Exhibit (ii)
Management's Discussion and Analysis
Year ended December 31, 1998
Overview
Pitney Bowes Inc. (the company) continues to build on the core activities that
support its strong competitive position. We concentrate on products and services
that enable us to be the provider of informed mail and messaging management.
The company operates in four reportable segments: Mailing and Integrated
Logistics, Office Solutions, Mortgage Servicing and Capital Services.
Mailing and Integrated Logistics includes revenues from the sale and financing
of mailing equipment, related supplies and services, and the rental of postage
meters. Office Solutions includes revenues from the sale, financing, rental and
service of reprographic and facsimile equipment including related supplies, and
facilities management services which provides reprographic business support, and
other processing functions. Mortgage Servicing provides billing, collecting and
processing services for major investors in residential first mortgages. The
interest rate environment, however, has caused the company to reexamine the
impact of fluctuating rates and prepay patterns on the way the mortgage
servicing business is managed. We will explore a range of strategic options to
address the changing profile of this business in a way that maximizes value for
our shareholders. Capital Services provides large-ticket financing and
fee-based programs covering a broad range of products and other financial
services to the commercial and industrial markets in the U.S.
As part of the company's strategy to reduce the capital committed to asset-based
financing, while increasing fee-based income, the company sold its
broker-oriented small-ticket leasing business to General Electric Capital
Corporation (GECC), a subsidiary of General Electric Company. As part of the
sale, the operations, employees and substantially all the assets of Colonial
Pacific Leasing Corporation (CPLC) were transferred to GECC. The company
received $790 million at closing, which approximates the book value of the net
assets sold or otherwise disposed of and related transaction costs. The
transaction is subject to post-closing adjustments. Operating results of CPLC
have been reported separately as discontinued operations in the Consolidated
Statements of Income. See Note 13 to the consolidated financial statements.
Results of Continuing Operations
1998 Compared to 1997
In 1998, revenue increased 8%, operating profit grew 16%, income from continuing
operations grew 12% and diluted earnings per share from continuing operations
increased 17% to $2.03 compared with $1.74 for 1997.
[BAR GRAPH APPEARS HERE]
Diluted Earnings Per Share from Continuing Operations
- -----------------------------------------------------
Dollars
1996 1.50
1997 1.74
1998 2.03
Revenue
(Dollars in millions) 1998 1997 % change
- --------------------------------------------------------------------------------
Mailing and
Integrated Logistics $2,707 $2,552 6%
Office Solutions 1,216 1,089 12%
Mortgage Servicing 130 73 77%
Capital Services 168 206 (18%)
- --------------------------------------------------------------------------------
$4,221 $3,920 8%
================================================================================
The revenue increase came from growth in the Mailing and Integrated Logistics,
Office Solutions and Mortgage Servicing segments of 6%, 12% and 77%,
respectively, over 1997. Volume increases in our U.S. Mailing Systems,
Production Mail, U.S. Copier Systems, Facsimile Systems, facilities management
and mortgage servicing businesses were the principal cause of the revenue
growth. The impact of prices and exchange rates was minimal. The revenue
increase was partially offset by an 18% decline in revenue in the Capital
Services segment due to our strategy to reduce our external assets and shift to
more fee-based revenue streams.
Approximately 75% of our total revenue in 1998 and 1997 is recurring revenue,
which we believe is a continuing good indicator of potential repeat business.
Operating profit
(Dollars in millions) 1998 1997 % change
- --------------------------------------------------------------------------------
Mailing and
Integrated Logistics $663 $584 14%
Office Solutions 235 197 19%
Mortgage Servicing 37 25 52%
Capital Services 52 48 7%
- --------------------------------------------------------------------------------
$987 $854 16%
================================================================================
Operating profit grew 16% over the prior year compared with growth of 18% in
1997, continuing to reflect our strong emphasis on reducing costs and
controlling operating expenses in all our businesses. Another measure of our
success in controlling costs and expenses in 1998 and 1997 was that growth in
operating
25
profit continued to significantly outpace revenue growth. Operating profit
grew 14% in the Mailing and Integrated Logistics segment, 19% in the Office
Solutions segment, 52% in the Mortgage Servicing segment and 7% in the Capital
Services segment.
The operating profit growth in the Mailing and Integrated Logistics segment came
from strong performances by U.S. Mailing Systems, International Mailing,
Production Mail and related financing. Strong operating performances by our
Facsimile Systems, U.S. Copier Systems and facilities management businesses
drove the operating profit growth in the Office Solutions segment. Despite the
impact of the declining interest rate environment which resulted in higher
amortization and asset impairment charges, Mortgage Servicing had strong
operating profit growth. However, as mentioned above, the company will explore a
range of strategic options to address the changing profile of the mortgage
servicing business in a way that maximizes shareholder value.
[BAR GRAPH APPEARS HERE]
Revenue
- -------
Dollars in millions
1996 1997 1998
------ ------ ------
Sales..................... 1,675 1,834 1,994
Rentals & Financing....... 1,555 1,602 1,711
Support Services.......... 466 484 516
Sales revenue increased 9% in 1998 due mainly to strong sales growth in our U.S.
Mailing Systems, U.S. Copier Systems, Facsimile Systems and facilities
management businesses. The increase in U.S. Mailing Systems was due to the
continuing shift to advanced technologies and feature-rich products in the
large, medium and entry level mailing machines and in weighing scales. Sales of
consumable supplies used in our digital products also had strong growth. Sales
growth in our Software Solutions business was driven by strong sales of
logistics and print management software. Copier sales growth was driven by our
new Smart Image(TM) Plus line of products in the high-end segment plus increased
product offerings of digital and color models. Copier supply sales were also
higher. For the second consecutive year, Buyers Laboratory has named our copiers
as the "Most Outstanding Copier Line," with eight copiers being called
"outstanding" in their respective class. The award recognizes reliability, copy
quality and ease of use, all factors critical to customer satisfaction.
Facsimile supply sales in the U.S. and equipment sales in the U.K. and Canada
drove sales growth in the Facsimile Systems business. Increases in contract base
and increases in value added services to the existing contract base accounted
for the growth in our facilities management business. In total, Financial
Services financed 38% and 36% of all sales in 1998 and 1997, respectively. This
increase was achieved despite the impact of the increased sales revenue from our
facilities management business, which does not use traditional financing
services used by our other businesses.
Rentals and financing revenue increased 7% in 1998. Rentals revenue grew 6%
driven by growth in the U.S. and the U.K. mailing markets due to the continuing
shift to electronic and digital meters. In the U.S., the growth came primarily
from continuing placement of the digital desktop Personal Post Office(TM) meter,
which is available through various distribution channels such as telemarketing,
the Internet and selected retail outlets specializing in business supplies. At
the end of 1998, electronic and digital meters represent over 90% of our U.S.
meter base, with digital meters representing 35% of all meters in service in the
U.S. The company no longer places mechanical meters, which is in line with U.S.
Postal Service (USPS) guidelines; such meters are now less than 10% of our U.S.
meter population. The growth in U.K. rentals revenue was due to the introduction
of the Personal Post Office(TM) meter in that market.
Contribution to rental revenue growth also came from our U.S. and U.K. facsimile
markets, driven by an increased rental base of the 33.6 kbps systems such as the
9920 and 9930 models in the U.S.
Financing revenue grew 8%. Revenue increases came from increases in the mortgage
servicing business, increased volume of leases of the company's products and
from new product offerings such as Purchase Power(SM), Business Rewards(SM) and
Postal Privilege(SM). The increase was offset by reduced revenues from the
large-ticket external financing business due to asset dispositions in 1998 and
prior years in accordance with our strategy.
Support services revenue increased 7% in 1998. U.S. Mailing had increased
support service revenue from a larger population of extended maintenance
contracts, despite competitive pricing pressures; chargeable service calls were
also higher. Production Mail had double-digit growth in support services revenue
as their service contract base and on-site contracts increased. U.S. Copier
Systems and most of our international mailing units, excluding currency impacts,
had increased support services revenue.
Cost of sales
(Dollars in millions) 1998 1997 % change
- --------------------------------------------------------------------------------
$1,146 $1,082 6%
Percentage of
sales revenue 57.5% 59.0%
The cost of sales ratio, cost of sales expressed as a percentage of sales
revenue, improved for the second consecutive year. The significant improvement
in this ratio was achieved principally due to lower product costs, the increased
sale of higher margin supplies in our mailing, copier and facsimile businesses
and the impact of strategic sourcing initiatives in the U.S. and Europe. The
improvement was achieved despite the offsetting effect of increased revenue and
costs of the lower-margin facilities management business, where most of its
expenses are in cost of sales.
26
Cost of rentals and financing
(Dollars in millions) 1998 1997 % change
- --------------------------------------------------------------------------------
$517 $451 15%
Percentage of rentals
and financing revenue 30.2% 28.2%
Cost of rentals and financing, as a percentage of rentals and financing revenue,
increased two percentage points. While the cost of rentals was essentially flat
with 1997, the cost of financing increased due to higher costs at our mortgage
servicing business. The declining interest rate environment and higher mortgage
prepayment activity resulted in larger amortization expenses of mortgage
servicing rights, as well as an impairment charge of $10.3 million for the year.
The ratio also increased due to lower revenues in the Capital Services segment,
reflecting the company's continued focus to reposition this business.
Selling, service and administrative expenses were 34% of revenue in 1998
compared with 35% in 1997. Continued emphasis on controlling expense growth
while growing revenues resulted in an improvement in this ratio. This was the
sixth consecutive year of improvement in our selling, service and administrative
cost to revenue ratio, excluding a charge in 1996 to exit the copier business in
Australia. The company is in the process of an enterprise-wide resource planning
initiative and has incurred expenses to comply with Year 2000 systems issues,
which have partially offset the improvement in this ratio.
[BAR GRAPH APPEARS HERE]
Selling, Service and Administrative Rate
(excluding 1996 Australian Charge)
1996 35.4%
1997 34.9%
1998 34.2%
Research and development expenses
(Dollars in millions) 1998 1997 % change
- --------------------------------------------------------------------------------
$101 $89 13%
Research and development expenses increased 13% in 1998 to $101 million
reflecting continued investment in developing new technologies and enhancing
features for all our products. The 1998 increase represents expenditures for new
digital meters and metering technology, inserting equipment, developing advanced
features for production mail equipment, high volume mail sorting equipment and
digital delivery technologies.
Net interest expense
(Dollars in millions) 1998 1997 % change
- --------------------------------------------------------------------------------
$149 $155 (3%)
Net interest expense decreased due to lower interest rates and higher interest
income, offset in part by higher average borrowings during 1998 compared to
1997. Lower interest expense resulting from utilizing the proceeds from prior
year asset sales in our Capital Services segment and the sale of the
broker-oriented small-ticket external financing business in 1998, was offset by
interest expense on borrowings to fund the continuing stock repurchase program.
Our variable and fixed debt mix, after adjusting for the effect of interest rate
swaps, was 32% and 68% at December 31, 1998.
Effective tax rate
1998 1997
- --------------------------------------------------------------------------------
34.3% 34.4%
The effective tax rate of 34.3% in 1998 reflects continued tax benefits from
leasing and financing activities and lower taxes attributable to international
sourced income. This rate was essentially flat with prior year.
[BAR GRAPH APPEARS HERE]
Continuing Operations Margin
Percentage of revenue
1996 12.2%
1997 13.0%
1998 13.5%
Income from continuing operations and diluted earnings per share from continuing
operations increased 12% and 17%, respectively, in 1998. The reason for the
increase in diluted earnings per share outpacing the increase in income from
continuing operations was the company's share repurchase program, under which 11
million shares, 4% of the average common and potential common shares outstanding
at the end of 1997, were repurchased in 1998. Income from continuing operations
as a percentage of revenue increased to 13.5% in 1998 from 13% in 1997.
27
[BAR GRAPH APPEARS HERE]
Income from Continuing Operations
Dollars in millions
1996 453
1997 509
1998 568
Results of Continuing Operations
1997 Compared to 1996
In 1997, revenue increased 6%, operating profit grew 18%, income from
continuing operations grew 12% and diluted earnings per share from continuing
operations increased 16% to $1.74 compared with $1.50 for 1996. Revenue growth
was 8%, after adjusting for the impacts of strategic actions in Australia, asset
sale activity and the strategic shift of the external large-ticket business to
more fee-based income sources.
