SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2001
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission file number 1-3579
PITNEY BOWES INC.
Incorporated pursuant to the Laws of the State of Delaware
Internal Revenue Service - Employer Identification No. 06-0495050
World Headquarters
Stamford, Connecticut 06926-0700
Telephone Number: (203) 356-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------------
Common Stock ($1 par value) New York Stock Exchange
$2.12 Convertible Cumulative New York Stock Exchange
Preference Stock (no par value)
Preference Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
4% Convertible Cumulative Preferred Stock ($50 par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
-
The aggregate market value of voting stock (common stock and $2.12 convertible
cumulative preference stock) held by non-affiliates of the registrant as of
February 28, 2002 is $10,132,705,235.
Number of shares of common stock, $1 par value, outstanding as of February 28,
2002 is 241,924,200.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 2002 Annual Meeting of
Shareholders are incorporated by reference in Part III.
PITNEY BOWES INC.
PART I
Item 1. - Business........................................................... 3
Item 2. - Properties......................................................... 5
Item 3. - Legal proceedings.................................................. 6
Item 4. - Submission of matters to a vote of security holders................ 6
PART II
Item 5. - Market for the registrant's common stock and related
stockholder's matters........................................... 7
Item 6. - Selected financial data............................................ 8
Item 7. - Management's discussion and analysis of financial condition
and results of operations....................................... 9
Item 7A. - Quantitative and qualitative disclosures about market risk........ 28
Item 8. - Financial statements and supplementary data........................ 29
Item 9. - Changes in and disagreements with accountants on
accounting and financial disclosure............................. 64
PART III
Item 10. - Directors and executive officers of the registrant................ 64
Item 11. - Executive compensation............................................ 64
Item 12. - Security ownership of certain beneficial owners and
management..................................................... 64
Item 13. - Certain relationships and related transactions.................... 64
PART IV
Item 14. - Exhibits, financial statement schedules and reports on Form 8-K... 64
Signatures................................................................... 69
PITNEY BOWES INC.
PART I
ITEM 1 - BUSINESS
Our company was incorporated in the state of Delaware on April 23, 1920, as the
Pitney Bowes Postage Meter Company. Today, we are a provider of leading-edge
global, integrated mail and document management solutions for organizations of
all sizes.
Pitney Bowes Inc. and its subsidiaries (which we refer to in this Form 10-K as
us, we, our or the company) operate in three reportable segments: Global
Mailing, Enterprise Solutions and Capital Services. We operate both inside and
outside the United States. Our financial information concerning revenue,
operating profit and identifiable assets, by reportable segment and geographic
area, appears on pages 58 to 60 of this Form 10-K.
Business Segments
Global Mailing
Our Global Mailing segment includes worldwide revenues and related expenses
from the rental of postage meters and the sale, rental and financing of mailing
equipment, such as mail finishing and software-based mail creation equipment.
We also include in this segment software-based shipping, transportation and
logistics systems, related supplies and services, and postal payment solutions
and supply chain solutions such as order management and fulfillment support.
We sell, rent or finance our products. We sell our supplies and services. Some
of our products are sold through dealers outside the United States.
Products in this segment include postage meters, mailing machines, address
hygiene software, manifest systems, letter and parcel scales, mail openers,
mailroom furniture, folders, paper handling, shipping equipment, software-based
shipping and logistics systems and postal payment solutions.
Enterprise Solutions
Our Enterprise Solutions segment comprises two divisions - Pitney Bowes
Management Services and Document Messaging Technologies. In this segment, we
sell, rent or finance our products, while we sell supplies and services.
Pitney Bowes Management Services includes revenues and related expenses from
facilities management contracts for advanced mailing, reprographic, document
management and other high-value services. Our facilities management services
are provided by our subsidiary, Pitney Bowes Management Services, Inc. (PBMS).
PBMS offers a variety of business support services to our customers to manage
copy, reprographic and mail centers, facsimile, electronic printing and imaging
services, and records management. PBMS is a major provider of on- and off-site
services which helps our customers manage, the creation, processing, storage,
retrieval, distribution and tracking of documents and messages in both paper
and digital form.
Document Messaging Technologies includes revenues and related expenses from the
sale, service and financing of high speed, software-enabled production mail
systems, sortation equipment, incoming mail systems, electronic statement,
billing and payment solutions, and mailing software.
We include our internal financial services operations in both the Global
Mailing and Enterprise Solutions segments. The internal financial services
operations provide lease financing for the company's products in the U.S.,
Canada, the United Kingdom, Germany, France, Norway, Ireland, Australia,
Austria, Spain, Italy, Switzerland and Sweden. Our financial services
operations financed approximately 33 percent of our consolidated sales in 2001,
37 percent in 2000, and 37 percent in 1999 and approximately 79 percent of our
leasable sales in 2001, 76 percent in 2000, and 73 percent in 1999.
Capital Services
Our Capital Services segment comprises primarily asset and fee-based income
generated by financing or arranging transactions of critical large-ticket
customer assets. We also include in this segment revenue and related expenses
associated with the strategic financing of equipment for postal authorities
around the world.
Some of the products which we directly finance or arrange financing for are
commercial and non-commercial aircraft, real estate, over-the-road trucks and
trailers, locomotives, railcars, rail and bus facilities, office equipment and
high-technology equipment such as data processing and communications equipment.
3
Spin-off of Imagistics International Inc.
On December 3, 2001, we completed the spin off of our office systems business
to our stockholders as an independent, publicly-traded company operating under
the name of Imagistics International Inc. We believe that the spin-off of the
office systems business allows us to focus on our global strategy of delivering
leading-edge mail and document management solutions.
Support Services
We maintain extensive field service organizations in the U.S. and some other
countries to provide support services to customers who have rented, leased or
purchased equipment. These support services, which are usually in the form of
annual maintenance contracts, accounted for approximately 13 percent of
revenues in 2001 and 2000 and 12 percent in 1999.
Marketing
Our products and services are marketed through an extensive network of offices
in the U.S. and through a number of our subsidiaries and independent
distributors and dealers in many countries throughout the world. We also use
direct marketing, outbound telemarketing, and the Internet. We sell to a
variety of business, governmental, institutional and other organizations. We
believe we have a broad base of customers, and we are not dependent upon any
one customer or type of customer for a significant part of our business. The
company does not have significant backlog or seasonality relating to its
businesses.
Operations Outside the United States
Our manufacturing operations outside the U.S. are in the United Kingdom, France
and Germany.
Competition
Historically we have been a leading supplier of products and services in our
business segments, particularly postage meters and mailing machines. Our meter
base and our continued ability to place meters in key markets is a significant
contributor to our current and future revenue and profitability. However, all
of our segments face strong competition from a number of companies. In
particular, we face competition in many countries for new placements from
several postage meter and mailing machine suppliers, and our mailing systems
products face competition from products and services offered as alternative
means of message communications. PBMS, a major provider of business support
services to the corporate, financial services, and professional services
markets, competes against national, regional and local firms specializing in
facilities management. We believe that our long experience and reputation for
product quality, and our sales and support service organizations are important
factors in influencing customer choices with respect to our products and
services.
The financing business is highly competitive with aggressive rate competition.
Leasing companies, commercial finance companies, commercial banks and other
financial institutions compete, in varying degrees, in the several markets in
which our finance operations do business. Our competitors range from very
large, diversified financial institutions to many small, specialized firms. In
view of the market fragmentation and absence of any dominant competitors, we
believe that it is not possible to provide a meaningful description of our
finance operations' competitive position in these markets.
Research and Development/Patents
We have research and development programs that are directed toward developing
new products and service methods. Our expenditures on research and development
totaled $133.1 million, $120.5 million, and $108.9 million in 2001, 2000, and
1999, respectively.
As a result of our research and development efforts, we have been awarded a
number of patents with respect to several of our existing and planned products.
However, we believe our businesses are not materially dependent on any one
patent or any group of related patents. We also believe our businesses are not
materially dependent on any one license or any group of related licenses.
4
Material Supplies
We believe we have adequate sources for most parts and materials for our
products that we manufacture. However, these products rely to an increasing
extent on microelectronic components, and temporary shortages of these
components have occurred from time to time due to the demands by many users of
such components. However, we do not expect these temporary shortages to have a
material adverse impact on our business.
Regulatory Matters
We are subject to the U.S. Postal Service's regulations and those of foreign
postal authorities, related to product specifications and business practices.
From time to time, we will work with these governing bodies to help in the
enhancement and growth of mail and the mail channel. See Legal and Regulatory
matters in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K.
Employee Relations
At December 31, 2001, we employed 26,698 persons in the U.S. and 6,026 persons
outside the U.S. We believe that employee relations are satisfactory. The
majority of our employees are not represented by any labor union. Our
management follows the policy of keeping employees informed of decisions, and
encourages and implements employee suggestions whenever practicable.
ITEM 2 - PROPERTIES
Our World Headquarters and certain other office and manufacturing facilities
are located in Stamford, Connecticut. We have additional office facilities
located in Shelton, Connecticut. We maintain research and development
operations at a corporate engineering and technology center in Shelton,
Connecticut. A sales and service training center is located near Atlanta,
Georgia. We believe that our current manufacturing, administrative and sales
office properties are adequate for the needs of all of our operations.
Global Mailing
Global Mailing products are manufactured in a number of plants principally in
Connecticut, as well as in Harlow, England; Friedberg, Germany; Lyon, France
and St. Denis, France. Most of these facilities are owned by the company. At
December 31, 2001, there were 134 sales, support services, and finance offices,
substantially all of which are leased, located throughout the U.S. and in a
number of other countries.
Enterprise Solutions
Our Document Messaging Technologies business is headquartered in Danbury,
Connecticut. We lease five facilities located throughout the U.S. Our
management services business is headquartered in Stamford, Connecticut and
leases 37 facilities located throughout the U.S. and facilities in Canada,
England, Belgium, Denmark, France, Germany, Norway, Netherlands and Sweden.
Our headquarters of the financing operations within the U.S. are located in
Shelton, Connecticut. Offices of the financing operations outside the U.S. are
maintained in Mississauga, Ontario, Canada; London, England; Heppenheim,
Germany; Paris, France; Oslo, Norway; Dublin, Ireland; French's Forest,
Australia; Vienna, Austria; Effretikon, Switzerland; Milan, Italy; Barcelona,
Spain; and Stockholm, Sweden.
Capital Services
Our wholly-owned subsidiary, Pitney Bowes Credit Corporation (PBCC), leases an
executive and administrative office in Shelton, Connecticut, which is owned by
Pitney Bowes Inc. There are nine leased regional and district sales offices
located throughout the U.S.
5
ITEM 3 - LEGAL PROCEEDINGS
In the course of normal business, we are occasionally party to lawsuits. These
may involve litigation by or against us relating to, among other things:
.. contractual rights under vendor, insurance or other contracts
.. intellectual property or patent rights
.. equipment, service or payment disputes with customers
.. disputes with employees
We are currently a plaintiff or a defendant in a number of lawsuits, none of
which should have, in the opinion of management and legal counsel, a material
adverse effect on our financial position, results of operations or cash flows.
See Legal and Regulatory matters in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 and the Legal
Settlements section under Special Items of this Form 10-K.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our shareholders during the three
months ended December 31, 2001.
Executive Officers of the Registrant
------------------------------------ Executive
Name Age Title Officer Since
---- ---- ----- -------------
Michael J. Critelli 53 Chairman and Chief Executive Officer 1988
Brian M. Baxendale 59 Executive Vice President and Group President, 2000
Pitney Bowes Document Messaging Technologies
Gregory E. Buoncontri 54 Senior Vice President and Chief Information Officer 2000
Karen M. Garrison 53 Executive Vice President and Group President, 1999
Pitney Bowes Business Services
Arlen F. Henock 45 Vice President - Finance 1996
Luis A. Jimenez 57 Senior Vice President and Chief Strategy Officer 1999
Matthew S. Kissner 47 Executive Vice President, Group President and Chief 1997
Development Officer
Murray D. Martin 54 Executive Vice President and Group President, 1998
Global Mailing Systems
John N. D. Moody 57 Executive Vice President - Office of the Chairman 1997
Sara E. Moss 55 Senior Vice President and General Counsel 1996
Bruce P. Nolop 51 Executive Vice President and Chief Financial Officer 2000
Johnna G. Torsone 51 Senior Vice President and Chief Human Resources 1993
Officer
There is no family relationship among the above officers, all of which have
served in various corporate, division or subsidiary positions with the company
for at least the past five years except G.E. Buoncontri, L.A. Jimenez and
B.P. Nolop.
Mr. Buoncontri was formerly the Vice President, Information Technology and
Chief Information Officer of Novartis Pharmaceuticals Corp. (merger of Sandoz
and Ciba Geigy). Prior to the merger, he also served as the Vice President,
Information Systems and Chief Information Officer for Sandoz Pharmaceuticals
Company. Mr. Buoncontri also served as Vice President, Information Management
Services and Chief Information Officer of Asea Brown Boveri, Inc.
6
Mr. Jimenez joined the company from Arthur D. Little, an international
management consulting company, with over 25 years of experience. Mr. Jimenez
was appointed worldwide practice leader for postal organizations in 1990,
Corporate Vice President in 1991, and served most recently on the firm's
global board for telecommunications and media and as Manager of the Latin
American practice.
Mr. Nolop joined the company from Wasserstein Perella & Co., an investment bank
and one of Pitney Bowes' financial advisors, where he had served as managing
director since 1993. Prior to joining Wasserstein Perella & Co., Mr. Nolop held
senior positions with Goldman Sachs & Co., Kimberly-Clark Corporation and
Morgan Stanley & Co.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS'
MATTERS
Pitney Bowes common stock is traded under the symbol "PBI". The principal
market it is listed on is the New York Stock Exchange. The stock is also
traded on the Chicago, Philadelphia, Boston, Pacific and Cincinnati stock
exchanges. At December 31, 2001, the company had 27,849 common stockholders
of record.
Stock Information
Dividends per common share
Quarter 2001 2000
--------- ---------
First $.29 $.285
Second . .29 .285
Third .29 .285
Fourth .29 .285
--------- ---------
Total $1.16 $1.14
========= =========
Quarterly price ranges of common stock
2001
Quarter High Low
--------- ---------
First 38.40 32.00
Second 42.41 32.73
Third 44.70 37.65
Fourth 42.44 33.91
2000
Quarter High Low
--------- ---------
First 54.13 41.00
Second 47.00 35.63
Third 40.44 33.75
Fourth 39.38 24.00
7
ITEM 6 - SELECTED FINANCIAL DATA
The following tables summarize selected financial data for the company, and
should be read in conjunction with the more detailed financial statements and
related notes thereto included under Item 8 of this Form 10-K.
Summary of Selected Financial Data
(Dollars in thousands, except per share data)
Years ended December 31
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------- --------------- --------------- ----------------- --------------
Total revenue $4,122,474 $ 3,880,868 $ 3,811,576 $ 3,499,483 $ 3,304,457
Cost and expenses 3,356,090 3,078,020 2,987,634 2,840,821 2,698,669
-------------- --------------- --------------- ----------------- --------------
Income from continuing operations
before income taxes 766,384 802,848 823,942 658,662 605,788
Provision for income taxes 252,064 239,723 260,952 215,513 198,877
-------------- --------------- --------------- ----------------- --------------
Income from continuing operations 514,320 563,125 562,990 443,149 406,911
Discontinued operations (25,977) 64,104 73,222 133,245 119,116
Cumulative effect of accounting change - (4,683) - - -
-------------- --------------- --------------- ----------------- --------------
Net income $ 488,343 $ 622,546 $ 636,212 $ 576,394 $ 526,027
============== =============== =============== ================= ==============
Basic earnings per share:
Continuing operations $2.09 $2.20 $2.11 $1.61 $1.41
Discontinued operations (.11) .25 .27 .49 .41
Cumulative effect of accounting change - (.02) - - -
-------------- --------------- --------------- ----------------- --------------
Net income $1.99 $2.43 $2.38 $2.10 $1.82
============== =============== =============== ================= ==============
Diluted earnings per share:
Continuing operations $2.08 $2.18 $2.07 $1.58 $1.39
Discontinued operations (.10) .25 .27 .48 .41
Cumulative effect of accounting change - (.02) - - -
-------------- --------------- --------------- ----------------- --------------
Net income $1.97 $2.41 $2.34 $2.06 $1.80
============== =============== =============== ================= ==============
Total cash dividends on common,
preference and preferred stock $285,164 $292,736 $272,866 $247,484 $231,392
Cash dividends per share of common stock $1.16 $1.14 $1.02 $.90 $.80
Average common and potential
common shares outstanding 247,615,560 258,602,218 272,006,143 279,656,603 292,517,116
Cash from operating activities $1,035,887 $872,244 $981,086 $772,028 $710,573
Free cash flow $779,683 $603,667 $676,188 $473,613 $466,508
Balance sheet at December 31
Total assets $8,318,471 $7,901,266 $8,222,672 $7,661,039 $7,893,389
Long-term debt $2,419,150 $1,881,947 $1,997,856 $1,712,937 $1,068,395
Capital lease obligations $3,103 $4,660 $6,372 $8,384 $10,142
Stockholders' equity $891,355 $1,284,975 $1,625,610 $1,648,002 $1,872,577
Book value per common share $3.68 $5.16 $6.13 $6.09 $6.69
Ratios
Profit margin-continuing operations:
Pretax earnings 18.6% 20.7% 21.6% 18.8% 18.3%
After-tax earnings 12.5% 14.5% 14.8% 12.7% 12.3%
Return on stockholders' equity
before accounting changes 54.8% 48.8% 39.1% 35.0% 28.1%
Debt to total capital 79.7% 71.1% 67.2% 64.4% 62.0%
EBIT to interest 5.2x 5.2x 5.8x 5.4x 4.9x
EBITDA to interest 6.5x 6.5x 7.3x 6.9x 6.3x
Other
Common stockholders of record 27,849 32,231 32,754 32,210 31,092
Total employees 32,724 28,542 27,267 27,700 26,385
Note: The sum of the earnings per share amounts may not equal the totals due to
rounding.
Earnings before interest and taxes (EBIT) and earnings before interest, taxes,
depreciation and amortization (EBITDA), are not presented as an alternative
measure of operating results or cash flow from operations, as determined in
accordance with generally accepted accounting principles, but is presented
because we believe it is a widely accepted indicator of our ability to incur
and service debt. EBIT and EBITDA do not give effect to cash used for debt
service requirements and capital expenditures and thus do not reflect funds
available for reinvestment, dividends or other discretionary uses. In addition,
EBIT and EBITDA as presented in this summary schedule may not be comparable to
similarly titled measures reported by other companies.
8
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We continue to build on the core activities that support our strong competitive
position in integrated mail and document management solutions.
We operate in three reportable segments: Global Mailing, Enterprise Solutions
and Capital Services.
Our Global Mailing segment includes worldwide revenues and related expenses
from the rental of postage meters and the sale, rental and financing of mailing
equipment, including mail finishing and software-based mail creation equipment.
We also include in this segment software-based shipping, transportation and
logistics systems, related supplies and services, postal payment solutions and
supply chain solutions such as order management and fulfillment support.
Our Enterprise Solutions comprises Pitney Bowes Management Services (PBMS) and
Document Messaging Technologies (DMT). PBMS includes revenues and related
expenses from facilities management contracts for advanced mailing,
reprographic, document management and other high-value services. DMT includes
revenues and related expenses from the sale, service and financing of high
speed, software-enabled production mail systems, sortation equipment, incoming
mail systems, electronic statement, billing and payment solutions, and mailing
software.
Our Capital Services segment comprises primarily large-ticket financing and
fee-based programs covering a broad range of products and other financial
services. We also include in this segment the strategic financing of equipment
for postal authorities around the world that were previously included in the
Global Mailing segment.
During 2001, we completed several acquisitions that increased our presence in
both domestic and international markets and that we believe will better
position the company for long-term growth and enhanced shareholder value. These
acquisitions included the following:
. Secap SA, a mailing systems company based in France.
. Danka Services International (DSI), a provider of on- and off-site
document management services.
. Bell & Howell's International Mail and Messaging Technologies (MMT)
business in Europe, Africa, the Middle East and Asia.
On December 3, 2001, we completed the spin off of our office systems business
to stockholders as an independent, publicly-traded company under the name of
Imagistics International Inc.(IGI). On December 3, 2001, we paid a special
stock dividend of IGI common stock to our common shareholders. Through this
special dividend, we distributed 100% of the shares of IGI stock to common
shareholders of the company. Each eligible common stockholder of record of the
company on November 19, 2001 received 0.08 shares of IGI stock for each share
of Pitney Bowes stock. The historical carrying amount of the IGI net assets
distributed to our shareholders on the spin-off date has been recorded as a
stock dividend of $311.7 million. We have segregated the operating results of
IGI and reported them as discontinued operations in the Consolidated Statements
of Income. In connection with the spin-off, we recorded a loss of approximately
$26.0 million (net of taxes of $12.2 million) for the year ended December 31,
2001. See Note 12 to the consolidated financial statements.
On January 14, 2000, we sold our mortgage servicing business, Atlantic Mortgage
& Investment Corporation (AMIC), a wholly-owned subsidiary of the company, to
ABN AMRO North America. We received approximately $484 million in cash at
closing. Accordingly, we segregated and reported as discontinued operations
operating results of AMIC in our Consolidated Statements of Income. In
connection with the sale, we recorded a loss of approximately $27.6 million
(net of taxes of $18.4 million) for the year ended December 31, 1999. The
transaction is subject to post-closing adjustments. See Note 12 to the
consolidated financial statements.
9
Special Items
The following table summarizes the impact of special items on our diluted
earnings per share from continuing operations during 2001, 2000 and 1999:
2001 2000 1999
--------- --------- ---------
Reported earnings per share $2.08 $2.18 $2.07
Meter transition .68 - -
Restructuring charges .30 .04 -
Legal settlements, net (.81) - (.11)
State tax benefits - (.05) -
--------- --------- ---------
Earnings per share excluding
special items $2.25 $2.17 $1.96
========= ========= =========
Meter transition
In 2001, we adopted a formal plan to transition to the next generation of
networked mailing technology. The information capture and exchange made
possible by advanced technology turns the postage meter into an "intelligent"
terminal that networks the mailer to postal and carrier information and
systems. This two-way information architecture, in turn, enables convenient
access to and delivery of value-added services such as tracking, delivery
confirmation and rate information. The adoption of this plan was facilitated by
our expanded access to technology and our ability to move to networked products
combined with our expectations that the U.S. and postal services around the
world will continue to encourage the migration of mailing systems to networked
digital technologies. In connection with this plan, we recorded non-cash
pretax charges of $268.3 million for the year ended December 31, 2001, related
to assets associated with our non-networked mailing technology. We have
segregated these charges in the Consolidated Statement of Income for the year
ended December 31, 2001. In November 2001, postal regulations were issued,
consistent with our meter transition plan, defining the meter migration process
and timing. See Regulatory Matters.
Restructuring charges
In 2001, we adopted a formal restructuring plan to implement a common,
streamlined business infrastructure across the corporation as a result of our
decisions to spin off our office systems business and align our mailing
business on a global basis, as well as cost saving opportunities resulting from
strategic acquisitions and partnerships, and additional benefits attained from
the consolidation of our information technology organization and
enterprise-wide resource planning initiatives. In connection with this plan, we
recorded pretax restructuring charges of $149.3 million in 2001, of which
$116.1 million was related to continuing operations and the remaining $33.2
million was related to discontinued operations. We have segregated the
restructuring charges related to continuing operations in the Consolidated
Statement of Income for the year ended December 31, 2001. The restructuring
charges related to discontinued operations are included in discontinued
operations in the Consolidated Statement of Income for the year ended December
31, 2001.
In 2000, we recorded a pretax charge of approximately $19 million related to
the consolidation of information technology staff and infrastructure. We have
segregated this charge in the Consolidated Statement of Income for the year
ended December 31, 2000.
