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Xerox Corp. announced May 31 that an external audit of its accounting practices exonerates the company of serious wrongdoing. Stamford, Conn.-based Xerox said that its auditors, KPMG LLP, have certified its financial statements for the three years ended Dec. 31, 2000, and found no false sales. “After rigorous reviews of Xerox’s accounting, no “fictitious transactions were found, and the company’s liquidity is not impacted,” said Xerox Chairman and CEO Paul Allaire in a statement. The news lifted Xerox’s stock 9.75 percent to $9.91 per share at Thursday close. The Securities and Exchange Commission launched an inquiry last year into alleged accounting irregularities at Xerox’s Mexico unit and other subsidiaries. The investigation continues and is separate from KPMG’s review. Although the copier giant cleared itself of serious wrongdoing, it conceded that it “misapplied” generally accepted accounting principles. To account for the bookkeeping adjustments, Xerox reduced common shareholders’ equity as of Dec. 31 by $137 million and consolidated tangible net worth by $76 million. Net income for 2000 increased by $127 million, and first quarter 2001 net income improved by about $50 million. But the level of adjustment will not continue in subsequent 2001 quarters. Adjustments to revenue in each of the three years from 1998 to 2000 were insignificant, Xerox added. KPMG conducted its review concurrently with an investigation by the audit committee of Xerox’s board of directors. In April, Xerox delayed filing of its 2000 annual report because KPMG requested more time to review the books. “Xerox can now continue to focus on effectively executing its turnaround strategy, which remains on track,” Allaire said. The company’s current worldwide cash balance is approximately $2 billion, following the repayment of most of its second quarter maturing debt. “I am very encouraged at the results from the KPMG review,” said Greg Smith, an analyst with H&R Block Financial Advisors in Detroit. “It carries more credibility than any financial disclosure from management alone. Given the full investigation by KPMG, it is not likely the SEC will come up with something material and detrimental.” After an internal investigation, Xerox indicated in February that officials in its Mexico division had engaged in practices that violated either Xerox policies or accepted accounting standards. A total of 13 managers in the unit were subsequently dismissed, and Xerox took a $120 million provision for the accounting problems in 2000. The SEC began its probe shortly thereafter. Questions about Xerox’s accounting practices were preceded by financial problems that began in the latter part of 1999. Increased competition and adverse economic conditions compounded organizational problems with the company. The problems resulted in a net loss in 2000, credit downgrades, dwindling access to capital markets and speculation Xerox would file for bankruptcy. With confidence building on Wall Street, Xerox management is now free to focus on its recovery program, where there’s still much work to be done, Smith said. Most pressing is cutting Xerox’s staggering debt. The company has about $15.4 billion in debt on its balance sheet, with $2.4 billion due this year, according to filings Thursday with the SEC. The company said it will use asset sales, strategic alliances and the sale or outsourcing of some manufacturing operations to increase liquidity. In March, Xerox garnered $1.3 billion in cash from the sale of half its stake in Fuji Xerox to Fuji Photo Film. In April, it sold its portfolio of lease receivables for its Nordic customers to a financing partner for about $370 million in cash. At the time, Xerox said it was in negotiations with other potential vendors in the United States and other countries to complete similar deals that could remove as much as $11 billion in equipment financing-related debt from its books. Copyright (c)2001 TDD, LLC. All rights reserved.

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