Revenue
(Dollars in millions) 1997 1996 % change
- --------------------------------------------------------------------------------
Mailing and
Integrated Logistics $2,552 $2,402 6%
Office Solutions 1,089 983 11%
Mortgage Servicing 73 53 38%
Capital Services 206 258 (20%)
- --------------------------------------------------------------------------------
$3,920 $3,696 6%
================================================================================
The revenue increase came from growth in the Mailing and Integrated Logistics,
Office Solutions and Mortgage Servicing segments of 6%, 11% and 38%,
respectively, over 1996. Volume increases in our U.S. Mailing Systems,
Production Mail, U.S. Copier Systems, Facsimile Systems, facilities management
and mortgage servicing businesses were the principal cause of the revenue
growth. The impact of prices and exchange rates was minimal. The revenue
increase was partially offset by a 20% decline in revenue in the Capital
Services segment due to our strategy to reduce our external assets and shift to
more fee-based revenue streams. The reduction of Capital Services assets
included the effect of the agreement with GATX Capital, more fully discussed
under Other Matters. Excluding the impact of planned asset sales, revenue in the
Capital Services segment would have declined by 12%.
Approximately 75% of our total revenue in 1997 and 1996 is recurring revenue,
which we believe is a good indicator of potential repeat business.
Operating profit
(Dollars in millions) 1997 1996 % change
- --------------------------------------------------------------------------------
Mailing and
Integrated Logistics $584 $477 22%
Office Solutions 197 172 15%
Mortgage Servicing 25 14 79%
Capital Services 48 60 (21%)
- --------------------------------------------------------------------------------
$854 $723 18%
================================================================================
Operating profit grew 18% over the prior year, continuing to reflect our strong
emphasis on reducing costs and controlling operating expenses in all our
businesses. Another measure of our success in controlling costs and expenses in
1997 and 1996 was that growth in operating profit continued to significantly
outpace revenue growth, excluding the 1996 charge for exiting the Australian
copier business. Operating profit grew 22% in the Mailing and Integrated
Logistics segment, 15% in the Office Solutions segment 79% in the Mortgage
Servicing segment and declined 21% in the Capital Services segment. Excluding
the 1996 charge for exiting the Australian copier business, operating profit
growth would have been 13%, with the Mailing and Integrated Logistics segment
operating profit growth at 15%.
The operating profit growth in the Mailing and Integrated Logistics and Office
Solutions segments came from strong performances by U.S. Mailing Systems,
Facsimile Systems and U.S. Copier Systems. In the Capital Services segment,
operating profit declined due to a planned reduction in the company's
large-ticket external portfolio. Operating profit in this segment included the
impacts of a charge for costs and asset valuation related to the agreement
announced in August 1997 with GATX Capital (see Other Matters) and external
large-ticket asset sales in 1996. Excluding these items, operating profit in the
Capital Services segment would have increased 10%.
Sales revenue increased 9% in 1997 due mainly to strong equipment sales in U.S.
Mailing Systems and U.S. Copier Systems, higher supplies revenue at Facsimile
Systems and increased sales of the facilities management business. The increase
in U.S. Mailing Systems' revenue is due mainly to customers' conversion to more
advanced technologies, with feature-rich products and services driven by meter
migration (see Regulatory Matters). The increase in U.S. Copier Systems was due
to solid equipment sales paced by the introduction of six new products, the
phased rollout of the color and digital copier systems and the introduction of
the Smart Image(TM) RIP controllers that allow a color copier to function as a
high-quality color printer. Buyers Laboratory named the Pitney Bowes copier line
as "Line of the Year," with a record seven Pitney Bowes copiers named "Picks of
the Year," the most by any copier vendor in the history of the award. The award
is based on factors that are critical to customer productivity,
satisfaction and value such as reliability, copy quality and ease
of use. Facsimile Systems' sales revenue increased due to higher supplies
28
revenue resulting from strong demand for plain paper cartridges. Increased sales
of the facilities management business were due primarily to the continued
expansion of our commercial contract base. In total, Financial Services financed
36% and 39% of all sales in 1997 and 1996, respectively. This decrease is due
mainly to the impact of increased sales revenue from our facilities management
business, which does not use traditional financing services used by our other
businesses.
Rentals and financing revenue increased 3% from 1996. Rentals revenue increased
5% from 1996 due mainly to rapid growth in the base of electronic and digital
meters. This resulted from the conversion of U.S. Mailing Systems' customers to
more advanced technology and new distribution channels such as the availability
of the digital desktop Personal Post Office(TM) meter via the Internet and
selected retail outlets specializing in business supplies. By the end of 1997,
75% of the company's U.S. meter base was made up of electronic and digital
meters, with approximately 25% made up of advanced technology digital meters.
Rentals revenue in 1997 no longer included the administrative revenue associated
with the trust fund, because the USPS took control of the fund in 1996.
Double-digit contributions to rentals revenue growth came from our U.S. and U.K.
facsimile businesses, driven by an increased rental base of advanced products
introduced in 1997, such as model 9830, selected as the "Best Plain Paper Fax
Machine" by the American Facsimile Association, and model 9910.
Financing revenue, adjusted for planned asset sales, grew 5% in 1997 on
increased volume of leases of Pitney Bowes products and new product offerings
such as Purchase Power(SM). Including the impact of asset sales, which generated
more revenues in 1996 than in 1997, financing revenue grew 1% in 1997.
Support services revenue in 1996 included service revenue from the Australian
copier business. Adjusting for this discontinued revenue, support services would
have increased 5%, led by healthy increases in on-site service contracts at
Production Mail and chargeable service calls in the U.K. U.S. Mailing Systems,
U.S. Copier Systems and Software Solutions also contributed to the growth.
Without adjusting for the discontinued Australian revenue, support services
revenue increased 4%.
Cost of sales
(Dollars in millions) 1997 1996 % change
- --------------------------------------------------------------------------------
$1,082 $1,025 5%
Percentage of
sales revenue 59.0% 61.2%
Cost of sales decreased to 59% of sales revenue in 1997 compared to 61% in 1996.
This improvement was driven by lower product costs, increased sales of high
margin supplies and the effect of a stronger dollar on equipment purchases. The
improvement was achieved despite the offsetting effect of increased revenue and
costs of the lower-margin facilities management business, where most of its
expenses are included in cost of sales.
Cost of rentals and financing
(Dollars in millions) 1997 1996 % change
- --------------------------------------------------------------------------------
$451 $435 4%
Percentage of rentals
and financing revenue 28.2% 28.0%
Cost of rentals and financing remained flat at 28% of related revenues for 1997.
This ratio remained unchanged despite the lower costs in 1996 as a result of not
placing mechanical meters and the additional depreciation expense in 1997 from
increased placements of electronic and digital meters. Cost of rentals and
financing in 1997 also includes the charge for costs and asset valuation related
to the agreement with GATX Capital (see Other Matters).
Selling, service and administrative expenses were 35% of revenue in 1997
compared with 36% in 1996. The ratio in 1996 included the impact of a $30
million charge resulting from the company's decision to exit the Australian
copier business. Excluding this charge, the ratio in 1996 would have been 35%.
Improvement in this ratio is due primarily to our continued emphasis on
controlling operating expenses while growing revenue. This was our fifth
consecutive year of an improving expense-to-revenue ratio, after adjusting for
the charge described above.
Research and development expenses
(Dollars in millions) 1997 1996 % change
- --------------------------------------------------------------------------------
$89 $82 9%
Research and development expenses increased 9% in 1997. This increase
demonstrates the company's continued commitment to developing new technologies
across all our product lines. specifically, the increase relates to the
development of new digital meters, advanced technology mailing and inserting
machines and software products.
Net interest expense
(Dollars in millions) 1997 1996 % change
- --------------------------------------------------------------------------------
$155 $157 (1%)
Net interest expense decreased 1% due mainly to lower average borrowings during
1997. Our variable and fixed rate debt mix, after adjusting for the effect of
interest rate swaps, was 48% to 52%, respectively, at December 31, 1997. As more
fully discussed in the Liquidity and Capital Resources section, the company and
its finance subsidiary issued additional debt in January 1998. Including this
debt, our variable and fixed rate debt mix at December 31, 1997 would have been
38% and 62%, respectively.
Effective tax rate
1997 1996
- --------------------------------------------------------------------------------
34.4% 31.1%
The effective tax rate was 34.4% for 1997 compared with 31.1% for 1996. The tax
benefit associated with the company's actions in
29
Australia and the related write-off of our Australian investment was primarily
responsible for the low rate in 1996. Excluding this benefit, the 1996 effective
tax rate would have been 34.1%.
Income from continuing operations and diluted earnings per share from continuing
operations increased 12% and 16%, respectively, in 1997. The reason for the
increase in diluted earnings per share outpacing the increase in income from
continuing operations was the company's share repurchase program, under which
17.9 million shares, 6% of the average common and potential common shares
outstanding at the end of 1996, were repurchased in 1997. Income from continuing
operations as a percentage of revenue increased to 13.0% in 1997 from 12.2% in
1996.
Other Matters
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, which approximates the book value of the net assets sold or otherwise
disposed of and related transaction costs. No gain or loss has been recognized
on this transaction. The transaction is subject to post-closing adjustments
pursuant to the terms of the purchase agreement with GECC.
On August 21, 1997, the company entered into an agreement with GATX Capital
Corporation (GATX Capital), a subsidiary of GATX Corporation, which reduced the
company's external large-ticket finance portfolio by approximately $1.1 billion.
This represented approximately 50% of the company's external large-ticket
portfolio and reflects the company's ongoing strategy of focusing on fee-and
service-based revenue rather than asset-based income.
Under the terms of the agreement, the company transferred external large-ticket
finance assets through a sale to GATX Capital and an equity investment in a
limited liability company owned by GATX Capital and the company. The company
received approximately $863 million in net cash relating to this transaction
during 1997 and 1998. At December 31, 1998, the company retained approximately
$166 million of equity investment in a limited liability company along with GATX
Capital.
Accounting Changes
In 1997, the company adopted Statement of Financial Accounting Standards (FAS)
No. 128, "Earnings per Share." The company discloses basic and diluted earnings
per share (EPS) on the face of the Consolidated Statements of Income and a
reconciliation of the basic and diluted EPS computation is presented in Note 10
to the consolidated financial statements.
In 1998, the company adopted FAS No. 130, "Reporting Comprehensive Income." The
company has disclosed all non-owner changes in equity in the Consolidated
Statements of Stockholders' Equity. Prior periods have been restated for
comparability purposes.
In 1998, the company adopted FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Under FAS 131, the company has four
reportable segments: Mailing and Integrated Logistics, Office Solutions,
Mortgage Servicing and Capital Services. See Note 17 to the consolidated
financial statements.
In 1998, the company adopted FAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." FAS 132 revises the company's disclosures
about pension and other postretirement benefit plans. See Note 12 to the
consolidated financial statements.
In June 1998, FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 (January 1, 2000 for the company) and
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 and losses depends on the
intended use of the derivative and the resulting designation. The company is
currently evaluating the impact of this statement.
Liquidity and Capital Resources
Our ratio of current assets to current liabilities improved to .92 to 1 at
December 31, 1998, compared to .74 to 1 at December 31,1997.
[BAR GRAPH APPEARS HERE]
Current Ratio
1996 .68
1997 .74
1998 .92
To control the impact of interest rate swings on our business, we use a balanced
mix of debt maturities, variable and fixed rate debt and interest rate swap
agreements. In 1998, we entered into interest rate swap agreements, primarily
through our financial services business. Swap agreements are used to fix or
obtain lower interest rates on commercial loans than we would otherwise have
been able to get without the swap.
The ratio of total debt to total debt and stockholders' equity was 66.6% at
December 31, 1998, versus 64.2% at December 31, 1997, including the preferred
stockholders' equity in a subsidiary company as debt. Excluding the preferred
stockholders' equity in a subsidiary company from debt, the ratio of total debt
to total debt and stockholders' equity was 64.4% at December 31, 1998, versus
62.0% at December 31, 1997. The $578 million repurchase of
30
11.0 million shares of common stock in 1998 increased this ratio. The company's
strong results and proceeds from the sale of its broker-oriented external
small-ticket leasing business and other external leasing assets partially offset
the increase in this ratio.
