全錄公司 (XRX) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Xerox Corporation 1st quarter, 2002 conference hosted by Anne Mulcahy, Chairman and Chief Executive Officer. She is joined by Greg Taylor, Vice President and Treasurer, and Leslie Baron, Vice President and Corporate Secretary. At request of Xerox Corporation, today's meeting will be recorded. Taping and rebroadcasting of the call are prohibited without express permission of Xerox. After the presentation, there will be a question and answer session. During the meeting, Anne, Mr. Taylor and Ms. Baron will make comments that constitute forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. Information concerning certain factors that could cause actual results to differ materially is included in the company's 8-K filed this morning. The company doesn't intend to update forward-looking statements made during the meeting. At this time, I would like to turn the meeting over to Ms. Baron. You may begin.

Good morning and thanks for joining us today. As you know from reading our release, Xerox's 1st quarter announcement is not business as usual. So, before Anne discusses the company's 1st quarter performance, I will first explain what we can report today, what we cannot and why. Xerox denounced on April 11th that we concluded our settlement with the Securities and Exchange Commission, relating to matters that were under investigation since June 2000. As part of this settlement, Xerox agreed with the SEC to restate the company's financial statements for the year's 1997 through 2000 as well as adjust the previously announced 2001 results. This is in addition to a previous restatement included in our 2000 10-K. The new restatement will primarily reflect adjustments in the timing and allocation of lease revenue, which will be reallocated among equipment, service, supplies and finance revenue streams as appropriate, by applying a methodology different than the one the company used in previous years. The resulting timing and allocation adjustments cannot be estimated until the restatement process is complete. In any event, there will be no impact on the cash that has been received or is due to be received from the leases. Further more, the monetary value of the leases does not change. The restatement will include adjustments that could be in excess of $300 million, due to the establishment and release of certain reserves prior to 2001 and the timing of recognition of interest income on tax refunds. The company is in the process of implementing a new methodology for lease revenue, which will be used in preparing the statement, making the adjustments to 2001 and reallocating lease revenues generated in the 1st quarter 2002 and there after. It is premature to speculate on the impact of the new methodology. So, as a result of these changes, the financial results we're discussing today are unaudited and do not reflect the impact of the additional [INAUDIBLE] changes to 1997 through 2000 or adjustments to previously reported 2001 results. Accordingly, the financial information reported is subject to adjustments pending the completion of this restatement and 2001 adjustments. They therefore should be interpreted [INAUDIBLE] made this context. As part of the settlement with the SEC, Xerox is changing the methodology it uses to create allocated revenues among the multiple deliverable elements. The new methodology will estimate normal selling prices or fair value of equipment, using an approach based on verifiable evidence of value, including prices achieved in cash sales and other market-based information. The full implementation of this requires application at detailed levels of the business and is linked to the restatement process and to the adjustment of previously reported 2001 results. Because of this, and in order to provide comparability to the previously announced 2001 results, the preliminary 1st quarter 2002 results discussed today are recorded uses our previously methodology. Since the restatement in 2001 adjustments may impact the periods differently, the trends may change. Following completion of the restatement process and filing of the 2001 10-K, the 1st quarter, 2002 10-Q will be filed with the new methodology. With that, Anne Mulcahy will now provide an update on other matters and share with you our operational results from the quarter as well as details on our performance on key areas in the business. Then Xerox Treasurer Greg Taylor will join Anne to take your questions. Anne?