Legal settlements, net
In 2001, the company and Hewlett-Packard announced that they had reached an
agreement resolving a lawsuit filed by us in 1995. The lawsuit arose out of a
dispute over print technology patents. Under the terms of the agreement, the
companies resolved all pending patent litigation without admission of
infringement and we received $400 million in cash and ten year supply and
technology agreements. We recorded the cash payment, net of legal fees and
related expenses of $37.8 million, as other income in the Consolidated Statement
of Income for the year ended December 31, 2001.
In 2001, we recorded a pretax charge of approximately $24 million associated
with the settlement of a lawsuit related to lease upgrade pricing in the early
to mid-1990s. The settlement is subject to court approval. The $24 million
charge relates to the following settlement costs: award certificates to be
provided to members of the class for purchase of office products through the
Pitney Bowes supply line and the cost of legal fees and related expenses of
$8.3 million. We included this charge in other income in the Consolidated
Statement of Income for the year ended December 31, 2001.
10
In 1999, the U.S. Postal Service (USPS) and the company announced that they had
reached an agreement resolving a lawsuit filed by the company in 1997. The
lawsuit arose out of a dispute over a 1978 Statement of Understanding
authorizing the company to offer Postage by Phone/R/, our proprietary version
of the Computerized Meter Resetting System. Under the terms of the agreement,
we received $51.8 million, representing a portion of the financial benefit that
the USPS obtained as a result of the revised regulations. We recorded this
payment, net of related legal expenses of $2.2 million, as other income in the
Consolidated Statement of Income for the year ended December 31, 1999.
State tax benefits
In 2000, we recorded a one-time tax benefit of $12 million related primarily to
state tax law changes.
Critical Accounting Policies
We have identified the policies below as critical to our business operations
and to the understanding of our results of operations. We discuss the impact
and any associated risks on our results of operations related to these policies
throughout Management's Discussion and Analysis of Financial Conditions and
Results of Operations. For a detailed discussion on the application of these
and other accounting policies, see Note 1 to the consolidated financial
statements.
The preparation of our financial statements in conformity with generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These estimates include, but are not limited to customer
cancellations and product returns, bad debts, inventories, investments, useful
lives of long-lived assets, intangible assets, income taxes, financing
operations, warranty obligations, restructuring, pensions and other
postretirement benefits, and contingencies and litigation. Our actual results
could differ from those estimates.
Revenue recognition
We derive our revenues from the following sources: (1) sales; (2) rentals and
financing; and (3) support services.
Sales and management services revenue
We recognize sales revenue when the risks of ownership have been transferred to
the buyer, which is generally when shipped. Our sales revenue from customized
equipment and software, including software-enabled mail creation equipment and
shipping products, is generally recognized when installed. We recognize our
sales revenue from sales type leases at the inception of the lease. We
recognize revenue from our sales of management services over the term of the
contract.
Rental revenue
We rent equipment to our customers, primarily postage meters, mailing equipment
and shipping systems under short-term rental agreements, generally for periods
of three months to three years. We invoice in advance the charges for equipment
rental. We defer the billed revenue and include it in advance billings and
record as income over the rental period on a straight-line basis.
Financing revenue
We provide lease financing of our products in the U.S. through our wholly-owned
subsidiary, Pitney Bowes Credit Corporation (PBCC) and of its products outside
the U.S. through several wholly-owned subsidiaries under both sales-type leases
and direct financing leases.
When a sales-type lease is consummated, we record the gross finance receivable,
unearned income and the estimated residual value of the leased equipment.
Unearned income represents the excess of the gross receivable plus the
estimated residual value over the sales price of the equipment. We recognize
unearned income as earned using the interest method over the term of the
transaction. This earned income is included in rentals and financing revenue in
the Consolidated Statements of Income.
When a direct finance lease is consummated, we record the gross finance
receivable, unearned income and the estimated residual value of the leased
equipment. Unearned income represents the excess of the gross receivable plus
the estimated residual value over the cost of the equipment. We recognize
unearned income as earned using the interest method over the term of the
transaction. This earned income is included in rentals and financing revenue in
the Consolidated Statements of Income. We account for initial direct costs
incurred in consummating a transaction as part of the investment in the lease
and appropriately amortized using the interest method over the term of the
lease.
11
From time to time, we sell selected finance assets. We follow Statement of
Financial Accounting Standards (FAS) No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," when
accounting for our sale of finance assets. We recognize all assets obtained or
liabilities incurred in consideration as proceeds of the sale and any gain or
loss on the sale is recognized in earnings.
Our investment in leveraged leases consists of rentals receivable net of
principal and interest on the related nonrecourse debt, estimated residual
value of the leased property and unearned income. We recognize the unearned
income as leveraged lease revenue in income from investments over the lease
term. See Leveraged Leases.
Support services revenue
We provide support services to our customers primarily through extended
maintenance contracts. We recognize support services revenue primarily over the
term of the service contract or as services are rendered.
Allowance for credit losses and doubtful accounts
General
We estimate our accounts receivable risks and provide allowances for doubtful
accounts and credit losses. We establish the allowance for credit losses
through charges to the provision for credit losses. We believe that our credit
risk for accounts receivable is limited because of the large number of our
customers and the relatively small account balances for most of our customers.
Also, our customers are dispersed across different businesses and geographic
areas. We believe that our allowance for credit losses and doubtful accounts is
sufficient.
We evaluate the adequacy of the allowance for credit losses on a periodic
basis. Our evaluation includes historical loss experience, the nature and
volume of our portfolios, adverse situations that may affect a customer's
ability to repay, estimated value of the underlying collateral (if any) and
prevailing economic conditions. We make adjustments to our reserve if the
evaluation of reserve requirements differs from the actual aggregate reserve.
This evaluation is inherently subjective because our estimates may be revised
as more information becomes available.
Our financial services businesses
Our financial services businesses establish credit approval limits based on the
credit quality of the customer and the type of equipment financed. We charge
finance receivables through the allowance for credit losses after collection
efforts are exhausted and we deem the account uncollectible. Our financial
services businesses base credit decisions primarily on a customer's financial
strength and, particularly in our Capital Services programs, we may also
consider collateral values. We believe that our concentration of credit risk
for finance receivables from sales type leases is limited because of our large
number of customers, small account balances and customer geographic and
industry diversification.
Our general policy for finance receivables contractually past due for over 90
to 120 days is to discontinue revenue recognition. We resume revenue
recognition when payments reduce the account to 60 days or less past due. In
our Capital Services programs, we discontinue revenue recognition as soon as it
is apparent that the obligor will not be making payments in accordance with
lease terms, such as in the event of bankruptcy. Otherwise, we discontinue
revenue recognition when accounts are over 90 days past due.
12
Accounting for income taxes
When we prepare our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate.
We record this amount as a provision for our taxes in accordance with the
accounting rules (FAS No. 109, Accounting for Income Taxes). This process
requires us to make the following assessments:
. we estimate our actual current tax liability in each jurisdiction
. we estimate our temporary differences resulting from differing
treatment of items, such as lease revenue and related depreciation,
for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which we include within our Consolidated
Balance Sheet
. we then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and if we believe that recovery
is not likely, we establish a valuation allowance.
At any time, our provision for taxes could be impacted by changes in tax law
and interpretations by governments or courts.
Fixed assets and depreciation
We state property, plant and equipment at cost. We depreciate property, plant
and equipment principally using the straight-line method over estimated useful
lives: machinery and equipment principally three to 15 years and buildings up
to 50 years. We capitalize major improvements which add to productive capacity
or extend the life of an asset and we charge to expense as incurred repairs and
maintenance. We depreciate rental equipment on the straight-line method over
appropriate periods, principally three to ten years. Changes in regulatory
provisions or technology may impact the useful lives of these assets. We
depreciate other depreciable assets using either the straight-line method or
accelerated methods. We amortize properties leased under capital leases on a
straight-line basis over the primary lease terms.
We capitalize certain costs of internally developed software. These costs
include purchased materials and services, payroll and payroll related costs and
interest costs. We amortize internally developed software on a straight-line
basis over the estimated useful life which is, principally three to ten years.
From time to time, we assess the carrying value of our long-lived and
intangible assets. Our assessment involves comparing the carrying value of the
asset on our Consolidated Balance Sheet to the cash flows we expect to generate
in the future by that asset. We forecast the cash flows based on our assessment
of our business. If the expected cash flows are less than the asset's carrying
value, we record an impairment charge on that asset.
We believe that we have no impairment to our assets as of December 31, 2001.
However, future events and circumstances, some of which are described below,
may result in an impairment charge:
. changes in postal regulations governing the types of meters allowable
for use. However, recent regulations were issued in November 2001,
and therefore we do not expect new regulations for the foreseeable
future
. new technological developments that provide significantly enhanced
benefits over current digital technology
. significant negative economic or industry trends
. changes in our business strategy that alter the expected usage of the
related assets
. significant increase or decrease in our cost of capital
. future terrorist or other actions that significantly impact the
volume of mail
. future economic results that are below our expectations used in the
current assessments.
Results of Continuing Operations 2001 Compared to 2000
In 2001, our revenue increased 6%, income from continuing operations decreased
9% and diluted earnings per share from continuing operations decreased 5% to
$2.08 compared with $2.18 for 2000. Excluding special items in both periods,
income from continuing operations decreased 1% and diluted earnings per share
from continuing operations increased 3% to $2.25 compared with $2.17 for 2000.
Excluding the acquisitions of Secap SA, DSI, and MMT, our revenue increased 1%.
These acquisitions did not materially impact earnings either on a per share or
an aggregate basis.
13
Revenue
The following table shows revenue in 2001 and 2000 by segment:
(Dollars in millions) 2001 2000 % change
---------- ---------- ----------
Global Mailing $2,847 $2,831 1%
Enterprise Solutions 1,083 862 26%
---------- ---------- ----------
Total Messaging Solutions 3,930 3,693 6%
Capital Services 192 188 2%
---------- ---------- ----------
$4,122 $3,881 6%
========== ========== ==========
Total Messaging Solutions revenue grew 6% over the prior year. The revenue
increase came from growth in the Global Mailing and Enterprise Solutions
segments of 1% and 26%, respectively, over 2000. Approximately 75% of our total
revenue in 2001 is recurring revenue, which we believe is a continuing good
indicator of potential repeat business.
Excluding the acquisitions of Secap SA and MMT, Global Mailing revenues
decreased 2%. Global Mailing revenue growth, particularly in the U.S. was
adversely impacted by moderating customer orders and upgrades due to the slow
economic environment, especially for shipping and system related products.
Within the Global Mailing segment, international mailing revenues grew at a
strong pace, fueled by revenues from the recent acquisitions of Secap SA and
MMT plus continued strong demand for mailing products in Europe. However,
revenue was also adversely impacted by weaker performance in the U.K. and
Canada, as both countries were affected by slowing economic activity and a
lull in those countries' meter migration programs.
Enterprise Solutions revenue growth was driven by a 34% increase at PBMS as a
result of higher volume in the core business and the acquisition of DSI.
Excluding the acquisition of DSI, Enterprise Solutions revenue grew 11%. DMT
revenues increased 5% over the prior year; however performance continues to be
impacted by a worldwide slow down in capital spending, which has caused many of
our customers to delay purchases of higher-margin customized inserting systems.
Capital Services revenue increased 2% primarily due to higher revenue
associated with the strategic financing of equipment for posts around the
world.
Operating profit
The following table shows operating profit in 2001 and 2000:
(Dollars in millions) 2001 2000 % change
---------- ---------- ----------
Global Mailing $ 860 $844 2%
Enterprise Solutions 77 73 6%
---------- ---------- ----------
Total Messaging Solutions 937 917 2%
Capital Services 73 65 11%
---------- ---------- ----------
$1,010 $982 3%
========== ========== ==========
Operating profit grew 3% over the prior year, which reflected contributions
from the acquisitions, as well as our continuing emphasis on reducing costs and
controlling operating expenses. Operating profit grew 2% in the Global Mailing
segment and 6% in the Enterprise Solutions segment.
The operating profit growth in the Global Mailing segment came from improved
profit margins at Pitney Bowes Small Business Solutions (SBS). Operating profit
growth was moderated by the events of September 11, 2001 and the continued
slowdown of the economy. This was particularly true for higher volume mail
creation and shipping products. The acquisitions of Secap SA and MMT did not
materially impact Global Mailing operating profit.
The operating profit growth in our Enterprise Solutions segment came from
double-digit operating profit growth at PBMS. Excluding the acquisitions of
DSI, Enterprise Solutions operating profit decreased 11%. Enterprise Solutions'
operating profit was negatively impacted by lower operating profit at DMT, due
to higher expenses associated with the introduction and marketing of new
products and lower placements of higher margin customized production mail
equipment as a result of the slowdown in worldwide capital spending.
Operating profit increased 11% in the Capital Services segment due primarily to
the higher revenue and the previously stated strategic shift to concentrate on
fee-based income opportunities.
14
The following table shows revenue in 2001 and 2000 by source of revenue:
(Dollars in millions) 2001 2000 % change
---------- ---------- ----------
Sales and management services $2,125 $1,883 13%
Rentals and financing 1,461 1,505 (3%)
Support services 536 493 9%
---------- ---------- ----------
$4,122 $3,881 6%
========== ========== ==========
Sales revenue increased 13% in 2001 due mainly to the acquisitions of Secap SA,
DSI and MMT and double-digit sales revenue growth at PBMS. Excluding these
acquisitions, sales grew 3%. Sales growth was moderated as a result of the
contraction and downsizing of operations of some of our customers resulting in
reduced demand for some of our higher value mailing products and outsourcing
services. The negative impact of foreign currency reduced sales growth by
slightly more than 1%. Increases in value-added services to both new and
existing customers, as part of the company's strategy of pursuing profitable
growth, stimulated revenue growth at PBMS. U.S. and U.K. Mailing Systems' sales
decreased due to softness in the high-end shipping and mail creation product
lines as the economy and slower customer decision-making process for the
higher-value, more complex products adversely impacted growth. Sales revenue
includes all revenues from PBMS which were $821 million, $612 million and
$576 million in 2001, 2000 and 1999, respectively. In total, Financial Services
financed 33% and 37% of all sales in 2001 and 2000, respectively.
Rentals and financing revenue decreased 3% in 2001. Rentals revenue decreased
6% primarily due to the slowing economy and consolidation of facilities by some
of our customers, which has resulted in fewer than usual upgrades to our larger
systems meters. We continue to experience good placements of our stand-alone
and new digital meters. At December 31, 2001, electronic meters represented
approximately 50% of our U.S. meter base and digital meters represented
approximately 50% of our U.S. meter base, up from 44% in 2000. We no longer
place mechanical meters, which is in line with USPS guidelines. As previously
mentioned, in 2001 we adopted a formal plan to transition to the next
generation of networked mailing technology. See Regulatory and Legal Matters.
We do not expect this transition to have a material adverse impact on rentals
revenue.
Financing revenue increased 1% driven by higher revenue associated with the
strategic financing of equipment for postal authorities around the world.
Financing revenue growth was moderated by our strategy to reduce our
asset-based financing in our Capital Services segment, through asset sales in
2001 and prior years.
Support services revenue increased 9% in 2001. Despite competitive pricing
pressures, U.S. and International Mailing had increased support services
revenue due to a larger population of extended maintenance contracts, higher
chargeable service calls and billed labor hours in 2001 and the acquisition of
MMT. DMT had double-digit growth in support services revenue due to an
increased service contract base and on-site contracts. Ongoing support services
revenue continues to be partially dependent on equipment sales levels.
Costs and Expenses
The following table shows cost of sales as a percentage of sales revenue in
2001 and 2000:
(Dollars in millions) 2001 2000 % change
---------- ---------- ----------
$1,271 $1,074 18%
Percentage of sales revenue 59.8% 57.1%
Cost of sales, as a percentage of sales revenue, increased primarily due to the
acquisition of DSI and the increasing mix of lower margin core PBMS sales
revenue. Cost of sales attributable to PBMS was $660 million and $495 million
in 2001 and 2000, respectively. This rate was also negatively impacted by
unfavorable product mix at our U.S. and international mailing businesses; in
particular, our DMT customers delayed purchases of higher-margin customized
inserting systems.
The following table shows cost of rentals and financing as a percentage of
rentals and financing revenue in 2000 and 2001:
(Dollars in millions) 2001 2000 % change
---------- ---------- ----------
$351 $373 (6%)
Percentage of rentals and financing revenue 24.0% 24.8%
15
Cost of rentals and financing, as a percentage of rentals and financing
revenue, improved .8 percentage points. The cost of rentals ratio improved due
to lower costs and related depreciation at U.S. Mailing and SBS, partially
attributable to our meter transition plan. We expect that this ratio will be
impacted in 2002 by the timing of our customers' transition to digital meters.
The cost of financing ratio was slightly higher due to higher costs associated
with new business initiatives.
Selling, service and administrative expenses
The following table shows selling, service and administrative expenses as a
percentage of total revenue in 2001 and 2000:
(Dollars in millions) 2001 2000 % change
---------- ---------- ----------
$1,370 $1,299 5%
Percentage of total revenue 33.2% 33.5%
Selling, service and administrative expenses were 33.2% of total revenue in
2001 compared with 33.5% in 2000. The improvement in this ratio resulted from
continued emphasis on controlling our expenses. This was the seventh
consecutive year of improvement in our selling, service and administrative
expenses to revenue ratio, excluding special items. The ratio was favorably
impacted by our successful Enterprise-Wide Resource Planning (ERP) initiative
and by our restructuring initiatives. The improvement in this ratio was
partially offset by costs associated with investments in acquisition and growth
initiatives and the higher mix of support services revenue.
Research and development expenses
The following table shows our research and development expenses in 2001 and
2000:
(Dollars in millions) 2001 2000 % change
---------- ---------- ----------
$133 $120 10%
Research and development expenses increased 10% in 2001 to $133 million
reflecting continued investment in developing new technologies and enhancing
features for all our products. The 2001 increase represents expenditures for
digital document delivery systems, new digital meters and mailing machines,
personal computer metering technology, advanced inserting equipment, and new
and advanced features for production mail equipment and high volume incoming
mail sorting equipment. We expect similar levels of investment in research and
development in 2002.
Net interest expense
The following table shows our net interest expense in 2001 and 2000:
(Dollars in millions) 2001 2000 % change
---------- ---------- ----------
$184 $192 (4%)
Net interest expense decreased due to lower average interest rates during 2001
compared to 2000 associated with borrowings to fund the company's investment in
leasing and rental products, acquisitions and the stock repurchase program. Our
variable and fixed rate debt mix, after adjusting for the effect of interest
rate swaps, was 42% and 58%, respectively, at December 31, 2001. Based on
current borrowing levels, a 25 basis point change in interest rates would
impact annual interest expense by approximately $3 million to $4 million.
Effective tax rate
The following table shows the effective tax rate in 2001 and 2000:
2001 2000
---------- ----------
32.9% 29.9%
Excluding the impact of special items in 2001, the effective tax rate was 31.6%
in 2001 compared to 31.4% in 2000, reflecting continued tax benefits from
leasing and financing activities. The tax rate is favorably impacted by
investment in leasing and international expansion. The company's provision for
taxes could be impacted by tax law changes and interpretations by governments
or courts.
16
Income from continuing operations decreased 9% and diluted earnings per share
from continuing operations decreased 5% in 2001. Excluding special items in
both periods, income from continuing operations decreased 1% and diluted
earnings per share from continuing operations increased 3% in 2001. The
increase in diluted earnings per share outperformed the decrease in income from
continuing operations due to the company's share repurchase program, under
which 7.8 million shares, approximately 3% of the average common and potential
common shares outstanding at the end of 2000, were repurchased in 2001.
Excluding special items in both periods, income from continuing operations as a
percentage of revenue decreased to 13.5% in 2001 from 14.5% in 2000 due
primarily to the higher mix of lower-margin revenues.
Results of Continuing Operations 2000 Compared to 1999
In 2000, our revenue increased 2%, operating profit grew 8%, income from
continuing operations was flat and diluted earnings per share from
continuing operations increased 5% to $2.18 compared with $2.07 for 1999.
Excluding the impact of special items in both periods, our income from
continuing operations grew 5% and diluted earnings per share from continuing
operations increased 11% to $2.17 compared with $1.96 for 1999.
Revenue
The following table shows revenue in 2000 and 1999 by segment:
(Dollars in millions) 2000 1999 % change
---------- ---------- ----------
Global Mailing $2,831 $2,799 1%
Enterprise Solutions 862 803 7%
---------- ---------- ----------
Total Messaging Solutions 3,693 3,602 3%
Capital Services 188 210 (10%)
---------- ---------- ----------
$3,881 $3,812 2%
========== ========== ==========
Total Messaging Solutions revenue grew 3% over the prior year. The revenue
increase came from growth in the Global Mailing and Enterprise Solutions
segments of 1% and 7%, respectively, over 1999. Approximately 74% of our total
revenue in 2000 was recurring revenue.
Global Mailing revenue growth was negatively impacted by lower sales of mail
creation and shipping logistics products in the second half of 2000. Global
Mailing revenue was also negatively impacted by the weakening of foreign
currencies, principally the British pound and Euro currencies.
Volume increases at PBMS and DMT were the principal reasons for the revenue
growth in the Enterprise Solutions segment.
Capital Services revenue decreased 10% due to the company's previously stated
strategy to concentrate on fee-based income opportunities. The impact of price
changes was minimal.
Operating profit
The following table shows operating profit in 2000 and 1999 by segment:
(Dollars in millions) 2000 1999 % change
---------- ---------- -----------
Global Mailing $844 $790 7%
Enterprise Solutions 73 52 42%
---------- ---------- ----------
Total Messaging Solutions 917 842 9%
Capital Services 65 65 -
---------- ---------- ----------
$982 $907 8%
========== ========== ==========
Operating profit grew 8% over the prior year, continuing to reflect our
emphasis on reducing costs and controlling operating expenses. The company's
successful ERP initiative also helped to enhance our operating capabilities.
Another measure of our success in controlling costs and expenses in 2000 and
1999 was that growth in operating profit continued to outpace revenue growth.
Operating profit grew 7% in the Global Mailing segment and 42% in the
Enterprise Solutions segment. Total Messaging Solutions operating profit grew
9% over the prior year. Operating profit remained flat in the Capital Services
segment.
The operating profit growth in the Global Mailing segment came from improved
profit margins at SBS and International Mailing, as well as margin improvements
at U.S. Mailing Systems and related financing. The operating profit growth in
our Enterprise Solutions segment came from double-digit operating profit growth
at PBMS and DMT.
17
The following table shows revenue in 2000 and 1999 by source of revenue:
(Dollars in millions) 2000 1999 % change
---------- ---------- ----------
Sales and management services $1,883 $1,863 1%
Rentals and financing 1,505 1,486 1%
Support services 493 463 6%
---------- ---------- ----------
$3,881 $3,812 2%
========== ========== ==========
Sales revenue increased 1% in 2000 due mainly to high single-digit growth in
our International Mailing, DMT and management services businesses. The negative
impact of foreign currency reduced sales growth by slightly more than 1%.
Increases in value-added services to both new and existing customers, as part
of the company's strategy of pursuing profitable growth, stimulated revenue
growth in our management services business. DMT's sales growth was driven by
strong demand for sophisticated, high speed production mail equipment to
process complex, unique marketing and billing statements. U.S. Mailing systems'
sales decreased due to softness in the high-end shipping and mail creation
product lines as the slowing economy and slower customer decision-making
process for the higher-value, more complex products adversely impacted growth.
In total, Financial Services financed 37% of all sales in 2000 and 1999.
Rentals and financing revenue increased 1% in 2000. Rentals revenue grew 2%
driven by growth in the U.S. and international mailing markets due to the
continuing shift to electronic and digital meters, including increased
placements of the digital desktop Personal Post/TM/ meter, available through
various distribution channels such as telemarketing, the Internet and selected
retail outlets specializing in business supplies. At December 31, 2000,
electronic meters represented approximately 56% of our U.S. meter base and
digital meters represented approximately 44% of our U.S. meter base, up from
40% in 1999. The company no longer places mechanical meters, which is in line
with USPS guidelines.
Financing revenue was flat due to our strategy to reduce our asset-based
financing, through asset sales in 2000 and prior years. Excluding Capital
Services, financing revenue grew 7% driven by increased volume of leases of the
company's products and by product offerings such as Purchase Power/R/, Postal
Privilege/R/ and Reserve Account.