As part of the company's non-financial services shelf registrations, a
medium-term note facility exists permitting issuance of up to $500 million in
debt securities with a minimum maturity of nine months, all of which remained
available at December 31, 1998. On January 22, 1998, the company issued notes
amounting to $300 million available under a prior shelf registration. These
unsecured notes bear annual interest at 5.95% and mature in February 2005. The
notes are redeemable earlier at the company's option. The net proceeds from
these notes were used for general corporate purposes, including the repayment of
short-term debt.
On January 16, 1998, Pitney Bowes Credit Corporation (PBCC), a wholly-owned
subsidiary of the company, issued notes amounting to $250 million available
under a prior shelf registration. These unsecured notes bear annual interest at
5.65% and mature in January 2003. The proceeds were used to meet PBCC's
financing needs during 1998. On July 15, 1998, PBCC filed a shelf registration
statement with the Securities and Exchange Commission (SEC) for the issuance of
debt securities up to $750 million.
On September 30, 1998, certain partnerships controlled by affiliates of PBCC
issued a total of $282 million of Series A and Series B Secured Floating Rate
Senior Notes (the notes). The notes are due in 2001 and bear interest at a
floating rate of LIBOR plus .65 percent, set as of the quarterly interest
payment dates. The proceeds from the notes were used to purchase subordinated
debt obligations from the company (PBI Obligations). The PBI Obligations have a
principal amount of $282 million and bear interest at a floating rate of LIBOR
plus one percent, set as of the notes' quarterly interest payment dates. The
proceeds from the PBI Obligations were used for general corporate purposes,
including the repayment of short-term debt.
In July 1996, PBCC issued $300 million of medium-term notes: $200 million at
6.54% due in July 1999 and $100 million at 6.78% due in July 2001. In September
1996, PBCC issued $200 million of medium-term notes: $100 million at 6.305% due
in October 1998 and $100 million at 6.8% due in October 2001.
To help us better manage our international cash and investments, in June 1995
and April 1997, Pitney Bowes International Holdings, Inc. (PBIH), 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 1998 and 1997 was 4.1%. Dividends are recorded in the
Consolidated Statements of Income as minority interest, and are included in
selling, service and administrative expenses. On December 31, 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, 1998, the company had unused lines of credit and revolving
credit facilities of $1.5 billion (including $1.2 billion at its financial
services businesses) in the U.S. and $58.8 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 shelf registration statements and existing
commercial and medium-term note programs. Information on debt maturities is
presented in Note 6 to the consolidated financial statements.
Total financial services assets decreased to $5.2 billion at December 31, 1998,
down 5.7% from $5.5 billion in 1997. To fund finance assets, borrowings were
$2.8 billion in 1998 and $3.3 billion in 1997. Approximately $.4 billion and
$1.1 billion in cash was generated from the sale of finance assets in 1998 and
1997, respectively. We used the money to pay down debt, repurchase shares and
fund new business development.
In October 1997, the Board of Directors declared a two-for-one split of the
company's common stock. The split was effected through a dividend of one share
of common stock for each common share outstanding. The company distributed the
stock dividend on or about January 16, 1998, for each share held of record at
the close of business December 29, 1997.
Market Risk
The company is exposed to the impact of interest rate changes and foreign
currency fluctuations due to its investing, funding and mortgage servicing
activities and its operations in different foreign currencies.
The company's objective in managing its exposure to interest rate changes is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. To achieve its objectives, the company uses a
balanced mix of debt maturities and variable and fixed rate debt together with
interest rate swaps to fix or lower interest expense. The company's mortgage
servicing business, in particular the assets associated with the purchase of the
right to service mortgage loans for others, known as mortgage servicing rights
(MSRs), is sensitive to interest rate changes. Since MSRs represent the right to
service mortgage loans, a decline in interest rates and the resulting actual or
probable increases in mortgage prepayments shortens the expected life of the MSR
asset and reduces its economic value. To mitigate the risk of declining
long-term interest rates, higher-than-expected mortgage prepayments and the
potential impairment of the MSRs, the company uses interest rate swaps and
floors tied to yields on ten-year constant maturity interest rate swaps.
31
The company's objective in managing the exposure to foreign currency
fluctuations is to reduce the volatility in earnings and cash flows associated
with foreign exchange rate changes. Accordingly, the company enters into various
contracts, which change in value as foreign exchange rates change, to protect
the value of external and intercompany transactions in foreign currencies. The
principal currencies hedged are the British pound, Canadian dollar, Japanese yen
and Australian dollar.
The company employs established policies and procedures governing the use of
financial instruments to manage its exposure to such risks. The company does 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.
The company utilizes 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
the company's debt and all interest rate and foreign exchange derivative
contracts. Anticipated transactions, firm commitments, and receivables and
accounts payable denominated in foreign currency, which certain of these
instruments are intended to hedge, were excluded from the model.
The VaR model is a risk analysis tool and does not purport to represent actual
losses in fair value that will be incurred by the company, nor does it consider
the potential effect of favorable changes in market factors.
At December 31, 1998, the company's maximum potential one-day loss in fair value
of the company's exposure to foreign exchange rates and interest rates, using
the variance/co-variance technique described above, was not material.
Year 2000
In 1997, the company established a formal worldwide program to identify and
resolve the impact of the Year 2000 date processing issue on the company's
business systems, products and supporting infrastructure. This included a
comprehensive review of the company's information technology (IT) and non-IT
systems, software and embedded processors. The program structure has strong
executive sponsorship and consists of a Year 2000 steering committee of senior
business and technology management, a Year 2000 program office of full-time
project management, and subject matter experts and dedicated business unit
project teams. The company has also engaged independent consultants to perform
periodic program reviews and assist in systems assessment and test plan
development.
The program encompasses the following phases: an inventory of affected
technology and critical third party suppliers, an assessment of Year 2000
readiness, resolution, unit and integrated testing and contingency planning. The
company completed its worldwide inventory and assessment of all business
systems, products and supporting infrastructure. Required modifications were
substantially completed by year-end 1998. Tests are performed as software is
remediated, upgraded or replaced. Integrated testing is expected to be complete
by mid-1999.
As part of ongoing product development efforts, the company's recently
introduced products are Year 2000 compliant. Over 95% of our installed product
base, including all postage meters and copier and facsimile systems, are already
Year 2000 compliant. For products not yet compliant, upgrades or replacements
will be available by mid-1999. Detailed product compliance information is
available on the company's Web site (www.pitneybowes.com/year2000).
The company relies on third parties for many systems, products and services. The
company could be adversely impacted if third parties do not make necessary
changes to their own systems and products successfully and in a timely manner.
We have established a formal process to identify, assess and monitor the Year
2000 readiness of critical third parties. This process includes regular meetings
with critical suppliers, including telecommunication carriers and utilities, as
well as business partners, including postal authorities. Although there are no
known problems at this time, the company is unable to predict with certainty
whether such third parties will be able to address their Year 2000 problems on a
timely basis.
The company estimates the total cost of the worldwide program from inception in
1997 through the Year 2000 to be approximately $38 million to $42 million, of
which approximately $20 million was incurred through December 31,1998. These
costs, which are funded through the company's cash flows, include both internal
labor costs as well as consulting and other external costs. These costs are
incorporated in the company's budgets and are being expensed as incurred.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from
uncertainty about the Year 2000 readiness of third parties, the company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the company's results of operations, liquidity or
financial condition. However, the company continues to evaluate its Year 2000
risks and is developing contingency plans to mitigate the impact of any
potential Year 2000 disruptions. We expect to complete our contingency plans by
the second quarter of 1999.
Capital Investment
During 1998, net investments in fixed assets included net additions of $91
million to property, plant and equipment and $207 million to rental equipment
and related inventories, compared with $98 million and $146 million,
respectively, in 1997. 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 for new placements and upgrade programs.
32
At December 31, 1998, 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, Environmental and Regulatory Matters
Legal In the course of normal business, the company is 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.
Environmental The company is subject to federal, state and local laws and
regulations relating to the environment and is currently named as a member of
various groups of potentially responsible parties in administrative or court
proceedings. As we previously announced, in 1996 the Environmental Protection
Agency (EPA) issued an administrative order directing us to be part of a soil
cleanup program at the Sarney Farm site in Amenia, New York. The site was
operated as a landfill between the years 1968 and 1970 by parties unrelated to
the company, and wastes from a number of industrial sources were disposed there.
We do not concede liability for the condition of the site, but are working with
the EPA to identify, and then seek reimbursement from, other potentially
responsible parties. We estimate the total cost of our remediation effort to be
in the range of $3 million to $5 million for the soil remediation program.
The administrative and court proceedings referred to above are in different
states. It is impossible for us to estimate with any certainty the total cost of
remediating, the timing or extent of remedial actions which may be required by
governmental authorities, or the amount of liability, if any, we might have. If
and when it is possible to make a reasonable estimate of our liability in any of
these matters, we will make a financial provision as appropriate. Based on the
facts we presently know, we believe that the outcome of any current proceeding
will not have a material adverse effect on our financial condition or results of
operations.
Regulation In May 1996, the USPS issued a proposed schedule for the phaseout of
mechanical meters in the U.S. Between May 1996 and March 1997, the company
worked with the USPS to negotiate a revised mechanical meter migration schedule.
The final schedule agreed to with the USPS is as follows:
. As of June 1, 1996, new placements of mechanical meters would no longer be
permitted; replacements of mechanical meters previously licensed to customers
would be permitted prior to the applicable suspension date for that category
of mechanical meter.
. As of March 1, 1997, use of mechanical meters by persons or firms who process
mail for a fee would be suspended and would have to be removed from service.
. As of December 31, 1998, use of mechanical meters that interface with mail
machines or processors ("systems meters") would be suspended and would have to
be removed from service.
. As of March 1, 1999, use of all other mechanical meters ("stand-alone meters")
would be suspended and have to be removed from service.
As a result of the company's aggressive efforts to meet the USPS mechanical
meter migration schedule combined with the company's ongoing and continuing
investment in advanced postage evidencing technologies, mechanical meters
represent less than 10% of the company's installed U.S. meter base at December
31, 1998, compared with 25% at December 31, 1997. At December 31, 1998, over 90%
of the company's installed U.S. meter base is electronic or digital, compared to
75% at December 31, 1997. The company continues to work in close cooperation
with the USPS, to convert those mechanical meter customers who have not migrated
to digital or electronic meters by the applicable USPS deadline.
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 significantly enhanced postal
revenue security and supported expanded USPS value-added services to mailers.
The program would consist of the development of four separate specifications:
. the Indicium specification--the technical specifications for the
indicium to be printed
. a Postal Security Device specification--the technical specification for the
device that would contain the accounting and security features of the system
. a Host specification
. a Vendor Infrastructure specification
In July 1996, the USPS published for public comment draft specifications for the
Indicium, Postal Security Device and Host specifications. The company submitted
extensive comments to these four specifications. In March 1997, the USPS
published for public comment the Vendor Infrastructure specification.
In August 1998, the USPS published for public comment a consolidated and revised
set of IBIP specifications entitled "Performance Criteria for Information Based
Indicia and Security Architecture for IBI Postage Metering Systems" (the IBI
Performance Criteria). The IBI
33
Performance Criteria consolidated the four aforementioned IBIP specifications
and incorporated many of the comments previously submitted by the company. The
company submitted comments to the IBI Performance Criteria on November 30, 1998.
As of December 31, 1998, the company is in the process of finalizing the
development of a PC product which satisfies the proposed IBI Performance
Criteria. This product is currently undergoing beta testing and is expected to
be ready for market upon final approval from the USPS.
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, the company has generally been able to maintain profit margins
through productivity and efficiency improvements, continual review of both
manufacturing capacity and operating expense level and, to an extent, price
increases.
Although not affecting income, deferred translation gains and (losses) amounted
to $(25) million, $(32) million and $16 million in 1998, 1997 and 1996,
respectively. In 1998, the translation loss resulted principally from the
weakening Canadian dollar throughout 1998. In 1997, the translation loss
resulted from the strengthening of the U.S. dollar against most other currencies
except for the British pound. In 1996, the translation gains resulted primarily
from the strengthening of the British pound and the Canadian dollar.
The results of the company's international operations are subject to currency
fluctuations, and we enter into foreign exchange contracts for purposes other
than trading 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, 1998, the company had approximately $291 million of foreign
exchange contracts outstanding, most of which mature in 1999, 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.
Dividend Policy
The company's Board of Directors has a policy to pay a cash dividend on common
stock each quarter when feasible. In setting dividend payments, the board
considers the dividend rate in relation to the company's recent and projected
earnings and its capital investment opportunities and requirements. The company
has paid a dividend each year since 1934.
