UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 8 - K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 10, 1999
PITNEY BOWES INC.
Commission File Number: 1-3579
State of Incorporation IRS Employer Identification No.
Delaware 06-0495050
World Headquarters
Stamford, Connecticut 06926-0700
Telephone Number: (203) 356-5000
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Item 5. - Other Events.
On June 30, 1999, the company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation (AMIC), a wholly owned subsidiary of
the company, in a manner that maximizes long-term shareholder value.
Accordingly, operating results of AMIC have been segregated and reported as
discontinued operations in the Consolidated Statements of Income for the
quarters and six months ended June 30, 1999 and 1998. Net assets of discontinued
operations have also been separately classified in the Consolidated Balance
Sheet at June 30, 1999, as filed in the company's Quarterly Report on Form 10-Q,
on August 13, 1999.
Pursuant to the treatment of AMIC as discontinued operations as of June 30,
1999, the company is restating Items 1,2,6,7,8,14(a)(2) and Exhibits (12) and
(27) of Item 14 in its Annual Report on Form 10-K for the year ended December
31, 1998. The Company is also restating Items 1 and 2, and Exhibits (12) and
(27) of Item 6 in its Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
These items are included herein as Exhibits and are incorporated by reference
into this Item 5 and the foregoing description of such documents is qualified in
its entirety by reference to such Exhibits.
The information included in this Form 8-K should be read in conjunction with the
company's 1998 Annual Report to Stockholders on Form 10-K and the company's
Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 1999.
Item 7. - Financial Statements and Exhibits
c. Exhibits.
The following exhibits are furnished in accordance with the provisions of Item
601 of Regulation S-K:
Exhibit Description
------- ------------------------------------------------------------------
(23) Consent of Independent Accountants
(99.01) Item 1 of Form 10-K for the year ended December 31, 1998, restated
for the treatment of AMIC as discontinued operations.
(99.02) Item 2 of Form 10-K for the year ended December 31, 1998, restated
for the treatment of AMIC as discontinued operations.
(99.03) Item 6 of Form 10-K for the year ended December 31, 1998, restated
for the treatment of AMIC as discontinued operations.
(99.04) Item 7 of Form 10-K for the year ended December 31, 1998, restated
for the treatment of AMIC as discontinued operations.
(99.05) Item 8 of Form 10-K for the year ended December 31, 1998, restated
for the treatment of AMIC as discontinued operations.
(99.06) Item 14(a)(2) of Form 10-K for the year ended December 31, 1998 -
Financial Statement Schedule II, Valuation and Qualifying Accounts
and Reserves, and Report of Independent Accountants on Financial
Statement Schedule, restated for the treatment of AMIC as
discontinued operations.
(99.07) Exhibit (12) of Item 14 of Form 10-K for the year ended December
31, 1998, restated for the treatment of AMIC as discontinued
operations.
(99.08) Item 1 of Form 10-Q for the quarter ended March 31, 1999, restated
for the treatment of AMIC as discontinued operations.
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Item 7. - Financial Statements and Exhibits (continued)
Exhibit Description
------- ------------------------------------------------------------------
(99.09) Item 2 of Form 10-Q for the quarter ended March 31, 1999, restated
for the treatment of AMIC as discontinued operations.
(99.10) Exhibit (12) of Item 6 of Form 10-Q for the quarter ended March
31, 1999, restated for the treatment of AMIC as discontinued
operations.
(99.11) Exhibit (27) of Item 14 of Form 10-K for the year ended December
31, 1998, restated for the treatment of AMIC as discontinued
operations.
(99.12) Exhibit (27) of Item 6 of Form 10-Q for the quarter ended March
31, 1999, restated for the treatment of AMIC as discontinued
operations.
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Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PITNEY BOWES INC.
December 10, 1999
/s/ M. L. Reichenstein
-------------------------------
M. L. Reichenstein
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ A. F. Henock
-------------------------------
A. F. Henock
Vice President - Controller
and Chief Tax Counsel
(Principal Accounting Officer)
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Exhibit (23)
- -----------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on:
Form Reference
Form S-8 No. 33-5291
Form S-8 No. 33-4549
Form S-8 No. 33-22238
Form S-8 No. 33-5765
Form S-8 No. 33-41182
Form S-8 No. 333-66735
Form S-3 No. 33-5289
Form S-3 No. 33-5290
Form S-3 No. 33-18280
Form S-3 No. 33-25730
Form S-3 No. 33-21723
Form S-3 No. 33-27244
Form S-3 No. 33-33948
Form S-3 No. 333-51281
of Pitney Bowes Inc. of our report, which appears on page 59, dated January 21,
1999, except as to Notes 10,11,13,15 and 17 which are as of July 20, 1999,
relating to the financial statements in this Current Report on Form 8-K. We also
consent to the incorporation by reference of our report, which appears on page
61, dated January 21, 1999, except as to Notes 10,11,13,15 and 17 which are as
of July 20, 1999, relating to the financial statement schedule in this Current
Report on Form 8-K.
PricewaterhouseCoopers LLP
Stamford, Connecticut
December 10, 1999
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Exhibit (99.01)
- ---------------
PART I
- ------
Item 1. Business
--------
Pitney Bowes Inc. and its subsidiaries (the company) operate in three reportable
segments: Mailing and Integrated Logistics, Office Solutions, and Capital
Services. The company operates in the United States and outside the U.S.
Financial information concerning revenue, operating profit and identifiable
assets by reportable segment and geographic area appears on pages 53 to 55 of
this Form 8-K.
Mailing and Integrated Logistics.
- -----------------------------------
Mailing and Integrated Logistics includes revenues from the sale and financing
of mailing equipment, related supplies and services, and the rental of postage
meters. Products are sold, rented or financed by the company, while supplies and
services are sold. Some of the company's products are sold through dealers
outside the U.S.
Products include postage meters, mailing machines, address hygiene software,
manifest systems, letter and parcel scales, mail openers, mailroom furniture,
folders, and paper handling and shipping equipment.
Office Solutions.
- -----------------
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. Products are sold, rented or financed by the
company, while supplies and services are sold.
Facilities management services are provided by the company's Pitney Bowes
Management Services, Inc. subsidiary (P.B.M.S.). P.B.M.S. provides customers
with a variety of business support services to manage copy, reprographic and
mail centers, facsimile, electronic printing and imaging services, and records
management. P.B.M.S. is a major provider of on- and off-site services which help
customers manage the creation, processing, storage, retrieval, distribution and
tracking of documents and messages in both paper and digital form.
The financial services operations provide lease financing for the company's
products (for both the Mailing and Integrated Logistics and Office Solutions
segments) in the U.S., Canada, the United Kingdom, Germany, France, Norway,
Ireland, Australia, Austria, Switzerland and Sweden. Consolidated financial
services operations financed 38 percent of consolidated sales from continuing
operations in 1998, 36 percent in 1997, and 39 percent in 1996. Consolidated
financial services operations financed approximately 77 percent of leasable
sales in 1998, 1997 and 1996.
Capital Services.
- -----------------
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.