Thanks, Leslie and good morning, everyone. It is no secret that Xerox has faced significant challenges in the past two years. In fact, the issue with the SEC surfaced weeks after I became President and COO, in May of 2000. Since then, it's been a distraction and cloud over the significant progress we have accomplished. But if there is one thing that this management team has proven, it's that when face we did difficult decisions we take the appropriate actions that will serve Xerox best for the long-term. That's why we chose to do what was needed to put the SEC issues behind us, we have and we're ready to move on. At the same time, we continue to take the necessary steps to ensure the highest integrity of our financial reporting and internal controls. Since we come under scrutiny for the issues, we made changes to our people, processes and storms strengthen our internal controls. In addition, we've established the new Office of Business Ethics and Compliance, led by Executive Vice President Al Duggan, who reports to me and the Audit Committee of the Board of Directors. Al has a broad charter to assure worldwide adherence to the business ethics and policies. And we now outsource internal audit sources to Earnston Young, the leader in this area. Lastly, as we continue our external search for a new Chief Financial Officer, we're being selective in identifying candidates with solid experience in both internal controls and worldwide physical planning and processes. The Board and I do continue to be impressed with the candidates who expressed interest in the position rand confident we will name the right person with the right skills and character traits to complement today's team, and we know that as we put our major issues behind us that this becomes a much more attractive opportunity for high-level and high-quality finance executives. In the meantime, our senior finance team continues to effectively manage the financial affairs of the company and is making significant progress in strengthening Xerox's liquidity. As we reported last week, our negotiations with lenders in the revolver are expected to be complete no later than the end of June. At the same time, the precise execution of our vendor financing strategy continues. Today we are announcing that Xerox Capital Services, our joint venture with GE Capital Services, will close and become operational on May 1st. I personally signed to the final agreement that effectively launches the new initiative, to manage Xerox's customer administration activities in the United States, including various financing programs, credit approval, order processing, billing and collections. The launch of the joint venture is one of three steps in our comprehensive vendor financing partnership with GE Capital. Secured financing is the second key element of our GECC relationship. And we have recently agreed with GE Capital to extend our U.S. finance receivable monetization agreement with GECC, providing Xerox with additional funding, expected to be approximately $1 billion this year, secured by portions of our lease receivables in the U.S.. This funding arrangement will continue while we finalize the third step in the process, completing agreements for GE Capital to be the primary provider of equipment financing for Xerox customers in the U.S. With progress made in the U.S., we continue to move forward in finalizing similar GE Capital agreements in Canada, France and Germany. In the 1st quarter, we also announced the completion of agreements with other financial institutions for new customer activations in Mexico and Brazil, both of which became operations -- operational on April 1st. We also activated the previously announced joint venture with [INAUDIBLE] for billing and collections for Netherlands operations. They provide the funding to support all new customer leases. And we completed the sale of Xerox's equipment financing operations in Italy for $227 million with our financing partner now providing ongoing exclusive equipment financing for new activations in Italy. And progress continues in engaging third party financing companies for the few other remaining key regions. It's all part of our broad strategy to restore Xerox to financial health by reducing debt and generating cash. In the evidence of our progress is in the numbers. Our cash balance in Q1 increased by about $700 million from last quarter, to $4.7 billion, representing a $1.9 billion improvement from March 31st of last year and following the repayment of $550 million of 1st quarter maturing debt. We continued to generate cash from operations at about $320 million in Q1, prior to a $350 million tax payment from the gain on the sale last year of half of the company's interest in Fuji Xerox. Debt net of cash was $12.3 billion, a 17% reduction from Q1, 2001. And costs continue to decline in the quarter. We have taken actions to eliminate another 100 million plus in annualized spending. In total, we have reduced annualized spending by more than $1.2 billion over the past 18 months. Worldwide employment is now 74,600, down 4,300 in the 1st quarter, including the transfer of 1,600 employees to collect products through our office manufacturing outsourcing agreement. At the same time, we hold firm on our commitment to invest in the company's future growth by maintaining flat research and development spending levels for the core business. We spent $230 million on R&D in the 1st quarter, a $16 million decline from Q1 of last year, primarily reflecting our exit from the Soho business. We continue to make exceptional progress in inventory reduction. In the 1st quarter, we decreased inventory by $490 million and a $60 million sequential improvement from Q4, 2001 and a year-over-year reduction of 28%. And our operational efficiencies extend to other areas of the business, as well. As Leslie mentioned, financial reports reported today are based on the use of previous methodology. We're in the process of changing the methodology, the results will be reflected in the '97 through 2000 restatements, 2001 10-K and 1st quarter 2002 10-Q. However, for today, we believe providing an apples to apples comparison of 1st quarter, 2002 with Q1, 2001, is helpful in analyzing trends and overall performance. Again, understand that the results I will now review are subject to change. Including restructuring charges of 15 cents, as well as a 2-cent loss from foreign currency, Xerox's 1st quarter net loss was $64 million, or 9 cents per share. For the 1st quarter, the company's operational earnings exceeded 1st call expectations, which were a 1-cent operational loss. Excluding restructuring charges and the effects of unhedged currency, we delivered an operational profit of 7 cents per share, which does include the benefits of the lower 1st quarter tax rate versus our planned full-year tax rate. Gross margins for the 1st quarter were 39%, an improvement of 5.4 percentage points from Q1 of last year. About half of this increase reflects the exit from Soho as well as significant operational improvements in developing markets. And equally important, gross margins improved due to increased productivity and pricing discipline, combined with our continued focus on pursuing profitable revenue versus market share. Despite spending on advertising and marketing activities related to Exprorn's sponsorship of the 2002 Winter Olympics, selling, administrative and general expenses of $1.1 billion were down approximately 6% from the 1st quarter of 2001. Revenue in the 1st quarter was $3.7 billion, a year-over-year decline of 11%.