Forward-Looking Statements
The company wants to caution readers that any forward-looking statements (those
which talk about the company's or management's current expectations as to the
future) in this Annual Report or made by the company management involve risks
and uncertainties which may change based on various important factors. 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 behalf of the company include:
. 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
. our success at managing customer credit risk
. changes in interest rates
. the impact of the Year 2000 issue, including the effects of third parties'
inabilities to address the Year 2000 problem as well as the company's own
readiness
34
Summary of Selected Financial Data
(Dollars in thousands, except per share data)
Years ended December 31
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue $4,220,517 $3,920,013 $3,695,550 $3,426,275 $3,176,896
Costs and expenses 3,356,340 3,144,486 3,038,380 2,828,804 2,654,921
Nonrecurring items, net -- -- -- -- (25,366)
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 864,177 775,527 657,170 597,471 547,341
Provision for income taxes 296,236 266,525 204,561 204,013 210,410
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 567,941 509,002 452,609 393,458 336,931
Discontinued operations 8,453 17,025 16,804 189,682 56,660
Effect of accounting changes -- -- -- -- (119,532)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 576,394 $ 526,027 $ 469,413 $ 583,140 $ 274,059
===========================================================================================================================
Basic earnings per share:
Continuing operations $2.07 $1.76 $1.51 $1.30 $1.08
Discontinued operations .03 .06 .06 .63 .18
Effect of accounting changes -- -- -- -- (.38)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $2.10 $1.82 $1.57 $1.93 $ .88
===========================================================================================================================
Diluted earnings per share:
Continuing operations $2.03 $1.74 $1.50 $1.29 $1.07
Discontinued operations .03 .06 .06 .62 .18
Effect of accounting changes -- -- -- -- (.38)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $2.06 $1.80 $1.56 $1.91 $ .87
===========================================================================================================================
Total dividends on common, preference
and preferred stock $247,484 $231,392 $206,115 $181,657 $162,714
Dividends per share of common stock $.90 $.80 $.69 $.60 $.52
Average common and potential common
shares outstanding 279,656,603 292,517,116 301,303,356 304,739,952 315,485,784
Balance sheet at December 31
Total assets $7,661,039 $7,893,389 $8,155,722 $7,844,648 $7,399,720
Long-term debt $1,712,937 $1,068,395 $1,300,434 $1,048,515 $779,217
Capital lease obligations $8,384 $10,142 $12,631 $14,241 $23,147
Stockholders' equity $1,648,002 $1,872,577 $2,239,046 $2,071,100 $1,745,069
Book value per common share $6.09 $6.69 $7.56 $6.90 $5.76
Ratios
profit margin -- continuing operations:
Pretax earnings 20.5% 19.8% 17.8% 17.4% 17.2%
After-tax earnings 13.5% 13.0% 12.2% 11.5% 10.6%
Return on stockholders' equity --
before accounting changes 35.0% 28.1% 21.0% 28.2% 22.6%
Debt to total capital 66.6% 64.2% 60.5% 62.2% 66.3%
Other
Common stockholders of record 32,210 31,092 32,258 32,859 31,226
Total employees 31,299 29,645 28,412 27,536 32,635
Postage meters in service in the U.S.,
U.K. and Canada 1,586,783 1,561,668 1,494,157 1,517,806 1,480,692
See notes, pages 40 through 57
35
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Years ended December 31
---------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from:
Sales $1,993,546 $1,834,057 $1,675,090
Rentals and financing 1,711,468 1,602,400 1,554,709
Support services 515,503 483,556 465,751
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 4,220,517 3,920,013 3,695,550
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,146,404 1,081,537 1,025,250
Cost of rentals and financing 517,167 451,090 434,625
Selling, service and administrative 1,442,730 1,367,862 1,340,276
Research and development 100,806 89,463 81,726
Interest expense 168,558 162,993 163,176
Interest income (19,325) (8,459) (6,673)
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 3,356,340 3,144,486 3,038,380
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes 864,177 775,527 657,170
Provision for income taxes 296,236 266,525 204,561
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 567,941 509,002 452,609
Income, net of income tax, from
discontinued operations 8,453 17,025 16,804
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 576,394 $ 526,027 $ 469,413
===================================================================================================================================
Basic earnings per share:
Income from continuing operations $2.07 $1.76 $1.51
Discontinued operations .03 .06 .06
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $2.10 $1.82 $1.57
===================================================================================================================================
Diluted earnings per share:
Income from continuing operations $2.03 $1.74 $1.50
Discontinued operations .03 .06 .06
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $2.06 $1.80 $1.56
===================================================================================================================================
See notes, pages 40 through 57
36
Consolidated Balance Sheets
(Dollars in thousands, except share data)
December 31
-----------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 125,684 $ 137,073
Short-term investments, at cost which approximates market 3,302 1,722
Accounts receivable, less allowances: 1998, $24,665; 1997, $21,129 382,406 348,792
Finance receivables, less allowances: 1998, $51,232; 1997, $54,170 1,400,786 1,546,542
Inventories 266,734 249,207
Other current assets and prepayments 330,051 222,106
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 2,508,963 2,505,442
Property, plant and equipment, net 477,476 497,261
Rental equipment and related inventories, net 806,585 788,035
Property leased under capital leases, net 3,743 4,396
Long-term finance receivables, less allowances: 1998, $79,543; 1997, $78,138 1,999,339 2,581,349
Investment in leveraged leases 827,579 727,783
Goodwill, net of amortization: 1998, $47,514; 1997, $40,912 222,980 203,419
Other assets 814,374 585,704
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $7,661,039 $7,893,389
===================================================================================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 898,548 $ 878,759
Income taxes payable 194,443 147,921
Notes payable and current portion of long-term obligations 1,259,193 1,982,988
Advance billings 369,628 363,565
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,721,812 3,373,233
Deferred taxes on income 920,521 905,768
Long-term debt 1,712,937 1,068,395
Other noncurrent liabilities 347,670 373,416
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,702,940 5,720,812
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stockholders' equity in a subsidiary company 310,097 300,000
Stockholders' equity:
Cumulative preferred stock, $50 par value, 4% convertible 34 39
Cumulative preference stock, no par value, $2.12 convertible 2,031 2,220
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 16,173 28,028
Retained earnings 3,073,839 2,744,929
Accumulated other comprehensive income (88,217) (63,348)
Treasury stock, at cost (52,959,537 shares) (1,679,196) (1,162,629)
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,648,002 1,872,577
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $7,661,039 $7,893,389
===================================================================================================================================
See notes, pages 40 through 57
37
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31
-------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $576,394 $526,027 $469,413
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 361,333 300,086 278,168
Net change in the strategic focus initiative -- -- (16,826)
Increase in deferred taxes on income 64,805 185,524 106,298
Change in assets and liabilities:
Accounts receivable (32,658) (11,295) 49,187
Net investment in internal finance receivables (219,141) (184,709) (225,565)
Inventories (11,522) 30,526 35,256
Other current assets and prepayments (18,431) (58,135) (14,467)
Accounts payable and accrued liabilities 47,454 33,622 43,125
Income taxes payable 46,909 (62,910) (21,281)
Advance billings 8,489 33,607 16,715
Other, net (56,514) (77,238) (28,543)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 767,118 715,105 691,480
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Short-term investments (1,655) (388) 548
Net investment in fixed assets (298,415) (244,065) (271,972)
Net investment in external finance receivables (83,987) 664,492 50,494
Investment in leveraged leases (109,217) (95,600) (63,320)
Investment in mortgage servicing rights (206,464) (110,014) (50,407)
Proceeds from sales of subsidiary 789,936 -- --
Other investing activities (8,004) 455 (9,493)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 82,194 214,880 (344,150)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
(Decrease) increase in notes payable, net (696,157) 89,536 (467,838)
Proceeds from long-term obligations 837,847 -- 500,000
Principal payments on long-term obligations (234,182) (256,326) (12,181)
Proceeds from issuance of stock 49,521 33,396 31,201
Stock repurchases (578,464) (662,758) (144,475)
Proceeds from preferred stock issued by a subsidiary 10,097 100,000 --
Dividends paid (247,484) (231,392) (206,115)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (858,822) (927,544) (299,408)
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,879) (639) 1,997
- -----------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (11,389) 1,802 49,919
Cash and cash equivalents at beginning of year 137,073 135,271 85,352
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $125,684 $137,073 $135,271
===================================================================================================================================
Interest paid $187,339 $203,870 $204,596
===================================================================================================================================
Income taxes paid, net $172,638 $159,854 $111,176
===================================================================================================================================
See notes, pages 40 through 57
38
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except per share data)
Accumulated
Capital in other Treasury
Preferred Preference Common excess of Comprehensive Retained comprehensive stock,
stock stock stock par value income earnings income at cost
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 $47 $2,547 $323,338 $30,299 $2,186,996 $(46,991) $(425,136)
Net income $469,413 469,413
Other comprehensive income:
Translation adjustments 15,694 15,694
--------
Comprehensive income $485,107
========
Cash dividends:
Preferred ($2.00 per share) (1)
Preference ($2.12 per share) (194)
Common ($.69 per share) (205,920)
Issuances of common stock (2,441) 31,649
Conversions to common stock (1) (178) (1,819) 1,998
Repurchase of common stock (144,475)
Tax credits relating to
stock options 4,221
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 46 2,369 323,338 30,260 2,450,294 (31,297) (535,964)
Net income $526,027 526,027
Other comprehensive income:
Translation adjustments (32,051) (32,051)
--------
Comprehensive income $493,976
========
Cash dividends:
Preferred ($2.00 per share) (1)
Preference ($2.12 per share) (179)
Common ($.80 per share) (231,212)
Issuances of common stock (2,741) 33,997
Conversions to common stock (7) (149) (1,940) 2,096
Repurchase of common stock (662,758)
Tax credits relating to
stock options 2,449
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 39 2,220 323,338 28,028 2,744,929 (63,348) (1,162,629)
Net income $576,394 576,394
Other comprehensive income:
Translation adjustments (24,869) (24,869)
--------
Comprehensive income $551,525
========
Cash dividends:
Preferred ($2.00 per share) (1)
Preference ($2.12 per share) (164)
Common ($.90 per share) (247,319)
Issuances of common stock (21,051) 58,597
Conversions to common stock (5) (189) (3,106) 3,300
Repurchase of common stock (578,464)
Tax credits relating to
stock options 12,302
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $34 $2,031 $323,338 $16,173 $3,073,839 $(88,217) $(1,679,196)
===================================================================================================================================
See notes, pages 40 through 57
39
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 appropriate periods: 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 appropriate periods,
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.
Rental arrangements and advance billings
The company rents equipment to its customers, primarily postage meters and
mailing, shipping, copier and facsimile 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 taken into income as earned.
Financing transactions
At the time a finance transaction is consummated, the company's finance
operations record the gross finance receivable, unearned income and the
estimated residual value of leased equipment. Unearned income represents the
excess of the gross finance receivable plus the estimated residual value over
the cost of equipment or contract acquired. 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.
In establishing the provision for credit losses, the company has successfully
utilized an asset-based percentage. This percentage varies depending on the
nature of the asset, recent historical experience, vendor recourse, management
judgment and the credit rating of the respective customer. The company evaluates
the collectibility of its net investment in finance receivables based upon its
loss experience and assessment of prospective risk, and does so through ongoing
reviews of its exposures to net asset impairment. The carrying value of its net
investment in finance receivables is adjusted to the estimated collectible
amount through adjustments to the allowance 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's general policy is to discontinue income recognition for finance
receivables contractually past due for over 90 to 120 days depending on the
nature of the transaction. Resumption of income recognition occurs when payments
reduce the account to 60 days or less past due. However, large-ticket external
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 the original or restructured contract
terms.
The company has, from time to time, sold selected finance assets. The company
follows Statement of Financial Accounting Standards (FAS) No. 125, "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. The unearned income is
recognized as leveraged lease revenue in income from investments over the lease
term.
Goodwill and other long-lived assets
Goodwill represents the excess of cost over the value of net tangible assets
acquired in business combinations and is amortized using the straight-line
method over appropriate periods, principally 40 years.
40
Goodwill and other long-lived assets are 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.
Revenue
Sales revenue is primarily recognized when a product is shipped.
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 $368 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
$13 million.
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 12 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.