Products financed include both commercial and non-commercial aircraft,
over-the-road trucks and trailers, locomotives, railcars, rail and bus
facilities and high-technology equipment such as data processing and
communications equipment. The finance operations have also participated, on a
select basis, in certain other types of financial transactions including: sales
of lease transactions, senior secured loans in connection with acquisitions,
leveraged buyout and recapitalization financings and certain project financings.
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 on October 30,
1998. 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
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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.
On June 30, 1999, the company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation (AMIC), a wholly owned subsidiary of
the company, in a manner that maximizes long-term shareholder value. Operating
results of AMIC have been segregated and reported separately as discontinued
operations in the Consolidated Statements of Income.
Support Services.
- -----------------
The company maintains extensive field service organizations in the U.S. and
certain other countries to provide support services to customers who have
rented, leased or purchased equipment. Such support services, provided primarily
on the basis of annual maintenance contracts, accounted for approximately 13
percent of revenue in 1998, 1997 and 1996.
Marketing.
- ----------
The company's products and services are marketed through an extensive network of
offices in the U.S. and through a number of subsidiaries and independent
distributors and dealers in many countries throughout the world as well as
through direct marketing and outbound telemarketing. The company sells to a
variety of businesses, governmental, institutional and other organizations. It
has a broad base of customers, and is not dependent upon any one customer or
type of customer for a significant part of its business. The company does not
have significant backlog or seasonality relating to its businesses.
Operations Outside the United States.
- -------------------------------------
The company's manufacturing operations outside the U.S. are in the United
Kingdom.
Competition.
- ------------
The company has historically been a leading supplier of certain products and
services in its business segments, particularly postage meters and mailing
machines. However, all segments have strong competition from a number of
companies. In particular, it is facing competition in many countries for new
placements from several postage meter and mailing machine suppliers, and its
mailing systems products face competition from products and services offered as
alternative means of message communications. P.B.M.S., a major provider of
business support services to the corporate, financial services, and professional
services markets, competes against national, regional and local firms
specializing in facilities management. The company believes that its long
experience and reputation for product quality, and its sales and support service
organizations are important factors in influencing customer choices with respect
to its products and services.
The financing business is highly competitive with aggressive rate competition.
Leasing companies, commercial finance companies, commercial banks and other
financial institutions compete, in varying degrees, in the several markets in
which the finance operations do business and range from very large, diversified
financial institutions to many small, specialized firms. In view of the market
fragmentation and absence of any dominant competitors which result from such
competition, it is not possible to provide a meaningful description of the
finance operations' competitive position in these markets.
Research and Development/Patents.
- -----------------------------------
The company has research and development programs that are directed towards
developing new products and service methods. Expenditures on research and
development totaled $100.8 million, $89.5 million, and $81.7 million in 1998,
1997 and 1996, respectively.
As a result of its research and development efforts, the company has been
awarded a number of patents with respect to several of its existing and planned
products. However, the company believes its businesses are not materially
dependent on any one patent or any group of related patents. The company also
believes its businesses are not materially dependent on any one license or any
group of related licenses.
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Material Supplies.
- -------------------
The company believes it has adequate sources for most parts and materials for
the products it manufactures. However, products manufactured by the company rely
to an increasing extent on microelectronic components, and temporary shortages
of these components have occurred from time to time due to the demands by many
users of such components.
The company purchases copiers, facsimile equipment and scales primarily from
Japanese suppliers. The company believes that it has adequate sources available
to it for the foreseeable future for such products.
Environmental Regulation.
- --------------------------
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 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 of 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 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 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. If and when it is
possible to make a reasonable estimate of the liability in any of these matters,
a financial provision will be made as appropriate. Based on the facts presently
known, the company believes that the outcome of any current proceeding will not
have a material adverse effect on its financial condition or results of
operations.
Regulatory Matters.
- --------------------
In May 1996, the U.S.P.S. 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 U.S.P.S. to negotiate a revised mechanical meter migration
schedule. The final schedule agreed to with the U.S.P.S. is as follows:
o 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.
o 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.
o 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.
o 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 U.S.P.S. 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 was electronic or digital, compared
to 75% at December 31, 1997. The company continues to work in close cooperation
with the U.S.P.S., to convert those mechanical meter customers who have not
migrated to digital or electronic meters by the applicable U.S.P.S. deadline.
<PAGE>
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In May 1995, the U.S.P.S. publicly announced its concept of its Information
Based Indicia Program (IBIP) for future postage evidencing devices. As initially
stated by the U.S.P.S., 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 U.S.P.S. value-added services to
mailers. The program would consist of the development of four separate
specifications:
o the Indicium specification - the technical specifications for the indicium
to be printed
o a Postal Security Device specification - the technical specification for the
device that would contain the accounting and security features of the system
o a Host specification
o a Vendor Infrastructure specification
In July 1996, the U.S.P.S. 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
U.S.P.S. published for public comment the Vendor Infrastructure specification.
In August 1998, the U.S.P.S. 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 U.S.P.S.
Employee Relations.
- --------------------
At December 31, 1998, 26,362 persons were employed by the company in the U.S.
and 4,507 outside the U.S. Employee relations are considered to be satisfactory.
The majority of employees are not represented by any labor union. Management
follows the policy of keeping employees informed of its decisions, and
encourages and implements employee suggestions whenever practicable.
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Exhibit (99.02)
- ---------------
Item 2. Properties
----------
The company's World Headquarters and certain other office and manufacturing
facilities are located in Stamford, Connecticut. Additional office facilities
are located in Shelton, Connecticut. The company maintains research and
development operations at a corporate engineering and technology center in
Shelton, Connecticut. A sales and service training center is located near
Atlanta, Georgia. The company believes that its current manufacturing,
administrative and sales office properties are adequate for the needs of all of
its operations.
Mailing and Integrated Logistics.
- ---------------------------------
Mailing and Integrated Logistics products are manufactured in a number of plants
principally in Connecticut, as well as in Harlow, England. Most of these
facilities are owned by the company. At December 31, 1998, there were 135 sales,
support services, and finance offices; substantially all of which are leased,
located throughout the U.S. and in a number of other countries.
Office Solutions.
- -----------------
The company's copier and facsimile systems businesses are both headquartered in
Trumbull, Connecticut. The company's facilities management subsidiary is
headquartered in Stamford, Connecticut and leases 29 facilities located
throughout the U.S., as well as in Toronto, Ontario, Canada, and London,
England.
Executive and administrative offices of the financing operations (for both the
Mailing and Integrated Logistics and Office Solutions segments) within the U.S.
are located in Shelton, Connecticut. Offices of the financing operations outside
the U.S. are maintained in Mississauga, Ontario, Canada; London, England;
Heppenheim, Germany; Paris, France; Oslo, Norway; Dublin, Ireland; French's
Forest, Australia; Vienna, Austria; Effretikon, Switzerland; and Stockholm,
Sweden.
Capital Services.
- ------------------
Pitney Bowes Credit Corporation leases an executive and administrative office in
Shelton, Connecticut, which is owned by Pitney Bowes Inc. There are ten leased
regional and district sales offices located throughout the U.S.