Support services revenue increased 6% in 2000. Despite competitive pricing
pressures, U.S. and International Mailing had increased support services
revenue due to a larger population of extended maintenance contracts and higher
chargeable service calls and billed labor hours in 2000. DMT had double-digit
growth in support services revenue due to increased service contract base and
on-site contracts.
Costs and Expenses
The following table shows cost of sales as a percentage of sales revenue in
2000 and 1999:
(Dollars in millions) 2000 1999 % change
---------- ---------- ----------
$1,074 $1,072 _
Percentage of sales revenue 57.1% 57.5%
Cost of sales, as a percentage of sales revenue, improved for the fourth
consecutive year. The improvement in this ratio was achieved principally due to
lower product costs, significant productivity improvements in our manufacturing
processes, increased sales of higher margin supplies in our mailing business
and the impact of strategic sourcing initiatives in the U.S. and Europe. The
improvement in this ratio was moderated by the increasing mix of lower margin
PBMS sales revenue.
The following table shows cost of rentals and financing as a percentage of
rentals and financing revenue:
(Dollars in millions) 2000 1999 % change
---------- ---------- ----------
$373 $396 (6%)
Percentage of rentals and financing
revenue 24.8% 26.6%
Cost of rentals and financing, as a percentage of rentals and financing
revenue, improved 1.8 percentage points. The cost of rentals ratio improvement
was due to lower costs at U.S. Mailing in 2000. The cost of financing ratio
decreased due to lower operating costs, partially offset by increased costs
associated with new business initiatives.
18
Selling, service and administrative expenses
The following table shows selling, service and administrative expenses as a
percentage to total revenue in 2000 and 1999:
(Dollars in millions) 2000 1999 % change
---------- ---------- ----------
$1,299 $1,290 1%
Percentage of total revenue 33.5% 33.8%
Selling, service and administrative expenses were 33.5% of total revenue in
2000 compared with 33.8% in 1999. The improvement in this ratio resulted from
continued emphasis on controlling expense growth. This was the sixth
consecutive year of improvement in our selling, service and administrative
expenses to revenue ratio, excluding special items. The improvement in this
ratio was moderated by the company's continued investment in the Internet, ERP
and other new business initiatives.
Research and development expenses
The following table shows research and development expenses in 2000 and 1999:
(Dollars in millions) 2000 1999 % change
---------- ---------- ----------
$120 $109 11%
Research and development expenses increased 11% in 2000 to $120 million
reflecting continued investment in developing new technologies and enhancing
features for all our products. The 2000 increase represents expenditures for
Internet-based bill presentment and metering, digital document delivery
systems, new digital meters, personal computer metering technology, advanced
inserting equipment, and new and advanced features for production mail
equipment and high volume incoming mail sorting equipment.
Net interest expense
The following table shows net interest expense in 2000 and 1999:
(Dollars in millions) 2000 1999 % change
---------- ---------- ----------
$192 $171 13%
Net interest expense increased due to higher interest rates during 2000
compared to 1999 associated with borrowings to fund the company's investment in
leasing and rental products, and the stock repurchase program. Our variable and
fixed rate debt mix, after adjusting for the effect of interest rate swaps, was
48% and 52%, respectively, at December 31, 2000.
Effective tax rate
The following table shows the effective tax rate in 2000 and 1999:
2000 1999
---------- ----------
29.9% 31.7%
Excluding the one-time tax benefit related primarily to recent state tax law
changes, the effective tax rate was 31.4% in 2000, reflecting continued tax
benefits from leasing and financing activities, lower state and local taxes, and
lower taxes attributable to international sourced income.
Income from continuing operations was flat and diluted earnings per share from
continuing operations increased 5% in 2000. Excluding special items in both
periods, income from continuing operations and diluted earnings per share from
continuing operations increased 5% and 11%, respectively, in 2000. The increase
in diluted earnings per share outpaced the increase in income from continuing
operations due to the company's share repurchase program, under which 17.2
million shares, approximately 6% of the average common and potential common
shares outstanding at the end of 1999, were repurchased in 2000. Excluding
special items in both periods, income from continuing operations as a
percentage of revenue increased to 14.5% in 2000 from 14.0% in 1999, the
seventh consecutive year of improvement in this ratio.
19
Restructuring Charges
In 2001, we adopted a formal restructuring plan to implement a common,
streamlined business infrastructure across the corporation as a result of our
decisions to spin off our office systems business and align our mailing
business on a global basis, as well as cost saving opportunities resulting from
strategic acquisitions and partnerships, and additional benefits attained from
the consolidation of our IT organization and ERP initiatives. In connection
with this plan, we recorded pretax restructuring charges of $149.3 million in
2001, of which $116.1 million was related to continuing operations and the
remaining $33.2 million was related to discontinued operations. The
restructuring charges related to continuing operations have been segregated in
the Consolidated Statements of Income for the year ended December 31, 2001. The
restructuring charges related to discontinued operations have been reported in
discontinued operations in the Consolidated Statement of Income for the year
ended December 31, 2001. See Note 13 to the consolidated financial statements.
The restructuring charges related to continuing operations are comprised of:
(Dollars in millions) December 31, 2001
----------------------
Severance and benefit costs $ 74.3
Asset impairments 28.0
Other exit costs 13.8
----------------------
$116.1
======================
All restructuring charges, except for the asset impairments, will result in
cash outflows. The severance and benefit costs relate to a reduction in
workforce of approximately 1,200 employees worldwide which was initiated in
2001 and will be completed over the next six months. The workforce reductions
relate to actions across several of our businesses resulting from
infrastructure and process improvements and our continuing efforts to
streamline operations, and include managerial, professional, clerical and
technical roles. Approximately 80% of our workforce reductions are in the U.S.
The majority of the international workforce reductions are in Europe. None of
the reductions will impact our sales coverage. As of December 31, 2001, 692
employees were separated under these initiatives and approximately $34 million
of severance and benefit costs were paid. Asset impairments relate primarily to
the disposal or abandonment of certain hardware and software applications,
resulting from the alignment of our mailing business on a global basis and ERP
initiatives. Other exit costs relate primarily to lease termination costs,
non-cancelable lease payments, and other costs associated with business
activities that have been exited and the consolidation of excess facilities.
The restructuring charges related to discontinued operations are comprised of:
(Dollars in millions) December 31, 2001
----------------------
Severance and benefit costs $ 1.9
Asset impairments 17.5
Other exit costs 13.8
----------------------
$ 33.2
======================
The severance and benefit costs relate to a reduction in workforce of
approximately 25 employees. The asset impairments relate primarily to an
impairment of residual values, in connection with leases of copier equipment,
and the write-down of certain facsimile and copier equipment, resulting from
the spin-off of our office systems business. Other exit costs relate primarily
to incremental costs associated with cancellation and separation of facility
occupancy leases that are shared between the company and IGI.
Accrued restructuring charges at December 31, 2001 consist of the following:
Total restructuring Non-cash Ending
(Dollars in millions) charges Cash payments charges balance
--------------------- ---------------- --------- ---------
Severance and benefit costs $ 76.2 $34.5 $ - $41.7
Asset impairments 45.5 - 45.5 -
Other exit costs 27.6 14.5 - 13.1
--------------------- ---------------- --------- ---------
$ 149.3 $49.0 $45.5 $54.8
===================== ================ ========= =========
We expect that the majority of the remaining cash outflows related to
restructuring charges will take place over the next six months, funded
primarily by cash provided by operating activities. The restructuring charges
are expected to increase our operating efficiency and effectiveness in 2002 and
beyond while enhancing growth, primarily as a result of reduced
personnel-related expenses. We expect pretax savings in operating expenses of
approximately $50 million in 2002.
In 2000, we recorded a one-time pretax charge of approximately $19 million
related to the consolidation of information technology staff and
infrastructure. This initiative was focused on creating an efficient global
organization and technology platform to leverage the
20
benefits of our ERP and e-business initiatives. The majority of the
initiatives and cash outflows relating to this consolidation, were completed by
December 31, 2001.
We operate in very competitive industries and we are continually evaluating our
cost structure. Economic or competitive events in the future may necessitate
that the company formulate additional plans to reduce our existing cost
structure.
Meter Transition
In 2001, we adopted a formal plan to transition to the next generation of
networked mailing technology. The information capture and exchange made
possible by advanced technology, turns the postage meter into an "intelligent"
terminal that networks the mailer to postal and carrier information and
systems. This two-way information architecture, in turn, enables convenient
access to and delivery of value-added services such as tracking, delivery
confirmation and rate information. The adoption of this plan was facilitated by
our expanded access to technology and our ability to move to networked products
combined with our expectations that the U.S. and postal services around the
world will continue to encourage the migration of mailing systems to networked
digital technologies. As a result of this plan, certain electronic meter rental
assets and related equipment will not be placed back in service. In addition,
certain leased equipment will either not be remarketed or will result in lower
realization at end of lease as a result of the introduction of new technology.
In connection with this plan, the company recorded non-cash pretax charges of
$268.3 million for the year ended December 31, 2001, related to assets
associated with our non-networked mailing technology. In November 2001, postal
regulations were issued, consistent with our meter transition plan, defining
the meter migration process and timing. See Regulatory Matters.
The charges related to the meter transition plan are comprised of:
December 31, 2001
(Dollars in millions) -------------------
Impairment of lease residual values $128.4
Impairment of meter rental assets 71.3
Inventory writedowns 27.6
Additional depreciation costs on meter rental assets 41.0
--------------------
$268.3
--------------------
Acquisitions
In October 2001, we acquired Secap SA, a company based in France, for
approximately Euros 220 million in cash. Secap offers a range of mail
processing and paper handling equipment, supplies and technology for low- to
mid-volume mailers. Secap holds more than 30% of the postage meter market share
in France.
In June 2001, we acquired DSI from Danka Business Systems PLC for $290 million
in cash. DSI provides on- and off-site document management services, including
the management of central reprographic departments, the placement and
maintenance of photocopiers, print-on-demand operations and document archiving
and retrieval services.
In June 2001, we acquired the MMT business in Europe, Africa, the Middle East
and Asia, for $51 million in cash. MMT markets and services high-end mail
processing, sorting and service-related products through a network of
distributors and direct operations. We accounted for the acquisition under the
purchase method and accordingly the operating results of MMT have been included
in the company's consolidated financial statements since the date of
acquisition.
The acquisitions of Secap SA, DSI and MMT did not materially impact income from
continuing operations for the year ended December 31, 2001. See Note 15 to the
consolidated financial statements.
21
Accounting Changes
In 1998, FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," amended in 2000 by FAS No. 138, was issued. FAS No. 133 requires
that an entity recognize all derivative instruments as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. Changes in the fair value of those instruments will
be reflected as gains or losses. The accounting for the gains or losses
depends on the intended use of the derivative and the resulting designation.
The company adopted the provisions of FAS No. 133 in the first quarter of 2001.
The company uses derivatives to reduce the volatility in earnings and cash
flows associated with the impact of interest rate changes and foreign currency
fluctuations due to its investing and funding activities and its operations in
different foreign currencies. Derivatives designated as cash flow hedges
include primarily foreign exchange contracts and interest rate swaps related to
variable-rate debt. Derivatives designated as fair value hedges include
primarily interest rate swaps related to fixed-rate debt. The adoption of FAS
No. 133 has resulted in an after-tax reduction to accumulated other
comprehensive income of $7.0 million, including a one-time cumulative effect of
accounting change which reduced accumulated other comprehensive income by
approximately $9.2 million in the first quarter of 2001. The adoption of FAS
No. 133 has also impacted assets and liabilities recorded on the Consolidated
Balance Sheet. The adoption of FAS No. 133 did not materially impact results of
operations for the year ended December 31, 2001.
In 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements,"
summarizing certain guidance in applying generally accepted accounting
principles to revenue recognition in financial statements. The company adopted
the provisions of SAB No. 101 in the fourth quarter of 2000, retroactive to
January 1, 2000. The adoption of SAB No. 101 resulted in a one-time cumulative
after-tax reduction in net income of $4.7 million (net of taxes of
approximately $3.1 million) in the first quarter of 2000. The reduction to net
income was primarily attributable to the deferral of sales recognition of
software-enabled mail creation equipment and shipping products prior to
installation. See Note 1 to the consolidated financial statements.
In 2000, FAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued, replacing FAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." FAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral, as well
as requiring certain additional disclosures. However, it carries over most of
the provisions contained in FAS No. 125. FAS No. 140 is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. However, it was effective for the recognition and
reclassification of collateral and for disclosures relating to those
transactions for the year ended December 31, 2000. The adoption of this
standard did not have a material impact on the company.
In July 2001, FAS No. 141, "Business Combinations" and FAS No. 142, "Goodwill
and Other Intangible Assets" were issued requiring business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting, and refining the criteria for recording intangible assets separate
from goodwill. Recorded goodwill and intangibles will be evaluated against
this new criterion and may result in certain intangibles being included in
goodwill, or alternatively, amounts initially recorded as goodwill may be
separately identified and recognized apart from goodwill. FAS No. 142 requires
the use of a nonamortization approach to account for purchased goodwill and
indefinite lived intangibles. Under a nonamortization approach, goodwill and
indefinite lived intangibles will not be amortized into results of operations,
but instead will be reviewed for impairment and charged against results of
operations only in the periods in which the recorded value of goodwill and
indefinite lived intangibles is more than its fair value. The company has
adopted the provisions of each statement, which apply to business combinations
completed after June 30, 2001. The adoption of these accounting standards did
not materially impact results of operations for the year ended December 31,
2001. The provisions of each statement, which apply to goodwill and intangible
assets acquired prior to June 30, 2001 will be adopted by the company on
January 1, 2002. The adoption of these standards is expected to reduce the
amortization of intangible assets commencing January 1, 2002. Goodwill will be
reviewed for impairment on a periodic basis.
In August 2001, FAS No. 143, "Accounting for Asset Retirement Obligations" was
issued, amending FAS No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies," and applies to all entities. FAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS No. 143 is effective January 1, 2003 for the company. The company is
currently evaluating the impact of this statement.
In August 2001, FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued, replacing FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and portions of Accounting Principles Board (APB) Opinion 30, "Reporting the
Results of Operations." FAS No. 144 provides a single accounting model for
long-lived assets to be disposed of and changes the criteria that would have to
be met to classify an asset as held-for-sale. FAS No. 144 retains the
requirement of APB Opinion 30, to report discontinued operations separately
from continuing operations and extends that reporting to separate components of
an entity. FAS No. 144 is effective January 1, 2002 for the company. The
company is currently evaluating the impact of this statement.
In September 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) reached a consensus on Issue 01-10, "Accounting for the
Impact of the Terrorist Attacks of September 11, 2001." EITF 01-10 provides
guidance for accounting for the
22
effects of the events of September 11, 2001 in financial statements. The
company believes it is in compliance with this consensus in all material
respects.
Liquidity and Capital Resources
Our current ratio reflects our practice of using a balanced mix of debt
maturities to fund finance assets. Our ratio of current assets to current
liabilities declined to .83 to 1 at December 31, 2001 compared to .91 to 1 at
December 31, 2000. The decrease in this ratio was primarily due to the prior
year classification of IGI's net assets to be disposed of in the current assets
section of the Consolidated Balance Sheet at December 31, 2000. Excluding IGI's
net current assets to be disposed of, the ratio of current assets to current
liabilities would have been .84 to 1 at December 31, 2000.
To manage interest rate risk, we use a balanced mix of debt maturities,
variable and fixed rate debt and interest rate swap agreements.
Our cash and cash equivalents increased to $231.6 million at December 31, 2001,
from $198.3 million at December 31, 2000. The increase resulted primarily from
$1.0 billion provided by operating activities, offset in part by $839.5 million
and $162.9 million used in investing and financing activities, respectively.
Net cash of $1.0 billion provided by operating activities consisted primarily
of net income adjusted for non cash items, and the increase in deferred taxes
on income, partially offset by changes in working capital and our investment in
internal finance receivables. Net cash used in working capital resulted
primarily from decreases in accounts payable, related to our implementation of
SAP. Net cash of $839.5 million used in investing activities consisted
primarily of acquisitions, investments in fixed assets and leveraged leases,
partially offset by reserve account deposits. Net cash of $162.9 million used
in financing activities consisted primarily of stock repurchases and dividend
paid to stockholders.
Excluding special items and discontinued operations in both periods, the ratio
of EBIT to interest was 5.4x and 5.3x and the ratio of EBITDA to interest was
6.7x and 6.6x for the years ended December 31, 2001 and 2000, respectively. The
ratio of total debt to total debt and stockholders' equity was 79.7% at
December 31, 2001, versus 71.1% at December 31, 2000. Including the preferred
stockholders' equity in a subsidiary company as debt, the ratio of total debt
to total debt and stockholders' equity was 81.0% at December 31, 2001 compared
to 73.0% at December 31, 2000. The increase in this ratio was driven primarily
by the special dividend associated with the spin-off of IGI and debt related to
acquisitions and the $300 million repurchase of 7.8 million shares of common
stock. The company's generation of $780 million of free cash flow (defined as
cash from operations less capital expenditures) partially offset the increase
in this ratio. Excluding the cash flow impacts of the restructuring
initiatives, HP settlement and discontinued operations, free cash flow was $617
million in 2001.
On June 30, 2000 the company, through PBCC, sold its PitneyWorks/SM/ Business
Rewards/SM/ Visa/R/ and Business Visa/R/ card operations, including credit card
receivables of approximately $322 million.
Financings and Capitalization
On February 20, 2002, the company completed an offering of Euros 250 million of
senior unsecured notes. These notes bear interest at a floating rate of EURIBOR
plus 20 basis points, set two Euro business days preceding the quarterly
interest payment dates and mature in August 2003. The notes are listed on the
Luxembourg Stock Exchange and have been designated as a hedge of Euro
denominated assets held by the company. The proceeds from these notes will be
used for general corporate purposes which may include repaying commercial
paper, financing acquisitions and the repurchase of company stock.
In October 2001, Pitney Bowes Inc. filed a shelf registration statement with
the SEC which permits the issuance of up to $2 billion in debt securities,
preferred stock and depositary shares, all of which remained available for
issuance at December 31, 2001.
In April 2001, the company issued the remaining $300 million of notes available
under a prior shelf registration, permitting issuances of up to $500 million in
debt securities (including medium-term notes) with a minimum maturity of nine
months. These unsecured notes bear annual interest at 5.875% and mature in May
2006. The proceeds were used for general corporate purposes, including the
repayment of commercial paper, financing acquisitions and the repurchase of
company stock.
PBCC has $75 million of unissued debt securities available at December 31, 2001
from a shelf registration statement filed with the SEC in July 1998. As part of
this shelf registration statement, in August 1999, PBCC established a
medium-term note program for the issuance from time to time of up to $500
million aggregate principal amount of Medium-Term Notes, Series D. In August
2001, PBCC issued $350 million of unsecured fixed rate notes maturing in August
2008. These notes bear interest at an annual rate of 5.75% and pay interest
semi-annually beginning February 15, 2002. The proceeds from these notes were
used for general corporate purposes, including the repayment of commercial
paper.
In July 2001, PBCC issued four non-recourse promissory notes totaling $111.5
million in connection with four lease transactions. The promissory notes are
all due in installments over 194 months at an interest rate of 7.24%. In
September 2001, PBCC sold its interest in two of the lease transactions and
transferred the obligation on two of the non-recourse promissory notes totaling
$55.3 million in principal balance. Two non-recourse promissory notes remain
outstanding at December 31, 2001 with a total principal balance of $54.9
million. These notes are serviced by the underlying lease transaction payments.
23
In December 2000, PBCC issued $100 million of unsecured floating rate notes
maturing in April 2002 and $100 million of unsecured floating rate notes
maturing June 2004, available under the medium-term note program. These notes
bear interest at floating rates of LIBOR plus five basis points and 25 basis
points, respectively, set as of the quarterly interest payment dates. The
proceeds from these notes were used for general corporate purposes, including
the repayment of commercial paper.
In March 2000, PBCC issued $43.3 million of 7.515% Senior Notes maturing 2002
through 2012. The proceeds from these notes were used to pay down commercial
paper.
In April 2000, PBCC issued a total of $134 million of Series A and Series B
Secured Floating Rate Senior Notes. The notes mature in 2003 and bear interest
at 7.443%. The proceeds from these notes were used for general corporate
purposes, including the repayment of short-term debt.
To help us better manage our international cash and investments, in June 1995
and April 1997, Pitney Bowes International Holdings, Inc., a subsidiary of the
company, issued $200 million and $100 million, respectively, of variable term,
voting preferred stock (par value $.01) representing 25% of the combined voting
power of all classes of its outstanding capital stock, to outside institutional
investors in a private placement. The remaining 75% of the voting power is held
directly or indirectly by Pitney Bowes Inc. The preferred stock is recorded on
the Consolidated Balance Sheets as preferred stockholders' equity in a
subsidiary company. We used the proceeds of these transactions to pay down
short-term debt. We have an obligation to pay cumulative dividends on this
preferred stock at rates that are set at auction. The auction periods are
generally 49 days, although they may increase in the future. The weighted
average dividend rate in 2001 and 2000 was 3.3% and 4.7%, respectively.
Preferred dividends are reflected as minority interest in the Consolidated
Statements of Income in selling, service and administrative expenses. In
December 1998, the company sold 9.11% Cumulative Preferred Stock, mandatorily
redeemable in 20 years, in a subsidiary company to an institutional investor
for approximately $10 million.
At December 31, 2001, the company, together with its financial services
businesses, had unused lines of credit and revolving credit facilities of $1.5
billion in the U.S. and $24.3 million outside the U.S., largely supporting
commercial paper debt.
We believe our financing needs for the next 12 months can be met with cash
generated internally, money from existing credit agreements, debt issued under
new and existing shelf registration statements and existing commercial and
medium-term note programs. Information on debt maturities is presented in Note
5 to the consolidated financial statements.
Total financial services assets increased to $6.5 billion at December 31, 2001,
up 4.3% from $6.2 billion in 2000. To fund finance assets, borrowings were $3.5
billion in 2001 and $3.3 billion in 2000. Approximately $290 million and $480
million in cash was generated from the sale of finance assets in 2001 and 2000,
respectively. We used the money to pay down debt, repurchase shares and fund
new business investments.
The following summarizes our contractual obligations at December 31, 2001, and
the effect that such obligations are expected to have on our liquidity and cash
flow in future periods:
(Dollars in millions) Total Less than 1 year 1-3 years After 3 years
--------- ----------------- ------------- ---------------
Commercial paper borrowings $ 865 $ 865 $ - $ -
Long-term debt and current portion of long-
term debt 2,624 205 1,333 1,086
Non-cancelable capital lease obligations 7 3 4 -
Non-cancelable operating lease obligations 223 67 132 24
--------- ----------------- ------------- ---------------
$3,719 $1,140 $1,469 $1,110
========= ================= ============= ===============
24
Leveraged Leases
Our investment in leveraged lease assets consists of the following:
December 31, 2001
(Dollars in billions) ---------------------
Rental receivables $7.7
Residual value .7
Principal and interest on nonrecourse loans (6.2)
Unearned income (.9)
----------------------
Total leveraged leases $1.3
======================
. The $1.3 billion is the amount that is on our Consolidated Balance
Sheet.
. Rental receivables represent total lease payments from our customers
over the remaining term of the leveraged leases.
. Residual value represents the value of the property anticipated at
the end of the leveraged lease terms and is based on independent
appraisals performed by nationally recognized appraisers. We
regularly review the recorded residual values to ensure they are
appropriate.
. Principal and interest on nonrecourse loans represent amounts due to
unrelated third parties from our customers over the remaining term
of the leveraged leases. The nonrecourse loans are secured by the
lessees' rental obligation and the leased property. If a lessee
defaults and if the amounts realized from the sale of these assets
are insufficient, we have no obligation to make any payments due on
these nonrecourse loans to the unrelated third parties. Accordingly,
we are required by generally accepted accounting principles to
subtract the principal and interest over the remaining term of the
nonrecourse loans from our rental receivables and residual value. At
December 31, 2001, the principal balances on the nonrecourse loans
totaled $3.1 billion and the related interest payments over the
remaining terms of the leases totaled $3.1 billion.