Okay, we are back. In DMO, we're moving to a model designed for profitable revenue. This strategy is paying off. In the 1st quarter quarter, we saw substantial improvement in the operations of DMO regions and expect to build on the momentum throughout the year. In North America and Europe we continue to deliver improved operational results, reflecting the flow-through from our cost reduction activities as well as year-over-year improvement in key segments of the core business. I'm going to break from tradition here and talk to you about equipment placements instead of revenues, since this install data provides useful trend information on the status of our business. Know that we plan to return in Q2 to segment revenue reporting. For Q1, in the production market, Docutech equipment placements grew 4% as the company solidified the leadership position in the high end monochrome. Color inclined 20% because of impacts from the weakened economy and competition. However, we continue to maintain leadership positions in key segments of the production business and based on the latest U.S. data available from year-end 2001, we've gained significant share in Docutech. More good news on this front is that we recently marked the 5,000th installation of the 2000 series of digital colored presses. The most successful product of its time. We've achieved significant manufacturing efficiencies in our 2000 series and flowing through the savings, along with the benefits of the weakened Yen to our customers. We announced U.S. list price reductions of 12% on the Docucolor 60 and 6% on the Docucolor 2045. In office monochrome, growth in Document Center [INAUDIBLE], including the launch of the Document Center for 90, were offset by substantial declines in light lens copiers, but similar to production, we're increasing share in the key segments of the office with the greatest possible revenue growth opportunities. Namely, monochrome network multi-function. U.S. Market share data from full year 2001 shows Xerox strengthening its leadership position in the critical space with a 5-point year-over-year share increase. And office color printings installs grew 6%, driven by the success of the company's Phaser 860 and 7700 printers. According to preliminary Q1 market share data for North America, our Phaser line of color printers continues to capture significant share from the market leader and next month we will make headlines on this base with a new addition to the portfolio. In fact, 2002 is said to be one of Xerox's most significant launch years in the company's history, with five few product platforms coming to market. Earlier this month, we made news with two of the major technologies. First, we introduced a common platform for operating color and black and white printers that saved time and lowered cost. The new Xerox Docu XP 2000 controller, a work station that processes print files and drives the printer, increasing [INAUDIBLE] between our industry leading print, color and Docucolor printing lines. Second, we began taking orders for our market-making digital color production press. The Igen3, which will ship later this year. In the two weeks since order taking began, we have received over 100 reservation orders for the Igen3. Evidence of the substantial potential for the break through technology. And significant customer wins play into the story, as well. We have logged many. Validated the strength of our product and services in the market and customers' continuing confidence in the quality offerings. In fact, this week we announced four-year, $109 million contract renewal with Office Max. We're replacing and upgrading their 975 in-store Copy Max facilities with more than 3800 Xerox digital, color and black and white products, to provide Office Max with cost efficiencies and the latest digital technologies. The contract calls for an equipment mix of the Docutech publishers, high speed multi-function systems, Docucolor 12 printer copiers and Docu 2000 series digital color presses. Xerox is knocking out competitor products in sites around the globe. Xerox Mexico signed a three-year contract worth $10 million with one of the world's largest oil companies, replacing Cannon products with 433 networked Document Centers, ready to produce more than 10 million documents a month. We also landed a significant win with the U.S. Army, knocking out Panasonic to place 1700 Xerox products in Army recruiting stations cross the U.S. In Xerox Global Services, we're creating demand for our unique content and document knowledge management services described to simplify work flow. Boeing's flight safety subsidiary engaged Xerox Global Services to develop and implement a solution to manage the massive digital repository of training documents. By integrating 21 different systems into 5, we're helping Boeing flight safety reduce costs while streamlining the flow and accessibility of realtime information. Despite the impact to weakened economic conditions, we continue to build momentum in the marketplace, supported by our aggressive marketing in advertising and expanded sales coverage. And over the next couple of months you will see more good news from Xerox. We'll complete our revolver negotiations, a positive sign of our strengthened liquidity, we will launch new offerings in the office printing and multi-function space. We will take additional steps forward in implementing vendor financing agreements in other key regions. We will complete our restatements, file the 2001 10-K as well as the 1st quarter, 2002 10-Q, closing the door on a challenging chapter in Xerox's history. And we'll continue do doing what we've proven we do best, implementing with prevision to improve our operations, investing in our core production office and services businesses to drive future profitable and sustainable revenue growth and delivering on our commitment to build back value in the company. It is all about execution and determination. We've been tested and we have proven that Xerox people are resilient and steadfast in their resolve to overcome challenges. Our results in the 1st quarter of evidence of just that. We've set the stage for a return to full-year operational profitability. Like other promises made and kept, we have every intention to deliver on this commitment, as well. So, thank you and now Greg Taylor will join me and we'd be delighted to take your questions.