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Exhibit (99.03)
- --------------
Item 6. - Summary of Selected Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $4,090,915 $3,846,767 $3,642,564 $3,389,153 $3,151,885
Costs and expenses 3,266,311 3,098,342 3,001,805 2,801,589 2,635,819
Nonrecurring items, net - - - - (25,366)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes 824,604 748,425 640,759 587,564 541,432
Provision for income taxes 282,092 256,073 198,230 200,192 208,131
---------- ---------- ---------- ---------- ----------
Income from continuing operations 542,512 492,352 442,529 387,372 333,301
Discontinued operations 33,882 33,675 26,884 195,768 60,290
Effect of accounting changes - - - - (119,532)
---------- ---------- ---------- ---------- ----------
Net income $ 576,394 $ 526,027 $ 469,413 $ 583,140 $ 274,059
========== ========== ========== ========== ==========
Basic earnings per share:
Continuing operations $1.98 $1.70 $1.48 $1.28 $1.07
Discontinued operations .12 .12 .09 .65 .19
Effect of accounting changes - - - - (.38)
----------- ---------- ---------- ---------- ----------
Net income $2.10 $1.82 $1.57 $1.93 $ .88
=========== ========== ========== ========== ==========
Diluted earnings per share:
Continuing operations $1.94 $1.68 $1.47 $1.27 $1.06
Discontinued operations .12 .12 .09 .64 .19
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 20.2% 19.5% 17.6% 17.3% 17.2%
After-tax earnings 13.3% 12.8% 12.1% 11.4% 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 30,869 29,368 28,160 27,366 32,507
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 29 through 58
</TABLE>
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Exhibit (99.04)
- ---------------
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 three reportable segments: Mailing and Integrated
Logistics, Office Solutions 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. 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.
On June 30, 1999, the company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation (AMIC), a wholly owned subsidiary of
the company, in a manner that maximizes long-term shareholder value.
Accordingly, operating results of AMIC have been segregated and reported as
discontinued operations in the Consolidated Statements of Income. See Note 13 to
the consolidated financial statements.
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 6%, operating profit grew 15%, income from continuing
operations grew 10% and diluted earnings per share from continuing operations
increased 15% to $1.94 compared with $1.68 for 1997.
Revenue
(Dollars in millions) 1998 1997 % change
- ------------------------------------------------------------------
Mailing and
Integrated Logistics $2,707 $2,552 6%
Office Solutions 1,216 1,089 12%
Capital Services 168 206 (18%)
- ------------------------------------------------------------------
$4,091 $3,847 6%
==================================================================
The revenue increase came from growth in the Mailing and Integrated Logistics
and Office Solutions segments of 6% and 12%, respectively, over 1997. Volume
increases in our U.S. Mailing Systems, Production Mail, U.S. Copier Systems,
Facsimile Systems, and facilities management 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.
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Page 13
Operating profit
(Dollars in millions) 1998 1997 % change
- ------------------------------------------------------------------
Mailing and
Integrated Logistics $660 $582 13%
Office Solutions 235 197 19%
Capital Services 52 48 7%
- ------------------------------------------------------------------
$947 $827 15%
==================================================================
Operating profit grew 15% over the prior year compared with growth of 17% 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 profit continued to significantly outpace revenue growth. Operating
profit grew 13% in the Mailing and Integrated Logistics segment, 19% in the
Office Solutions 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.
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 3% 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 was flat. Revenue increases came from increased volume of
leases of the company's products and from new product offerings such as Purchase
PowerSM, Business RewardsSM and Postal PrivilegeSM. 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.
<PAGE>
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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.
Cost of rentals and financing
(Dollars in millions) 1998 1997 % change
- -------------------------------------------------------------------------
$419 $401 4%
Percentage of rentals
and financing revenue 26.5% 26.2%
Cost of rentals and financing, as a percentage of rentals and financing revenue,
increased slightly. While the cost of rentals was essentially flat with 1997,
the cost of financing 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 35% of revenue in 1998
compared with 36% 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.
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.
<PAGE>
Page 15
Net interest expense
(Dollars in millions) 1998 1997 % change
- -------------------------------------------------------------------------
$157 $158 (1%)
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
- ---------------------------------
34.2% 34.2%
The effective tax rate of 34.2% 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.
Income from continuing operations and diluted earnings per share from continuing
operations increased 10% and 15%, 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 13.3% in 1998 from 12.8% in 1997.
Results of Continuing Operations 1997 Compared to 1996
In 1997, revenue increased 6%, operating profit grew 17%, income from continuing
operations grew 11% and diluted earnings per share from continuing operations
increased 15% to $1.68 compared with $1.47 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%
Capital Services 206 258 (20%)
- ------------------------------------------------------------------------
$3,847 $3,643 6%
========================================================================
The revenue increase came from growth in the Mailing and Integrated Logistics
and Office Solutions segments of 6% and 11%, respectively, over 1996. Volume
increases in our U.S. Mailing Systems, Production Mail, U.S. Copier Systems,
Facsimile Systems and facilities management 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.
<PAGE>
Page 16
Operating profit
(Dollars in millions) 1997 1996 % change
- -------------------------------------------------------------------------
Mailing and
Integrated Logistics $582 $474 23%
Office Solutions 197 172 15%
Capital Services 48 60 (21%)
- -------------------------------------------------------------------------
$827 $706 17%
=========================================================================
Operating profit grew 17% 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 23% in the Mailing and Integrated
Logistics segment, 15% in the Office Solutions 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 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 2% 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.
<PAGE>
Page 17
Financing revenue, adjusted for planned asset sales, grew 2% in 1997 on
increased volume of leases of Pitney Bowes products and new product offerings
such as Purchase PowerSM. Including the impact of asset sales, which generated
more revenues in 1996 than in 1997, financing revenue decreased 2% 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
- -------------------------------------------------------------------------
$401 $395 2%
Percentage of rentals
and financing revenue 26.2% 26.3%
Cost of rentals and financing remained flat at 26% 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 36% of revenue in 1997
compared with 37% 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 36%.
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
- ------------------------------------------------------------------------
$158 $160 (1%)
<PAGE>
Page 18
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
- ----------------------------------
34.2% 30.9%
The effective tax rate was 34.2% for 1997 compared with 30.9% for 1996. The tax
benefit associated with the company's actions in 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 33.5%.
Income from continuing operations and diluted earnings per share from continuing
operations increased 11% and 15%, 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 12.8% in 1997 from 12.1% in
1996.
Other Matters
On June 30, 1999, the Company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation (AMIC), a wholly owned subsidiary of
the Company, in a manner that maximizes long-term shareholder value.
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. This 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.
<PAGE>
Page 19
In 1998, the company adopted FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Under FAS 131, the company has three
reportable segments: Mailing and Integrated Logistics, Office Solutions 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.
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 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.
<PAGE>
Page 20
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.
<PAGE>
Page 21
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 currencies, 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.
<PAGE>
Page 22
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.
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:
o contractual rights under vendor, insurance or other contracts
o intellectual property or patent rights
o equipment, service or payment disputes with customers
o 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.
