounting practices. This all came during a period of distress at Xerox -- its debt was downgraded to junk status late in 2000 and it was having difficulty obtaining financing necessary to continue operations.

There ensued a tit-for-tat, with some members of Xerox's Mexican management team saying they had warned the company of unpaid bills from some customer's accounts. By not recognizing these problem debts in a timely manner, the company was, in effect, overstating profits. Further damaging Xerox's contention that its problems were merely the result of "rogue executives," a former assistant treasurer, James Bingham, filed a lawsuit contending that he was fired in August 2000 for criticizing the company's accounting practices.

Bingham said that the company had cut corners in its bookkeeping, particularly in the way it handled its leasing operations, to cloud a deterioration in its underlying business. Now, investors are hoping the clouds are finally all behind them.

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