Thank you. If you have a question, please press the number one on your touch-tone phone. All participants are asked to limit themself to one question. Once again, press the one on your touch-tone phone. Our first question from Ben Bastianen of UBS Warburg, go ahead.

Good morning. Thank you.

Good morning.

Good morning. I wanted to ask, with regard to the fundamentals of the business right now, how the quarter ended and how you are going into the 2nd quarter here, what the pace of business looks like regarding the 2nd quarter and maybe how the formation of the joint venture may impact your pace of bookings in May? And heading into the 2nd quarter. And then for a clarification, your outlook for achieving operational profitability, does that mean that you have at least a little bit of an idea for how the accounting will play out and if you could just talk about what -- what, really operational profitability means versus what you had said previously? Maybe on prior calls. Thank you.

Okay, Ben. A lot of questions. I will first talk about fundamentals and I think what we wanted to convey today is that the operational fundamentals of the business really are in good shape. I think that's evidenced by the fact that our continued focus on cost reductions flow through and will continue the focus for the balance of the year, both in sharing flow-through and new cost opportunities. We're quite pleased with the progress on growth margins. I think, quite frankly, we had talked about sort of an end point goal of approximately 40% gross margins and 39% gross margins show a ton of progress on the efficiencies and cost flow-throughs as well as the manufacturing efficiencies that we've been seeing, as well. Certainly we are back into a marking mode this year and still seeing sand reductions, which we're quite pleased about. So, despite the fact that we were front-loaded with Olympic investments, we were very pleased with the fact that we continue to see reductions in the -- in the SAG absolute cost. I think we would look and say top line certainly is disappointing, but when you pull back some of the divestitures like Soho and China and some of the other decisions we've made as it relates to asset sales or closures, quite frankly we're pleased with the core elements of our business that are showing good growth. As you know, black and white production area was a challenge for us and we're delighted to turn the corner in that important part of your segment. And office color printing shows positive signs and is making gains. So, overall, I think the fundamentals, you know, are in good shape and we continue to see the kind of progress we hoped for in Q1. 2nd quarter, I think is more of the same kind of progress. We expect to continue to see sequential progress in most aspects or all aspects of the business. We believe, actually, that the JV will be quite helpful. We've actually been operating as a joint venture despite the absence of the formal agreement in terms of the partnership we've built with GE. So, this is not like an on-off transition. This transition has been planned and been transitioning for quite a long time. Quite frankly, we don't see any issues in terms of, you know, an impact on bookings and I look forward seeing some of the opportunities with regard to the credit discipline and the collection discipline that certainly we know that GE is already implementing and bringing to our back office operations. And I think in terms of clarifications going forward, the message we'd want to leave you with is that obviously we are at a point in time that it's subject to a gray field of change. However, there is a lot of aspects -- operational aspects of the business, not impacted by the -- we are diligently working through the restatement. As you know, Ben, the vast majority of this is about the timing and allocation of revenues. So that, you know, clearly we do understands some of the implications of that, but it would be premature to certainly try to take it in any amount of detail now. But we can certainly assure you with our confidence in terms of operational profitability and let me just remind you that's really without -- simply without restructuring unhedged currency. So, that is our definition and we're confident about continuing to make progress and continuing to operational profitability.

Just to clarify, Anne, normally there is a sequential uptick in business pace, except for last year, for the company into the 2nd quarter, I take it from your comments that you still think that can take place on a relatively normal level?

Yeah, Ben, I think we're kind of pleased that a lot of the issues are behind us and therefore we sense in the very near future that we will be totally focused on the operations of the business and not some of the areas that have been distracting over the last 18 months. So, if anything going forward, we will have 100% of our energy dedicated to operational improvement.

All right, thanks.

Thank you, Ben.

Our next question comes from Jonathan Rosenzweig of Salomon Smith Barney. Please state your question.

Hi, guys.

Hi, Jon.

A couple of quick things, first of all, the tax rate. When do we think that drops back down to what we would consider a more normal level and is there anything that will offset the higher tax rate in the near-term? I think most people on the street didn't look for it to be that high. Will anything offset it? And what's drawing it and what will bring it down? And on the second thing, on the GE outsourcing in the third party financing, do we assume by the in fact you're getting the interim financing from GE that this is just taking longer than you initially expected and think by the end of the year we can get 8%? I think that's the numbers number you used, outsourced by the end of the year?