<PAGE>
Page 23
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:
o 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.
o 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.
o 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.
o 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:
o the Indicium specification--the technical specifications for the indicium to
be printed
o a Postal Security Device specification--the technical specification for the
device that would contain the accounting and security features of the system
o a Host specification
o 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.
<PAGE>
Page 24
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 levels, 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 Form 8-K 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:
o changes in postal regulations
o timely development and acceptance of new products
o success in gaining product approval in new markets where regulatory approval
is required
o successful entry into new markets
o mailers' utilization of alternative means of communication or competitors'
products
o our success at managing customer credit risk
o changes in interest rates
o the impact of the Year 2000 issue, including the effects of third parties'
inabiliities to address the Year 2000 problem as well as the company's own
readiness
<PAGE>
Page 25
Exhibit (99.05)
- --------------
<TABLE>
<CAPTION>
Item 8. - Financial Statements and Supplementary Data
- ---------------------------------------------------------------------------------------
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Years ended December 31
-----------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue from:
Sales $1,993,546 $1,834,057 $1,675,090
Rentals and financing 1,581,866 1,529,154 1,501,723
Support services 515,503 483,556 465,751
---------- ---------- ----------
Total revenue 4,090,915 3,846,767 3,642,564
---------- ---------- ----------
Costs and expenses:
Cost of sales 1,146,404 1,081,537 1,025,250
Cost of rentals and financing 419,123 401,345 395,031
Selling, service and administrative 1,443,080 1,367,862 1,340,276
Research and development 100,806 89,463 81,726
Interest expense 162,092 161,867 163,173
Interest income (5,194) (3,732) (3,651)
---------- ---------- ----------
Total costs and expenses 3,266,311 3,098,342 3,001,805
---------- ---------- ----------
Income from continuing operations before
income taxes 824,604 748,425 640,759
Provision for income taxes 282,092 256,073 198,230
---------- ---------- ----------
Income from continuing operations 542,512 492,352 442,529
Income, net of income tax, from
discontinued operations 33,882 33,675 26,884
---------- ---------- ----------
Net income $ 576,394 $ 526,027 $ 469,413
========== ========== ==========
Basic earnings per share:
Income from continuing operations $1.98 $1.70 $1.48
Discontinued operations .12 .12 .09
---------- ---------- ----------
Net income $2.10 $1.82 $1.57
========== ========== ==========
Diluted earnings per share:
Income from continuing operations $1.94 $1.68 $1.47
Discontinued operations .12 .12 .09
---------- ---------- ----------
Net income $2.06 $1.80 $1.56
========== ========== ==========
</TABLE>
See notes, pages 29 through 58
<PAGE>
Page 26
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
(Dollars in thousands, except share data)
December 31
-------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
========== ==========
</TABLE>
See notes, pages 29 through 58
<PAGE>
Page 27
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------
1998 1997* 1996*
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 (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
======== ======== ========
* Certain prior year amounts have been reclassified to conform with the 1998
presentation.
</TABLE>
See notes, pages 29 through 58
<PAGE>
Page 28
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
===================================================================================================================================
</TABLE>
See notes, pages 29 through 58
<PAGE>
Page 29
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 statement 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.
<PAGE>
Page 30
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
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. 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.
<PAGE>
Page 31
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.
<PAGE>
Page 32
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, foreclosure, delinquency 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 Statement 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
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.
Reclassification
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
========== ==========
<PAGE>
Page 33
If all inventories 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:
December 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.
<PAGE>
Page 34
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.
<PAGE>
Page 35
The company enters into interest rate swap agreements primarily through its
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.
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.
<PAGE>
Page 36
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.
<PAGE>
Page 37
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
123, net income and earnings per share for 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
<PAGE>
Page 38
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
========= ===
<PAGE>
Page 39
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.
<PAGE>
Page 40
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.
<PAGE>
Page 41
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 $542,512
Less:
Preferred stock dividends (1)
Preference stock dividends (164)
--------
Basic earnings per share $542,347 274,977,135 $1.98
-------- ----------- -----
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 $542,512 279,656,603 $1.94
========= =========== =====
1997
------------------------------------------
Per
Income Shares Share
---------------------------------------------------------------------------
Income from
continuing operations $492,352
Less:
Preferred stock dividends (1)
Preference stock dividends (179)
--------
Basic earnings per share $492,172 288,782,996 $1.70
-------- ----------- -----
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 $492,352 292,517,116 $1.68
======== =========== =====
1996
-------------------------------------------
Per
Income Shares Share
---------------------------------------------------------------------------
Income from
continuing operations $442,529
Less:
Preferred stock dividends (1)
Preference stock dividends (194)
---------
Basic earnings per share $442,334 298,233,766 $1.48
--------- ----------- -----
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 $442,529 301,303,356 $1.47
======== =========== =====
<PAGE>
Page 42
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. $732,214 $663,194 $613,238
Outside the U.S. 92,390 85,231 27,521
-------- -------- --------
Total $824,604 $748,425 $640,759
======== ======== ========
Provision for income taxes:
U.S. federal:
Current $ 87,326 $ 92,517 $ 54,597
Deferred 130,479 108,645 85,126
-------- -------- --------
217,805 201,162 139,723
-------- -------- --------
U.S. state and local:
Current 21,046 39,313 12,808
Deferred 23,566 (6,969) 26,344
-------- --------- --------
44,612 32,344 39,152
-------- -------- --------
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 138,291 165,426 96,099
Total deferred 143,801 90,647 102,131
-------- -------- --------
Total $282,092 $256,073 $198,230
======== ======== ========
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.
<PAGE>
Page 43
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 3.5 2.9 4.0
Foreign tax differential (1.5) (1.0) (0.2)
Australian write-off - - (2.6)
Life insurance investment (0.3) (0.8) (1.7)
Other (2.5) (1.9) (3.6)
-----------------------------------------------------------------------------
Effective income tax rate 34.2% 34.2% 30.9%
=============================================================================
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 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.
<PAGE>
Page 44
12. Retirement plans and nonpension postretirement benefits
The company has several defined benefit and defined contribution pension
plans covering substantially all employees worldwide. Benefits are
primarily based on employees' compensation and years of service. Company
contributions are determined based on the funding requirements of U.S.
federal and other governmental laws and regulations.
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 company 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 cost 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:
<TABLE>
<CAPTION>
Pension Benefits
---------------------------------------------------------
United States Foreign
-------------------------- -------------------------
December 31 1998 1997 1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
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
========================== ==========================
</TABLE>
<PAGE>
Page 45
<TABLE>
<S> <C> <C> <C> <C>
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%
</TABLE>
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 included 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 contributions.
