"If the government is big enough to give you everything you want, it is big enough to take away everything you have." -- Gerald Ford

BREAKFAST WITH THE FOOL
Rotten to the Core Values at Xerox

By Rick Aristotle Munarriz (TMF Edible)
October 3, 2000

You can beat a drum cartridge but you can't beat estimates. Things continue to worsen for global document solutions pioneer Xerox (NYSE: XRX). The company's going to have to break out the color copier to print out the red ink left behind by the September quarter's deficit. For analysts who were expecting a profit of $0.12 a share, this is the office prank equivalent of mooning the copier and circulating Xerox copies around the board room.

While Xerox had already warned Wall Street of a soft second half of the year back in July, even the most pessimistic of analysts were still looking for a profit. No more. The expected loss of $0.15 to $0.20 a share is enough to make the even the most straightforward of downgrades curl.

Weak sales and strong competition were cited for the shortfall, but it's just another poor showing by a company whose recent malaise can be carbon-dated back a few quarters. The freefall is best illustrated by breaking down the company's six core values:

1. We succeed through satisfied customers. Xerox is suffering through a patron backlash after a sales-staff reorganization that alienated clients. Want proof? Sales dipped last year and continue to fall in fiscal 2000. Also, companies with "satisfied customers" don't single out the strength of the competition as a reason for poor financial performance.

2. We value and empower employees. I mentioned reorganization, right? CEO Paul Allaire has also mentioned that further actions, including "asset dispositions" and "major cost reductions," are required. With just shy of 100,000 employees worldwide at the start of the year, even the slightest impact will be substantial. Yes, employees are valued, only that value is being marked down.

3. We deliver quality and excellence in all we do. While the company continues to draw accolades, they are often the rearview mirrors of scout badges. This week the company slipped from the top slot in its category in Fortune's "Global Most Admired" annual listing. With the top line slumping over the last year -- and the company now having missed estimates in four of the past five quarters -- either "quality" and "excellence" are out of style, or we need new definitions.

4. We provide superior return to our shareholders. If pictures speak louder than words, click here. The stock was trading in the $60s back in the summer of 1999. The company closed yesterday at $15 5/16 and is set to open today at levels it hasn't seen since 1993. Just two months ago Allaire noted that the juicy dividend was not in jeopardy. As of this morning, it is under review.

5. We use technology to deliver market leadership. While the Xerox brand has become synonymous with photocopying -- and the company continues to make technological breakthroughs in the realm of color printing -- the heart of the September weakness has come from softness in core European and stateside markets. Will that have a ripple effect in smaller markets in the future? Once again, innovators don't single out the strengthening competition, do they?

6. We behave responsibly as a corporate citizen. Accounting irregularities run deep in the company's Mexican operations. For years, several senior managers had falsely inflated receivables and written off liabilities prematurely to bloat subsidiary performance. The company is cooperating with the SEC and already took a charge in the second quarter. No company, especially a global titan like Xerox, can be on top of weekly or even quarterly financial anomalies -- but this went unnoticed for how many years?

Since last year, the company has been putting out bad news and hitting the "Start" button on the copier. Unfortunately, the pages keep coming.

News to Go

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Word? Perfect? Apparently not. Microsoft (Nasdaq: MSFT) will be making a $135 million investment in struggling software maker Corel (Nasdaq: CORL). While it may seem like an odd lifeline to throw out, the fact that Microsoft now has the option to own a 25% stake in the Canadian-based company is not that far-fetched. Corel's WordPerfect once ruled the realm of word processing before Microsoft's Word became a bundle of joy. But Corel is already making strides to make its software Internet-dependent, in line with the Microsoft.NET initiative. The unspoken motivation might be that -- despite the lagging share price -- Corel's operating system for Linux has been seen by many as a threat to Mr. Softy.

Hot chips! Get your hot chips here! The Semiconductor Industry Association reported record semi chip sales for August this morning. At $18.2 billion in sales, that represents a year-over-year increase of 53%. The robust growth in the cyclical sector should help the shares of chipmakers such as Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD).

Amazon.com (Nasdaq: AMZN) is picking out its partnerships. While the e-tail titan passed on renewing its marketing deal with megaportal Yahoo! (Nasdaq: YHOO) two weeks ago, it has upped the ante on its role as a premier music provider on Microsoft's MSN eShops today. That might be music to the ears of investors who feared that Amazon was retreating from the exposure wars. Offering "Earth's Biggest Selection" loses some of its luster if it's not marketed to Earth's biggest websites.

Hack attack! In a Symantec (Nasdaq: SYMC) survey, 38.5% of the technology professional respondents experienced at least one attempt to hack into their network last month. Only 15% of those who participated in the survey claimed to have a desktop firewall solution to block the illegal entries. Naturally Symantec is pleased with the results as it hopes to move more of its product, but it also shines a spotlight on the entire Network Security sector. That's exactly what we have done in the latest issue of our Internet Report.

Get well, whenever. At a time when companies are hitting the wires with earning surprises, drug maker Schering-Plough (NYSE: SGP) announced that fiscal 2000 earnings would be in line with estimates. Is the non-news, news? Apparently. With some wondering how the company would fare due to soft allergy seasons and an even softer euro, the clean bill of health is welcome news. The company is on target to hit consensus estimates of $1.65 a share.

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