. Unearned income represents our future financing income that will be
earned over the remaining term of the leases.
The $1.3 billion investment in leveraged leases on our Consolidated Balance
Sheet is diversified across the following types of assets:
. $332.1 million related to commercial real estate facilities, with
original lease terms ranging from 15 to 25 years.
. $301.3 million for nine aircraft transactions with major commercial
airlines, with original lease terms ranging from 22 to 25 years.
. $286.4 million related to locomotives and railcars, with original
lease terms ranging from 19 to 47 years.
. $166.6 million for postal equipment with international postal
authorities, with original lease terms ranging from 16 to 24 years.
. $130.0 million for rail and bus facilities with original lease terms
ranging from 32 to 44 years.
. $120.8 million for telecommunications equipment, with original lease
terms ranging from 14 to 16 years.
We have been entering into leveraged lease transactions for 14 years and losses
related to our leveraged lease portfolio have been minimal. We enter into these
transactions selectively with highly creditworthy lessees to whom we lease
equipment and other assets with consistently strong resale values. Our average
transaction value is approximately $28 million. Additionally, our investment in
leveraged leases is diversified across 37 customers, 48 individual
transactions and six major product types. As a result, we believe that our
risk of a material loss in the current portfolio is minimal.
Off-Balance Sheet Items
Finance receivables sales
We have sold net finance receivables and in selective cases entered into
guarantee contracts with varying amounts of recourse in privately placed
transactions with unrelated third-party investors. The uncollected principal
balance of receivables sold and guarantee contracts totaled $181.2 million and
$262.1 million at December 31, 2001 and 2000, respectively. In accordance with
generally accepted accounting principles, we do not record these amounts as
liabilities on our Consolidated Balance Sheet.
Our maximum risk of loss on these net financing receivables and guarantee
contracts arises from the possible non-performance of lessees to meet the terms
of their contracts and from changes in the value of the underlying equipment.
These contracts are secured by the underlying equipment value, and supported by
the creditworthiness of our customers. At December 31, 2001, the underlying
equipment value exceeded the sum of the uncollected principal balance of
receivables sold and the guarantee contracts. As part of our review of our risk
exposure, we believe we have made adequate provision for sold receivables and
guarantee contracts which may not
25
be collectible. See Notes 18 and 20 to the consolidated financial statements.
We do not depend on these types of transactions to fund our leasing
investments. We selectively use these transactions when the overall economic
impact on us is more favorable than debt.
Equity interest
During 1997, PBCC and GATX Corporation (GATX) formed PBG Capital Partners LLC
(PBG) for the purpose of financing and managing certain leasing related assets
existing at that time. We contributed assets to PBG and maintain a 50% interest.
We account for our investment in PBG under the equity method. Our maximum
exposure is our investment of $166 million on our Consolidated Balance Sheet at
December 31, 2001. PBG's total assets and liabilities at December 31, 2001 are
$536 million and $290 million, respectively. In accordance with generally
accepted accounting principles, we do not record these assets and liabilities on
our Consolidated Balance Sheet.
State and local government financing
We have originated tax-exempt secured loans to state and local governments and
have sold certificates of interest in these loans to third parties. Generally,
we recognize revenue for the fees we receive upon the sale of these
certificates. These transactions however, may require us to buy back
certificates from the third parties if interest rates rise significantly. Our
maximum risk of loss arises because we may be required to buy back certificates
and resell them to other third parties at below our cost. We have structured
these transactions so that even in a rising interest rate environment, our
losses would be minimal. We have further minimized any risk of non-performance
on the state and local government loans by obtaining credit guarantees of these
loans from a highly-rated nationally recognized insurance company. Certificates
outstanding at December 31, 2001 and 2000 were $263.7 million and $240.7
million, respectively. In accordance with generally accepted accounting
principles, we do not record these certificates as assets or liabilities on our
Consolidated Balance Sheet.
Capital Investment
During 2001, net investments in fixed assets included net additions of $132
million to property, plant and equipment and $124 million of rental equipment
and related inventories, compared with $122 million and $147 million,
respectively, in 2000. These additions included expenditures for normal plant
and manufacturing equipment. In the case of rental equipment, the additions
included the production of postage meters and the purchase of facsimile and
copier equipment related to the discontinued operations of IGI. Excluding IGI,
net investments in fixed assets during 2001 included net additions of $119
million to property, plant and equipment and $68 million to rental equipment
and related inventories, compared with $118 million and $71 million during
2000, respectively.
The company expects net investments in fixed assets in 2002, relating to
continuing operations, to be flat to slightly higher than the prior year. These
investments will also be impacted by the timing of our customer's transition to
digital meters. At December 31, 2001, commitments for the acquisition of
property, plant and equipment reflected plant and manufacturing equipment
improvements as well as rental equipment for new and replacement programs.
Legal and Regulatory Matters
Legal
In the course of normal business, we are occasionally party to lawsuits. These
may involve litigation by or against the company relating to, among other
things:
.. contractual rights under vendor, insurance or other contracts
.. intellectual property or patent rights
.. equipment, service or payment disputes with customers
.. disputes with employees
We are currently a plaintiff or a defendant in a number of lawsuits, none of
which should have, in the opinion of management and legal counsel, a material
adverse effect on the company's financial position or results of operations.
See Legal settlements, net in Special Items.
26
USPS meter transition
In 2000, the USPS issued a proposed schedule for the phaseout of manually reset
electronic meters in the U.S. as follows:
.. As of February 1, 2000, new placements of manually reset electronic
meters are no longer permitted.
.. Current users of manually reset electronic meters can continue to use
these meters for the term of their current rental and lease agreements.
Leases or rentals that expired in 2000 could be extended to December 31,
2001.
On November 15, 2001, the USPS issued a final rule as follows:
.. New placements of non-digital meters without the "timeout" feature that
enables the meters to be automatically disabled, if not reset within a
specified time period are no longer permitted after December 31, 2002.
These meters must be off the market by December 31, 2006.
.. New placements of non-digital meters with a "timeout" feature are no
longer permitted after June 2004. These meters must be off the market by
December 31, 2008.
We have submitted comments to the USPS's proposed schedules described above. We
adopted a formal meter transition plan in the second quarter of 2001, to
transition to the next generation of networked mailing technology. See Note 14
to the consolidated financial statements.
USPS Information Based Indicia Program (IBIP)
In May 1995, the USPS publicly announced its concept of its IBIP for future
postage evidencing devices. As initially stated by the USPS, the purpose of the
program was to develop a new standard for future digital postage evidencing
devices which would significantly enhance postal revenue security and support
expanded USPS value-added services to mailers. The program would consist of
the development of four separate specifications: (i) the Indicium
specification; (ii) a Postal Security Device specification; (iii) a Host
specification; and (iv) a Vendor Infrastructure specification. During the
period from May 1995 through December 31, 2001, we submitted extensive comments
to a series of proposed IBIP specifications issued by the USPS, including
comments on the IBI Performance Criteria.
Other regulatory matters
In June 1999, we were served with a Civil Investigative Demand (CID) from the
U.S. Justice Department's Antitrust Division. A CID is a tool used by the
Antitrust Division for gathering information and documents. The company
believes that the Justice Department may have been reviewing the company's
efforts to protect its intellectual property rights. We believed we have
complied fully with the antitrust laws and cooperated fully with the
department's investigation. In February 2002, the Justice Department advised us
that it has decided to close this investigation with no further action.
Effects of Inflation and Foreign Exchange
Inflation, although moderate in recent years, continues to affect worldwide
economies and the way companies operate. It increases labor costs and operating
expenses, and raises costs associated with replacement of fixed assets such as
rental equipment. Despite these growing costs and the USPS meter migration
initiatives, we have generally been able to maintain profit margins through
productivity and efficiency improvements, continual review of both
manufacturing capacity and operating expense levels, and, to an extent, price
increases.
Although not affecting income, deferred translation losses amounted to $9
million, $46 million and $5 million in 2001, 2000 and 1999, respectively. These
translation losses resulted principally from the weakening Canadian dollar,
British pound and Euro currencies.
The results of our international operations are subject to currency
fluctuations. We enter into foreign exchange contracts primarily to minimize
our risk of loss from such fluctuations. Exchange rates can impact settlement
of our intercompany receivables and payables that result from transfers of
finished goods inventories between our affiliates in different countries, and
intercompany loans.
At December 31, 2001, we had approximately $601 million of foreign exchange
contracts outstanding, most of which mature in 2002, to buy or sell various
currencies. Risks arise from the possible non-performance by counterparties in
meeting the terms of their contracts and from movements in securities values,
interest and/or exchange rates. However, we do not anticipate non-performance
by the counterparties as they are composed of a number of major international
financial institutions. Maximum risk of loss on these contracts is limited to
the amount of the difference between the spot rate at the date of the contract
delivery and the contracted rate.
27
Dividend Policy
Our Board of Directors has a policy to pay a cash dividend on common stock each
quarter when feasible. In setting dividend payments, our board considers the
dividend rate in relation to the company's recent and projected earnings and
our capital investment opportunities and requirements. We have paid a dividend
each year since 1934.
Forward-Looking Statements
We want to caution readers that any forward-looking statements with the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 in this Form 10-K, other reports or press releases or made
by our management involve risks and uncertainties which may change based on
various important factors. These forward-looking statements are those which
talk about the company's or management's current expectations as to the future
and include, but are not limited to, statements about the amounts, timing and
results of possible restructuring charges and future earnings. Words such as
"estimate," "project," "plan," "believe," "expect," "anticipate," "intend," and
similar expressions may identify such forward-looking statements. Some of the
factors which could cause future financial performance to differ materially
from the expectations as expressed in any forward-looking statement made by or
on our behalf include:
.. changes in international or national political or economic conditions
.. changes in postal regulations
.. timely development and acceptance of new products
.. success in gaining product approval in new markets where regulatory
approval is required
.. successful entry into new markets
.. mailers' utilization of alternative means of communication or
competitors' products
.. the company's success at managing customer credit risk
.. changes in interest rates
.. foreign currency fluctuations
.. timing and execution of the restructuring plan
.. regulatory approvals and satisfaction of other conditions to consummation
of any acquisitions
.. impact on mail volume resulting from current concerns over the use of the
mail for transmitting harmful biological agents
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and foreign currency
fluctuations due to our investing and funding activities and our operations in
different foreign currencies.
Our objective in managing our exposure to interest rate changes is to limit the
impact of interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. To achieve our objectives, we use a balanced mix of
debt maturities and variable and fixed rate debt together with interest rate
swaps.
Our objective in managing our exposure to foreign currency fluctuations is to
reduce the volatility in earnings and cash flows associated with the effect of
foreign exchange rate changes on transactions that are denominated in foreign
currencies. Accordingly, we enter into various contracts, which change in value
as foreign exchange rates change, to protect the value of external and
intercompany transactions.
The principal currencies hedged are the British pound, Canadian dollar and Euro
currencies.
We employ established policies and procedures governing the use of financial
instruments to manage our exposure to such risks. We do not enter into foreign
currency or interest rate transactions for speculative purposes. The gains and
losses on these contracts offset changes in the value of the related exposures.
We utilize a "Value-at-Risk" (VaR) model to determine the maximum potential loss
in fair value from changes in market conditions. The VaR model utilizes a
"variance/co-variance" approach and assumes normal market conditions, a 95%
confidence level and a one-day holding period. The model includes all of our
debt and all interest rate and foreign exchange derivative contracts. The model
excludes anticipated transactions, firm commitments, and receivables and
accounts payable denominated in foreign currencies, which certain of these
instruments are intended to hedge.
The VaR model is a risk analysis tool and does not purport to represent actual
losses in fair value that will be incurred by us, nor does it consider the
potential effect of favorable changes in market factors.
During 2001, our maximum potential one-day loss in fair value of our exposure
to foreign exchange rates and interest rates, using the variance/co-variance
technique described above, was not material.
28
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Years ended December 31
-------------------------------------------
2001 2000 1999
-------------------------------------------
Revenue from:
Sales and management services $2,125,745 $1,882,501 $1,862,753
Rentals and financing 1,460,915 1,505,101 1,485,599
Support services 535,814 493,266 463,224
------------ ------------ ------------
Total revenue 4,122,474 3,880,868 3,811,576
------------ ------------ ------------
Costs and expenses:
Cost of sales and management services 1,271,445 1,074,177 1,071,782
Cost of rentals and financing 350,870 373,232 395,667
Cost of meter transition - impairment 227,300 - -
Cost of meter transition - additional depreciation 41,000 - -
Selling, service and administrative 1,370,152 1,299,081 1,290,180
Research and development 133,105 120,486 108,900
Other income (338,097) - (49,574)
Interest expense 193,076 200,957 175,699
Interest income (8,903) (8,580) (5,020)
Restructuring charges 116,142 18,667 -
------------ ------------ ------------
Total costs and expenses 3,356,090 3,078,020 2,987,634
------------ ------------ ------------
Income from continuing operations before
income taxes 766,384 802,848 823,942
Provision for income taxes 252,064 239,723 260,952
------------ ------------ ------------
Income from continuing operations 514,320 563,125 562,990
Income from discontinued operations,
net of income tax - 64,104 97,140
Loss on disposal of discontinued operations,
net of income tax (25,977) - (23,918)
Cumulative effect of accounting change - (4,683) -
------------ ------------ ------------
Net income $ 488,343 $ 622,546 $ 636,212
============ ============ ============
Basic earnings per share:
Income from continuing operations $2.09 $2.20 $2.11
Discontinued operations (.11) .25 .27
Cumulative effect of accounting change - (.02) -
------------ ------------ ------------
Net income $1.99 $2.43 $2.38
============ ============ ============
Diluted earnings per share:
Income from continuing operations $2.08 $2.18 $2.07
Discontinued operations (.10) .25 .27
Cumulative effect of accounting change - (.02) -
------------ ------------ ------------
Net income $1.97 $2.41 $2.34
------------ ------------ ------------
Note: The sum of the earnings per share amounts may not equal the totals above
due to rounding.
See notes, pages 33 through 62
29
Consolidated Balance Sheets
(Dollars in thousands, except share data)
December 31
----------------------------
2001 2000
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 231,588 $ 198,255
Short-term investments, at cost which approximates market 1,790 15,250
Accounts receivable, less allowances: 2001, $32,448; 2000, $26,468 408,414 313,510
Finance receivables, less allowances: 2001, $61,451; 2000, $44,129 1,601,189 1,592,920
Inventories 163,012 167,969
Other current assets and prepayments 150,615 145,786
Net current assets of discontinued operations - 193,018
------------ ------------
Total current assets 2,556,608 2,626,708
Property, plant and equipment, net 534,595 491,312
Rental equipment and related inventories, net 472,186 620,841
Property leased under capital leases, net 1,489 2,303
Long-term finance receivables, less allowances: 2001, $65,967; 2000, $53,222 1,898,976 1,980,876
Investment in leveraged leases 1,337,282 1,150,656
Goodwill, net of amortization: 2001, $70,697; 2000, $58,658 635,873 203,447
Other assets 881,462 612,760
Net long-term assets of discontinued operations - 212,363
------------ ------------
Total assets $8,318,471 $7,901,266
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued liabilities $1,425,809 $ 995,283
Income taxes payable 250,895 262,125
Notes payable and current portion of long-term obligations 1,072,057 1,277,941
Advance billings 334,281 346,228
------------ ------------
Total current liabilities 3,083,042 2,881,577
Deferred taxes on income 1,273,593 1,226,597
Long-term debt 2,419,150 1,881,947
Other noncurrent liabilities 341,331 316,170
------------ ------------
Total liabilities 7,117,116 6,306,291
------------ ------------
Preferred stockholders' equity in a subsidiary company 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par value, 4% convertible 24 29
Cumulative preference stock, no par value, $2.12 convertible 1,603 1,737
Common stock, $1 par value (480,000,000 shares authorized;
323,337,912 shares issued) 323,338 323,338
Capital in excess of par value 6,979 10,298
Retained earnings 3,658,481 3,766,995
Accumulated other comprehensive income (155,380) (139,434)
Treasury stock, at cost (81,309,566 shares) (2,943,690) (2,677,988)
------------ ------------
Total stockholders' equity 891,355 1,284,975
------------ ------------
Total liabilities and stockholders' equity $8,318,471 $7,901,266
============ ============
See notes, pages 33 through 62
30
Consolidated Statements of Cash Flows
(Dollars in thousands) Years ended December 31
----------------------------------------
2001 2000 1999
------------ ------------- -----------
Cash flows from operating activities:
Net income $488,343 $622,546 $636,212
Nonrecurring charges, net 280,473 - 23,918
Nonrecurring payments (63,004) - -
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 317,449 321,157 412,104
Increase in deferred taxes on income 196,341 135,208 158,803
Pension plan investment (30,000) - (67,000)
Change in assets and liabilities, net of
effects of acquisitions:
Accounts receivable 1,962 (8,531) (47,737)
Net investment in internal finance receivables (40,748) (149,701) (178,898)
Inventories 61,305 (71,184) 11,341
Other current assets and prepayments (6,893) (20,667) (29,383)
Accounts payable and accrued liabilities (124,204) 57,580 6,174
Income taxes payable (1,552) 9,272 76,069
Advance billings (29,560) (1,117) 10,667
Other, net (14,025) (22,319) (31,184)
------------ ------------- -----------
Net cash provided by operating activities 1,035,887 872,244 981,086
------------ ------------- -----------
Cash flows from investing activities:
Short-term investments 13,495 (12,934) 659
Net investment in fixed assets (256,204) (268,577) (304,898)
Net investment in finance receivables (4,020) (67,850) (184,182)
Net investment in capital and mortgage services 31,383 (22,177) 148,670
Investment in leveraged leases (190,117) (189,859) (138,527)
Investment in mortgage servicing rights - - (28,738)
Proceeds and cash receipts from the sale of AMIC - 512,780 -
Net proceeds from the sale of credit card portfolio - 321,746 -
Net investment in insurance contracts 1,727 (129,964) (58,825)
Acquisitions, net of cash acquired (578,947) - -
Reserve account deposits 158,896 78,742 62,207
Other investing activities (15,735) (77,587) (33,868)
------------ ------------- -----------
Net cash (used in) provided by investing activities (839,522) 144,320 (537,502)
------------ ------------- -----------
Cash flows from financing activities:
Increase (decrease) in notes payable, net 63,969 (327,227) 77,230
Proceeds from long-term obligations 762,641 383,232 358,232
Principal payments on long-term obligations (546,229) (205,026) (94,687)
Proceeds from issuance of stock 30,792 39,961 56,368
Net proceeds from the spin-off of Imagistics International Inc. 111,088 - -
Stock repurchases (299,952) (663,987) (438,229)
Dividends paid (285,164) (292,736) (272,866)
------------ ------------- -----------
Net cash used in financing activities (162,855) (1,065,783) (313,952)
------------ ------------- -----------
Effect of exchange rate changes on cash (177) (6,796) (1,046)
------------ ------------- -----------
Increase (decrease) in cash and cash equivalents 33,333 (56,015) 128,586
Cash and cash equivalents at beginning of year 198,255 254,270 125,684
------------ ------------- -----------
Cash and cash equivalents at end of year $231,588 $198,255 $254,270
============ ============= ===========
Interest paid $191,246 $247,749 $218,931
============ ============= ===========
Income taxes paid, net $190,286 $122,880 $67,647
============ ============= ===========
See notes, pages 33 through 62
31
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except per share data)
Accumulated
Capital in Compre- other Treasury
Preferred Preference Common excess of hensive Retained comprehen- stock
stock stock stock par value income earnings sive income at cost
--------- ---------- -------- ---------- -------- ---------- ----------- -----------
Balance, January 1, 1999 $34 $2,031 $323,338 $16,173 $3,073,839 $(88,217) $(1,679,196)
Net income $636,212 636,212
Other comprehensive income:
Translation adjustments (4,798) (4,798)
--------
Comprehensive income $631,414
========
Cash dividends:
Preferred ($2.00 per share) (1)
Preference ($2.12 per share) (150)
Common ($1.02 per share) (272,715)
Issuances of common stock (5,431) 52,403
Conversions to common stock (5) (190) (3,679) 3,872
Repurchase of common stock (438,229)
Tax credits relating to stock options 10,319
------ ------ -------- ------- ---------- --------- -----------
Balance, December 31, 1999 29 1,841 323,338 17,382 3,437,185 (93,015) (2,061,150)
Net income $622,546 622,546
Other comprehensive income:
Translation adjustments (46,419) (46,419)
--------
Comprehensive income $576,127
========
Cash dividends:
Preferred ($2.00 per share) (1)
Preference ($2.12 per share) (139)
Common ($1.14 per share) (292,596)
Issuances of common stock (11,563) 44,940
Conversions to common stock (104) (2,106) 2,209
Repurchase of common stock (663,987)
Tax credits relating to stock options 6,585
------ ------ -------- ------- ---------- --------- -----------
Balance, December 31, 2000 29 1,737 323,338 10,298 3,766,995 (139,434) (2,677,988)
Net income $488,343 488,343
Other comprehensive income:
Translation adjustments (8,950) (8,950)
Net unrealized loss on derivative
instruments (6,996) (6,996)
--------
Comprehensive income $472,397
========
Cash dividends:
Preferred ($2.00 per share) (1)
Preference ($2.12 per share) (129)
Common ($1.16 per share) (285,034)
Spin-off of Imagistics
International Inc. (311,693)
Issuances of common stock (5,421) 31,768
Conversions to common stock (5) (134) (2,341) 2,481
Repurchase of common stock (299,952)
Tax credits relating to stock options 4,443
------ ------ -------- ------- ---------- --------- -----------
Balance, December 31, 2001 $24 $1,603 $323,338 $ 6,979 $3,658,481 $(155,380) $(2,943,691)
====== ====== ======== ======= ========== ========= ===========
See notes, pages 33 through 62
32
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data or as otherwise indicated)
1.Summary of significant accounting policies
Consolidation
The consolidated financial statements include the accounts of Pitney Bowes Inc.
and all of its subsidiaries (the company). All significant intercompany
transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents, short-term investments and accounts receivable
Cash equivalents include short-term, highly liquid investments with a maturity
of three months or less from the date of acquisition. The company places its
temporary cash and short-term investments with financial institutions and
limits the amount of credit exposure with any one financial institution.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers and relatively small account balances
within the majority of the company's customer base, and their dispersion across
different businesses and geographic areas.
Inventory valuation
Inventories are valued at the lower of cost or market. Cost is determined on
the last-in, first-out (LIFO) basis for most U.S. inventories, and on the
first-in, first-out (FIFO) basis for most non-U.S. inventories.
Fixed assets and depreciation
Property, plant and equipment are stated at cost and depreciated principally
using the straight-line method over estimated useful lives: machinery and
equipment principally three to 15 years and buildings up to 50 years. Major
improvements which add to productive capacity or extend the life of an asset
are capitalized while repairs and maintenance are charged to expense as
incurred. Rental equipment is depreciated on the straight-line method over
estimated useful lives, principally three to ten years. Other depreciable
assets are depreciated using either the straight-line method or accelerated
methods. Properties leased under capital leases are amortized on a
straight-line basis over the primary lease terms.
Capitalized computer software costs
The company capitalizes certain costs of internally developed software.
Capitalized costs include purchased materials and services, payroll and payroll
related costs and interest costs. The cost of internally developed software is
amortized on a straight-line basis over the estimated useful life which is,
principally three to ten years.
Rental arrangements and advance billings
The company rents equipment to its customers, primarily postage meters, mailing
equipment and shipping systems under short-term rental agreements, generally
for periods of three months to three years. Charges for equipment rental and
maintenance contracts are billed in advance; the related revenue is included in
advance billings and recorded as income over the service period on a
straight-line basis. Ancillary rental and other finance income is recognized as
earned.
Financing transactions
At the time a sales-type lease is consummated, the company records the gross
finance receivable, unearned income and the estimated residual value of the
leased equipment. Unearned income represents the excess of the gross receivable
plus the estimated residual value over the sales price of the equipment.