The change in benefit obligations and plan assets and the funded status for
nonpension postretirement benefit plans is as follows:
<TABLE>
<CAPTION>
Nonpension Postretirement Benefits
-----------------------------------------
December 31 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
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
========= =========
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)
========= =========
</TABLE>
<PAGE>
Page 46
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:
<TABLE>
<CAPTION>
Pension Benefits
--------------------------------------------------------------------
United States Foreign
-------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
-------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 559 977 1,232 - 7 (201)
---------------------------------- ---------------------------------
Net periodic benefit cost $ 8,591 $ 8,405 $31,177 $ 3,146 $ 4,480 $ 4,301
================================== =================================
</TABLE>
<TABLE>
<CAPTION>
Nonpension Postretirement Benefits
------------------------------------------
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
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
==========================================
</TABLE>
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
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
obligation 12,769 12,050
13. Discontinued Operations
On June 30, 1999, the company committed itself to a formal plan to
dispose of Atlantic Mortgage & Investment Corporation (AMIC), a wholly
owned subsidiary of the company, in a manner that maximizes long-term
shareholder value.
<PAGE>
Page 47
Revenue of AMIC was $129.6 million, $73.2 million and $53.0 million for
the years ended December 31, 1998, 1997, and 1996, respectively. Net
interest expense (income) allocated to AMIC's discontinued operations
was $4.9 million, $0.1 million and $(1.8) million for the years ended
December 31, 1998, 1997 and 1996, respectively. Interest has been
allocated based on AMIC's net intercompany borrowing levels with
PBCC, a wholly owned subsidiary of the company, charged at PBCC's
weighted average borrowing rate, offset by the interest savings
PBCC realizes due to borrowings against AMIC's escrow deposits as
opposed to regular commercial paper borrowings.
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. The company does not expect the effect of any
adjustments to be significant.
Revenue of CPLC was $113.8 million, $180.5 million and $163.0 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
December 31, 1998, 1997 and 1996, respectively. Interest expense has been
allocated based on CPLC's intercompany borrowing levels with PBCC,
charged at PBCC's weighted average borrowing rate.
Operating results of both AMIC and CPLC have been segregated and reported
as discontinued operations in the Consolidated Statements of Income.
Prior year results have been reclassified to conform to the current year
presentation. Net assets of discontinued operations have not been
separately classified in the Consolidated Balance Sheets at December 31,
1998 and 1997. Cash flow impacts of discontinued operations have not been
segregated in the Consolidated Statements of Cash Flows. Details of
income from discontinued operations, net of taxes, are as follows:
<TABLE>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
AMIC $25,429 $16,650 $10,080
CPLC 8,453 17,025 16,804
------- ------- -------
Income from discontinued operations $33,882 $33,675 $26,884
======= ======= =======
</TABLE>
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 credit-worthiness on a case-by-case basis. Upon extension of
credit, the amount and type of collateral obtained, if deemed necessary
by the company, is based on management's credit assessment of the
customer. Fees received under the agreements are recognized over the
commitment period. The maximum risk of loss arises from the possible
non-performance of the customer to meet the terms of the credit
agreement. As part of the company's review of its exposure to risk,
adequate provisions are made for finance assets, which may be
uncollectible.
From time to time, the company is a party to lawsuits that arise in the
ordinary course of its business. These lawsuits may involve litigation by
or against the company to enforce contractual rights under vendor,
insurance, or other contracts; lawsuits relating to intellectual property
or patent rights; equipment, service or payment disputes with customers;
disputes with employees; or other matters. The company is currently a
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.
<PAGE>
Page 48
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 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.
<PAGE>
Page 49
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 its 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 $110.9 million, $116.3 million and $120.5 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.
<PAGE>
Page 50
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 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
======== ======== ========
<PAGE>
Page 51
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.
Maturities of gross finance receivables and notes payable for the finance
operations are as follows:
Gross finance Notes payable, current
Years ending December 31 receivables and long-term debt
----------------------------------------------------------------------
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
========== ==========
<PAGE>
Page 52
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 lessee's 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.
<PAGE>
Page 53
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 $545.0 million and $502.0 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 reported segment derives revenue, see
"Overview" on page 12. That information is incorporated herein by
reference. The information set forth below should be read in conjunction
with such information. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies, with
the exception of the items outlined below.
Operating profit of each segment is determined by deducting from revenue
the related costs and operating expenses directly attributable to the
segment. Segment operating profit excludes general corporate expenses,
income taxes and net interest attributable to corporate debt. Interest from
financial services businesses includes intercompany interest. Identifiable
assets are those used in the company's operations and exclude cash, and
cash equivalents, short-term investments and general corporate assets. Long
lived assets exclude finance receivables, investment in leveraged leases
and mortgage servicing rights.
Revenue and operating profit by business segment and geographic area for
the years ended 1996 to 1998 were as follows:
Revenue
------------------------------------------------
(in millions) 1998 1997 1996
--------------------------------------------------------------------------
Business Segments:
Mailing and
Integrated Logistics $2,707 $2,552 $2,402
Office Solutions 1,216 1,089 983
Capital Services 168 206 258
------ ------ ------
Total $4,091 $3,847 $3,643
====== ====== ======
Geographic areas:
United States $3,505 $3,285 $3,082
Outside the
United States 586 562 561
------ ------ ------
Total $4,091 $3,847 $3,643
====== ====== ======
<PAGE>
Page 54
Operating Profit
---------------------------------------------
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------
Business segments:
Mailing and
Integrated Logistics $660 $582 $474
Office Solutions 235 197 172
Capital Services 52 48 60
---- ---- ----
Total $947 $827 $706
==== ==== ====
Geographic areas:
United States $860 $748 $674
Outside the
United States(a) 87 79 32
---- ---- ----
Total $947 $827 $706
==== ==== ====
(a)In 1996, excluding the Australian charge of $30 million, operating profit for
the Mailing and Integrated Logistics segment would have been $504 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 14.
Additional segment information is as follows:
Years ended December 31
-----------------------------------------
(in millions) 1998 1997 1996
- ------------------------------------------------------------------------------
Depreciation and
amortization:
Mailing and
Integrated Logistics $177 $167 $166
Office Solutions 88 74 62
Capital Services 16 15 14
---- ---- ----
Total $281 $256 $242
==== ==== ====
Net interest expense:
Mailing and
Integrated Logistics $ 63 $ 58 $ 52
Office Solutions 5 5 4
Capital Services 72 104 120
---- ---- ----
Total $140 $167 $176
==== ==== ====
December 31
-------------------------
(in millions) 1998 1997
------------------------------------------------------------
Net additions to
long-lived assets:
Mailing and
Integrated Logistics $177 $176
Office Solutions 123 98
Capital Services 16 (42)
---- ----
Total $316 $232
==== ====
Identifiable assets:
Mailing and
Integrated Logistics $3,893 $3,596
Office Solutions 879 769
Capital services 2,012 2,020
----- -----
Total $6,784 $6,385
====== ======
<PAGE>
Page 55
Identifiable long-lived assets by geographic areas:
United States $1,561 $1,450
Outside the United States 195 182
------ ------
Total $1,756 $1,632
====== ======
Reconciliation of Segment amounts to consolidated totals:
Years ended December 31
------------------------------------
(in millions) 1998 1997 1996
--------------------------------------------------------------------------
Operating profit:
Total operating profit for
reportable segments $947 $827 $706
Unallocated amounts:
Net interest (corporate
interest expense, net of
intercompany transactions) (17) 9 16
Corporate expense (105) (88) (81)
---- ---- ----
Income from continuing operations
before income taxes $825 $748 $641
==== ==== ====
Net interest expense:
Total interest expense for
reportable segments $140 $167 $176
Net interest(corporate interest
expense,net of intercompany
transactions) 17 (9) (16)
---- ---- ----
Consolidated net interest
expense $157 $158 $160
==== ==== ====
Depreciation and amortization:
Total depreciation and
amortization for reportable
segments $281 $256 $242
Corporate depreciation 14 13 13
Discontinued operations 66 31 23
---- ---- ----
Consolidated depreciation
and amortization $361 $300 $278
==== ==== ====
December 31
----------------------------------
(in millions) 1998 1997
----------------------------------------------------------------------------
Net additions to long-lived assets:
Total additions for
reportable segments $ 316 $ 232
Unallocated amounts 6 10
Discontinued operations 3 8
------ ------
Consolidated additions to
long-lived assets $ 325 $ 250
====== ======
Total assets:
Total identifiable assets
by reportable segments $6,784 $6,385
Cash and cash equivalents and
short-term investments 129 139
General corporate assets 138 147
Discontinued operations 610 1,222
------ ------
Consolidated assets $7,661 $7,893
====== ======
<PAGE>
Page 56
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 value 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 the dealer quotes.