I will begin with tax rate, Jon and the bottom line on why the tax rate is high is simply that our losses are recurring in regions where we aren't getting the benefit of, you know, any tax help and our earnings are taking place an our profits are taking place in high tax rate areas. You know, the simple explanation on this one is that the company improves in any geography, obviously the tax rate implications will improve, as well. We have done kind of a full-year planned tax rate assessment, but we are updating that every quarter and I should mention that it's subject to some degree of change, based upon the restatement, as well. So, as much as we'd like to be precise as it relates to tax rates, you know, there are a lot of impacts that we will understand better in the next 90 days and be able to be more explicit with you when we file the 10-K and complete, you know, the restatement process, but the fundamental here is -- is that as the company continues to improve its position geographically, particularly in the developing markets, that will be a helpful implication as it relates to lowering the tax rate going forward.

Is there any way that sort of identifies what a reasonable long range tax rate for the company would like like? Or is it not possible right now?

That's something, Jon, you should expect to [INAUDIBLE] after we understand the impacts of the restatement. Probably it would be imprudent to jump at that now. We will update you that within the next out days. I want to address the second part of your question on the GE deal. There is no question that the monetization agreements we have with GE make up somewhat balance sheet indifferent with regard to the operationalizing of the transaction funding, and obviously, from a transaction perspective, the delay in launching the joint venture really had no delayed impact with regard to the balance sheet benefit. The real reason we delayed the operationalzation of this to May 1st was that our whole objective is to make it seamless to our customers and be sure we were totally ready with regard to adapting some of the GE processes and that we go forward, making sure that our systems linkages are flawless and there won't be any hiccups with regard to any part of the back office operations as it relates to our customers, but yet to be able to recognize the financial benefits of this strategy as expected. So, you know, the delays had had nothing to do do with the financial impacts, but everything to do with wanting to do a flawless implementation in the field and with our customers.

It sounds like you're talking more about the JV. I'm interested in the agreements for the third party financing going forward, not the customer side of it?

Yeah, and actually referring to both, but, to, you know, launch the transaction funding portion of this does require an enormous amount of systems and process linkages between the two companies that we're currently working on. So, that's really what we're doing and clearly expect not to [INAUDIBLE] and to be able to complete it by the end of the year. So, in the interim, that's why we've made the agreements with GE, to basically, you know, use the monetization process until we're ready to turn the switch on transaction funding with all of the systems and processes in place that are required.

And the 65% still stands?

Yes.

Okay. Thanks.

Next is Gibboney Huske of CS First Boston. Please state your question.

Thank you. One question and a couple of parts, just trying to think about the top line there, there are a lot of moving parts. Part of what you're doing is shrinking toward profitability and part of that is not participating in real egressive bits and tenors and changing the business model and DMO. When do you start to grandfather out of that change in business model? It seems like we've been going on a little bit over a year now. Do you start to see, you know, the impact of that stabilize? And second, is it possible just to get the equipment sales percentage number, pre-currency on the old methodology to give us a sense of overall how we're tracking?

Okay, let me take your first question, I mean I would look at it a little different and say that we're making portfolio choice basis Xerox's future on exiting businesses like Soho or certainly the financing business that certainly is -- is not -- has not been helpful with regard to the overall financial health of the company, that do represent, certainly, you know, impacts on the top line, but absolutely represent a much healthier approach for the company in terms of focusing on the core businesses. But we are starting very much to turn the corner. You know, part of the focus on gross margin has been to each of the geographies healthy and profitable before we start scaling and focusing on stale scaling the revenue engine, if you will, in the company. One of certainly my goals is to be sure that we can optimize our product launches in the second half of the year because our geographies have business model that ensure profitable revenue growth going forward. We're in very good shape, particularly in North America and Europe, to capture the benefit of the product launches, particularly the second half of the year, certainly a few in the 1st half, but the other portion in the second half of the year. And there's no question that product launches are engines of growth from technology companies and do, you know, really provide a motivation in the field as it relates to driving, you know, additional revenues. So, I would look and say we're well positioned, as it relates to the fundamental health in our European and North American businesses to fully capitalize on the product launches in the second half, which will definitely help the top line. Our developing markets, we've basically indicated that our bottom line results will sequentially improve and get dramatically better this year, but we're still implementing, if you will, a profitable, a focus on profitable revenue growth that will preclude us from growth in the developing markets until we turn the corner there. Developing markets will be somewhat of a -- a depressing element as it relates to top line growth. So, I think we absolutely are entering into the territory of focusing on top line growth, particularly for the second half of the year. It really would be difficult for us to give you an equipment sales number based upon the fact that we are committed to providing only very, very top level financial information, based upon the amount of volatility and change that could occur as a result of the restatement and it would [INAUDIBLE] potentially be misleading and not useful.

