STAMFORD, Conn.- July 25, 2001-- Xerox Corporation today announced a second quarter operations loss of 10 cents per share, which includes currency losses of 2 cents. Including net restructuring charges, gains from the early retirement of debt and a charge associated with the disengagement from the small office/home office (SOHO) business, the company reported a second quarter loss of 40 cents per share. "Despite weaknesses in the economy that are impacting overall sales, the effective execution of Xerox's turnaround is on track and resulting in improved financial performance,'' said Paul A. Allaire, chairman and chief executive officer. "Xerox is delivering progress in key areas of the business, including cost reduction as well as improvement in inventory turnover and gross margins,'' said Anne M. Mulcahy, president and chief operating officer. "We delivered strong operational cash flow in the second quarter, and have clearly turned the corner in improving liquidity and restoring Xerox's financial strength.'' At the end of the second quarter, Xerox had $2.2 billion cash on hand and net debt was down $700 million from the first quarter of 2001. The company also reported continued progress in the reduction of inventory by approximately $200 million, reduced capital spending and improved receivables' performance. Second quarter revenue was $4.1 billion, 13 percent lower than the second quarter of last year. Pre-currency revenue declined 12 percent from the second quarter 2000. Year-over-year pre-currency revenue declines of 4 percent in North America and 7 percent in Europe represent in part a weakened economic environment that impacted equipment sales. A 33 percent revenue decline in developing markets is driven by the company's reconfiguration of its Latin American operations. "Over the past year, we've taken the necessary actions to streamline our business and build on core growth opportunities in the production printing and networked office markets with a focus on color, services and solutions,'' said Mulcahy. "While year-over-year revenue slowed, we delivered sequential pre-currency revenue gains in North America and Europe, increased profitability in North America and continued progress in our European operations - clear evidence of the overall improvement in our core operations.'' Mulcahy also said that Xerox is ahead of schedule in achieving its $1 billion cost-reduction target with the implementation of actions that account for more than 75 percent of the year-end goal, including the reduction of 8,600 jobs worldwide since Sept. 2000. For the second quarter, gross margins were 36.4 percent, 38.1 percent excluding SOHO - a sequential improvement from the first quarter of 2001 gross margins of 33.6 percent. Selling, general and administrative expenses declined 7 percent from second quarter 2000. Research and development spending remained flat at 6 percent of revenue reflecting the company's continued commitment to innovation and new product development. Xerox's second quarter earnings include unhedged currency losses of 2 cents per share compared to a 5-cent gain in the first quarter. The company also reported a 28-cent charge related to the disengagement from the SOHO business. Xerox announced in June its intent to discontinue its line of personal inkjet and xerographic products sold primarily through retail channels. The company will continue to provide service, support and supplies for its customers who own Xerox SOHO products. In the second quarter of 2001, Xerox recorded a $84 million worldwide pre-tax loss in its SOHO business. Worldwide revenues for SOHO were $108 million, representing 3 percent of total second-quarter revenues. Commenting on expectations for the balance of the year, Mulcahy said that the adverse impact of a weakened economy is delaying customers' purchasing decisions - a trend that is not expected to turn in the third quarter. "Our challenge for the second half of 2001 is driving growth in weakened economic markets. We continue to expect a return to profitability in the second half of 2001, but the economic environment and normal third-quarter seasonality will likely delay this to the fourth quarter,'' added Mulcahy. In related news, Xerox confirmed that it had further strengthened liquidity through the sale of $513 million in asset-backed securities. Including cash proceeds received this week from the sale, Xerox's current net cash balance increases to approximately $2.6 billion.