Mortgage servicing rights
Rights to service mortgage loans for others, whether those servicing rights are
originated or purchased, are recognized as separate assets. The company
capitalizes the cost of originated mortgage servicing rights (MSRs) based upon
the relative fair market value of the underlying mortgage loans and MSRs at the
time of the sale of the underlying mortgage loan. Servicing rights purchased are
recorded at cost. The company assesses the impairment of MSRs based on the fair
value of these rights. Fair value is estimated based on estimated future net
servicing income, using a valuation model which considers such factors as market
discount rates, prepayment estimates, interest rates and other economic factors.
MSRs are evaluated based on predominant risk characteristics of the underlying
loans, which include adjustable rate versus fixed rate, segregated into strata
by loan type and interest rate bands. The amount of impairment recognized is the
amount by which the capitalized value of MSRs for a stratum exceeds the
estimated fair value. Impairment is recognized through a valuation allowance.
MSRs are amortized in proportion to and over the period of the estimated future
net servicing income stream of the underlying mortgages. The company adjusts
amortization prospectively in response to changes in actual and anticipated
prepayments, foreclosures, delinquencies and cost experience.
The value of the company's MSRs is sensitive to changes in interest rates. To
maintain the relative value of its MSRs, the company has developed and
implemented a hedge program. In order to qualify for hedge accounting, the
following requirements must be met: the hedge instruments reduce the risks
associated with the asset, changes in the fair value of the hedge instruments
and underlying MSRs correlate, and the correlation is measurable. The company
has acquired certain derivative financial instruments, primarily interest rate
floors and interest rate swaps, to administer its hedge program. Unrealized and
realized gains and losses from hedge instruments are deferred and recorded as
adjustments to the basis of the underlying MSRs and amortized in proportion to
the estimated net servicing income. In the event the performance of the hedge
instruments do not meet the above requirements, changes in fair value of the
hedge instruments will be reflected in the Consolidated Statements of Income in
the current period.
Foreign exchange
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.
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. Gains and losses on foreign exchange contracts entered into
as hedges are deferred and recognized as part of the cost of the underlying
transaction. At December 31, 1998, the
41
company had approximately $291 million of foreign exchange contracts
outstanding, most of which mature in 1999, 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.
Foreign currency transaction gains and (losses) net of tax were $(1.2) million,
$.5 million and $(.5) million in 1998, 1997 and 1996, respectively.
Reclassication
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform with the current year presentation.
2. Inventories
Inventories consist of the following:
December 31 1998 1997
- --------------------------------------------------------------------------------
Raw materials
and work in process $ 54,001 $ 51,429
Supplies and service parts 106,864 93,064
Finished products 105,869 104,714
- --------------------------------------------------------------------------------
Total $266,734 $249,207
================================================================================
If all inventories that were valued at LIFO had been stated at current costs,
inventories would have been $24.9 million and $33.8 million higher than reported
at December 31, 1998 and 1997, respectively.
3. Fixed assets
December 31 1998 1997
- --------------------------------------------------------------------------------
Land $ 34,775 $ 34,844
Buildings 305,596 307,341
Machinery and equipment 813,202 778,140
- --------------------------------------------------------------------------------
1,153,573 1,120,325
Accumulated depreciation (676,097) (623,064)
- --------------------------------------------------------------------------------
Property, plant and equipment, net $ 477,476 $ 497,261
================================================================================
Rental equipment
and related inventories $ 1,706,995 $ 1,577,370
Accumulated depreciation (900,410) (789,335)
- --------------------------------------------------------------------------------
Rental equipment and
related inventories, net $ 806,585 $ 788,035
================================================================================
Property leased
under capital leases $ 19,430 $ 20,507
Accumulated amortization (15,687) (16,111)
- --------------------------------------------------------------------------------
Property leased
under capital leases, net $ 3,743 $ 4,396
================================================================================
4. Mortgage servicing rights
The company purchased rights to service loans with aggregate unpaid principal
balances of approximately $22.2 billion in 1998, $6.9 billion in 1997 and $5.3
billion in 1996. The costs associated with acquiring these rights were
capitalized and included in other assets in the Consolidated Balance Sheets.
The following summarizes the company's capitalized MSR activity:
1998 1997 1996
- --------------------------------------------------------------------------------
Beginning balance $ 220,912 $ 138,146 $ 108,851
MSR acquisitions 206,464 110,014 50,407
Deferred hedge loss 1,709 -- --
MSR amortization (54,787) (27,248) (21,112)
Impairment reserve (10,227) -- --
- --------------------------------------------------------------------------------
Ending balance $ 364,071 $ 220,912 $ 138,146
================================================================================
The fair value of MSRs was approximately $367.3 million at December 31, 1998 and
$247.5 million at December 31, 1997.
42
5. Current liabilities
Accounts payable and accrued liabilities and notes payable and current portion
of long-term obligations are comprised as follows:
December 31 1998 1997
- --------------------------------------------------------------------------------
Accounts payable-trade $ 265,144 $ 263,416
Accrued salaries,
wages and commissions 134,262 106,670
Accrued pension benefits 95,341 84,005
Accrued nonpension
postretirement benefits 15,500 15,500
Accrued postemployment benefits 6,900 6,900
Miscellaneous accounts
payable and accrued liabilities 381,401 402,268
- --------------------------------------------------------------------------------
Accounts payable
and accrued liabilities $ 898,548 $ 878,759
================================================================================
Notes payable and overdrafts $1,051,182 $1,747,377
Current portion of long-term debt 206,253 234,080
Current portion of
capital lease obligations 1,758 1,531
- --------------------------------------------------------------------------------
Notes payable and current
portion of long-term obligations $1,259,193 $1,982,988
================================================================================
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.
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 $.9 million in 1998 and 1997
and $1.5 million in 1996.
At December 31, 1998, overdrafts outside the U.S. totaled $3.5 million and U.S.
notes payable totaled $1.0 billion. Unused credit facilities outside the U.S.
totaled $58.8 million at December 31, 1998, of which $37.4 million were for
finance operations. In the U.S., the company had unused credit facilities of
$1.5 billion at December 31, 1998, largely in support of commercial paper
borrowings, of which $1.2 billion were for its finance operations. The weighted
average interest rates were 4.6% and 4.8% on notes payable and overdrafts
outstanding at December 31, 1998 and 1997, respectively.
The company periodically enters into interest rate swap agreements as a means of
managing interest rate exposure 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 differential between the fixed and variable rates; such exposure
is considered minimal.
The company enters 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
control its sensitivity to interest rate volatility. The company's variable and
fixed rate debt mix, after adjusting for the effect of interest rate swap
agreements, was 32% and 68%, respectively, at December 31, 1998. The company
utilizes interest rate swap agreements when it considers the economic benefits
to be favorable. Swap agreements, as noted above, have been principally utilized
to fix interest rates on commercial paper and/or obtain a lower cost on debt
than would otherwise be available absent the swap. At December 31, 1998, the
company had outstanding interest rate swap agreements with notional principal
amounts of $391.5 million and terms expiring at various dates from 2000 to 2006.
The company exchanged variable commercial paper rates on an equal notional
amount of notes payable and overdrafts for fixed rates ranging from 5.5% to
10.75%.
6. Long-term debt
December 31 1998 1997
- --------------------------------------------------------------------------------
Non-financial services debt:
5.95% notes due 2005 $ 300,000 $ --
Other 11,757 3,175
Financial services debt:
Senior notes:
6.54% notes due 1999 -- 200,000
6.06% to 6.11% notes due 2000 50,000 50,000
5.89% notes due 2001 282,000 --
6.78% to 6.80% notes due 2001 200,000 200,000
6.63% notes due 2002 100,000 100,000
5.65% notes due 2003 250,000 --
8.80% notes due 2003 150,000 150,000
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
Canadian dollar notes due
2000 (11.05% to 11.20%) 10,857 15,220
Other 8,323 --
- --------------------------------------------------------------------------------
Total long-term debt $1,712,937 $1,068,395
================================================================================
The company has a medium-term note facility which was established as a part
of the company's shelf registrations, permitting issuance of up to $500 million
in debt securities with a minimum maturity of nine months, all of which remained
available at December 31, 1998.
PBCC has $750 million of unissued debt securities available from a shelf
registration statement filed with the SEC in July 1998.
43
The annual maturities of the outstanding debt during each of the next five years
are as follows: 1999, $206.3 million; 2000, $65 million; 2001, $485.2 million;
2002, $102.1 million; 2003, $401.7 million; and $658.9 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.
7. 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 1998 and 1997 was 4.1%.
Preferred dividends are reflected as a minority interest 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, 1998 or
1997.
On December 31, 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.
8. Capital stock and capital in excess of par value
At December 31, 1998, 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 270,378,375 shares of common stock (net of 52,959,537 shares of
treasury stock), 688 shares of 4% Convertible Cumulative Preferred Stock (4%
preferred stock) and 74,997 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
(599,312 shares) and preference stock (4,925,003 shares). This will determine
the dividend rate, terms of redemption, terms of conversion (if any) and other
pertinent features. At December 31, 1998, unreserved and unissued common stock
(exclusive of treasury stock) amounted to 113,286,009 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
shares of common stock, subject to adjustment in certain events.
At December 31, 1998, a total of 1,216,630 shares of common stock were reserved
for issuance upon conversion of the 4% preferred stock (16,678 shares) and $2.12
preference stock (1,199,952 shares). In addition, 2,245,797 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.
9. 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
44
the years ended 1998, 1997 and 1996 would have been reduced to the following pro
forma amounts:
1998 1997 1996
- --------------------------------------------------------------------------------
Net income
As reported $576,394 $526,027 $469,413
Pro forma $567,907 $523,400 $467,742
Basic earnings per share
As reported $2.10 $1.82 $1.57
Pro forma $2.07 $1.81 $1.57
Diluted earnings per share
As reported $2.06 $1.80 $1.56
Pro forma $2.03 $1.79 $1.55
- --------------------------------------------------------------------------------
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:
1998 1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield 1.5% 2.0% 2.5%
Expected stock price volatility 18% 17% 17%
Risk-free interest rate 5% 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 become exercisable in three equal installments during the first three
years following their grant and expire after ten years. At December 31, 1998,
there were 21,417,867 options available for future grants under these plans. The
per share weighted average fair value of options granted was $11 in 1998, $7 in
1997 and $5 in 1996.
The following table summarizes information about stock option transactions:
Per share
weighted
average
exercise
Shares price
- --------------------------------------------------------------------------------
Options outstanding
at January 1, 1996 4,361,002 $16
Granted 805,790 $26
Exercised (702,560) $15
Canceled (86,258) $22
- --------------------------------------------------------------------------------
Options outstanding
at December 31, 1996 4,377,974 $18
Granted 1,837,730 $30
Exercised (774,728) $17
Canceled (67,852) $28
- --------------------------------------------------------------------------------
Options outstanding
at December 31, 1997 5,373,124 $23
Granted 3,039,344 $47
Exercised (884,512) $17
Canceled (142,953) $40
- --------------------------------------------------------------------------------
Options outstanding
at December 31, 1998 7,385,003 $33
================================================================================
Options exercisable
at December 31, 1996 2,017,702 $15
================================================================================
Options exercisable
at December 31, 1997 2,703,734 $18
================================================================================
Options exercisable
at December 31, 1998 2,966,399 $21
================================================================================
45
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding
- --------------------------------------------------------------------------------
Weighted Per share
Range of average weighted
per share remaining average
exercise contractual exercise
prices Number life price
- --------------------------------------------------------------------------------
$9-$13 269,550 1.8 years $13
$14-$21 1,625,025 5.5 years $18
$22-$33 2,390,500 8.6 years $28
$34-$51 2,709,395 9.9 years $45
$52-$62 390,533 10.0 years $55
- --------------------------------------------------------------------------------
7,385,003 8.2 years
================================================================================
Options Exercisable
- --------------------------------------------------------------------------------
Per share
Range of weighted
per share average
exercise exercise
prices Number price
- --------------------------------------------------------------------------------
$9-$13 269,550 $13
$14-$21 1,625,025 $18
$22-$33 1,026,506 $27
$34-$51 45,318 $39
-----------
2,966,399
===========
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 exercisable three years following their grant and expire after a period not
to exceed ten years. There were 156,158 and 90,904 options outstanding under
this plan at December 31, 1998 and 1997, 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 $10 in 1998 and $7 in 1997.
Certain executives are awarded restricted stock under the company's U.S. stock
option plan. 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.