Unearned income is recognized as financing income using the interest method
over the term of the transaction and is included in rentals and financing
revenue in the Consolidated Statements of Income.
33
At the time a direct finance lease is consummated, the company records the gross
finance receivable, unearned income and the estimated residual value of the
leased equipment. Unearned income represents the excess of the gross receivable
plus the estimated residual value over the cost of the equipment. Unearned
income is recognized as financing income using the interest method over the
term of the transaction and is included in rentals and financing revenue in the
Consolidated Statements of Income. Initial direct costs incurred in
consummating a transaction are accounted for as part of the investment in a
lease and amortized to income using the interest method over the term of the
lease.
The company has, from time to time, sold selected finance assets. The company
follows Statement of Financial Accounting Standards (FAS) No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," when accounting for its sale of finance assets. All assets
obtained or liabilities incurred in consideration are recognized as proceeds of
the sale and any gain or loss on the sale is recognized in earnings.
The company's investment in leveraged leases consists of rentals receivable net
of principal and interest on the related nonrecourse debt, estimated residual
value of the leased property and unearned income. At lease inception, unearned
income represents the excess of rentals receivable, net of that portion of the
rental applicable to principal and interest on the nonrecourse debt, plus the
estimated residual value of the leased property over the company's investment
in the transaction. Unearned income is recognized as financing revenue over the
term of the transaction.
The allowance for credit losses is established through charges to the provision
for credit losses. Finance receivables are charged to the allowance for credit
losses after collection efforts are exhausted and the account is deemed
uncollectible.
The company evaluates the adequacy of the allowance for credit losses on a
periodic basis. The evaluation includes historical loss experience, the nature
and volume of the company's portfolios, adverse situations that may affect a
customer's ability to repay, estimated value of the underlying collateral (if
any) and prevailing economic conditions. If the evaluation of reserve
requirements differs from the actual aggregate reserve, adjustments are made to
the reserve. This evaluation is inherently subjective, as it requires estimates
that are susceptible to revision as more information becomes available.
The company's general policy is to discontinue income recognition for finance
receivables contractually past due for over 90 to 120 days. Resumption of income
recognition occurs when payments reduce the account to 60 days or less past due.
Capital Services' transactions are reviewed on an individual basis. Income
recognition is normally discontinued as soon as it is apparent that the obligor
will not be making payments in accordance with lease terms and resumed after the
company has sufficient experience on resumption of payments to be satisfied that
such payments will continue in accordance with contract terms.
Business combinations, goodwill and other intangible assets
In July 2001, FAS No. 141, "Business Combinations" and FAS No. 142, "Goodwill
and Other Intangible Assets" were issued requiring business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting, and refining the criteria for recording intangible assets separate
from goodwill. Recorded goodwill and intangibles will be evaluated against
this new criterion and may result in certain intangibles being included in
goodwill, or alternatively, amounts initially recorded as goodwill may be
separately identified and recognized apart from goodwill. FAS No. 142
requires the use of a nonamortization approach to account for purchased
goodwill and indefinite lived intangibles. Under a nonamortization approach,
goodwill and indefinite lived intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and charged against
results of operations only in the periods in which the recorded value of
goodwill and indefinite lived intangibles is more than its fair value. The
company has adopted the provisions of each statement, which apply to business
combinations completed after June 30, 2001. The adoption of these accounting
standards did not materially impact results of operations for the year ended
December 31, 2001. The company will adopt the provisions of each statement,
which apply to goodwill and intangible assets acquired prior to June 30, 2001
on January 1, 2002. The adoption of these standards is expected to reduce the
amortization of intangible assets commencing January 1, 2002. Goodwill will be
reviewed for impairment on a periodic basis.
Goodwill represents the excess of cost over the value of net tangible and other
intangible assets acquired in business combinations. Goodwill acquired under
business combinations completed prior to June 30, 2001 has been amortized using
the straight-line method over its estimated useful life, principally 40 years.
Goodwill acquired under business combinations completed after June 30, 2001 has
not been amortized. Intangible assets with finite lives, acquired under
business combinations, are amortized using the straight-line method over
estimated useful lives, principally five to 15 years. Intangible assets with
indefinite lives, acquired under business combinations have not been amortized.
34
Long-lived assets
Long-lived assets, including goodwill and other intangible assets have been
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be fully recoverable. If such a change in
circumstances occurs, the related estimated future undiscounted cash flows
expected to result from the use of the asset and its eventual disposition, are
compared to the carrying amount. If the sum of the expected cash flows is less
than the carrying amount, the company records an impairment loss. The
impairment loss is measured as the amount by which the carrying amount exceeds
the fair value of the asset.
Commencing January 1, 2002, goodwill will be reviewed for impairment in
accordance with the provisions of FAS No. 142. In August 2001, FAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," was issued,
replacing FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." FAS No. 144 provides a single
accounting model for long-lived assets to be disposed of and changes the
criteria that would have to be met to classify an asset as held-for-sale. FAS
No. 144 is effective January 1, 2002 for the company. The company is currently
evaluating the impact of this statement.
Revenue
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," summarizing certain guidance in applying generally accepted
accounting principles to revenue recognition in financial statements. The
company adopted the provisions of SAB No. 101 in the fourth quarter of 2000,
retroactive to January 1, 2000. The adoption of SAB No. 101 resulted in a
one-time cumulative after-tax reduction in net income of $4.7 million (net of
taxes of approximately $3.1 million) in the first quarter of 2000. The
reduction to net income was primarily attributable to the deferral of sales of
software-enabled mail creation equipment and shipping products until
installation has occurred. The change in accounting had no material impact on
quarterly results, and as a result, quarterly information was not restated. The
pro forma effect of retroactive application of this new method of accounting
did not materially affect the results of operations for the years ended
December 31, 2000 and 1999.
Revenue is recognized when earned. Sales revenue is recognized when the risks
of ownership have been transferred to the buyer, which is generally when
shipped. Sales revenue from customized equipment and software, including
software-enabled mail creation equipment and shipping products, is generally
recognized when installed. Sales revenue from sales type leases is generally
recognized at the inception of the lease. We recognize revenue from our sales
of management services over the term of the contract. Sales revenue includes
all revenues from PBMS which were $821 million, $612 million and $576 million
in 2001, 2000 and 1999, respectively. Cost of sales attributable to PBMS was
$660 million, $495 million and $466 million in 2001, 2000 and 1999,
respectively. Support services revenue is primarily recognized over the term of
the service contract or as services are rendered.
Costs and expenses
Operating expenses of field sales and service offices are included in selling,
service and administrative expenses because no meaningful allocation of such
expenses to cost of sales, rentals and financing or support services is
practicable.
Income taxes
The deferred tax provision is determined under the liability method. Deferred
tax assets and liabilities are recognized based on differences between the book
and tax bases of assets and liabilities using currently enacted tax rates. The
provision for income taxes is the sum of the amount of income tax paid or
payable for the year as determined by applying the provisions of enacted tax
laws to the taxable income for that year and the net change during the year in
the company's deferred tax assets and liabilities.
Deferred taxes on income result principally from expenses not currently
recognized for tax purposes, the excess of tax over book depreciation,
recognition of lease income and gross profits on sales to finance subsidiaries.
For tax purposes, income from leases is recognized under the operating method
and represents the difference between gross rentals billed and depreciation
expense.
It has not been necessary to provide for income taxes on $289 million of
cumulative undistributed earnings of subsidiaries outside the U.S. These
earnings will be either indefinitely reinvested or remitted substantially free
of additional tax. Determination of the liability that would result in the
event all of these earnings were remitted to the U.S. is not practicable. It is
estimated, however, that withholding taxes on such remittances would
approximate $11 million.
35
Nonpension postretirement benefits and postemployment benefits
It is the company's practice to fund amounts for nonpension postretirement and
postemployment benefits as incurred. See Note 11 to the consolidated financial
statements.
Earnings per share
Basic earnings per share is based on the weighted average number of common
shares outstanding during the year, whereas diluted earnings per share also
gives effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares include preference stock,
preferred stock and stock option and purchase plan shares.
Translation of Non-U.S. currency amounts
Assets and liabilities of subsidiaries operating outside the U.S. are
translated at rates in effect at the end of the period and revenues and
expenses are translated at average rates during the period. Net deferred
translation gains and losses are included in accumulated other comprehensive
income in stockholders' equity.
Derivative instruments
The company adopted the provisions of Statement of Financial Accounting
Standards (FAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by FAS No. 138, in the first quarter of 2001. The
adoption of FAS No. 133 has resulted in an after-tax reduction to accumulated
other comprehensive income of $7.0 million, including a one-time cumulative
effect of accounting change which reduced accumulated other comprehensive
income by approximately $9.2 million in the first quarter of 2001. The adoption
of FAS No. 133 has also impacted assets and liabilities recorded on the
Consolidated Balance Sheet. The adoption of FAS No. 133 did not materially
impact results of operations for the year ended December 31, 2001.
In the normal course of business, the company enters into foreign exchange
contracts for purposes other than trading primarily to minimize its risk of
loss from exchange rate fluctuations on the settlement of intercompany
receivables and payables arising in connection with transfers of finished
goods, inventories between affiliates and certain intercompany loans. Foreign
exchange contracts are primarily designated as cash flow hedges and the
resulting gains and losses on these contracts are included in other
comprehensive income. At December 31, 2001, the company had approximately $601
million of foreign exchange contracts outstanding, most of which mature in
2002, to buy or sell various currencies. Risks arise from the possible
non-performance by counterparties in meeting the terms of their contracts and
from movements in securities values, interest and/or exchange rates. However,
the company does not anticipate non-performance by the counterparties as they
are composed of a number of major international financial institutions.
Maximum risk of loss on these contracts is limited to the amount of the
difference between the spot rate at the date of the contract delivery and the
contracted rate.
In the normal course of business, the company uses a variety of derivative
financial instruments, principally interest rate swaps, to manage the impact of
interest rate changes on earnings and cash flows. To qualify for hedge
accounting, the company requires that the instruments are effective in reducing
the risk exposure that they are designed to hedge. For instruments that are
associated with the hedge of an anticipated transaction, hedge effectiveness
criteria also require that it be probable that the underlying transaction will
occur. Instruments that meet these hedging criteria are formally designated as
hedges at the inception of the contract. Derivatives designated as cash flow
hedges include primarily interest rate swaps related to variable-rate debt.
Derivatives designated as fair value hedges include primarily interest rate
swaps related to fixed-rate debt.
All derivative instruments are recognized as either assets or liabilities in
the Consolidated Balance Sheet, measured at fair value. Changes in the fair
value of those instruments are reflected as gains or losses. The accounting for
the gains or losses depends on the intended use of the derivative, the
resulting designation and the effectiveness of the instrument in offsetting the
risk exposure they are designed to hedge.
Reclassification
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform with the current year presentation.
36
2. Inventories
Inventories consist of the following:
December 31 2001 2000
----------- -----------
Raw materials and work in process $ 55,679 $ 67,990
Supplies and service parts 48,498 38,708
Finished products 58,835 61,271
----------- -----------
Total $163,012 $167,969
=========== ===========
If all inventories valued at LIFO had been stated at current costs, inventories
would have been $19.9 million and $14.2 million higher than reported at
December 31, 2001 and 2000, respectively.
3. Fixed assets
December 31 2001 2000
----------- -----------
Land $ 36,246 $ 34,289
Buildings 320,344 298,496
Machinery and equipment 904,512 862,534
----------- -----------
1,261,102 1,195,319
Accumulated depreciation (726,507) (704,007)
----------- -----------
Property, plant and equipment, net $ 534,595 $ 491,312
=========== ===========
Rental equipment and related inventories $1,079,260 $1,218,251
Accumulated depreciation (607,074) (597,410)
----------- -----------
Rental equipment and related inventories, net $ 472,186 $ 620,841
=========== ===========
Property leased under capital leases $ 19,240 $ 19,059
Accumulated amortization (17,751) (16,756)
----------- -----------
Property leased under capital leases, net $ 1,489 $ 2,303
=========== ===========
Depreciation expense was $290.6 million, $294.7 million and $285.3 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
4. Current liabilities
Accounts payable and accrued liabilities and notes payable and current portion
of long-term obligations are comprised as follows:
December 31 2001 2000
----------- -----------
Accounts payable-trade $ 401,711 $ 254,425
Reserve account deposits 300,107 141,255
Accrued salaries, wages and commissions 163,000 121,497
Accrued restructuring charges 54,775 -
Finance lease advances 80,543 -
Accrued pension benefits - 26,353
Accrued nonpension postretirement benefits 15,500 15,500
Accrued postemployment benefits 6,700 6,900
Miscellaneous accounts payable and accrued
liabilities 403,473 429,353
----------- -----------
Accounts payable and accrued liabilities $1,425,809 $ 995,283
=========== ===========
Notes payable $ 865,240 $ 798,963
Current portion of long-term debt 205,260 477,267
Current portion of capital lease obligations 1,557 1,711
----------- -----------
Notes payable and current portion of
long-term obligations $1,072,057 $1,277,941
=========== ===========
In countries outside the U.S., banks generally lend to non-finance subsidiaries
of the company on an overdraft or term-loan basis. These overdraft arrangements
and term-loans, for the most part, are extended on an uncommitted basis by
banks and do not require compensating balances or commitment fees.
37
Notes payable were issued as commercial paper, loans against bank lines of
credit, or to trust departments of banks and others at below prevailing prime
rates. Fees paid to maintain lines of credit were $.6 million in 2001, $.8
million in 2000, and $1.0 million in 1999.
At December 31, 2001, U.S. notes payable totaled $865.2 million. Unused credit
facilities outside the U.S. totaled $24.3 million at December 31, 2001, of
which $19.7 million were for finance operations. In the U.S., the company,
together with its financial service businesses, had unused credit facilities of
$1.5 billion at December 31, 2001, largely in support of commercial paper
borrowings. The weighted average interest rates were 1.8% and 6.5% on notes
payable and overdrafts outstanding at December 31, 2001 and 2000, respectively.
The company periodically enters into interest rate swap agreements as a means
of managing interest rate risk on both its U.S. and non-U.S. debt. The
interest differential to be paid or received is recognized over the life of the
agreements as an adjustment to interest expense. The company is exposed to
credit losses in the event of non-performance by swap counterparties to the
extent of the difference between the fixed and variable rates; such risk is
considered minimal.
The company has entered into interest rate swap agreements primarily through
Pitney Bowes Credit Corporation (PBCC), a wholly-owned subsidiary of the
company. It has been the policy and objective of the company to use a balanced
mix of debt maturities, variable and fixed rate debt and interest rate swap
agreements to manage interest rate risk. The company's variable and fixed rate
debt mix, after adjusting for the effect of interest rate swap agreements, was
42% and 58%, respectively, at December 31, 2001. The company utilizes interest
rate swap agreements when it considers the economic benefits to be favorable.
At December 31, 2001, the company had outstanding interest rate swap agreements
with notional principal amounts of $594.4 million and terms expiring at various
dates from 2002 to 2009. The company exchanged $244.4 million notional
principal amounts of variable commercial paper rates on an equal notional
amount of notes payable and overdrafts for fixed rates ranging from 5.5% to
8.9%. In addition, the company exchanged $350.0 million notional principal
amounts of fixed rate debt on an equal notional amount of variable rate debt.
The variable rates for the swaps are based on six month LIBOR plus a spread,
equal to the difference between the fixed rate of the debt and the fixed rate
currently available for similar debt.
Finance lease advances represent a short-term interest in direct finance leases
in our Capital Services segment.
Current liabilities of IGI have been classified in net assets of discontinued
operations at December 31, 2000 (See Note 12).
38
5. Long-term debt
December 31 2001 2000
------------ ------------
Non-financial services debt:
5.50% notes due 2004 $ 200,000 $ 200,000
2.22% to 6.84% notes due 2004 150,000 150,000
5.95% notes due 2005 300,000 300,000
5.88% notes due 2006 300,000 -
Financial services debt:
Senior notes:
6.63% notes due 2002 - 100,000
6.73% notes due 2002 - 100,000
5.65% notes due 2003 250,000 250,000
7.44% notes due 2003 134,000 134,000
8.80% notes due 2003 150,000 150,000
6.93% notes due 2004 100,000 100,000
5.75% notes due 2008 350,000 -
8.63% notes due 2008 100,000 100,000
9.25% notes due 2008 100,000 100,000
8.55% notes due 2009 150,000 150,000
7.51% notes due 2002 thru 2012 38,993 40,819
7.24% notes due 2017 53,175 -
Fair value hedges basis adjustment 31,043 -
Other 11,939 7,128
------------ ------------
Total long-term debt $2,419,150 $1,881,947
============ ============
On February 20, 2002, the company completed an offering of Euros 250 million of
senior unsecured notes. These notes bear interest at a floating rate of EURIBOR
plus 20 basis points, set two Euro business days preceding the quarterly
interest payment dates and mature in August 2003. The notes are listed on the
Luxembourg Stock Exchange and have been designated as a hedge of Euro
denominated assets held by the company. The proceeds from these notes will be
used for general corporate purposes which may include repaying commercial
paper, financing acquisitions and the repurchase of company stock.
In October 2001, Pitney Bowes Inc. filed a shelf registration statement with
the SEC permitting issuances of up to $2 billion in debt securities, preferred
stock and depositary shares, all of which remained available at December 31,
2001.
In April 2001, the company issued the remaining $300 million of notes available
under a prior shelf registration, permitting issuances of up to $500 million in
debt securities (including medium-term notes) with a minimum maturity of nine
months. These unsecured notes bear annual interest at 5.875% and mature in May
2006. The proceeds were used for general corporate purposes, including the
repayment of commercial paper, financing acquisitions and the repurchase of the
company's stock.
PBCC has $75 million of unissued debt securities available at December 31, 2001
from a shelf registration statement filed with the SEC in July 1998. As part of
this shelf registration statement, in August 1999, PBCC established a
medium-term note program for the issuance from time to time of up to $500
million aggregate principal amount of Medium-Term Notes, Series D. In August
2001, PBCC issued $350 million of unsecured fixed rate notes maturing in August
2008. These notes bear interest at an annual rate of 5.75% and pay interest
semi-annually beginning February 15, 2002. The proceeds from these notes were
used for general corporate purposes, including the repayment of commercial
paper.
39
In July 2001, PBCC issued four non-recourse promissory notes totaling $111.5
million in connection with four lease transactions. The promissory notes are
all due in installments over 194 months at an interest rate of 7.24%. In
September 2001, PBCC sold its interest in two of the lease transactions and
transferred the obligation on two of the non-recourse promissory notes totaling
$55.3 million in principal balance. Two non-recourse promissory notes remain
outstanding at December 31, 2001 with a total principal balance of $54.9
million. These notes are serviced by the underlying lease transaction payments.
The annual maturities of the outstanding debt during each of the next five
years are as follows: 2002, $205.3 million; 2003, $572.6 million; 2004, $455.0
million; 2005, $305.4 million; 2006, $305.4 million; and $780.7 million
thereafter.
Under terms of their senior and subordinated loan agreements, certain of the
finance operations are required to maintain earnings before taxes and interest
charges at prescribed levels. With respect to such loan agreements, the company
will endeavor to have these finance operations maintain compliance with such
terms and, under certain loan agreements, is obligated, if necessary, to pay to
these finance operations amounts sufficient to maintain a prescribed ratio of
earnings available for fixed charges. The company has not been required to make
any such payments to maintain earnings available for fixed charges coverage.
The fair value hedges basis adjustment represents the revaluation of fixed
rate debt that has been hedged in accordance with FAS No. 133 (see Note 1).
6. Preferred stockholders' equity in a subsidiary company
Preferred stockholders' equity in a subsidiary company represents 3,000,000
shares of variable term voting preferred stock issued by Pitney Bowes
International Holdings, Inc., a subsidiary of the company, which are owned by
certain outside institutional investors. These preferred shares are entitled to
25% of the combined voting power of all classes of capital stock. All
outstanding common stock of Pitney Bowes International Holdings, Inc.,
representing the remaining 75% of the combined voting power of all classes of
capital stock, is owned directly or indirectly by Pitney Bowes Inc. The
preferred stock, $.01 par value, is entitled to cumulative dividends at rates
set at auction. The weighted average dividend rate in 2001 and 2000 was 3.3%
and 4.7%, respectively. Preferred dividends are reflected in the Consolidated
Statements of Income in selling, service and administrative expenses. The
preferred stock is subject to mandatory redemption based on certain events, at
a redemption price not less than $100 per share, plus the amount of any
dividends accrued or in arrears. No dividends were in arrears at December 31,
2001 or 2000.
In 1998, the company sold 100 shares of 9.11% Cumulative Preferred Stock,
mandatorily redeemable in 20 years, in a subsidiary company to an institutional
investor for approximately $10 million.
7. Capital stock and capital in excess of par value
At December 31, 2001, 480,000,000 shares of common stock, 600,000 shares of
cumulative preferred stock, and 5,000,000 shares of preference stock were
authorized, and 242,028,346 shares of common stock (net of 81,309,566 shares of
treasury stock), 488 shares of 4% Convertible Cumulative Preferred Stock (4%
preferred stock) and 59,175 shares of $2.12 Convertible Preference Stock ($2.12
preference stock) were issued and outstanding. In the future, the Board of
Directors can issue the balance of unreserved and unissued preferred stock
(599,512 shares) and preference stock (4,940,825 shares). This will determine
the dividend rate, terms of redemption, terms of conversion (if any) and other
pertinent features. At December 31, 2001, unreserved and unissued common stock
(exclusive of treasury stock) amounted to 117,117,840 shares.
The 4% preferred stock outstanding, entitled to cumulative dividends at the
rate of $2 per year, can be redeemed at the company's option, in whole or in
part at any time, at the price of $50 per share, plus dividends accrued to the
redemption date. Each share of the 4% preferred stock can be converted into
24.24 shares of common stock, subject to adjustment in certain events.
The $2.12 preference stock is entitled to cumulative dividends at the rate of
$2.12 per year and can be redeemed at the company's option at the rate of $28
per share. Each share of the $2.12 preference stock can be converted into 16.53
shares of common stock, subject to adjustment in certain events.
At December 31, 2001, a total of 989,992 shares of common stock were reserved
for issuance upon conversion of the 4% preferred stock (11,829 shares) and
$2.12 preference stock (978,163 shares). In addition, 1,836,846 shares of
common stock were reserved for issuance under the company's dividend
reinvestment and other corporate plans.
Each share of common stock outstanding has attached one preference share
purchase right. Each right entitles each holder to purchase 1/200th of a share
of Series A Junior Participating Preference Stock for $97.50 and will expire in
February 2006. Following a merger or certain other transactions, the rights
will entitle the holder to purchase common stock of the company or the
acquirers at a 50% discount.
40
8. Stock plans
The company has the following stock plans which are described below: the U.S.
and U.K. Stock Option Plans (ESP), the U.S. and U.K. Employee Stock Purchase
Plans (ESPP), and the Directors' Stock Plan.
The company adopted FAS No. 123, "Accounting for Stock-Based Compensation," on
January 1, 1996. Under FAS No. 123, companies can, but are not required to,
elect to recognize compensation expense for all stock-based awards using a fair
value methodology. The company has adopted the disclosure-only provisions, as
permitted by FAS No. 123. The company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock-based
plans. Accordingly, no compensation expense has been recognized for the ESP or
the ESPP, except for the compensation expense recorded for its
performance-based awards under the ESP and the Directors' Stock Plan as
discussed herein. If the company had elected to recognize compensation expense
based on the fair value method as prescribed by FAS No. 123, net income and
earnings per share for the years ended 2001, 2000 and 1999 would have been
reduced to the following pro forma amounts:
2001 2000 1999
------------- ------------- --------------
Net Income
As reported $488,343 $622,546 $636,212
Pro forma $462,806 $597,799 $619,625
Basic earnings per share
As reported $1.99 $2.43 $2.38
Pro forma $1.88 $2.33 $2.32
Diluted earnings per share
As reported $1.97 $2.41 $2.34
Pro forma $1.87 $2.31 $2.28
------------- ------------- --------------
In accordance with FAS No. 123, the fair value method of accounting has not
been applied to awards granted prior to January 1, 1995. Therefore, the
resulting pro forma impact may not be representative of that to be expected in
future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
2001 2000 1999
------------- ------------- --------------
Expected dividend yield 3.0% 2.9% 2.0%
Expected stock price volatility 29% 27% 21%
Risk-free interest rate 4% 6% 6%
Expected life (years) 5 5 5
Stock Option Plans
Under the company's stock option plans, certain officers and employees of the
U.S. and the company's participating subsidiaries are granted options at prices
equal to the market value of the company's common shares at the date of grant.
