rowth of mid to high teens." In effect, the predicted growth bar was raised, and some wondered how profits could grow at three times the rate of revenues. Revenue growth was predicted to be 5 percent for the quarter although year-to-year revenue growth for the first quarter was zero.
Investors Grow Uneasy
By July investors were getting suspicious. In retrospect, they had good reason. The stock had fallen more than 10 percent when Xerox reported that it was in line with its targets for second- quarter growth of 13 percent in "core earnings." The company also noted that revenue had grown at only 2.5 percent and that "mid to high teens" earnings per share growth would be hard to achieve for the balance of the year. On receipt of that news, the stock traded down 8.2 percent to close just below $51. The company tried to adjust the spin to emphasize future opportunities, noting that it was transforming itself from a copier company to a copier services company and that it expected the services component to account for 50 percent of total revenue (up from 15 percent) within eight to ten years. Research analysts supported the company story. Eight out of eleven continued to rank Xerox a strong buy.
By mid-September 1999, Xerox was forced to lower expectations again when the CFO noted that revenue growth would fall below 5 percent. A strong U.S. dollar and economic weakness were blamed-although with the stock down about 30 percent from the high four months earlier, several analysts expressed doubt that Xerox’s problems were limited to foreign sales. Within a week Xerox announced the acquisition of Tektronix’s color printing and imaging business for $950 million, saying that it expected that market to grow at 23 percent for the next three years. Thoman said, "This is really about…
The complaint alleged that Xerox had overstated revenues by more than $3 billion and profits by more than $1.5 billion over a four-year period beginning in 1997. This year coincided with the time that Xerox began to outperform the market and Allaire began to accumulate a fortune. The action was finally settled in June 2002 with a second restatement involving the inappropriate booking of $6.4 billion in revenue and overstated pretax profits of $1.4 billion.(Securities and Exchange Commission, 2002) The company was fined $10 million, paid, of course, with shareholders’ money.
Stephen Cutler, the SEC’s director of enforcement said, “Xerox used its accounting to burnish and distort operating results rather than to describe them accurately. As a result, investors were misled and betrayed.” Paul R. Berger, associate director of enforcement said, “Xerox’s senior management orchestrated a four-year scheme to disguise the company’s true operating performance…. Senior management had no compunctions about engaging in improper conduct.” And Charles D. Neimeier, chief accountant for the division of enforcement added, “Xerox employed a wide variety of undisclosed and often improper top-side accounting actions to manage the quality of its reported earnings. As a result, the company created an illusion that its operating results were substantially better than they really were.