There were no shares awarded in 1998 and 1997 and 100,500 shares awarded in 1996
at no cost to the executives. The compensation expense for each award is
recognized over the performance period. Compensation expense recorded by the
company related to these awards was $1.7 million, $4.1 million and $2.0 million
in 1998, 1997 and 1996, respectively. The per share weighted average fair value
of shares awarded was $23 in 1996.
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 1998, the offering
price was 90% of the average closing price of the company's common stock on the
New York Stock Exchange for the 30 day period preceding 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 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 1998, 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 10,109,282 common shares to its
regular employees under these plans. The company granted rights to purchase
593,256 shares in 1998, 855,916 shares in 1997, and 764,088 shares in 1996. The
per share fair value of rights granted was $7 in 1998, $4 in 1997 and $3 in 1996
for the U.S. ESPP and $14 in 1998, $9 in 1997 and $7 in 1996 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 11,600 in 1998, 10,900 in 1997 and 7,200 in
1996. Compensation expense recorded by the company was $560,000, $370,000 and
$175,000 for 1998, 1997 and 1996, respectively. The shares carry full voting and
dividend rights but 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. The per share weighted average fair value of shares granted was $42
in 1998, $28 in 1997 and $19 in 1996.
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 the Directors' Stock
Plan. Stock options acquired under this plan are exercisable three years
following their grant and expire after a period not to exceed ten years. There
were 4,822 and 1,994 options outstanding under this plan at December 31, 1998
and 1997, respectively. The per share weighted average fair value of options
granted was $12 in 1998 and $9 in 1997.
46
10. 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, 1998, 1997
and 1996 is as follows:
1998
----------------------------------------
Per
Income Shares Share
- --------------------------------------------------------------------------------
Income from
continuing operations $ 567,941
Less:
Preferred stock dividends (1)
Preference stock dividends (164)
- --------------------------------------------------------------------------------
Basic earnings per share $ 567,776 274,977,135 $ 2.07
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock 1 16,863
Preference stock 164 1,250,592
Stock options 2,892,149
Other 519,864
- --------------------------------------------------------------------------------
Diluted earnings per share $ 567,941 279,656,603 $ 2.03
================================================================================
1997
----------------------------------------
Per
Income Shares Share
- --------------------------------------------------------------------------------
Income from
continuing operations $ 509,002
Less:
Preferred stock dividends (1)
Preference stock dividends (179)
- --------------------------------------------------------------------------------
Basic earnings per share $ 508,822 288,782,996 $ 1.76
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock 1 21,420
Preference stock 179 1,355,116
Stock options 2,068,442
Other 289,142
- --------------------------------------------------------------------------------
Diluted earnings per share $ 509,002 292,517,116 $ 1.74
================================================================================
1996
----------------------------------------
Per
Income Shares Share
- --------------------------------------------------------------------------------
Income from
continuing operations $ 452,609
Less:
Preferred stock dividends (1)
Preference stock dividends (194)
- --------------------------------------------------------------------------------
Basic earnings per share $ 452,414 298,233,766 $ 1.51
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock 1 22,882
Preference stock 194 1,453,512
Stock options 1,344,634
Other 248,562
- --------------------------------------------------------------------------------
Diluted earnings per share $ 452,609 301,303,356 $ 1.50
================================================================================
11. Taxes on income
Income from continuing operations before income taxes and the provision for
income taxes consist of the following:
Years ended December 31
---------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Income from continuing
operations before
income taxes:
U.S $ 771,787 $ 690,296 $ 629,649
Outside the U.S. 92,390 85,231 27,521
- -------------------------------------------------------------------------------
Total $ 864,177 $ 775,527 $ 657,170
- -------------------------------------------------------------------------------
Provision for income
taxes:
U.S. federal:
Current $ 101,000 $ 101,479 $ 61,550
Deferred 130,479 108,645 83,601
- -------------------------------------------------------------------------------
231,479 210,124 145,151
- -------------------------------------------------------------------------------
U.S. state and local:
Current 21,516 40,803 13,420
Deferred 23,566 (6,969) 26,635
- -------------------------------------------------------------------------------
45,082 33,834 40,055
- -------------------------------------------------------------------------------
Outside the U.S.:
Current 29,919 33,596 28,694
Deferred (10,244) (11,029) (9,339)
- -------------------------------------------------------------------------------
19,675 22,567 19,355
- -------------------------------------------------------------------------------
Total current 152,435 175,878 103,664
Total deferred 143,801 90,647 100,897
- -------------------------------------------------------------------------------
Total $ 296,236 $ 266,525 $ 204,561
===============================================================================
47
Including discontinued operations, the provision for income taxes consists of
the following:
Years ended December 31
--------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
U.S. federal $236,031 $219,291 $154,200
U.S. state and local 45,767 35,213 41,415
Outside the U.S. 19,675 22,567 19,355
- --------------------------------------------------------------------------------
Total $301,473 $277,071 $214,970
================================================================================
In 1996 through 1998, the company recognized a reduction in tax expense on
account of its investment in a life insurance program. In 1996, the company
recognized U.S. tax benefits from the write-off of its Australian investment and
from restructuring its Australian operations.
A reconciliation of the U.S. federal statutory rate to the company's effective
tax rate for continuing operations follows:
1998 1997 1996
- --------------------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes 3.4 2.8 4.0
Foreign tax differential (1.5) (1.0) (0.2)
Australian write-off -- -- (2.5)
Life insurance investment (0.3) (0.7) (1.7)
Other, net (2.3) (1.7) (3.5)
- --------------------------------------------------------------------------------
Effective income tax rate 34.3% 34.4% 31.1%
================================================================================
The effective tax rate for discontinued operations in 1998, 1997 and 1996
differs from the statutory rate due primarily to state and local income taxes.
Deferred tax liabilities and (assets)
December 31 1998 1997
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 113,455 $ 97,988
Deferred profit
(for tax purposes) on
sales to finance subsidiaries 416,941 393,645
Lease revenue and
related depreciation 823,914 843,422
Other 134,147 109,621
- --------------------------------------------------------------------------------
Deferred tax liabilities 1,488,457 1,444,676
- --------------------------------------------------------------------------------
Deferred tax assets:
Nonpension postretirement
benefits (122,481) (125,377)
Inventory and
equipment capitalization (40,745) (38,191)
Net operating loss carryforwards (64,035) (43,602)
Other (219,947) (244,171)
Valuation allowance 60,957 41,301
- --------------------------------------------------------------------------------
Deferred tax assets (386,251) (410,040)
- --------------------------------------------------------------------------------
Net deferred taxes 1,102,206 1,034,636
Less: Current net deferred taxes(a) 181,685 128,868
- --------------------------------------------------------------------------------
Deferred taxes on income $ 920,521 $ 905,768
================================================================================
(a) The table of deferred tax liabilities and (assets) above includes $181.7
million and $128.9 million for 1998 and 1997, 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 and
related valuation allowance was due mainly to finalized German audits for the
years 1991 to 1994, as well as losses incurred by certain foreign subsidiaries.
At December 31, 1998 and 1997, approximately $131.1 million and $94.5 million,
respectively, of net operating loss carryforwards were available to the
company. Most of these losses can be carried forward indefinitely.
12. Retirement plans
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.
During 1997, the company announced that it amended its U.S. defined benefit
pension plan to a pay equity plan for most of its active U.S. employees. A pay
equity plan is a defined benefit pension plan in which pension benefits are
defined as a lump sum amount based on final average pay. The prior plan was a
defined benefit plan in which pension benefits were defined as annual annuity
amounts based on final average pay. In addition, the com-
48
pany enhanced the employer contributions to the U.S. defined contribution plan.
The net impact of these changes was a reduction in 1997 U.S. pension plan costs
of approximately $15.4 million and a reduction in the projected benefit
obligation for the U.S. defined benefit plan of $74.3 million. The reduction in
pension costs and the projected benefit obligation result from the fact that the
value of pension benefits are lower under the pay equity plan than under the
prior plan using the actuarial assumptions disclosed.
The company contributed $32 million, $16.9 million and $10.1 million to its
defined contribution plans in 1998, 1997 and 1996, 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 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligations:
Benefit obligations at beginning of year $ 968,950 $ 995,009 $ 179,713 $ 162,613
Service cost 22,754 22,780 5,641 6,771
Interest cost 70,341 67,111 12,293 12,515
Amendments -- (74,266) 1,393 --
Actuarial loss 40,708 5,581 19,722 9,029
Foreign currency changes -- -- (4,543) (2,106)
Benefits paid (72,374) (47,265) (9,709) (9,109)
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit obligations at end of year $ 1,030,379 $ 968,950 $ 204,510 $ 179,713
===================================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 959,632 $ 868,752 $ 209,629 $ 179,040
Actual return on plan assets 134,853 136,629 2,819 34,525
Company contribution 1,306 1,516 6,396 6,489
Foreign currency changes -- -- (6,556) (1,316)
Benefits paid (72,374) (47,265) (9,709) (9,109)
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 1,023,417 $ 959,632 $ 202,579 $ 209,629
===================================================================================================================================
Funded status $ (6,962) $ (9,318) $ (1,931) $ 29,916
Unrecognized actuarial (gain) loss (23,902) (7,854) 8,353 (20,317)
Unrecognized prior service cost (46,318) (49,845) 5,448 5,789
Unrecognized transition cost (6,278) (9,457) (6,221) (9,283)
- -----------------------------------------------------------------------------------------------------------------------------------
(Accrued) prepaid benefit cost $ (83,460) $ (76,474) $ 5,649 $ 6,105
===================================================================================================================================
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid benefit cost $ -- $ -- $ 16,181 $ 13,373
Accrued benefit liability (83,460) (76,474) (10,532) (7,268)
Additional minimum liability -- (353) (136) (875)
Intangible asset -- 353 136 875
- -----------------------------------------------------------------------------------------------------------------------------------
(Accrued) prepaid benefit cost $ (83,460) $ (76,474) $ 5,649 $ 6,105
===================================================================================================================================
Weighted average assumptions:
Discount rate 7.00% 7.25% 3.5%--7.0% 4.0%--7.8%
Expected return on plan assets 9.30% 9.50% 4.0%--8.3% 4.0%--9.0%
Rate of compensation increase 4.25% 4.25% 2.0%--5.0% 2.0%--5.0%
49
At December 31, 1998, 34,900 shares of the company's common stock with a fair
value of $2.3 million were included in the plan assets of the company's pension
plan.
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.
During 1997, the company amended its retiree medical program for current and
future retirees of Pitney Bowes Management Services who will now have increased
participant contributions.
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 1998 1997
- --------------------------------------------------------------------------------
Change in benefit obligations:
Benefit obligations at
beginning of year $ 306,722 $ 304,756
Service cost 9,423 9,688
Interest cost 18,952 18,770
Plan participants' contributions 1,305 1,419
Actuarial gain (720) (6,366)
Foreign currency changes (464) (323)
Benefits paid (19,938) (19,488)
Plan amendments (581) (1,734)
- --------------------------------------------------------------------------------
Benefit obligations at end of year $ 314,699 $ 306,722
================================================================================
December 31 1998 1997
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $ -- $ --
Company contribution 18,633 18,069
Plan participants' contributions 1,305 1,419
Benefits paid (19,938) (19,488)
- --------------------------------------------------------------------------------
Fair value of plan assets
at end of year $ -- $ --
================================================================================
Funded status $(314,699) $(306,722)
Unrecognized actuarial gain (2,094) (1,057)
Unrecognized prior service cost (7,826) (23,141)
- --------------------------------------------------------------------------------
Accrued benefit cost $(324,619) $(330,920)
================================================================================
The assumed weighted-average discount rate used in determining the accumulated
postretirement benefit obligations was 7.0% in 1998 and 7.25% in 1997.
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
------------------------------------ ------------------------------------
1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost $ 22,754 $ 22,780 $ 31,952 $ 5,641 $ 6,771 $ 6,046
Interest cost 70,341 67,111 69,292 12,293 12,515 10,882
Expected return on plan assets (78,100) (75,518) (70,500) (14,779) (14,676) (12,288)
Amortization of transition cost (3,179) (3,179) (3,179) (1,604) (1,614) (1,693)
Amortization of prior service costs (3,784) (3,766) 2,380 1,595 1,477 1,555
Recognized net actuarial loss (gain) 559 977 1,232 -- 7 (201)
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 8,591 $ 8,405 $ 31,177 $ 3,146 $ 4,480 $ 4,301
===================================================================================================================================
50
Nonpension Postretirement benefits
-----------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 9,423 $ 9,688 $ 10,445
Interest cost 18,952 18,770 17,654
Amortization of
prior service costs (15,873) (16,045) (16,000)
Recognized net
actuarial loss 58 -- 54
- --------------------------------------------------------------------------------
Net periodic
benefit cost $ 12,560 $ 12,413 $ 12,153
================================================================================
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations was 7.0% in 1998 and 7.25% in 1997. This was
assumed to gradually decline to 3.75% by the year 2000 and remain at that level
thereafter for 1998 and 1997.