Options generally become exercisable in three equal installments during the
first three years following their grant and expire after ten years. In 1999 the
plans were amended to allow options granted on or after January 1, 1999 to be
fully vested to optionees (or their beneficiaries) in certain events. In
addition, the U.S. stock option plan was amended to permit optionees to gift
vested options to family members, trusts or partnerships. At December 31,
2001, there were 8,499,195 options available for future grants under these
plans. The per share weighted average fair value of options granted was $9 in
2001, $9 in 2000, and $15 in 1999.
41
The following table summarizes information about stock option transactions:
Per share
weighted
average
Shares exercise price
------------ ---------------
Options outstanding at January 1, 1999 7,385,003 $33
Granted 3,288,716 $65
Exercised (967,657) $21
Canceled (208,065) $52
------------ ---------------
Options outstanding at December 31, 1999 9,497,997 $45
Granted 9,372,320 $35
Exercised (812,122) $21
Canceled (670,477) $55
------------ ---------------
Options outstanding at December 31, 2000 17,387,718 $40
Granted 1,875,132 $38
Exercised (406,521) $23
Canceled (699,421) $41
------------ ---------------
Options outstanding at November 30, 2001 18,156,908 $40
Spin-off of Imagistics International Inc. 332,740 $39
Granted 72,612 $40
Exercised (32,162) $27
Canceled (112,145) $39
------------ ---------------
Options Outstanding at December 31, 2001 18,417,953 $39
============ ===============
Options exercisable at December 31, 1999 3,790,291 $29
============ ===============
Options exercisable at December 31, 2000 5,420,101 $39
============ ===============
Options exercisable at December 31, 2001 8,255,635 $43
============ ===============
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2001:
Options Outstanding
--------------------------------------------------------------------------------------------
Range of per share Weighted average Per share weighted
exercise prices Number remaining contractual life average exercise price
----------------------- --------------- --------------------------- -----------------------
$12-$18 378,645 3.1 years $16
$19-$28 7,401,521 8.1 years $27
$29-$43 2,649,023 9.6 years $37
$44-$66 7,988,764 8.0 years $52
--------------- ---------------------------
18,417,953 8.2 years
=============== ===========================
Options Exercisable
-------------------------------------------------------------------
Range of per share Per share weighted
exercise prices Number average exercise price
----------------------- ---------------- --------------------------
$12-$18 378,645 $16
$19-$28 2,172,324 $26
$29-$43 354,360 $38
$44-$66 5,350,306 $52
----------------
8,255,635
================
Beginning in 1997, certain employees eligible for performance-based
compensation may defer up to 100% of their annual awards, subject to the terms
and conditions of the Pitney Bowes Deferred Incentive Savings Plan.
Participants may allocate deferred compensation among specified investment
choices, including stock options under the U.S. stock option plan. Stock
options acquired under this plan are generally exercisable three years
following their grant and expire after a period not to exceed ten years. There
were 372,829, 285,289, and 220,647 options outstanding under this plan at
December 31, 2001, 2000, and 1999, respectively, which are included in
outstanding options under the company's U.S. stock option plan. The per share
weighted average fair value of options granted was $8 in 2001, $12 in 2000, and
$16 in 1999.
42
The U.S. stock option plan permits the issuance of restricted stock.
Restricted stock awards are subject to both tenure and financial performance
over three years. The restrictions on the shares are released, in total or in
part, only if the executive is still employed by the company at the end of the
performance period and if the performance objectives are achieved. The
compensation expense for each award is recognized over the performance period.
There were no restricted stock awards in 2001, 2000, and 1999.
Employee Stock Purchase Plans
The U.S. ESPP enables substantially all employees to purchase shares of the
company's common stock at a discounted offering price. In 2001, the offering
price was 85% of the average price of the company's common stock on the New York
Stock Exchange on the offering date. At no time will the exercise price be less
than the lowest price permitted under Section 423 of the Internal Revenue Code.
The U.K. ESPP also enables eligible employees of the company's participating
U.K. subsidiaries to purchase shares of the company's stock at a discounted
offering price. In 2001, the offering price was 90% of the average closing price
of the company's common stock on the New York Stock Exchange for the three
business days preceding the offering date. The company may grant rights to
purchase up to 9,074,687 common shares to its regular employees under these
plans. The company granted rights to purchase 542,309 shares in 2001, 758,741
shares in 2000, and 1,016,480 shares in 1999. The per share fair value of rights
granted was $6 in 2001, $9 in 2000, and $11 in 1999 for the U.S. ESPP and $11 in
2001, $10 in 2000, and $17 in 1999 for the U.K. ESPP.
Directors' Stock Plan
Under this plan, each non-employee director is granted 1,400 shares of
restricted common stock annually as part of their compensation. Shares granted
at no cost to the directors were 14,176 in 2001, 13,475 in 2000, and 12,600 in
1999. Compensation expense net of taxes recorded by the company was $345,000,
$320,000, and $520,000 for 2001, 2000, and 1999, respectively. The shares
carry full voting and dividend rights but, except as provided herein, may not
be transferred or alienated until the later of (1) termination of service as a
director, or, if earlier, the date of a change of control, or (2) the
expiration of the six month period following the grant of such shares. In
1999, the Directors' Stock Plan was amended to permit certain dispositions of
restricted common stock to family members, trusts or partnerships, as well as
donations to charity after the expiration of the six month holding period,
provided the director retain restricted common stock with a minimum market
value of $350,000. The per share weighted average fair value of shares granted
was $29 in 2001, $30 in 2000, and $57 in 1999.
Beginning in 1997, non-employee directors may defer up to 100% of their
eligible compensation, subject to the terms and conditions of the Pitney Bowes
Deferred Incentive Savings Plan for directors. Participants may allocate
deferred compensation among specified investment choices, including stock
options under the Directors' Stock Plan. Stock options acquired under this plan
are generally exercisable three years following their grant and expire after a
period not to exceed ten years. There were 35,598, 18,136, and 8,823 options
outstanding under this plan at December 31, 2001, 2000, and 1999, respectively.
The per share weighted average fair value of options granted was $9 in 2001,
$10 in 2000, and $14 in 1999.
43
9. Earnings per share
A reconciliation of the basic and diluted earnings per share computations for
income from continuing operations for the years ended December 31, 2001, 2000,
and 1999 is as follows:
2001
-------------------------------------------
Income Shares Per Share
---------- --------------- --------------
Income from continuing operations $514,320
Less:
Preferred stock dividends (1)
Preference stock dividends (129)
---------- --------------- --------------
Basic earnings per share 514,190 245,706,283 $2.09
---------- --------------- --------------
Effect of dilutive securities:
Preferred stock 1 12,761
Preference stock 129 976,570
Stock options 756,927
Other 163,019
---------- --------------- --------------
Diluted earnings per share $514,320 247,615,560 $2.08
========== =============== ==============
2000
-------------------------------------------
Income Shares Per Share
---------- --------------- --------------
Income from continuing operations $563,125
Less:
Preferred stock dividends (1)
Preference stock dividends (139)
---------- --------------- --------------
Basic earnings per share 562,985 256,549,114 $2.20
---------- --------------- --------------
Effect of dilutive securities:
Preferred stock 1 14,253
Preference stock 139 1,058,897
Stock options 869,322
Other 110,632
---------- --------------- --------------
Diluted earnings per share $563,125 258,602,218 $2.18
---------- --------------- --------------
1999
-------------------------------------------
Income Shares Per Share
---------- --------------- --------------
Income from continuing operations $562,990
Less:
Preferred stock dividends (1)
Preference stock dividends (150)
---------- --------------- --------------
Basic earnings per share 562,839 267,504,030 $2.11
---------- --------------- --------------
Effect of dilutive securities:
Preferred stock 1 15,185
Preference stock 150 1,143,691
Stock options 3,008,359
Other 334,878
---------- --------------- --------------
Diluted earnings per share $562,990 272,006,143 $2.07
---------- --------------- --------------
In accordance with FAS No. 128, "Earnings per Share," the common stock
equivalent shares issuable upon the exercise of stock options which were not
included in the calculation were 2.7 million, 6.6 million and 1.5 million in
2001, 2000 and 1999, respectively, because they were antidilutive.
44
10. Taxes on income
Income from continuing operations before income taxes and the provision for
income taxes consist of the following:
Years ended December 31
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Income from continuing operations before income taxes:
U.S. $698,005 $679,734 $713,863
Outside the U.S. 68,379 123,114 110,079
----------- ----------- -----------
Total $766,384 $802,848 $823,942
=========== =========== ===========
Provision for income taxes:
U.S. federal:
Current $147,538 $ 31,609 $114,066
Deferred 67,227 172,639 72,927
----------- ----------- -----------
214,765 204,248 186,993
----------- ----------- -----------
U.S. state and local:
Current 19,739 5,029 30,557
Deferred 5,448 (4,632) 7,997
----------- ----------- -----------
25,187 397 38,554
----------- ----------- -----------
Outside the U.S.:
Current 13,549 18,748 29,592
Deferred (1,437) 16,330 5,813
----------- ----------- -----------
12,112 35,078 35,405
----------- ----------- -----------
Total current 180,826 55,386 174,215
Total deferred 71,238 184,337 86,737
----------- ----------- -----------
Total $252,064 $239,723 $260,952
=========== =========== ===========
Including discontinued operations, the provision for income taxes consists of
the following:
Years ended December 31
-------------------------------------
2001 2000 1999
----------- ----------- -----------
U.S. federal $209,240 $236,872 $223,699
U.S. state and local 23,895 8,173 47,460
Outside the U.S. 6,760 37,065 38,049
----------- ----------- -----------
Total $239,895 $282,110 $309,208
=========== =========== ===========
A reconciliation of the U.S. federal statutory rate to the company's effective
tax rate for continuing operations follows:
2001 2000 1999
---------- ----------- -----------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes 2.2 0.1 3.0
Foreign tax differential (1.6) (1.0) (0.4)
Partnership leasing transactions (2.5) (3.2) (3.2)
Other (0.2) (1.0) (2.7)
---------- ----------- -----------
Effective income tax rate 32.9% 29.9% 31.7%
========== =========== ===========
The effective tax rate for discontinued operations in 2001, 2000 and 1999
differs from the statutory rate due primarily to foreign, state and local
income taxes.
45
Deferred tax liabilities and (assets)
December 31 2001 2000
-------------- -------------
Deferred tax liabilities:
Depreciation $ 139,787 $ 118,036
Deferred profit (for tax purposes) on
sales to finance subsidiaries 438,120 449,306
Lease revenue and related depreciation 1,074,333 995,698
Loss on the sale of preferred stock 102,005 99,781
Other 198,910 159,025
-------------- -------------
Deferred tax liabilities 1,953,155 1,821,846
-------------- -------------
Deferred tax assets:
Nonpension postretirement benefits (95,976) (101,750)
Inventory and equipment capitalization (36,292) (34,900)
Meter transition and restructuring charges (79,203) (4,704)
Net operating loss carryforwards (37,018) (27,309)
Other (213,456) (199,945)
Valuation allowance 23,823 24,949
-------------- -------------
Deferred tax assets (438,122) (343,659)
-------------- -------------
Net deferred taxes $1,515,033 $1,478,187
Less: Current net deferred taxes (a) 241,440 251,590
-------------- -------------
Deferred taxes on income $1,273,593 $1,226,597
============== =============
(a) The table of deferred tax liabilities and (assets) above includes $241.4
million and $251.6 million for 2001 and 2000, respectively, of current net
deferred taxes, which are included in income taxes payable in the
Consolidated Balance Sheets.
The increase in the deferred tax asset for net operating loss carryforwards was
mainly due to the foreign and domestic acquisitions. The decrease in the
related valuation allowance was mainly due to the realization of foreign tax
loss carryforwards in Germany and Australia. At December 31, 2001 and 2000
approximately $87.2 million and $69.1 million, respectively, of net operating
loss carryforwards were available to the company. Most of these losses can be
carried forward indefinitely.
46
11. Retirement plans and nonpension postretirement benefits
The company has several defined benefit and defined contribution pension plans
covering substantially all employees worldwide. Benefits are primarily based
on employees' compensation and years of service. Company contributions are
determined based on the funding requirements of U.S. federal and other
governmental laws and regulations.
The company contributed $19.8 million, $21.0 million and $19.7 million to its
defined contribution plans in 2001, 2000 and 1999, respectively.
The change in benefit obligations and plan assets and the funded status for
defined benefit pension plans is as follows:
Pension Benefits
---------------------------------------------------------------------------
United States Foreign
---------------------------------- ------------------------------------
December 31 2001 2000 2001 2000
---------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligations at beginning of year $1,046,967 $ 996,572 $233,918 $210,412
Service cost 26,734 24,937 6,391 5,668
Interest cost 79,379 76,064 13,530 11,967
Amendments - - 209 1,711
Plan participants contribution - - 1,116 3,231
Actuarial loss 46,307 40,204 809 26,399
Foreign currency changes - - (8,464) (15,213)
Curtailment 4,661 - - -
Benefits paid (83,819) (90,810) (10,648) (10,257)
---------------------------------- ------------------------------------
Benefit obligations at end of year $1,120,229 $1,046,967 $236,861 $233,918
================================== ====================================
Change in plan assets:
Fair value of plan assets at beginning of year $1,179,373 $1,339,387 $244,860 $230,975
Actual return on plan assets (82,348) (71,256) (25,212) 30,623
Company contribution 34,835 2,052 5,524 6,135
Plan participants contribution - - 1,116 3,231
Foreign currency changes - - (8,956) (15,847)
Benefits paid (83,819) (90,810) (10,439) (10,257)
---------------------------------- ------------------------------------
Fair value of plan assets at end of year $1,048,041 $1,179,373 $206,893 $244,860
================================== ====================================
Funded status $ (72,188) $ 132,406 $(29,967) $ 10,941
Unrecognized actuarial loss (gain) 126,433 (107,262) 47,129 4,994
Unrecognized prior service cost (29,405) (38,752) 3,364 4,195
Unrecognized transition cost 4 80 (2,534) (4,018)
---------------------------------- ------------------------------------
Prepaid (accrued) benefit cost $ 24,844 $ (13,528) $ 17,992 $ 16,112
================================== ====================================
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost $ 60,334 $ 22,390 $ 23,568 $ 22,365
Accrued benefit liability (35,490) (35,918) (5,576) (6,253)
Additional minimum liability (2,223) (3,186) (265) (604)
Intangible asset 2,223 3,186 265 604
---------------------------------- ------------------------------------
Prepaid (accrued) benefit cost $ 24,844 $ (13,528) $ 17,992 $ 16,112
================================== ====================================
Weighted average assumptions:
Discount rate 7.25% 7.50% 2.5%-6.5% 3.0%-7.0%
Expected return on plan assets 9.55% 9.55% 4.0%-8.3% 4.0%-8.3%
Rate of compensation increase 4.75% 4.75% 2.0%-4.0% 2.0%-4.5%
At December 31, 2001, no shares of the company's common stock were included in
the plan assets of the company's pension plan.
47
The company provides certain health care and life insurance benefits to
eligible retirees and their dependents. The cost of these benefits are
recognized over the period the employee provides credited service to the
company. Substantially all of the company's U.S. and Canadian employees become
eligible for retiree health care benefits after reaching age 55 and with the
completion of the required service period. Postemployment benefits include
primarily company-provided medical benefits to disabled employees and
company-provided life insurance as well as other disability and death-related
benefits to former or inactive employees, their beneficiaries and covered
dependents.
The change in benefit obligations and plan assets and the funded status for
nonpension postretirement benefit plans is as follows:
Nonpension Postretirement Benefits
----------------------------------------
December 31 2001 2000
----------------------------------------
Change in benefit obligation:
Benefit obligations at beginning of year $ 279,216 $ 264,770
Service cost 5,450 6,952
Interest cost 17,319 17,948
Plan participants' contributions 2,210 1,969
Actuarial loss 16,187 15,624
Foreign currency changes (292) (212)
Curtailment (3,297) -
Benefits paid (30,702) (26,933)
Plan amendments - (902)
-------------------- -----------------
Benefit obligations at end of year $ 286,091 $ 279,216
==================== =================
Change in plan assets:
Fair value of plan assets at beginning of year $ - $ -
Company contribution 28,492 24,964
Plan participants' contributions 2,210 1,969
Benefits paid (30,702) (26,933)
-------------------- -----------------
Fair value of plan assets at end of year $ - $ -
==================== =================
Funded status $(286,091) $(279,216)
Unrecognized actuarial loss 13,822 433
Unrecognized prior service cost (20,070) (28,378)
-------------------- -----------------
Accrued benefit cost $(292,339) $(307,161)
==================== =================
The assumed weighted average discount rate used in determining the accumulated
postretirement benefit obligations was 7.25% in 2001 and 7.50% in 2000.
The components of the net periodic benefit cost for defined pension plans and
nonpension postretirement benefit plans are as follows:
Pension Benefits
----------------------------------------------------------------------------------------
United States Foreign
------------------------------------------- -------------------------------------------
2001 2000 1999 2001 2000 1999
------------- ------------- ------------- ------------- ------------- -------------
Service cost $ 26,734 $24,937 $24,863 $6,391 $ 5,668 $ 5,770
Interest cost 79,379 76,064 73,340 13,530 11,967 12,171
Expected return on plan assets (105,311) (97,577) (87,845) (17,856) (16,410) (15,936)
Amortization of transition cost 76 (3,179) (3,179) (1,335) (1,482) (1,555)
Amortization of prior service cost (3,583) (3,784) (3,784) 840 1,359 1,601
Recognized net actuarial loss 478 331 854 18 578 1,716
Curtailment (1,103) - - 336 - -
------------- ------------- ------------- ------------- ------------- -------------
Net periodic benefit cost $ (3,330) $(3,208) $ 4,249 $1,924 $ 1,680 $ 3,767
============= ============= ============= ============= ============= =============
48
Nonpension Postretirement Benefits
-------------------------------------------
2001 2000 1999
------------ ------------ -------------
Service cost $ 5,450 $ 6,952 $ 9,003
Interest cost 17,319 17,948 15,733
Amortization of prior service cost (7,060) (7,192) (12,972)
Recognized net actuarial loss 18 73 41
Curtailment (4,535) - -
------------ ------------ -------------
Net periodic benefit cost $ 11,192 $17,781 $ 11,805
============ ============ =============
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations was 10.00% in 2002 and 7.00% in 2001. This
was assumed to gradually decline to 5.00% by the year 2007 and remain at that
level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1- Percentage-Point 1- Percentage-Point
Increase Decrease
------------------- -------------------
Effect on total of service and interest cost
components $ 950 $ 907
Effect on postretirement benefit obligation $12,461 $11,878
The curtailment gains and losses are related to the spin-off of IGI.
12. Discontinued Operations
On December 3, 2001, the company completed the spin off of its office
systems business to stockholders as an independent, publicly-traded company
operating under the name of Imagistics International Inc. (IGI). On that date,
the company paid a special stock dividend of IGI common stock to the company's
common shareholders. Through this special dividend, the company distributed
100% of the shares of IGI stock to common shareholders of the company. The
historical carrying amount of the IGI net assets distributed to shareholders on
the spin-off date has been recorded as a stock dividend of $311.7 million. Each
eligible common stockholder of record of the company on November 19, 2001
received 0.08 shares of IGI stock for each share of Pitney Bowes stock. The
Internal Revenue Service has notified the company that the spin-off will be tax
free as provided for under the Internal Revenue Code. The company received a
net amount of approximately $111 million in cash from IGI after repayment of
certain amounts due and a dividend. Operating results of IGI, prior to the spin
off, have been segregated and reported as discontinued operations in the
Consolidated Statements of Income. Revenue of IGI was $568.0 million, $641.3
million and $621.0 million for the period ended December 3, 2001 and the years
ended December 31, 2000 and 1999, respectively. Net interest expense allocated
to IGI discontinued operations was $10.3 million for the period ended December
3, 2001 and $11.3 million and $8.7 million for the years ended December 31,
2000 and 1999, respectively. Interest has been allocated based on the net
assets of IGI charged at the company's weighted average borrowing rate. Income
from IGI discontinued operations was $9.1 million (net of taxes of $6.2
million) for the period ended December 3, 2001, offset by costs, expenses and
restructuring charges directly associated with the spin-off. The total amounts
of costs, expenses and restructuring charges directly related to the spin-off
exceeded the income from discontinued operations of IGI between the measurement
date (December 11, 2000) and the spin-off date by $26.0 million (net of taxes
of $12.2 million), primarily as a result of continued weakness in the copier
business and the company's restructuring initiatives. This amount has been
reflected as a loss on disposal of discontinued operations in the Consolidated
Statements of Income for the period ended December 31, 2001. Income from
discontinued operations of IGI, net of taxes, was $64.1 million and $96.2
million for the period ended December 11, 2000 and year ended December 31,
1999, respectively.
49
The assets of IGI discontinued operations were separately classified in the
Consolidated Balance Sheet at December 31, 2000. Assets and liabilities of IGI
discontinued operations at December 31, 2000 were as follows:
2000
---------------
Accounts receivable $ 128,289
Inventories 153,247
Net current liabilities (88,518)
---------------
Net current assets $ 193,018
===============
Rental equipment and related inventories, net $ 141,308
Goodwill, net of amortization 53,053
Net other assets 18,002
---------------
Net long-term assets $ 212,363
===============
On January 14, 2000, the company sold Atlantic Mortgage & Investment
Corporation (AMIC), a wholly-owned subsidiary of the company, to ABN AMRO North
America. The company received approximately $484 million in cash at closing. In
connection with the sale, the company recorded a loss of approximately $27.6
million (net of taxes of $18.4 million) for the year ended December 31, 1999.
The transaction is subject to post-closing adjustments. Revenue of AMIC was
$114.9 million for the year ended December 31, 1999. Net interest expense
allocated to AMIC's discontinued operations was $5.6 million for the year ended
December 31, 1999. Interest has been allocated based on AMIC's net
intercompany borrowing levels with PBCC, charged at PBCC's weighted average
borrowing rate, offset by the interest savings PBCC realizes due to borrowings
against AMIC's escrow deposits as opposed to regular commercial paper
borrowings. Operating results of AMIC have been segregated and reported as
discontinued operations in the Consolidated Statement of Income. Income from
discontinued operations for the year ended December 31, 1999 was approximately
$1.0 million.
On October 30, 1998, Colonial Pacific Leasing Corporation (CPLC), a
wholly-owned subsidiary of the company, transferred the operations, employees
and substantially all assets related to its broker-oriented external financing
business to General Electric Capital Corporation (GECC), a subsidiary of the
General Electric Company. The company received approximately $790 million at
closing. In connection with this transaction, the company recorded a gain of
approximately $3.7 million (net of taxes of $2.0 million) for the year ended
December 31, 1999. This gain resulted from the settlement of post-closing
adjustments in 1999 related to the sale, offset by the cost of settlement with
regard to a dispute with GECC over certain assets that were included
in the sale.
Cash flow impacts of discontinued operations have not been segregated in the
Consolidated Statements of Cash Flows.
13. Restructuring Charges
In 2001, the company adopted a formal restructuring plan to implement a common,
streamlined business infrastructure across the corporation as a result of the
company's decisions to spin off its office systems business and align its
mailing business on a global basis, as well as cost saving opportunities
resulting from strategic acquisitions and partnerships, and additional benefits
attained from the consolidation of its IT organization and ERP initiatives. In
connection with this plan, the company recorded pretax restructuring charges of
$149.3 million in 2001, of which $116.1 million was related to continuing
operations and the remaining $33.2 million was related to discontinued
operations. The restructuring charges related to continuing operations have
been segregated in the Consolidated Statements of Income for the year ended
December 31, 2001. The restructuring charges related to discontinued operations
have been reported in discontinued operations in the Consolidated Statements of
Income for the year ended December 31, 2001. See Note 12 to the consolidated
financial statements.