The interest rate swap portion represents the estimated amount the company
would receive or pay to terminate the agreements, 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.
<PAGE>
Page 57
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.
<PAGE>
Page 58
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 $ 954 $ 1,015 $1,013 $ 1,109
Cost of sales and rentals
and financing $ 378 $ 394 $ 385 $ 408
Income from continuing
operations $ 123 $ 133 $ 133 $ 154
Discontinued operations 7 9 8 9
----- ------- ------ ------
Net income $ 130 $ 142 $ 141 $ 163
===== ======= ====== ======
Basic earnings per share:
Continuing operations $ .43 $ .49 $ .49 $ .57
Discontinued operations .03 .03 .03 .03
----- ------- ------ ------
Net income $ .46 $ .52 $ .52 $ .60
===== ======= ====== ======
Diluted earnings per share:
Continuing operations $ .43 $ .48 $ .48 $ .56
Discontinued operations .03 .03 .03 .03
----- ------- ------ ------
Net income $ .46 $ .51 $ .51 $ .59
===== ======= ====== ======
Three Months Ended
----------------------------------------------
1997 March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------------------------------
Total revenue $911 $952 $955 $1,028
Cost of sales and rentals
and financing $351 $366 $372 $ 394
Income from continuing
operations $114 $124 $120 $ 135
Discontinued operations 6 7 8 12
---- ---- ---- ------
Net income $120 $131 $128 $ 147
==== ==== ==== ======
Basic earnings per share:
Continuing operations $.39 $.43 $.41 $ .48
Discontinued operations .02 .02 .03 .04
---- ---- ---- ------
Net income $.41 $.45 $.44 $ .52
==== ==== ==== ======
Diluted earnings per share:
Continuing operations $.38 $.43 $.41 $ .47
Discontinued operations .02 .02 .03 .04
---- ---- ---- ------
Net income $.40 $.45 $.44 $ .51
==== ==== ==== ======
The sum of the quarters of 1998 and 1997 may not equal the annual amount
due to rounding.
<PAGE>
Page 59
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 accounting principles generally accepted in the United
States. 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 auditing standards generally
accepted in the United States 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.
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 21, 1999, except as to Note 10,11,13,15 and 17 which are as of
July 20, 1999
<PAGE>
Page 60
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
=======================================================================
<PAGE>
Page 61
Exhibit (99.06)
--------------
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Pitney Bowes Inc.
Our audits of the consolidated financial statements referred to in our
report dated January 21, 1999, except as to Notes 10,11,13,15 and 17 which
are as of July 20, 1999, appearing on page 59 of this Current Report on Form
8-K, also included an audit of the financial statement schedule appearing on
page 62 of this Current Report on Form 8-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 21, 1999, except as to Notes 10,11,13,15 and 17 which are as of
July 20, 1999
<PAGE>
Page 62
PITNEY BOWES INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996 TO 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance
beginning of costs and at end
Description year expenses Deductions of year
- ----------- ------------ ---------- ---------- -------
Allowance for doubtful accounts
- -------------------------------
<S> <C> <C> <C> <C>
1998 $ 21,129 $ 9,872 $ 6,336 (1) $ 24,665
1997 $ 16,160 $ 9,269 $ 4,300 (1) $ 21,129
1996 $ 13,050 $ 9,894 $ 6,784 (1) $ 16,160
Allowance for credit losses on finance receivables
- --------------------------------------------------
1998 $132,308 $73,142 $74,675 (1) $130,775
1997 $113,737 $85,628 $67,057 (1) $132,308
1996 $113,506 $74,785 $74,554 (1) $113,737
Valuation allowance for mortgage servicing rights impairment
- ------------------------------------------------------------
1998 $ - $12,102 $ 1,875 $ 10,227
1997 $ - $ - $ - $ -
1996 $ - $ - $ - $ -
Valuation allowance for deferred tax asset (2)
- ------------------------------------------
1998 $ 41,301 $22,221 $ 2,565 $ 60,957
1997 $ 46,601 $ 1,233 $ 6,533 $ 41,301
1996 $ 48,693 $ 3,066 $ 5,158 $ 46,601
(1) Principally uncollectible accounts written off.
(2) Included in balance sheet as a liability.
</TABLE>
<PAGE>
Page 63
Exhibit (99.07)
- --------------
PITNEY BOWES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (1)
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1998(2) 1997 (2) 1996 (2) 1995 (2) 1994 (2)
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income from continuing
operations before
income taxes................. $ 824,604 $748,425 $640,759 $587,564 $541,432
Add:
Interest expense............ 162,092 161,867 163,173 196,436 170,996
Portion of rents
representative of
the interest factor........ 36,962 38,764 40,157 41,750 42,066
Amortization of
capitalized interest....... 973 914 914 914 914
Minority interest in
the income of
subsidiary with
fixed charges.............. 12,425 11,322 8,121 5,013 -
---------- -------- -------- -------- --------
Income as adjusted............ $1,037,056 $961,292 $853,124 $831,677 $755,408
========== ======== ======== ======== ========
Fixed charges:
Interest expense............ $162,092 $161,867 $163,173 $196,436 $170,996
Capitalized interest........ - - 1,201 2,178 733
Portion of rents
representative of
the interest factor........ 36,962 38,764 40,157 41,750 42,066
Minority interest,
excluding taxes, in
the income of
subsidiary with
fixed charges.............. 18,886 17,209 11,759 7,604 -
--------- -------- -------- -------- --------
$217,940 $217,840 $216,290 $247,968 $213,795
========= ======== ======== ======== ========
Ratio of earning to
fixed charges................ 4.76 4.41 3.94 3.35 3.53
========= ======== ======== ======== ========
Ratio of earnings to
fixed charges
excluding minority
interest..................... 5.15 4.73 4.13 3.44 3.53
========= ======== ======== ======== ========
</TABLE>
(1) The computation of the ratio of earnings to fixed charges has been computed
by dividing income from continuing operations before income taxes as
adjusted by fixed charges. Included in fixed charges is one-third of rental
expense as the representative portion of interest.