Thank you very much.

Our next question is from Shannon Cross of Merrill Lynch. Please state your question.

Hi, good morning.

Good morning.

Just a couple of questions for you. First of all, can you give us an idea of what you spent on the Olympic marketing and advertising campaigns to get an idea of, you know, what -- how that hit SG&A during the quarter? Secondly, can you give us some numbers in terms of accounts receivable, accounts payable, day sales outstanding, I don't know if you can release the information, but it would be helpful. And finally, is there a way to get an idea, the reservation orders you've taken for the Igen3, can we get a percentage that may come in during this year versus 2003? Is there any way to get some, at least, you know, bigger than a bread basket idea of that breaking out?

I will take a portion of it, Shannon and then turn it over to Greg on some of the other data. But approximately we spent about $25 million in the 1st quarter on Olympics, obviously there were expenditures earlier than that, as well, with the Olympic commitment, but during the 1st quarter I believe it was a $25 million, you know, what I would call non-repeatable expenditure relating to the Olympic spend. I will jump to Igen3, then turn to to Greg for accounts receivable, accounts payable and DSO. But we're -- by the way, very, very pleased, I mean in two weeks to get over 100 reservation orders, you know, as we look at that compared to the competitive statistics we've seen, we're really encouraged about the marketplace reaction to Igen3 and I will just remind you that we talked about what we would call a limited launch this year and looking at a 300 to 400 level of installs in 2003, so to have, quite frankly, 100 plus reservation orders after the last two weeks, I think puts us in very, very good shape to build a very healthy backlog that ensures our 2003 commitments and really allows us, then, to focus on doing the market development for 2003 and beyond to get even better penetration in some of the markets we're focused on. So, I think it's an indication that our expectation areas totally reasonable and provide an area of opportunity for the company going forward. Greg, do you want to comment on...

Yeah, sure, on receivables and payables, in total, between a finance and trade receivables, we fundamentally decreased receivables in total by just under a couple hundred million dollars. On the payable side, both payables and accruals, increased just under $100 million, so, both were positive from a working capital point of view. From DSO, the fact is that DSO is going to be -- likely going to be impacted as we go through the restatement exercise. So, it's one of the numbers that I don't think we can focus on at this pain.

Okay. And just one follow-up, when it comes to the GE Capital deal, have they signed anything that commits them to providing the financing? Or is it just part of the understood agreement within the -- the framework agreement you have put in place?

Well, first they signed the framework agreement, which laid out the terms and conditions. As part of the agreements that we just signed, effectively yesterday, or Monday, included in that was the commitments to fund an additional $2 million of funding, we're now entering the stage of negotiating the final agreements to go to the transaction-based funding and implementing the agreements.

So, the -- the final, where they will underwrite, you know, the financing still has to be -- the final agreement that covers the underwriting on the [INAUDIBLE] still needs to be signed, but they agreed to it in principle in the framework?

They've agreed to it in principle and also agreed through the contract on the monetizations until we get to the transactions funding part of the agreement.

Okay, great. Thanks.

Thanks.

Our next question comes from Steve Weber of SG Cowen. Please state your question.

Yes, good morning.

Good morning, Steve.

Could you give us some feel for how much bad debt reserve accrual you made in the 1st quarter and -- and then I know there are things are affecting it, but you talked about 200 basis points of SAG improvement year-over-year when you when we talked in January -- in January, how does that look at this point, or maybe you can put it in dollar terms because we've got some fluidity at the top line. I'm very interested in where this is going and how much -- and then the relatedly, can you talk, again, about sales coverage?

Okay. First of all I will have Greg talk on the bad debt side of it. I will take the SAG improvement piece, Steve.

Steve, the -- on the bad debt side, I will only give you a view of trend because bad debt will possibly be impacted through the restatement process, as well. And while we did not see, though, on a trend basis is any deterioration year-over-year in the bad debt side of it. From that perspective.

Did you -- I'm -- I'm -- in the numbers you've given us, you must have made a reserve accrual. I'm not so much the experience, I'm wondering what's embedded in the SAG number of $1.1 billion?

It's in line with my comment about the trend of not seeing any deterioration.

Year to year or quarter-to-quarter?

Year to year.