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 the assumed
health care cost trend rates would have the following effects (in millions):
1-Percentage- 1-Percentage-
Point Increase Point Decrease
- --------------------------------------------------------------------------------
Effect on total of service
and interest cost components $ 977 $ 936
Effect on postretirement
benefit obligations $12,769 $12,050
- --------------------------------------------------------------------------------
13. Discontinued Operations
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, which approximates the book value of the net assets sold or otherwise
disposed of and related transaction costs. The transaction is subject to
post-closing adjustments pursuant to the terms of the purchase agreement with
GECC entered into on October 12, 1998.
Operating results of CPLC have been reported separately as discontinued
operations in the Consolidated Statements of Income. Revenue of CPLC was $113.8
million, $180.5 million and $163 million for the years ended December 31, 1998,
1997 and 1996, respectively. Income from discontinued operations includes
allocated interest expense of $33.9 million, $46.2 million and $40.7 million for
the years ended 1998, 1997 and 1996, respectively. Interest expense has been
allocated based on CPLCs intercompany borrowing levels with PBCC charged at
PBCC's weighted average borrowing rate.
14. Commitments, contingencies and regulatory matters
The company's finance subsidiaries had no unfunded commitments to extend credit
to customers at December 31, 1998. 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 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 or
results of operations.
The company is subject to federal, state and local laws and regulations
concerning the environment, and is currently participating in administrative or
court proceedings as a participant in various groups of potentially responsible
parties. As previously announced by the company, in 1996 the Environmental
Protection Agency (EPA) issued an administrative order directing the company to
be part of a soil cleanup program at the Sarney Farm site in Amenia, New York.
The site was operated as a landfill between the years 1968 and 1970 by parties
unrelated to the company, and wastes from a number of industrial sources were
disposed there. The company does not concede liability for the condition of the
site, but is working with the EPA to identify and then seek reimbursement from
other potentially responsible parties. The company estimates that the cost of
this remediation effort will range between $3 million and $5 million for the
soil remediation program. All of these proceedings are at various stages of
activity, and it is impossible to estimate with any certainty the total cost of
remediating, the timing and extent of remedial actions which may be required by
governmental authorities, or the amount of liability, if any, of the company. If
and when it is possible to make a reasonable estimate of the company's liability
in any of these matters, we will make a financial provision as appropriate.
Based on facts presently known, the company does not believe that the outcome of
these proceedings will have a material adverse effect on its financial
condition.
In May 1996, the USPS issued a proposed schedule for the phaseout of mechanical
meters in the U.S. Between May 1996 and March 1997, the company worked with the
USPS to negotiate a revised mechanical meter migration schedule. The final
51
schedule agreed to with the USPS is as follows: (i) as of June 1, 1996, new
placements of mechanical meters would no longer be permitted. Replacements of
mechanical meters previously licensed to customers would be permitted prior to
the applicable suspension date for that category of mechanical meter; (ii) as of
March 1, 1997, use of mechanical meters by persons or firms who process mail for
a fee would be suspended and would have to be removed from service; (iii) as of
December 31, 1998, use of mechanical meters that interface with mail machines or
processors ("systems meters") would be suspended and would have to be removed
from service; (iv) as of March 1, 1999, use of all other mechanical meters
("stand-alone meters") would be suspended and have to be removed from service.
As a result of the company's aggressive efforts to meet the USPS mechanical
meter migration schedule combined with the company's ongoing and continuing
investment in advanced postage evidencing technologies, mechanical meters
represent less than 10% of the company's installed U.S. meter base at December
31, 1998, compared with 25% at December 31, 1997. At December 31, 1998, over 90%
of the company's installed U.S. meter base is electronic or digital, compared to
75% at December 31, 1997. The company continues to work in close cooperation
with the USPS to convert those mechanical meter customers who have not migrated
to digital or electronic meters by the applicable USPS deadline.
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 significantly enhanced postal
revenue security and supported 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.
In July 1996, the USPS published for public comment draft specifications for the
Indicium, Postal Security Device and Host specifications. The company submitted
extensive comments to these four specifications. In March 1997, the USPS
published for public comment the Vendor Infrastructure specification.
In August 1998, the USPS published for public comment a consolidated and revised
set of IBIP specifications entitled "Performance Criteria for Information Based
Indicia and Security Architecture for IBI Postage Metering Systems" (the IBI
Performance Criteria). The IBI Performance Criteria consolidated the four
aforementioned IBIP specifications and incorporated many of the comments
previously submitted by the company. The company submitted comments to the IBI
Performance Criteria on November 30, 1998.
As of December 31, 1998, the company is in the process of finalizing the
development of a PC product which satisfies the proposed IBI Performance
Criteria. This product is currently undergoing beta testing and is expected to
be ready for market upon final approval from the USPS.
15. 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 operating leases at
December 31, 1998 are as follows:
Capital Operating
Years ending December 31 leases leases
- --------------------------------------------------------------------------------
1999 $ 3,238 $ 57,228
2000 2,880 44,283
2001 2,739 33,196
2002 2,334 24,707
2003 1,977 17,428
Thereafter 2,069 43,446
- --------------------------------------------------------------------------------
Total minimum lease payments $ 15,237 $220,288
========
Less: Amount representing interest 5,095
- ---------------------------------------------------------------
Present value of net minimum
lease payments $ 10,142
===============================================================
Rental expense was $112.2 million, $117.4 million and $121.2 million in 1998,
1997 and 1996, respectively.
16. 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, Switzerland and Sweden, as
well as other financial services to the commercial and industrial markets in the
U.S.
As discussed in Note 13, CPLC 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, which approximates the book value of the net assets sold or otherwise
disposed of and related transaction costs. The transaction is subject to
post-closing adjustments pursuant to the terms of the purchase agreement with
GECC entered into on October 12, 1998. As a result, the operating results of
CPLC have been excluded from continuing operations.
On August 21, 1997, the company announced that it had entered into an agreement
with GATX Capital Corporation (GATX Capital), a subsidiary of GATX Corporation,
which reduced the company's
52
external large-ticket finance portfolio by approximately $1.1 billion. This
represented approximately 50% of the company's external large-ticket portfolio
and reflects the company's ongoing strategy of focusing on fee- and
service-based revenue rather than asset-based income.
Under the terms of the agreement, the company transferred external large-ticket
finance assets through a sale to GATX Capital and an equity investment in a
limited liability company owned by GATX Capital and the company. The company
received approximately $863 million in net cash relating to this transaction
during 1997 and 1998. At December 31, 1998, the company retained approximately
$166 million of equity investment in a limited liability company along with GATX
Capital.
Condensed financial data for the consolidated finance operations follows:
Condensed summary of operations
Years ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Revenue $600,693 $608,641 $631,790
- --------------------------------------------------------------------------------
Costs and expenses 184,213 180,100 199,032
Interest, net 139,845 167,490 175,519
- --------------------------------------------------------------------------------
Total expenses 324,058 347,590 374,551
- --------------------------------------------------------------------------------
Income before
income taxes 276,635 261,051 257,239
Provision for
income taxes 71,952 72,279 81,229
- --------------------------------------------------------------------------------
Income from continuing
operations 204,683 188,772 176,010
Discontinued
operations 8,453 17,025 16,804
- --------------------------------------------------------------------------------
Net income $213,136 $205,797 $192,814
================================================================================
Condensed balance sheet
December 31 1998 1997
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 27,057 $ 41,637
Finance receivables, net 1,400,786 1,546,542
Accounts receivable 560,177 263,738
Other current assets
and prepayments 54,846 54,753
- --------------------------------------------------------------------------------
Total current assets 2,042,866 1,906,670
Long-term finance receivables, net 1,999,339 2,581,349
Investment in leveraged leases 827,579 727,783
Other assets 315,821 281,244
- --------------------------------------------------------------------------------
Total assets $5,185,605 $5,497,046
================================================================================
Accounts payable and
accrued liabilities $ 499,204 $ 423,462
Income taxes payable 146,913 102,110
Notes payable and
current portion of
long-term obligations 699,453 1,897,915
- --------------------------------------------------------------------------------
Total current liabilities 1,345,570 2,423,487
Deferred taxes on income 349,082 423,832
Long-term debt 2,097,737 1,378,827
Other noncurrent liabilities 878 4,042
- --------------------------------------------------------------------------------
Total liabilities 3,793,267 4,230,188
Equity 1,392,338 1,266,858
- --------------------------------------------------------------------------------
Total liabilities and equity $5,185,605 $5,497,046
================================================================================
Finance receivables are generally due in monthly, quarterly or semiannual
installments over periods ranging from three to 15 years. In addition, 18.6% of
the company's net finance assets represent secured commercial and private jet
aircraft transactions with lease terms ranging from three to 25 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.
53
Maturities of gross finance receivables and notes payable for the finance
operations are as follows:
Gross Notes payable,
finance current and
Years ending December 31 receivables long-term debt
- --------------------------------------------------------------------------------
1999 $1,727,361 $ 699,453
2000 868,840 60,857
2001 606,453 482,000
2002 316,165 100,000
2003 111,863 400,000
Thereafter 271,903 1,054,880
- --------------------------------------------------------------------------------
Total $3,902,585 $2,797,190
================================================================================
Finance operations' net purchases of Pitney Bowes equipment amounted to $750.8
million, $667.3 million and $645.4 million in 1998, 1997 and 1996, respectively.
The components of net finance receivables were as follows:
December 31 1998 1997
- --------------------------------------------------------------------------------
Gross finance receivables $ 3,902,585 $ 4,756,947
Residual valuation 479,777 527,503
Initial direct cost deferred 55,176 93,438
Allowance for credit losses (130,775) (132,308)
Unearned income (906,638) (1,117,689)
- --------------------------------------------------------------------------------
Net finance receivables $ 3,400,125 $ 4,127,891
================================================================================
The company's net investment in leveraged leases is composed of the following
elements:
December 31 1998 1997
- --------------------------------------------------------------------------------
Net rents receivable $ 955,563 $ 810,750
Unguaranteed residual valuation 608,858 609,737
Unearned income (736,842) (692,704)
- --------------------------------------------------------------------------------
Investment in leveraged leases 827,579 727,783
Deferred taxes arising
from leveraged leases (477,814) (300,164)
- --------------------------------------------------------------------------------
Net investment in leveraged leases $ 349,765 $ 427,619
================================================================================
Following is a summary of the components of income from leveraged leases:
Years ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Pretax leveraged
lease income $20,671 $ 6,797 $ 8,497
Income tax effect 9,990 16,110 6,501
- --------------------------------------------------------------------------------
Income from
leveraged leases $30,661 $22,907 $14,998
================================================================================
Leveraged lease assets acquired by the company are financed primarily through
nonrecourse loans from third-party debt participants. These loans are secured by
the lessees rental obligations and the leased property. Net rents receivable
represent gross rents less the principal and interest on the nonrecourse debt
obligations. Unguaranteed residual values are principally based on independent
appraisals of the values of leased assets remaining at the expiration of the
lease.
Leveraged lease investments include $301.6 million related to commercial real
estate facilities, with original lease terms ranging from five to 25 years. Also
included are seven aircraft transactions with major commercial airlines, with a
total investment of $297.5 million with original lease terms ranging from 22 to
25 years and transactions involving locomotives, railcars and rail and bus
facilities, with a total investment of $228.4 million and original lease terms
ranging from 15 to 44 years.
The company has sold net finance receivables with varying amounts of recourse in
privately placed transactions with third-party investors. The uncollected
principal balance of receivables sold and residual guarantee contracts totaled
$545 million and $502 million at December 31, 1998 and 1997, respectively. The
maximum risk of loss 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. Conversely, these contracts are supported by the underlying equipment
value and creditworthiness of customers. As part of the review of its exposure
to risk, the company believes adequate provisions have been made for sold
receivables, which may be uncollectible.
The company has invested in various types of equipment under operating leases;
the net investment at December 31, 1998 and 1997 was not significant.