The restructuring charges related to continuing operations are comprised of:
December 31, 2001
(Dollars in millions) -------------------
Severance and benefit costs $ 74.3
Asset impairments 28.0
Other exit costs 13.8
-------------------
$ 116.1
===================
50
All restructuring charges, except for the asset impairments, will result in
cash outflows. The severance and benefit costs relate to a reduction in
workforce of approximately 1,200 employees worldwide which was initiated in
2001 and will be completed over the next six months. The workforce reductions
relate to actions across several of our businesses resulting from
infrastructure and process improvements and our continuing efforts to
streamline operations, and include managerial, professional, clerical and
technical roles. Approximately 80% of the workforce reductions are in the U.S.
The majority of the international workforce reductions are in Europe. None of
the reductions will impact sales coverage. As of December 31, 2001, 692
employees were separated under these initiatives and approximately $34 million
of severance and benefit costs were paid. Asset impairments relate primarily to
the disposal or abandonment of certain hardware and software applications,
resulting from the alignment of our mailing business on a global basis and ERP
initiatives. Other exit costs relate primarily to lease termination costs,
non-cancelable lease payments, and other costs associated with business
activities that have been exited and the consolidation of excess facilities.
The restructuring charges related to discontinued operations are comprised of:
December 31, 2001
(Dollars in millions) --------------------
Severance and benefit costs $ 1.9
Asset impairments 17.5
Other exit costs 13.8
--------------------
$ 33.2
====================
The severance and benefit costs relate to a reduction in workforce of
approximately 25 employees. The asset impairments relate primarily to an
impairment of residual values, in connection with leases of copier equipment,
and the write-down of certain facsimile and copier equipment, resulting from
the spin-off of our office systems business. Other exit costs relate primarily
to incremental costs associated with cancellation and separation of facility
occupancy leases that are shared between the company and IGI.
Accrued restructuring charges at December 31, 2001 consist of the following:
Total restructuring
(Dollars in millions) charges Cash payments Non-cash charges Ending balance
---------------------- --------------- ------------------- ----------------
Severance and benefit costs $ 76.2 $ 34.5 $ - $ 41.7
Asset impairments 45.5 - 45.5 -
Other exit costs 27.6 14.5 - 13.1
---------------------- --------------- ------------------- ----------------
$149.3 $ 49.0 $ 45.5 $ 54.8
====================== =============== =================== ================
We expect that the majority of the remaining cash outflows related to
restructuring charges will take place over the next six months, funded
primarily by cash provided by operating activities. The restructuring charges
are expected to increase our operating efficiency and effectiveness in 2002 and
beyond while enhancing growth, primarily as a result of reduced
personnel-related expenses.
In 2000, the company recorded a one-time pretax charge of approximately $19
million related to the consolidation of information technology staff and
infrastructure. This initiative was focused on creating an efficient global
organization and technology platform to leverage the benefits of our current
ERP and e-business initiatives. The majority of the initiatives and cash
outflows relating to this consolidation, were completed by December 31, 2001.
51
14. Meter Transition
In 2001, the company adopted a formal plan to transition to the next generation
of networked mailing technology. The information capture and exchange, made
possible by advanced technology, turns the postage meter into an "intelligent"
terminal that networks the mailer to postal and carrier information and
systems. This two-way information architecture, in turn, enables convenient
access to and delivery of value-added services such as tracking, delivery
confirmation and rate information. The adoption of this plan was facilitated by
our expanded access to technology and our ability to move to networked products
combined with our expectations that the U.S. and posts around the world will
continue to encourage the migration of mailing systems to networked digital
technologies. As a result of this plan, certain electronic meter rental assets
and related equipment will not be placed back in service. In addition, certain
leased equipment will either not be remarketed or will result in lower
realization at end of lease as a result of the introduction of new technology.
In connection with this plan, the company recorded non-cash pretax charges of
$268.3 million for the year ended December 31, 2001, related to assets
associated with our non-networked mailing technology. In November 2001, postal
regulations were issued, consistent with our meter transition plan, defining
the meter migration process and timing (see Regulatory Matters).
The charges related to the meter transition plan are comprised of:
December 31, 2001
(Dollars in millions) -------------------
Impairment of lease residual values $128.4
Impairment of meter rental assets 71.3
Inventory writedowns 27.6
Additional depreciation costs on meter rental assets 41.0
-------------------
$268.3
===================
15. Acquisitions
Secap SA
On October 31, 2001, the company announced it had completed the acquisition of
Secap SA, the France-based mailing systems subsidiary of Fimalac, for
approximately Euros 220 million ($206 million) in cash. The results of Secap's
operations have been included in the consolidated financial statements since
the date of acquisition. Secap offers a range of mail processing and paper
handling equipment, supplies and technology for low- to mid-volume mailers.
Secap holds more than 30% of the postage meter market share in France. The
results of Secap's operations have been included in the consolidated financial
statements since the date of acquisition.
The following table summarizes the estimated fair values of the major assets
acquired and liabilities assumed at the date of acquisition. The company is in
the process of obtaining third-party valuations of certain intangible assets;
thus, the allocation of the purchase price is preliminary:
Intangible assets $ 112,400
Goodwill 135,229
Other, net (41,202)
-------------
Purchase price $ 206,427
=============
Intangible assets include $56.8 million of finite lived intangible assets
comprising customer relationships valued at $33.9 million, and paper handling
and meter technology valued at $22.9 million. These intangible assets have a
weighted-average useful life of approximately 15 years. The goodwill was
assigned to the Global Mailing segment and has not been amortized.
52
Danka Services International (DSI)
On June 29, 2001, the company completed its acquisition of DSI from Danka
Business Systems PLC for $290 million in cash. DSI provides on- and off-site
document management services, including the management of central reprographic
departments, the placement and maintenance of photocopiers, print-on-demand
operations and document archiving and retrieval services. The acquisition has
been accounted for under the purchase method and accordingly, the operating
results of DSI have been included in the company's consolidated financial
statements since the date of acquisition.
The following table summarizes the estimated fair values of the major assets
acquired and liabilities assumed at the date of acquisition. The company is in
the process of obtaining third-party valuations of certain intangible assets;
thus, the allocation of the purchase price is preliminary:
Intangible assets $ 43,800
Goodwill 214,990
Other, net 31,210
---------------
Purchase price $ 290,000
===============
The intangible assets relate to customer relationships and have a useful life
of approximately 15 years. The goodwill was assigned to the Enterprise
Solutions segment and has been amortized using a 40 year life, since the date
of acquisition.
Bell & Howell International Mail and Messaging Technologies (MMT)
On June 5, 2001, the company completed the acquisition of MMT in Europe, Africa,
the Middle East and Asia for $51 million in cash. MMT markets and services
high-end mail processing, sorting and service-related products through a
network of distributors and direct operations. The acquisition has been
accounted for under the purchase method and accordingly, the operating results
of the acquisition have been included in the company's consolidated financial
statements since the date of acquisition.
The following table summarizes the estimated fair values of the major assets
acquired and liabilities assumed at the date of acquisition. The company is in
the process of obtaining third-party valuations of certain intangible assets;
thus, the allocation of the purchase price is preliminary:
Intangible assets $ 10,900
Goodwill 47,547
Other, net (7,447)
---------------
Purchase price $ 51,000
===============
The intangible assets relate to customer relationships and have a useful life
of approximately 15 years. The goodwill was assigned to the Global Mailing
segment and has been amortized using a 40 year life, since the date of
acquisition.
Consolidated impact of acquisitions
The Consolidated Income Statement for the year ended December 31, 2001 included
revenues of $15.7 million, $129.9 million and $56.5 million from Secap, DSI and
MMT, respectively. The acquisitions of Secap, DSI, and MMT did not materially
impact income from continuing operations for the year ended December 31, 2001.
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions of Secap, DSI, and MMT had occurred on January
1, 2000:
Years ended December 31
----------------------------
2001 2000
----------- -----------
Total revenue $4,380,565 $4,339,959
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been completed on January 1,
2000, nor do they purport to be indicative of the results that will be obtained
in the future. The pro forma earning results of these acquisitions were not
material to earnings on either a per share or an aggregate basis.
During the year the company also completed several smaller acquisitions
including, the acquisition of a majority ownership in MailCode Inc., a mail
processing company, the acquisition of Alysis Technologies Inc., a leading
provider of digital document
53
delivery solutions and the acquisition of some of the company's international
dealerships. The cost of these acquisitions was in the aggregate less than $50
million. These acquisitions did not have a material impact on the company's
financial results either individually or on an aggregate basis.
16. Commitments, contingencies and regulatory matters
At December 31, 2001, as part of the company's Capital Services programs, the
company has committed to extend credit of $356 million that has not been funded.
These transactions will be sold or syndicated, consistent with the company's
strategy. The company evaluates each customer's creditworthiness on a
case-by-case basis. Upon extension of credit, the amount and type of collateral
obtained, if deemed necessary by the company, is based on management's credit
assessment of the customer. Fees received under the agreements are recognized
over the commitment period. The maximum risk of loss arises from the possible
non-performance of the customer to meet the terms of the credit agreement. As
part of the company's review of its exposure to risk, adequate provisions are
made for finance assets, which may be uncollectible.
From time to time, the company is a party to lawsuits that arise in the
ordinary course of its business. These lawsuits may involve litigation by or
against the company to enforce contractual rights under vendor, insurance, or
other contracts; lawsuits relating to intellectual property or patent rights;
equipment, service or payment disputes with customers; disputes with employees;
or other matters. The company is currently a plaintiff or a defendant in a
number of lawsuits, none of which should have, in the opinion of management and
legal counsel, a material adverse effect on the company's financial position,
results of operations or cash flows.
In December 2001, the company recorded a pretax charge of approximately $24
million associated with the settlement of a lawsuit related to lease upgrade
pricing in the early to mid-1990's. The settlement is subject to court
approval. The $24 million charge relates to the following settlement costs:
award certificates to be provided to members of the class for purchase of
office products through Pitney Bowes supply line and the cost of legal fees and
related expenses of $8.3 million. This charge has been included in other income
in the Consolidated Statement of Income for the year ended December 31, 2001.
In June 2001, the company and Hewlett-Packard announced that they had reached
an agreement resolving a lawsuit filed by the company in 1995. The lawsuit
arose out of a dispute over print technology patents. Under the terms of the
agreement, the companies resolved all pending patent litigation without
admission of infringement and the company received $400 million in cash and ten
year supply and technology agreements. The cash payment, net of legal fees and
related expenses of $37.8 million, was recorded as other income in the
Consolidated Statement of Income for the year ended December 31, 2001.
In November 2001, the U.S. Postal Service (USPS) issued its finalized service
plan for the retirement of non-digital, or letterpress, meters. New placements
of non-digital meters without the "timeout" feature that enables the meters to
be automatically disabled, if not reset within a specified time period are no
longer permitted after December 31, 2002. These meters must be off the market
by December 31, 2006. New placements of non-digital meters with a "timeout"
feature are no longer permitted after June 2004. These meters must be off the
market by December 31, 2008.
In 2000, the USPS issued a proposed schedule for the phaseout of manually reset
electronic meters in the U.S. As of February 1, 2000, new placements of
manually reset electronic meters are no longer permitted. Current users of
manually reset electronic meters can continue to use these meters for the term
of their current rental and lease agreements. Leases or rentals due to expire
in 2000 could have been extended only to December 31, 2001.
In connection with the above, the company adopted a formal meter transition
plan in the second quarter of 2001, to transition to the next generation of
networked mailing technology. See Note 14 to the consolidated financial
statements.
In May 1995, the USPS publicly announced its concept of its Information Based
Indicia Program (IBIP) for future postage evidencing devices. As initially
stated by the USPS, the purpose of the program was to develop a new standard
for future digital postage evidencing devices which would significantly enhance
postal revenue security and support expanded USPS value-added services to
mailers. The program would consist of the development of four separate
specifications: (i) the Indicium specification - the technical specifications
for the indicium to be printed; (ii) a Postal Security Device specification -
the technical specification for the device that would contain the accounting
and security features of the system; (iii) a Host specification; and (iv) a
Vendor Infrastructure specification. During the period from May 1995 through
December 31, 2001, the company submitted extensive comments to a series of
proposed IBIP specifications issued by the USPS, including comments on the IBI
Performance Criteria.
In August 1999, the USPS and the company announced that they had reached an
agreement (USPS Settlement) resolving a lawsuit filed by the company in 1997.
The lawsuit arose out of a dispute over a 1978 Statement of Understanding
authorizing the company to offer Postage by Phone/R/, its proprietary version of
the Computerized Meter Resetting System. Under the terms of the agreement, the
company received $51.8 million, representing a portion of the financial benefit
that the USPS obtained as a result of the revised regulations. This payment,
net of related legal expenses of $2.2 million, was recorded as other income in
the Consolidated Statement of Income for the year ended December 31, 1999.
54
In June 1999, the company was served with a Civil Investigative Demand (CID)
from the Justice Department's Antitrust Division. A CID is a tool used by the
Antitrust Division for gathering information and documents. The company
believes that the Justice Department may have been reviewing the company's
efforts to protect its intellectual property rights. The company believes it
has complied fully with the antitrust laws and cooperated fully with the
department's investigation. In February 2002, the Justice Department advised the
company that it has decided to close this investigation with no further action.
17. Leases
In addition to factory and office facilities owned, the company leases similar
properties, as well as sales and service offices, equipment and other
properties, generally under long-term lease agreements extending from three to
25 years. Certain of these leases have been capitalized at the present value of
the net minimum lease payments at inception. Amounts included under liabilities
represent the present value of remaining lease payments.
Future minimum lease payments under both capital and non-cancelable operating
leases at December 31, 2001 are as follows:
Years ending December 31 Capital leases Operating leases
-------------- ----------------
2002 $2,632 $ 66,994
2003 2,597 49,631
2004 1,154 32,794
2005 474 49,465
2006 138 7,784
Thereafter - 16,061
-------------- ----------------
Total minimum lease payments $6,995 $222,729
================
Less: Amount representing interest 1,305
--------------
Present value of net minimum lease payments $5,690
==============
Rental expense was $108.1 million, $103.5 million and $99.1 million in 2001,
2000 and 1999, respectively.
18. Financial services
The company has several consolidated finance operations which are engaged in
lease financing of the company's products in the U.S., Canada, the U.K.,
Germany, France, Norway, Ireland, Australia, Austria, Spain, Switzerland,
Sweden and Italy, as well as other financial services to the commercial and
industrial markets in North America.
As discussed in Note 12, CPLC transferred the operations, employees and
substantially all assets related to its broker-oriented external financing
business to GECC in 1998.
Condensed financial data for the consolidated finance operations follows:
Condensed summary of operations
Years ended December 31 2001 2000 1999
-------- -------- --------
Revenue $676,547 $671,529 $667,757
-------- -------- --------
Costs and expenses 322,158 220,479 244,019
Interest, net 113,828 126,728 132,913
-------- -------- --------
Total expenses 435,986 347,207 376,932
-------- -------- --------
Income before income taxes 240,561 324,322 290,825
Provision for income taxes 49,121 73,532 71,312
-------- -------- --------
Income from continuing operations 191,440 250,790 219,513
Gain on sale of discontinued operations, net of income tax - - 3,682
-------- -------- --------
Net income $191,440 $250,790 $223,195
======== ======== ========
55
Condensed balance sheet
December 31 2001 2000
---------- ----------
Cash and cash equivalents $ 133,958 $ 88,051
Finance receivables, net 1,601,189 1,592,920
Accounts receivable 67,470 27,454
Other current assets and prepayments 95,908 106,309
---------- ----------
Total current assets 1,898,525 1,814,734
Long-term finance receivables, net 1,898,976 1,980,876
Investment in leveraged leases, net 1,337,282 1,150,656
Other assets 1,313,968 1,248,246
---------- ----------
Total assets $6,448,751 $6,194,512
========== ==========
Accounts payable and accrued liabilities $ 826,251 $ 563,639
Income taxes payable 222,447 203,549
Notes payable and current portion of long-term obligations 976,702 1,404,412
---------- ----------
Total current liabilities 2,025,400 2,171,600
Deferred taxes on income 398,479 423,662
Long-term debt 2,247,646 1,914,989
Other noncurrent liabilities 4,971 777
---------- ----------
Total liabilities 4,676,496 4,511,028
Equity 1,772,255 1,683,484
---------- ----------
Total liabilities and equity $6,448,751 $6,194,512
========== ==========
Finance receivables are generally due in monthly, quarterly or semiannual
installments over periods ranging from three to 15 years. In addition, 5% of
the company's net finance assets represent secured commercial and private jet
aircraft transactions with lease terms ranging from six to 24 years. The
company considers its credit risk for these leases to be minimal since all
aircraft lessees are making payments in accordance with lease agreements. The
company believes any potential exposure in aircraft investment is mitigated by
the value of the collateral as the company retains a security interest in the
leased aircraft.
Maturities of gross finance receivables and notes payable for the finance
operations are as follows:
Gross finance Notes payable, current
Years ending December 31 receivables and long-term debt
------------- ----------------------
2002 $1,893,757 $ 976,702
2003 906,492 569,726
2004 594,448 104,631
2005 317,634 4,985
2006 111,208 4,983
Thereafter 211,931 1,563,321
------------- ----------------------
Total $4,035,470 $3,224,348
============= ======================
Finance operations' net purchases of Pitney Bowes equipment amounted to $701.4
million, $698.7 million and $694.8 million in 2001, 2000 and 1999,
respectively.
The components of net finance receivables were as follows:
December 31 2001 2000
----------- -----------
Gross finance receivables $4,035,470 $4,033,388
Residual valuation 289,878 447,271
Initial direct cost deferred 52,106 53,243
Allowance for credit losses (127,418) (97,351)
Unearned income (749,871) (862,755)
----------- -----------
Net finance receivables $3,500,165 $3,573,796
=========== ===========
56
The company's net investment in leveraged leases is composed of the following
elements:
December 31 2001 2000
----------- -----------
Rental receivables $7,762,093 $7,211,802
Residual value 708,841 748,994
Principal and interest on nonrecourse loans (6,224,380) (5,934,778)
Unearned income (909,272) (875,362)
----------- -----------
Total leveraged leases 1,337,282 1,150,656
Deferred taxes arising from leveraged leases (850,698) (702,194)
----------- -----------
Net leveraged leases $ 486,584 $ 448,462
=========== ===========
Following is a summary of the components of income from leveraged leases:
Years ended December 31 2001 2000 1999
-------- -------- -------
Pretax leveraged lease income $44,185 $39,806 $35,954
Income tax effect (4,841) (3,019) 5,761
-------- -------- -------
Income from leveraged leases $39,344 $36,787 $41,715
======== ======== =======
. The $1.3 billion is the amount that is on our Consolidated Balance
Sheet at December 31, 2001.
. Rental receivables represent total lease payments from our customers
over the remaining term of the leveraged leases.
. Residual value represents the value of the property anticipated at
the end of the leveraged lease terms and is based on independent
appraisals performed by nationally recognized appraisers. We
regularly review the recorded residual values to ensure they are
appropriate.
. Principal and interest on nonrecourse loans represent amounts due to
unrelated third parties from our customers over the remaining term of
the leveraged leases. The nonrecourse loans are secured by the
lessees' rental obligation and the leased property. If a lessee
defaults and if the amounts realized from the sale of these assets
are insufficient, we have no obligation to make any payments due on
these nonrecourse loans to the unrelated third parties. Accordingly,
we are required by generally accepted accounting principles to
subtract the principal and interest over the remaining term of the
nonrecourse loans from our rental receivables and residual value. At
December 31, 2001, the principal balances on the nonrecourse loans
totaled $3.1 billion and the related interest payments over the
remaining terms of the leases totaled $3.1 billion.
. Unearned income represents our future financing income that will be
earned over the remaining term of the leases.
The $1.3 billion investment in leveraged leases on our Consolidated Balance
Sheet is diversified across the following types of assets:
. $332.1 million related to commercial real estate facilities, with
original lease terms ranging from 15 to 25 years.
. $301.3 million for nine aircraft transactions with major commercial
airlines, with original lease terms ranging from 22 to 25 years.
. $286.4 million related to locomotives and railcars, with original
lease terms ranging from 19 to 47 years.
. $166.6 million for postal equipment with international postal
authorities, with original lease terms ranging from 16 to 24 years.
. $130.0 million for rail and bus facilities with original lease terms
ranging from 32 to 44 years.
. $120.8 million for telecommunications equipment, with original lease
terms ranging from 14 to 16 years.
We have sold net finance receivables and in selective cases entered into
guarantee contracts with varying amounts of recourse in privately placed
transactions with unrelated third-party investors. The uncollected principal
balance of receivables sold and guarantee contracts totaled $181.2 million and
$262.1 million at December 31, 2001 and 2000, respectively. In accordance with
generally accepted accounting principles, we do not record these amounts as
liabilities on our Consolidated Balance Sheet.
Our maximum risk of loss on these net financing receivables and guarantee
contracts arises from the possible non-performance of lessees to meet the terms
of their contracts and from changes in the value of the underlying equipment.
These contracts are secured by the underlying equipment value, and supported by
the creditworthiness of our customers. At December 31, 2001, the underlying
equipment value exceeded the sum of the uncollected principal balance of
receivables sold and the guarantee contracts. As part of our review of our risk
exposure, we believe we have made adequate provision for sold receivables and
guarantee contracts which may not be collectible.
57
During 1997, PBCC and GATX Corporation (GATX) formed PBG Capital Partners LLC
(PBG) for the purpose of financing and managing certain leasing related assets
existing at that time. We contributed assets to PBG and maintain a 50% interest.
We account for our investment in PBG under the equity method. Our maximum
exposure is our investment of $166 million on our Consolidated Balance Sheet at
December 31, 2001. PBG's total assets and liabilities at December 31, 2001 are
$536 million and $290 million, respectively. In accordance with generally
accepted accounting principles, we do not record these assets and liabilities on
our Consolidated Balance Sheet.
We have originated tax-exempt secured loans to state and local governments and
have sold certificates of interest in these loans to third parties. Generally,
we recognize revenue for the fees we receive upon the sale of these
certificates. These transactions however, may require us to buy back
certificates from the third parties if interest rates rise significantly. Our
maximum risk of loss arises because we may be required to buy back certificates
and resell them to other third parties at below our cost. We have structured
these transactions so that even in a rising interest rate environment, our
losses would be minimal. We have further minimized any risk of non-performance
on the state and local government loans by obtaining credit guarantees of these
loans from a highly rated nationally recognized insurance company. Certificates
outstanding at December 31, 2001 and 2000 were $263.7 million and $240.7
million, respectively. In accordance with generally accepted accounting
principles, we do not record these certificates as assets or liabilities on our
Consolidated Balance Sheet.
The company has invested in various types of equipment under operating leases;
the net investment at December 31, 2001 and 2000 was not significant.
19. Business segment information
For a description of the company's reportable segments and the types of
products and services from which each reportable segment derives its revenue,
see "Overview" on page 9. That information is incorporated herein by reference.
The information set forth below should be read in conjunction with such
information. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies, with the exception
of the items outlined below.
Operating profit of each segment is determined by deducting from revenue the
related costs and operating expenses directly attributable to the segment.
Segment operating profit excludes general corporate expenses, income taxes and
net interest attributable to corporate debt. Interest from financial services
businesses includes intercompany interest. Identifiable assets are those used
in the company's operations and exclude cash and cash equivalents, short-term
investments and general corporate assets. Long-lived assets exclude finance
receivables, investment in leveraged leases and mortgage servicing rights.