(2) Amounts reclassified to reflect CPLC and AMIC as discontinued operations.
Interest expense and the portion of rents representative of the interest
factor of these discontinued operations have been excluded from fixed
charges in the computation.
Including these amounts in fixed charges, the ratio of earnings to fixed
charges would be 4.20, 3.80, 3.47, 3.10, and 3.28 for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994, respectively. The ratio
of earnings to fixed charges excluding minority interest would be 4.48,
4.01, 3.61, 3.17 and 3.28 for the years ended December 31, 1998, 1997,
1996, 1995, and 1994, respectively.
<PAGE>
Page 64
Exhibit (99.08)
- --------------
Part I - Financial Information
Item 1. Financial Statements.
Pitney Bowes Inc.
Consolidated Statements of Income
(Unaudited)
---------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Ended March 31,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Revenue from:
Sales.......................................... $ 510,382 $ 450,425
Rentals and financing.......................... 405,725 380,371
Support services............................... 133,217 122,989
-------------- --------------
Total revenue................................ 1,049,324 953,785
-------------- --------------
Costs and expenses:
Cost of sales.................................. 296,719 275,000
Cost of rentals and financing.................. 110,933 102,621
Selling, service and administrative............ 361,028 330,982
Research and development....................... 25,904 23,631
Interest, net.................................. 45,500 35,497
-------------- --------------
Total costs and expenses..................... 840,084 767,731
-------------- --------------
Income from continuing operations before
income taxes................................... 209,240 186,054
Provision for income taxes....................... 70,669 63,719
-------------- --------------
Income from continuing operations................ 138,571 122,335
Discontinued operations (Note 2)................. 3,700 7,352
-------------- --------------
Net income....................................... $ 142,271 $ 129,687
============== ==============
Basic earnings per share:
Continuing operations.......................... $ .52 $ .43
Discontinued operations........................ .01 .03
-------------- --------------
Net income..................................... $ .53 $ .46
============== ==============
Diluted earnings per share:
Continuing operations.......................... $ .51 $ .43
Discontinued operations........................ .01 .03
-------------- --------------
Net income..................................... $ .52 $ .46
============== ==============
Dividends declared per share of
common stock................................... $ .255 $ .225
============== ==============
Ratio of earnings to fixed charges............... 4.40 4.60
============== ==============
Ratio of earnings to fixed
charges excluding minority interest............ 4.69 5.00
============== ==============
</TABLE>
See Notes, pages 67 through 70
<PAGE>
Page 65
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Assets (unaudited)
- ------
Current assets:
Cash and cash equivalents................................. $ 129,687 $ 125,684
Short-term investments, at cost which
approximates market..................................... 1,654 3,302
Accounts receivable, less allowances:
3/99, $25,667; 12/98, $24,665........................... 419,002 382,406
Finance receivables, less allowances:
3/99, $51,114; 12/98, $51,232........................... 1,543,328 1,400,786
Inventories (Note 3)...................................... 260,727 266,734
Other current assets and prepayments...................... 350,659 330,051
--------- ---------
Total current assets.................................... 2,705,057 2,508,963
Property, plant and equipment, net (Note 4)................. 474,985 477,476
Rental equipment and related
inventories, net (Note 4)................................. 829,470 806,585
Property leased under capital
leases, net (Note 4)...................................... 3,418 3,743
Long-term finance receivables, less allowances:
3/99, $78,816; 12/98, $79,543............................. 1,941,355 1,999,339
Investment in leveraged leases.............................. 841,780 827,579
Goodwill, net of amortization:
3/99, $49,588; 12/98, $47,514............................. 223,213 222,980
Other assets (Note 5)....................................... 823,025 814,374
---------- ----------
Total assets................................................ $7,842,303 $7,661,039
========== ==========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and
accrued liabilities..................................... $ 830,084 $ 898,548
Income taxes payable...................................... 224,865 194,443
Notes payable and current portion of
long-term obligations................................... 1,483,599 1,259,193
Advance billings.......................................... 393,829 369,628
--------- ---------
Total current liabilities............................... 2,932,377 2,721,812
Deferred taxes on income.................................... 949,322 920,521
Long-term debt (Note 6)..................................... 1,710,427 1,712,937
Other noncurrent liabilities................................ 354,801 347,670
--------- ---------
Total liabilities....................................... 5,946,927 5,702,940
Preferred stockholders' equity in a
subsidiary company........................................ 310,000 310,097
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible................................... 34 34
Cumulative preference stock, no par
value, $2.12 convertible................................ 1,976 2,031
Common stock, $1 par value................................ 323,338 323,338
Capital in excess of par value............................ 13,807 16,173
Retained earnings......................................... 3,146,946 3,073,839
Accumulated other comprehensive income (Note 8)........... (88,665) (88,217)
Treasury stock, at cost................................... (1,812,060) (1,679,196)
---------- ----------
Total stockholders' equity.............................. 1,585,376 1,648,002
---------- ----------
Total liabilities and stockholders' equity.................. $7,842,303 $7,661,039
========== ==========
See Notes, pages 67 through 70
</TABLE>
<PAGE>
Page 66
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<TABLE>
(Dollars in thousands) Three Months Ended March 31,
----------------------------
1999 1998*
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 142,271 $ 129,687
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............................ 99,418 79,916
Increase in deferred taxes on income..................... 27,417 32,864
Pension plan investment.................................. (67,000) -
Change in assets and liabilities:
Accounts receivable.................................... (37,868) (671)
Net investment in internal finance receivables......... 6,962 (14,607)
Inventories............................................ 5,816 6,641
Other current assets and prepayments................... (1,237) (4,534)
Accounts payable and accrued liabilities............... 3,350 (9,999)
Income taxes payable................................... 30,016 21,743
Advance billings....................................... 24,243 15,590
Other, net............................................... (22,858) (5,503)
----------- -----------
Net cash provided by operating activities.............. 210,530 251,127
----------- -----------
Cash flows from investing activities:
Short-term investments....................................... 1,636 (33,314)
Net investment in fixed assets............................... (91,797) (79,074)
Net investment in external finance receivables............... (109,472) (214,507)
Investment in leveraged leases............................... (12,950) (34,151)
Investment in mortgage servicing rights...................... (7,380) (86,611)
Other investing activities................................... (1,476) 378
----------- -----------
Net cash used in investing activities................... (221,439) (447,279)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in notes payable, net.................... 225,011 (258,098)
Proceeds from long-term obligations.......................... 1,633 554,123
Principal payments on long-term obligations.................. (6,008) (4,205)
Proceeds from issuance of stock.............................. 7,105 5,546
Stock repurchases............................................ (142,437) (56,452)
Dividends paid............................................... (69,164) (62,941)
----------- -----------
Net cash provided by financing activities.............. 16,140 177,973
----------- -----------
Effect of exchange rate changes on cash........................ (1,228) (1,694)
----------- -----------
Increase (decrease) in cash and cash equivalents............... 4,003 (19,873)
Cash and cash equivalents at beginning of period............... 125,684 137,073
----------- -----------
Cash and cash equivalents at end of period..................... $ 129,687 $ 117,200
=========== ===========
Interest paid.................................................. $ 54,483 $ 34,869
=========== ===========
Income taxes paid, net......................................... $ 18,567 $ 14,922
=========== ===========
</TABLE>
* Certain prior year amounts have been reclassified to conform with the 1999
presentation.