17. 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 25. 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 in each segment 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.
54
Revenue and operating profit by business segment and geographic area for the
years ended 1996 to 1998 were as follows:
Revenue
----------------------------------
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Business segments:
Mailing and
Integrated Logistics $2,707 $2,552 $2,402
Office Solutions 1,216 1,089 983
Mortgage Servicing 130 73 53
Capital Services 168 206 258
- --------------------------------------------------------------------------------
Total $4,221 $3,920 $3,696
================================================================================
Geographic areas:
United States $3,635 $3,358 $3,135
Outside the
United States 586 562 561
- --------------------------------------------------------------------------------
Total $4,221 $3,920 $3,696
================================================================================
Operating profit
----------------------------------
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Business segments:
Mailing and
Integrated Logistics(a) $ 663 $ 584 $ 477
Office Solutions 235 197 172
Mortgage Servicing 37 25 14
Capital Services 52 48 60
- --------------------------------------------------------------------------------
Total $ 987 $ 854 $ 723
================================================================================
Geographic areas:
United States $ 900 $ 775 $ 691
Outside the
United States(a) 87 79 32
- --------------------------------------------------------------------------------
Total $ 987 $ 854 $ 723
================================================================================
(a) In 1996, excluding the Australian charge of $30 million, operating
profit for the Mailing and Integrated Logistics segment would have been
$507 million and the operating profit for the geographic area outside
the United States would have been $62 million. See discussion of
selling, service and administrative expense on page 29.
Additional segment information is as follows:
Years ended December 31
----------------------------------------
(Dollars in millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Depreciation and
amortization:
Mailing and
Integrated Logistics $ 177 $ 167 $ 166
Office Solutions 88 74 62
Mortgage Servicing 64 29 22
Capital Services 18 17 15
- -------------------------------------------------------------------------------
Total $ 347 $ 287 $ 265
===============================================================================
Net interest expense:
Mailing and
Integrated Logistics $ 61 $ 57 $ 51
Office Solutions 5 5 4
Mortgage Servicing (6) (2) (2)
Capital Services 72 104 120
- -------------------------------------------------------------------------------
Total $ 132 $ 164 $ 173
===============================================================================
December 31
---------------------------
(Dollars in millions) 1998 1997
- -------------------------------------------------------------------------------
Net additions to
long-lived assets:
Mailing and
Integrated Logistics $ 177 $ 176
Office Solutions 123 98
Mortgage Servicing 2 1
Capital Services 17 (35)
- -------------------------------------------------------------------------------
Total $ 319 $ 240
===============================================================================
Identifiable assets:
Mailing and
Integrated Logistics $ 3,893 $ 3,596
Office Solutions 879 769
Mortgage Servicing 610 346
Capital Services 2,012 2,896
- -------------------------------------------------------------------------------
Total $ 7,394 $ 7,607
===============================================================================
55
December 31
---------------------
(Dollars in millions) 1998 1997
- -------------------------------------------------------------------------------
Identifiable long-lived assets by
geographic areas:
United States $1,636 $1,531
Outside the United States 195 182
- -------------------------------------------------------------------------------
Total $1,831 $1,713
===============================================================================
Reconciliation of segment amounts to consolidated totals:
Years ended December 31
----------------------------
(Dollars in millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Operating profit:
Total operating profit for
reportable segments $ 987 $ 854 $ 723
Unallocated amounts:
Net interest (corporate
interest expense, net of
intercompany transactions) (17) 9 16
Corporate expense (106) (87) (82)
- -------------------------------------------------------------------------------
Income from continuing
operations before
income taxes $ 864 $ 776 $ 657
===============================================================================
Net interest expense:
Total interest expense for
reportable segments $ 132 $ 164 $ 173
Net interest (corporate interest
expense, net of intercompany
transactions) 17 (9) (16)
- -------------------------------------------------------------------------------
Consolidated net interest
expense $ 149 $ 155 $ 157
===============================================================================
Depreciation and amortization:
Total depreciation and
amortization for reportable
segments $ 347 $ 287 $ 265
Corporate depreciation 14 13 13
- -------------------------------------------------------------------------------
Consolidated depreciation
and amortization $ 361 $ 300 $ 278
===============================================================================
December 31
-------------------
(Dollars in millions) 1998 1997
- -------------------------------------------------------------------------------
Net additions to long-lived assets:
Total additions for
reportable segments $ 319 $ 240
Unallocated amounts 6 10
- -------------------------------------------------------------------------------
Consolidated additions to
long-lived assets $ 325 $ 250
===============================================================================
Total assets:
Total identifiable assets
by reportable segments $7,394 $7,607
Cash and cash equivalents and
short-term investments 129 139
General corporate assets 138 147
- -------------------------------------------------------------------------------
Consolidated assets $7,661 $7,893
===============================================================================
18. 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.
MSR hedge
The fair values of the MSR hedge are obtained from dealer quotes. The interest
rate swap portion represents the estimated amount the company would receive or
pay to terminate the agreements,
56
taking into consideration current interest rates and creditworthiness of the
counterparties. The interest rate floor portion represents the difference
between the market value and amounts paid to enter into the contracts.
Residual, conditional commitment and financial guarantee contracts
The fair values of residual and conditional commitment guarantee contracts are
based on the projected fair market value of the collateral as compared to the
guaranteed amount plus a commitment fee generally required by the counterparty
assuming the guarantee. The fair value of financial guarantee contracts
represents the estimate of expected future losses.
Transfer of receivables with recourse
The fair value of the recourse liability represents the estimate of expected
future losses. 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 estimated fair value of the company's financial instruments at December 31,
1998 is as follows:
Carrying Fair
value(a) value
- -------------------------------------------------------------------------------
Investment securities $ 9,022 $ 9,898
Loans receivable $ 453,558 $ 469,159
Long-term debt $(1,954,434) $(2,058,237)
Interest rate swaps $ (2,142) $ (31,912)
Foreign currency
exchange contracts $ 1,867 $ 652
MSR hedge $ 3,950 $ 2,864
Residual, conditional
commitment and financial
guarantee contracts $ (2,077) $ (3,460)
Transfer of receivables
with recourse $ (42,805) $ (42,805)
- -------------------------------------------------------------------------------
(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,
1997 is as follows:
Carrying Fair
value(a) value
- -------------------------------------------------------------------------------
Investment securities $ 20,124 $ 20,015
Loans receivable $ 357,227 $ 358,941
Long-term debt $(1,321,497) $(1,396,369)
Interest rate swaps $ (1,242) $ (28,551)
Foreign currency
exchange contracts $ 735 $ 4,542
Residual, conditional
commitment and financial
guarantee contracts $ (6,406) $ (7,518)
Transfer of receivables
with recourse $ (8,005) $ (8,005)
- -------------------------------------------------------------------------------
(a) Carrying value includes accrued interest and deferred fee income, where
applicable.
19. Quarterly financial data (unaudited)
Summarized quarterly financial data (dollars in millions, except for per share
data) for 1998 and 1997 follows:
Three Months Ended
-----------------------------------------
1998 March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------
Total revenue $ 977 $1,044 $1,052 $1,147
Cost of sales and rentals
and financing $ 394 $ 415 $ 416 $ 439
Income from:
Continuing operations $ 127 $ 139 $ 139 $ 162
Discontinued operations 3 3 2 1
- --------------------------------------------------------------------------
Net income $ 130 $ 142 $ 141 $ 163
==========================================================================
Basic earnings per share:
Continuing operations $ .45 $ .51 $ .51 $.60
Discontinued operations .01 .01 .01 --
- --------------------------------------------------------------------------
Net income $ .46 $ .52 $ .52 $.60
==========================================================================
Diluted earnings per share:
Continuing operations $ .45 $ .50 $ .50 $.59
Discontinued operations .01 .01 .01 --
- --------------------------------------------------------------------------
Net income $ .46 $ .51 $ .51 $.59
==========================================================================
Three Months Ended
-------------------------------------------
1997 March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------
Total revenue $ 926 $ 969 $ 975 $ 1,050
Cost of sales and rentals
and financing $ 361 $ 377 $ 385 $ 409
Income from:
Continuing operations $ 117 $ 128 $ 124 $ 140
Discontinued operations 3 3 4 7
- --------------------------------------------------------------------------
Net income $ 120 $ 131 $ 128 $ 147
==========================================================================
Basic earnings per share:
Continuing operations $ .40 $ .44 $ .43 $ .50
Discontinued operations .01 .01 .01 .02
- --------------------------------------------------------------------------
Net income $ .41 $ .45 $ .44 $ .52
==========================================================================
Diluted earnings per share:
Continuing operations $ .39 $ .44 $ .43 $ .49
Discontinued operations .01 .01 .01 .02
- --------------------------------------------------------------------------
Net income $ .40 $ .45 $ .44 $ .51
==========================================================================
The sum of the quarters of 1998 and 1997 may not equal the annual amount
due to rounding.
57
Report of Independent Accountants
To the Stockholders and Board of Directors of Pitney Bowes Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Pitney Bowes
Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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 the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 21, 1999
58
Stockholder Information
World Headquarters
Pitney Bowes Inc.
1 Elmcroft Rd.
Stamford, CT 06926-0700
(203) 356-5000
www.pitneybowes.com
Annual Meeting
Stockholders are cordially invited to attend the 1999 Annual Meeting at 9:00
a.m., Monday, May 10, 1999, at Pitney Bowes World Headquarters in Stamford,
Connecticut. A notice of the meeting, proxy statement and proxy will be mailed
to each stockholder under separate cover.
10-K Report
The Form 10-K report, to be filed by Pitney Bowes with the Securities and
Exchange Commission, will provide certain additional information. Stockholders
may obtain copies of this report without charge by writing to:
MSC 6140
Investor Relations
Pitney Bowes Inc.
1 Elmcroft Rd.
Stamford, CT 06926-0700
Stock Exchanges
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.
Comments concerning the Annual Report should be sent to:
MSC 6309
Director Corporate Marketing and Advertising
Pitney Bowes Inc.
1 Elmcroft Rd.
Stamford, CT 06926-0700
Investors should contact First Chicago Trust Company at the address below for:
. Lost securities and certificate replacement
. Change of address, account consolidations, legal transfer
requirements, replacement checks, tax information
. Certificate transfers
. Dividend reinvestment plan information
First Chicago Trust Company,
a division of EquiServe
PO Box 2500
Jersey City, NJ 07303-2500
Transfer Agent and Registrar:
First Chicago Trust Company,
a division of EquiServe
PO Box 2500
Jersey City, NJ 07303-2500
Stockholders may call First Chicago Trust Company at
(800) 648-8170.
Investor Inquiries
All investor inquiries about Pitney Bowes should be addressed to:
MSC 6140
Investor Relations
Pitney Bowes Inc.
1 Elmcroft Rd.
Stamford, CT 06926-0700
Stock Information
Dividends per common share
Quarter 1998 1997
- --------------------------------------------------------------------------------
First $.225 $.20
Second .225 .20
Third .225 .20
Fourth .225 .20
- --------------------------------------------------------------------------------
Total $.900 $.80
================================================================================
Quarterly price ranges of common stock
1998
Quarter High Low
- --------------------------------------------------------------------------------
First 51 15/16 42 7/32
Second 52 3/16 44 13/16
Third 58 3/16 46 5/8
Fourth 66 3/8 47 1/8
1997
Quarter High Low
- --------------------------------------------------------------------------------
First 31 3/4 26 13/16
Second 37 7/16 27 15/16
Third 42 1/2 35
Fourth 45 3/4 37 7/16
================================================================================
Trademarks
3 Series, 14 Series, AccuTrac, AddressRight, Arrival, Ascent, ClickStamp,
Conquest, D3, DirectNet, DocuMatch, Finalist, ForwardTrak, Fulfillment, Galaxy,
iSend, Mail Essentials, Mail List Manager, Mailers Choice, Marketing Materials,
Paragon, pb.commander, pb.control, pb.digital, pb.printmgr, Personal Post,
PitneyWorks, Postage by Phone, ReUnion, Smart Image, SmartMailer, StreamWeaver,
Target Prospects, Universal Access, ValueShip, Weigh-on-the-Way are trademarks
or service marks of Pitney Bowes Inc.
Business Rewards, Postal Privilege, Purchase Power, ValueMax, are trademarks or
service marks of Pitney Bowes Financial Services.
All other trademarks are service marks owned by their respective companies.
59