Okay.

Okay, Steve, on the SAG improvement we're committed to the 200-basis point improvement, which is about half a billion dollars for a year. Certainly a large part of, you know, the $100 million, [INAUDIBLE] Q1, you know, is related to SAG, although not the direct selling resources, but other portions of the SG&A line. We have a number of very explicit strategies going forward that certainly play into the reduction, not the least of which is the GE Capital joint venture, which when he expect to see efficiencies particularly in the second half of the year. Our telebusiness strategy that we've been very focused ramping up, providing a lot of efficiencies, if you will, to the selling model. And then just continuing to look for the kind of overall overhead [INAUDIBLE] that's we continue to focus on in all of our operating companies. So, we're still confident that that will be very much part of the delivery for full year.

Okay, and the sales coverage, Anne?

Yeah, sales coverage is slightly up. You know, as it relates too the Q1 piece of it I think it was about a 3% improvement, so, yeah, sales coverage is up, probably as important as sales coverage being up is the fact that a retention rates are terrific and we've seen better retention rates in Q1 in terms of the sales force than we've seen in many, many quarters. So, I think the combination of -- I was just talking to the President of our North American group and 98% filled territories is the number we hit very rarely and we are -- we have our territories filled, we have people on the bench and our retention rates look great. So, I'm actually pretty enthusiastic about the stability of the sales coverage piece.

Okay, thank you.

You're welcome.

Our next question is from [INAUDIBLE] Morgan Stanley. Go ahead.

Good morning.

Good morning.

Obviously some great news on the Igen3 side, but we saw pretty substantial deterioration in color production placements. Can you provide a little more detail in terms of what you saw in the market? Give us your best guess of how much of it was the economy and customers' general reluctance to purchase anything at all, as opposed to deferrals ahead of the Igen3 shipments?

Sure, and we are also enthusiastic about Igen3, but quite frankly Igen3 is one of the big opportunities in the company and production color continues to be a very big part of our future. I'd say we definitely believe that the economy has played a very significant part of, you know, the declines in production color. Certainly, you know, this one seems to be definitely more sensitive to the IT spending constraints than the traditional black and white business or the office business. So, production color seems to be hardest hit. We've also definitely seen the competition from the CLC 5000, which, you know, does play in the space as kind of a less-featured but lower-cost entry and one of the things that really drove us to take the pricing actions that we just announced I guess yesterday, is the in fact we want to face-off with the 5000 and win more aggressively. So, a 12% reduction on the Docucolor 2060 and 6% of the [INAUDIBLE] have puts us in a good position in terms of competing with Cannon in that part of the market. And the great news about being able to take the price reductions that, you know, that efficiency is coming through manufacturing efficiencies and we're able to maintain margins as it relates to, you know, the actual flow-through of profitability from those transactions. So, certainly this has been a tough area of the business for us. The majority of it is economy, we're taking actions to be sure we win, you know, in the competitive face-off. And we still believe that we're the market share leader worldwide with the amount of Docucolor placements that we have. So, despite the fact that it's been a tough category, we will retain our leadership and hopefully with the price reductions see an improvement in the category going forward.

And just as a quick follow-on, can you provide any color in terms of what the trends were on a geographic basis? And any sense of what the panelization could be on your Docucolor placement as a result of Igen3.

You mean general basis, right, or production color?

I meant production color, the down 22% in placements.

Yeah, I actually believe that it was better in Europe than in North America and we can check it out for you, but as I read through and looking at it and saying Europe performed better with production color than North America, so that it would have been, you know, a bigger problem in North America than -- than in our [INAUDIBLE]. And by the way, Europe has performed very well in color, consistently over the last 18 months. So, I think that would be the flavor I'd give it there in developing markets, that, you know, we really haven't even fully focused on production color as a -- a major strategy yet in our developing markets. That will come in the future. And in terms of cannibalization, I mean -- I don't think we see an -- a lot of cannibalization between Docucolor and Igen3, it is one of the reasons for the price reductions in the Docucolor series that we're looking to make Docucolor a better value at lower volumes, therefore, to increase the market placements for the Docucolor series. Igen3, we're pleased that we see a break-even on Docucolor 3, that we think is modest, considering the [INAUDIBLE] of Igen3, there will be some, but it is not a terribly significant portion of the Igen3 placements at this point in time.

Great. Thank you.

Our next question is from Jack Kelly of Goldman Sachs. Please state your question.

Good morning.

Good morning, Jack.