Revenue and operating profit by business segment and geographic area for the
years ended 1999 to 2001 were as follows:
Revenue
--------------------------------
(Dollars in millions) 2001 2000 1999
------- -------- --------
Business segments:
Global Mailing $2,847 $2,831 $2,799
Enterprise Solutions 1,083 862 803
------- -------- --------
Total Messaging Solutions 3,930 3,693 3,602
Capital Services 192 188 210
------- -------- --------
Total $4,122 $3,881 $3,812
======= ======== ========
Geographic areas:
United States $3,374 $3,234 $3,201
Outside the United States 748 647 611
------- -------- --------
Total $4,122 $3,881 $3,812
======= ======== ========
58
Operating Profit
-----------------------------------
(Dollars in millions) 2001 2000 1999
----------- --------- ---------
Business segments:
Global Mailing $ 860 $844 $790
Enterprise Solutions 77 73 52
----------- --------- ---------
Total Messaging Solutions 937 917 842
Capital Services 73 65 65
----------- --------- ---------
Total $1,010 $982 $907
=========== ========= =========
Geographic areas:
United States $891 $862 $803
Outside the United States 119 120 104
----------- --------- ---------
Total $1,010 $982 $907
=========== ========= =========
Additional segment information is as follows:
Years ended December 31
-----------------------------------
(Dollars in millions) 2001 2000 1999
----------- --------- ---------
Depreciation and amortization:
Global Mailing $178 $187 $180
Enterprise Solutions 37 30 31
----------- --------- ---------
Total Messaging Solutions 215 217 211
Capital Services 13 17 33
----------- --------- ---------
Total $228 $234 $244
=========== ========= =========
Net interest expense:
Global Mailing $ 56 $ 66 $ 72
Enterprise Solutions 1 1 1
----------- --------- ---------
Total Messaging Solutions 57 67 73
Capital Services 57 59 60
----------- --------- ---------
Total $114 $126 $133
=========== ========= =========
Net additions to fixed assets:
Global Mailing $141 $169 $164
Enterprise Solutions 22 15 28
----------- --------- ---------
Total Messaging Solutions 163 184 192
Capital Services (4) (20) 7
----------- --------- ---------
Total $159 $164 $199
=========== ========= =========
December 31
---------------------
(Dollars in millions) 2001 2000
--------- ---------
Identifiable assets:
Global Mailing $4,098 $3,933
Enterprise Solutions 858 439
--------- ---------
Total Messaging Solutions 4,956 4,372
Capital Services 2,743 2,565
--------- ---------
Total $7,699 $6,937
========= =========
Identifiable long-lived assets by geographic areas:
United States $1,416 $1,372
Outside the United States 613 179
--------- ---------
Total $2,029 $1,551
========= =========
59
Reconciliation of segment amounts to consolidated totals:
Years ended December 31
------------------------------------
2001 2000 1999
----------- ----------- ----------
(Dollars in millions)
Operating profit:
Total operating profit for
reportable segments $1,010 $982 $907
Unallocated amounts:
Net interest (corporate
interest expense, net of
intercompany transactions) (70) (66) (38)
Corporate expense (128) (94) (95)
Cost of meter transition (268) - -
Restructuring charges (116) (19) -
Other income 338 - 50
----------- ----------- ----------
Income from continuing operations
before income taxes $ 766 $803 $824
=========== =========== ==========
Net interest expense:
Total interest expense for
reportable segments $114 $126 $133
Net interest (corporate interest
expense, net of intercompany
transactions) 70 66 38
----------- ----------- ----------
Consolidated net interest expense $184 $192 $171
=========== =========== ==========
Depreciation and amortization:
Total depreciation and
amortization for reportable
segments $228 $234 $244
Corporate depreciation 16 13 13
Discontinued operations 73 74 155
----------- ----------- ----------
Consolidated depreciation
and amortization $317 $321 $412
=========== =========== ==========
Net additions to fixed assets:
Total additions for
reportable segments $159 $164 $199
Unallocated amounts 26 24 10
Discontinued operations 71 81 96
----------- ----------- ----------
Consolidated additions to
fixed assets $256 $269 $305
=========== =========== ==========
December 31
-----------------------
(Dollars in millions) 2001 2000
----------- ----------
Total assets:
Total identifiable assets by reportable segments $7,699 $6,937
Cash and cash equivalents and short-term investments 233 214
General corporate assets 386 345
Discontinued operations - 405
----------- ----------
Consolidated assets $8,318 $7,901
=========== ==========
60
20. Fair value of financial instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash, cash equivalents, short-term investments, accounts receivable, accounts
payable and notes payable
The carrying amounts approximate fair value because of the short maturity of
these instruments.
Investment securities
The fair value of investment securities is estimated based on quoted market
prices, dealer quotes and other estimates.
Loans receivable
The fair value of loans receivable is estimated based on quoted market prices,
dealer quotes or by discounting the future cash flows using current interest
rates at which similar loans would be made to borrowers with similar credit
ratings and similar remaining maturities.
Long-term debt
The fair value of long-term debt is estimated based on quoted dealer prices for
the same or similar issues.
Interest rate swap agreements and foreign currency exchange contracts
The fair values of interest rate swaps and foreign currency exchange contracts
are obtained from dealer quotes. These values represent the estimated amount the
company would receive or pay to terminate agreements taking into consideration
current interest rates, the creditworthiness of the counterparties and current
foreign currency exchange rates.
Transfer of receivables with recourse
The fair value of the recourse liability represents the estimate of expected
future losses and has accordingly been recorded in the company's Balance Sheet.
The company periodically evaluates the adequacy of reserves and estimates of
expected losses; if the resulting evaluation of expected losses differs from the
actual reserve, adjustments are made to the reserve. The prior year amount has
been revised to conform with the current year presentation.
The estimated fair value of the company's financial instruments at December 31,
2001 is as follows:
Carrying value (a) Fair value
-------------------- --------------
Investment securities $22,340 $22,056
Loans receivable $343,833 $345,893
Long-term debt $(2,668,189) $(2,752,361)
Interest rate swaps $18,347 $18,347
Foreign currency exchange contracts $1,038 $1,038
Transfer of receivables with recourse $(829) $(829)
-------------------- --------------
(a) Carrying value includes accrued interest and deferred fee income, where
applicable.
The estimated fair value of the company's financial instruments at December 31,
2000 is as follows:
Carrying value (a) Fair value
-------------------- --------------
Investment securities $18,356 $18,921
Loans receivable $394,241 $405,288
Long-term debt $(2,395,995) $(2,416,755)
Interest rate swaps $(632) $9,687
Foreign currency exchange contracts $270 $(3,717)
Transfer of receivables with recourse $(3,676) $(3,676)
-------------------- --------------
(a) Carrying value includes accrued interest and deferred fee income, where
applicable.
61
21. Quarterly financial data (unaudited)
Summarized quarterly financial data (dollars in millions, except for per share
data) for 2001 and 2000 follows:
Three Months Ended
-------------------------------------------
2001 March 31 June 30 Sept. 30 Dec. 31
----------- --------- ---------- ---------
Total revenue $966 $1,021 $1,044 $1,091
Cost of sales and rentals and financing $369 $394 $418 $441
Income from continuing operations $104 $188 $122 $100
Discontinued operations - (11) (5) (10)
----------- --------- ---------- ---------
Net income $104 $177 $117 $90
=========== ========= ========== =========
Basic earnings per share:
Continuing operations $.42 $.76 $.50 $.41
Discontinued operations - (.04) (.02) (.04)
----------- --------- ---------- ---------
Net income $.42 $.72 $.48 $.37
=========== ========= ========== =========
Diluted earnings per share:
Continuing operations $.42 $.76 $.49 $.41
Discontinued operations - (.04) (.02) (.04)
----------- --------- ---------- ---------
Net income $.42 $.71 $.47 $.37
=========== ========= ========== =========
Three Months Ended
-------------------------------------------
2000 March 31 June 30 Sept. 30 Dec. 31
----------- --------- ---------- ---------
Total revenue $945 $998 $960 $978
Cost of sales and rentals and financing $358 $376 $351 $363
Income from continuing operations $134 $146 $145 $138
Discontinued operations 18 20 16 10
Cumulative effect of accounting change (5) - - -
----------- --------- ---------- ---------
Net income $147 $166 $161 $148
=========== ========= ========== =========
Basic earnings per share:
Continuing operations $.51 $.57 $.57 $.55
Discontinued operations .07 .07 .06 .04
Cumulative effect of accounting change (.02) - - -
----------- --------- ---------- ---------
Net income $.56 $.64 $.63 $.59
=========== ========= ========== =========
Diluted earnings per share:
Continuing operations $.50 $.56 $.57 $.55
Discontinued operations .07 .08 .06 .04
Cumulative effect of accounting change (.02) - - -
----------- --------- ---------- ---------
Net income $.55 $.64 $.63 $.59
=========== ========= ========== =========
The sum of the quarters and earnings per share amounts may not equal the annual
and total amounts due to rounding.
62
Report of Independent Accountants
To the Stockholders and Board of Directors of Pitney Bowes Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 64 present fairly, in all material
respects, the financial position of Pitney Bowes Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 64 present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 28, 2002
63
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding the company's executive officers the
information called for by this Item is incorporated herein by reference to the
sections entitled "Election of Directors", "How much stock is owned by
directors, nominees and executive officers?" and "Security Ownership" of the
Pitney Bowes Inc. Notice of the 2002 Annual Meeting and Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
The sections entitled "Directors' Compensation", "Executive Officer
Compensation", "Severance and Change of Control Arrangements" and "Pension
Benefits" of the Pitney Bowes Inc. Notice of the 2002 Annual Meeting and Proxy
Statement are incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "How much stock is owned by directors, nominees and
executive officers?" and "Security Ownership" of the Pitney Bowes Inc. Notice
of the 2002 Annual Meeting and Proxy Statement is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of the spin-off of IGI, Pitney Bowes has entered into several
agreements with IGI that govern the ongoing relations between the two
companies. The purpose of the agreements is to provide an orderly transition
for both companies. Additional or modified agreements, arrangements or
transactions, which would be negotiated at arm's length, may be entered into
between Pitney Bowes and IGI.
Agreements included matters such as cross-indemnification, employee benefits,
non-competition provisions, restrictions on solicitation or employment of
employees, access of information, provision of witnesses, confidentiality,
transaction expenses, employee termination, transition services, tax
separation, intellectual property, vendor financing, real estate and a credit
agreement. As part of the credit agreement Pitney Bowes arranged to provide IGI
with $100 million in financing of which $30 million had been sold to a third
party as of December 31, 2001. Furthermore, the credit agreement stipulates
that Pitney Bowes will sell the entire credit facility prior to December 31,
2002.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial statements - see Item 8 on page 29 and "Index to
Financial Schedules" on page 71.
2. Financial statement schedules - see "Index to Financial Schedules"
on page 71.
3. Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
64
Reg. S-K Status or incorporation
Exhibits Description by reference
---------------------------------------------------------------------------------------------------------------
(3)(a) Restated Certificate of Incorporated by reference to Exhibit (3a) to Form 10-K as
Incorporation, as amended filed with the Commission on March 30,1993.
(Commission file number 1-3579)
(a.1) Certificate of Amendment to the Incorporated by reference to Exhibit (a.1) to Form 10-K as
Restated Certificate of Incorporation filed with the Commission on March 27, 1998.
(as amended May 29, 1996) (Commission file number 1-3579)
(b) By-laws, as amended Incorporated by reference to Exhibit (3b) to Form 10-K as
filed with the Commission on April 1, 1996. (Commission
file number 1-3579)
(c) By-laws, as amended Incorporated by reference to Exhibit (3)(ii) to Form 10-Q
as filed with the Commission on November 16, 1998.
(Commission file number 1-3579)
(4)(a) Form of Indenture dated as of Incorporated by reference to Exhibit (4a) to Form 10-K as
November 15, 1987 between the filed with the Commission on March 24, 1988.
company and Chemical Bank, as (Commission file number 1-3579)
Trustee
(b) Form of Debt Securities Incorporated by reference to Exhibit (4b) to Form 10-K as
filed with the Commission on March 24, 1988.
(Commission file number 1-3579)
(c) Form of First Supplemental Incorporated by reference to Exhibit (1) to Form 8-K as
Indenture dated as of June 1, 1989 filed with the Commission on June 16, 1989. (Commission
between the company and Chemical file number 1-3579)
Bank, as Trustee
(d) Form of Indenture dated as of April Incorporated by reference to Exhibit (4.1) to Registration
15, 1990 between the company and Statement on Form S-3 (No. 33-33948) as filed with the
Chemical Bank, as successor to Commission on March 28, 1990.
Manufacturers Hanover Trust
Company, as Trustee
(e) Forms of Debt Securities Incorporated by reference to Exhibit (4) to Form 10-Q as
filed with the Commission on May 14, 1990. (Commission
file number 1-3579)
(f) Form of Indenture dated as of May Incorporated by reference to Exhibit (4a) to Registration
1, 1985 between Pitney Bowes Statement on Form S-3 (No. 2-97411) as filed with the
Credit Corporation and Bankers Commission on May 1, 1985.
Trust Company, as Trustee
(g) Letter Agreement between Pitney Incorporated by reference to Exhibit (4b) to Registration
Bowes Inc. and Bankers Trust Statement on Form S-3 (No. 2-97411) as filed with the
Company, as Trustee Commission on May 1, 1985.
(h) Form of First Supplemental Incorporated by reference to Exhibit (4b) to Registration
Indenture dated as of December 1, Statement on Form S-3 (No. 33-10766) as filed with the
1986 between Pitney Bowes Credit Commission on December 12, 1986.
Corporation and Bankers Trust
Company, as Trustee
65
Reg. S-K Status or incorporation
Exhibits Description by reference
---------------------------------------------------------------------------------------------------------------
(i) Form of Second Supplemental Incorporated by reference to Exhibit (4c) to Registration
Indenture dated as of February 15, Statement on Form S-3 (No. 33-27244) as filed with the
1989 between Pitney Bowes Credit Commission on February 24, 1989.
Corporation and Bankers Trust
Company, as Trustee
(j) Form of Third Supplemental Incorporated by reference to Exhibit (1) to Form 8-K as
Indenture dated as of May 1, 1989 filed with the Commission on May 16, 1989. (Commission
between Pitney Bowes Credit file number 1-3579)
Corporation and Bankers Trust
Company, as Trustee
(k) Indenture dated as of November 1, Incorporated by reference to Exhibit (4a) to Amendment
1995 between the company and No. 1 to Registration Statement on Form S-3 (No. 33-
Chemical Bank, as Trustee 62485) as filed with the Commission on November 2,
1995.
(l) Preference Share Purchase Rights Incorporated by reference to Exhibit (4) to Form 8-K as
Agreement dated December 11, filed with the Commission on March 13, 1996.
1995 between the company and (Commission file number 1-3579)
Chemical Mellon Shareholder Serv-
ices, LLC., as Rights Agent, as
amended
The company has outstanding certain other long-term indebtedness.
Such long-term indebtedness does not exceed 10% of the total assets
of the company; therefore, copies of instruments defining the rights
of holders of such indebtedness are not included as exhibits.
The company agrees to furnish copies of such instruments to the
Securities and Exchange Commission upon request.
66
Executive Compensation Plans :
------------------------------
(10)(a) Retirement Plan for Directors of Incorporated by reference to Exhibit (10a) to Form 10-K as
Pitney Bowes Inc. filed with the Commission on March 30, 1993. (Commission
file number 1-3579)
(b) Pitney Bowes Inc. Directors' Stock Incorporated by reference to Exhibit (i) to Form 10-K as filed
Plan (as amended and restated with the Commission on March 31, 1997. (Commission file
1997) number 1-3579)
(b.1) Pitney Bowes Inc. Directors' Stock Incorporated by reference to Exibit (i) to Form 10-K as filed
Plan (as amended and restated with the Commission on March 30, 2000. (Commission file
1999) number 1-3579)
(c) Pitney Bowes 1991 Stock Plan Incorporated by reference to Exhibit (10b) to Form 10-K as
filed with the Commission on March 25, 1992. (Commission
file number 1-3579)
(c.1) First Amendment to Pitney Bowes Incorporated by reference to Exhibit (ii) to Form 10-K as filed
1991 Stock Plan with the Commission on March 31, 1997. (Commission file 1-
3579)
(c.2) Second Amendment to Pitney Incorporated by reference to Exhibit (i) to Form 10-Q as filed
Bowes 1991 Stock Plan with the Commission on November 13, 1997. (Commission file
number 1-3579)
(c.3) Pitney Bowes 1991 Stock Plan (as Incorporated by reference to Exhibit (10) to Form 10-Q as
amended and restated) filed with the Commission on May 14, 1998. (Commission file
number 1-3579)
(c.4) Pitney Bowes 1998 Stock Plan (as Incorporated by reference to Exhibit (ii) to Form 10-K as filed
amended and restated ) with the Commission on March 30, 2000. (Commission file
number 1-3579)
(d) Pitney Bowes Inc. Key Employees' Incorporated by reference to Exhibit (10c) to Form 10-K as
Incentive Plan (as amended and filed with the Commission on March 25, 1992. (Commission
restated) file number 1-3579)
(d.1) First Amendment to Pitney Bowes Incorporated by reference to Exhibit (iii) to Form 10-K as filed
Inc. Key Employees' Incentive Plan with the Commission on March 31, 1997. (Commission file
(as amended and restated June 10, number 1-3579)
1991)
(d.2) Second Amendment to Pitney Incorporated by reference to Exhibit (i) to Form 10-K as filed
Bowes Inc. Key Employees' with the Commission on March 26, 2001. (Commission file
Incentive Plan (as amended and number 1-3579)
restated)
(e) 1979 Pitney Bowes Stock Option Incorporated by reference to Exhibit (10d) to Form 10-K as
Plan (as amended and restated) filed with the Commission on March 25, 1992. (Commission
file number 1-3579)
(f) Pitney Bowes Severance Plan, as Incorporated by reference to Exhibit (10) to Form 10-K as
amended, dated December 12, 1988 filed with the Commission on March 23, 1989. (Commission
file number 1-3579)
67
Executive Compensation Plans:
----------------------------
(g) Pitney Bowes Executive Severance Incorporated by reference to Exhibit (10h) to Form 10-K
Policy, adopted December 11, 1995 as filed with the Commission on April 1, 1996.
(Commission file number 1-3579)
(h) Pitney Bowes Inc. Deferred Incentive Incorporated by reference to Exhibit (i) to Form 10-Q as
Savings Plan for the Board of Directors filed with the Commission on May 15, 1997. (Commission
file number 1-3579)
(h.1) Pitney Bowes Inc. Deferred Incentive Incorporated by reference to Exhibit (iii) to Form 10-K as
Savings Plan for the Board of Directors filed with the Commission on March 30, 2000.(Commission
(as amended and restated 1999) file number 1-3579)
(i) Pitney Bowes Inc. Deferred Incentive Incorporated by reference to Exhibit (v) to Form 10-K as
Savings Plan filed with the Commission on March 31, 1997.
(Commission file number 1-3579)
(j) Pitney Bowes U.K. Stock Option Plan Incorporated by reference to Exhibit (iv) to Form 10-K as
(as amended and restated 1999) filed with the Commission on March 30, 2000.
(Commission file number 1-3579)
(k) Pitney Bowes Letter of Agreement with Incorporated by reference to Exhibit (vi) to Form 10-K as
Marc C. Breslawsky dated October 27, filed with the Commission on March 26, 2001.
2000 (Commission file number 1-3579)
(l) Pitney Bowes Separation Agreement Incorporated by reference to Exhibit (vii) to Form 10-K as
with Marc C. Breslawsky dated October filed with the Commission on March 26, 2001.
27, 2000 (Commission file number 1-3579)
(m) Pitney Bowes Separation Agreement Incorporated by reference to Exhibit (viii) to Form 10-K
with Marc C. Breslawsky dated October as filed with the Commission on March 26, 2001.
27, 2000 (Commission file number 1-3579)
(12) Computation of ratio of earnings to fixed Exhibit (i)
charges
(21) Subsidiaries of the registrant Exhibit (ii)
(23) Consent of experts and counsel Exhibit (iii)
(b) Reports on Form 8-K
On December 3, 2001, the company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting the Press Release dated December
3, 2001, regarding the completed spin-off of the company's office
systems business.
On November 13, 2001, the company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting the Press Release dated November
12, 2001 regarding the designated date for the spin-off of the
company's office systems business.
On November 1, 2001, the company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting the Press Release dated October
31, 2001, regarding its completion of the acquisition of Secap SA.
On October 23, 2001, the company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting the Press Release dated October
18, 2001, regarding its financial results for the period ended
September 30, 2001.
68
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PITNEY BOWES INC.
By: /s/ Michael J. Critelli
-----------------------
(Michael J. Critelli)
Chairman and Chief
Executive Officer
Date: March 12, 2002
----------------
69
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael J. Critelli Chairman and Chief Executive Officer - March 12, 2002
----------------------- Director --------------
Michael J. Critelli
/s/ Bruce P. Nolop Executive Vice President and Chief March 12, 2002
------------------ Financial Officer (principal financial officer) --------------
Bruce P. Nolop
/s/ Arlen F. Henock Vice President - Finance (principal March 12, 2002
------------------- accounting officer) --------------
Arlen F. Henock
/s/ Linda G. Alvarado Director March 12, 2002
--------------------- --------------
Linda G. Alvarado
/s/ Colin G. Campbell Director March 12, 2002
--------------------- --------------
Colin G. Campbell
/s/ Jessica P. Einhorn Director March 12, 2002
---------------------- --------------
Jessica P. Einhorn
/s/ Ernie Green Director March 12, 2002
--------------- --------------
Ernie Green
/s/ Herbert L. Henkel Director March 12, 2002
--------------------- --------------
Herbert L. Henkel
/s/ James H. Keyes Director March 12, 2002
------------------ --------------
James H. Keyes
/s/ John S. McFarlane Director March 12, 2002
--------------------- --------------
John S. McFarlane
/s/ Eduardo R. Menasce Director March 12, 2002
---------------------- --------------
Eduardo R. Menasce
/s/ Michael I. Roth Director March 12, 2002
------------------- --------------
Michael I. Roth
/s/ David L. Shedlarz Director March 12, 2002
--------------------- --------------
David L. Shedlarz
/s/ Robert E. Weissman Director March 12, 2002
---------------------- --------------
Robert E. Weissman
70
INDEX TO FINANCIAL SCHEDULES
----------------------------
The financial schedules should be read in conjunction with the financial
statements included in Item 8 in this Form 10-K. Schedules not included herein
have been omitted because they are not applicable or the required information
is shown in the financial statements or notes thereto. Also, separate financial
statements of less than 100 percent owned companies, which are accounted for by
the equity method, have been omitted because they do not constitute significant
subsidiaries.
Page
----
Pitney Bowes Inc.:
Financial statement schedule for the years 1999 - 2001:
Report of independent accountants on
financial statement schedule 63
Valuation and qualifying accounts and
reserves (Schedule II) 71
PITNEY BOWES INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1999 TO 2001
(Dollars in thousands)
Additions
Balance at beginning charged to costs Balance at
Description of year and expenses Deductions end of year
------------------ ----------------------- ---------------------- -------------------- -----------------
Allowance for doubtful accounts
-------------------------------
2001 $ 26,468 $ 16,294 $ 10,314 (2) $ 32,448
2000 $ 28,716 $ 9,337 $ 11,585 (2) $ 26,468
1999 $ 24,665 $ 8,668 $ 4,617 (2) $ 28,716
Allowance for credit losses on finance receivables
--------------------------------------------------
2001 $ 97,351 $ 80,467 (4) $ 50,400 (2) $ 127,418
2000 $ 104,721 $ 58,421 $ 65,791 (2) $ 97,351
1999 $ 130,775 $ 67,257 $ 93,311 (2)(3) $ 104,721
Valuation allowance for deferred tax asset (1)
------------------------------------------
2001 $ 24,949 $ 2,895 $ 4,021 $ 23,823
2000 $ 35,443 $ 372 $ 10,866 $ 24,949
1999 $ 39,872 $ 586 $ 5,015 $ 35,443
(1) Included in balance sheet as a liability
(2) Principally uncollectible accounts written off
(3) Amounts include the write-off of finance receivables retained in connection
with the disposal of our small-ticket external leasing business against
previously established allowance for credit losses recorded at the time of
disposal of the business in 1998
(4) Includes additions related to the meter transition plan
71