Can you just update us a little bit on the cost savings overall, Anne? You mentioned in the press release, another $100 million in annualized savings? How much of [INAUDIBLE] '02? And if we combine that with last year's actions, what with you say the total cost reduction number might be? Secondly, just a follow-up on the geographic question, could you broaden that a little bit to the other product lines? And finally, your CAP spending number best guess this year?

Okay. Let me start on the cost savings number. You know, we track this from the announcement of the turn around plan, late 2000 in terms of what we delivered. Basically we looked and said we can track specifically 1.2 billion annualized savings due to the actions that we've taken basically in the last 16 months or so. And we see the flow-through in 2002 as certainly being almost totally capturable from Q1 in terms of the additional 100 million we identified in Q1, we also indicated that we are going to capture half a billion dollars of savings in the SAG line in 2002. So, although we're not going to give you the full year cost savings number, you can count on the fact that we're very, very focused on identifying additional cost opportunities and we will announce them as we go in terms of both the, you know, the cost reductions as well as the restructuring actions we take by quarter. This is absolutely going to continue throughout the year and, you know, certainly we're not losing any focus or pace with regard to cost reduction actions. On the geographic piece of it, let me just speak generally. North America continues to be what I would call the lead region, if you will, in terms of overall business results, certainly improving trends, margins, I mean everything is actually going very positively in North America. That's both our agent channel as well as our direct sales force. Europe certainly has continued to make progress but we definitely see, you know, bigger issues with regard to top line in Europe than we see in North America and in DMO, our focus has obviously been on decreasing the losses that we're very pleased with the progress we've made DMO, particularly Brazil with the alliance portion of our losses coming somewhere. So, I'd say that, you know, North America continues to trend well, Europe we're definitely seeing more issues on the top line than we are in the rest [INAUDIBLE] certainly North America. And in the DMO region, we're doing exactly what we intend to do, which is improving bottom line results. When we get there we can certainly, you know, get -- I think begin to focus on top line growth. On the CAP spending, I'm going to actually ask Greg to confirm this, but think it was about $250 million for the year and we're certainly pleased on the Q1 piece of it in terms of being able to commit to it. But I don't think we're prepared give you the number right now.

And okay, on the cost savings, Anne, you're saying $600 million plus, 100 plus 5, is that fair?

No, the 100, a lot came from SAG. Which we've [INAUDIBLE] to the half a billion area, but we will take more costs than just SAG reductions, so, in excess of that, Jack.

I think we have time for one more question.

Our last question today is from Peter Ausnit of Deutsche Banc. Please state your question.

Thanks very much.

Hi, Peter.

Hi, Anne. Just a simple question. Did you provide a share count?

You know, I don't think we did, but we can certainly give it to you! So, I'm just -- I think, yeah, the shares, 726 million, which is a slight increase over last quarter.

Okay, now here's a little tougher question, I don't know if you can address this, but, you know, now that you settled with the SEC and are moving forward, is there any way you can kind of bound or give us any kind of guidance on whether we should be concerned about shareholder lawsuits relating to the allegations? And lastly, the SEC said that the investigation is closed with the regard to Xerox, but is pursuing other individuals. Is anyone currently in the company, the subject of any -- any further inquiry? Or is it something that only relates to people who have since ceased active management roles?

Okay, let me talk about the shareholder litigation first. I think it is important for us to reiterate the fact that we're going to vigorously defend these lawsuits and, by the waffle, the settlement with the SEC doesn't change that. That was the whole point of neither admitting or denying the allegations. I think the other point that, you know, just a point of confidence, is that we certainly gave this very serious thought and certainly a lot of consideration before we settled with the SEC so that, you know, we're not taking these decisions lightly, we're scoping them out and making the right decisions for the business going forward. That's as much as a boundary as I'm able to give you right now, but hopefully that is a sense that this was a thoughtful decision with a lot of facts that we -- we, in short we had before going through this settlement process. On the investigation, you're right, it is closed for the company and -- and we have basically said we will not comment on any discussion with regard to any individuals. Our whole focus is to get the company to face forward, we've made a lot of progress in the company, although this was a very difficult, certainly period of time. This has been an overhang for the company, certainly for the last two years and the fact that we can move forward and focus on the business is really taking -- that's where we're going place all of our energies so we're not able to comment on any individual situations what so far.

Okay. Well thanks very much and congratulations on the margins and on the progress you've made so far.

Thank you, Peter. I [INAUDIBLE]. And by the way, my thanks to all of you for joining us today. We should note the fact, thanking you for bearing with us during the somewhat less than business than usual quarterly report. Next quarter we will be back on track with a full set of financials and analysis and we do look forward it. So, thank you, again, for your time and participation.