See Notes, pages 67 through 70
<PAGE>
Page 67
Pitney Bowes Inc.
Notes to Consolidated Financial Statements
------------------------------------------
Note 1:
- ------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Pitney Bowes Inc. (the
company), all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the company at March 31,
1999 and December 31, 1998, and the results of its operations and cash flows for
the three months ended March 31, 1999 and 1998 have been included. Operating
results for the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999. These
statements should be read in conjunction with the financial statements and notes
thereto included in the company's 1998 Annual Report to Stockholders on Form
10-K.
Note 2:
- ------
On June 30, 1999, the Company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation (AMIC), a wholly owned subsidiary of
the company, in a manner that maximizes long-term shareholder value.
Revenue of AMIC was $32.5 million and $23.3 million for the three months ended
March 31, 1999 and 1998, respectively. Net interest expense allocated to AMIC's
discontinued operations was $1.8 million and $1.6 million for the three months
ended March 31, 1999 and 1998, respectively. Interest has been allocated based
on AMIC's net intercompany borrowing levels with Pitney Bowes Credit Corporation
(PBCC), a wholly owned subsidiary of the company, charged at PBCC's weighted
average borrowing rate, offset by the interest savings PBCC realizes due to
borrowings against AMIC's escrow deposits as opposed to regular commercial paper
borrowings.
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. The company does not expect the effect of
any adjustments to be significant.
Revenue of CPLC was $34.5 million for the three months ended March 31, 1998.
Income from discontinued operations includes allocated interest expense of $10.5
million for the three months ended March 31, 1998. Interest expense has been
allocated based on CPLC's intercompany borrowing levels with PBCC, charged at
PBCC's weighted average borrowing rate.
Operating results of AMIC and CPLC have been segregated and reported as
discontinued operations in the Consolidated Statements of Income. Prior year
results have been reclassified to conform to the current year presentation. Net
assets of discontinued operations have not been separately classified in the
Consolidated Balance Sheet at March 31, 1999. Cash flow impacts of discontinued
operations have not been segregated in the Consolidated Statements of Cash
Flows. Details of income from discontinued operations, net of taxes, are as
follows (in thousands of dollars):
Three Months Ended March 31,
---------------------------
1999 1998
------- -------
AMIC........................................ $ 3,700 $ 4,599
CPLC........................................ - 2,753
------- -------
Income from discontinued operations......... $ 3,700 $ 7,352
======= =======
<PAGE>
Page 68
Note 3:
- -------
Inventories are comprised of the following:
(Dollars in thousands) March 31, December 31,
1999 1998
--------- ------------
Raw materials and work in process............ $ 42,985 $ 54,001
Supplies and service parts................... 105,276 106,864
Finished products............................ 112,466 105,869
--------- ------------
Total........................................ $ 260,727 $ 266,734
========= ============
Note 4:
- ------
Fixed assets are comprised of the following:
(Dollars in thousands) March 31, December 31,
1999 1998
---------- ------------
Property, plant and equipment................... $1,160,064 $1,153,573
Accumulated depreciation........................ (685,079) (676,097)
---------- ------------
Property, plant and equipment, net.............. $474,985 $ 477,476
========== ============
Rental equipment and related inventories........ $1,727,337 $1,706,995
Accumulated depreciation........................ (897,867) (900,410)
---------- ------------
Rental equipment and related inventories, net... $ 829,470 $ 806,585
========== ============
Property leased under capital leases............ $ 18,862 $ 19,430
Accumulated amortization........................ (15,444) (15,687)
---------- ------------
Property leased under capital leases, net....... $ 3,418 $ 3,743
========== ============
Note 5:
- ------
The cost of rights to service mortgage loans, whether those servicing rights are
originated or purchased, are capitalized and included in other assets in the
Consolidated Balance Sheets. These costs are amortized in proportion to and over
the period of estimated net servicing income. The company assesses impairment of
Mortgage Servicing Rights (MSRs) based on the fair value of those rights. The
company estimates the fair value of MSRs based on estimated future net servicing
income, using a valuation model which considers such factors as market discount
rates, consensus loan prepayment predictions, servicing costs and other economic
factors. For purposes of impairment valuation, the company stratifies MSRs based
on predominant risk characteristics of the underlying loans, including loan
type, amortization type (fixed or adjustable) and note rate. To the extent that
the carrying value of MSRs exceeds the fair value by individual stratum, a
valuation reserve is established, which is adjusted as the value of MSRs
increases or decreases. Based on an evaluation performed as of March 31, 1999,
no additional impairment was recognized in the company's MSRs portfolio.
<PAGE>
Page 69
Note 6:
- ------
In April 1999, the company issued notes amounting to $200 million from its shelf
registration filed with the SEC in April 1998. These unsecured notes bear annual
interest at 5.5% and mature in April 2004. The net proceeds from these notes are
being used for general corporate purposes, including the repayment of commercial
paper.
The company has a medium-term note facility which was established as part of the
company's shelf registrations, which currently permits issuance of up to $300
million in debt securities with a minimum maturity of nine months.
Pitney Bowes Credit Corporation (PBCC), a wholly owned subsidiary of the
company, has $750 million of unissued debt securities available from a shelf
registration statement filed with the SEC in July 1998.
Note 7:
- ------
A reconciliation of the basic and diluted earnings per share computations for
income from continuing operations for the three months ended March 31, 1999 and
1998 is as follows (in thousands, except per share data):
<TABLE>
1999 1998
-------------------------------- ---------------------------------
Per Per
Income Shares Share Income Shares Share
------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from
continuing operations $138,571 $ 122,335
Less:
Preferred stock
dividends - -
Preference stock
dividends (39) (42)
------------------------------------------------------------- ---------------------------------
Basic earnings per
share $138,532 269,789 $ .52 $ 122,293 279,408 $ .43
------------------------------------------------------------- ---------------------------------
Effect of dilutive
securities:
Preferred stock - 17 - 17
Preference stock 39 1,179 42 1,292
Stock options 3,533 2,718
Other 444 436
------------------------------------------------------------- ---------------------------------
Diluted earnings per
share $138,571 274,962 $ .51 $ 122,335 283,871 $ .43
============================================================= =================================
</TABLE>
Note 8:
- ------
Comprehensive income for the three months ended March 31, 1999 and 1998 was as
follows:
(Dollars in thousands)
1999 1998
-------- --------
Net income.................................. $142,271 $129,687
Other comprehensive income:
Foreign currency translation adjustments.... (448) (10,039)
-------- --------
Comprehensive income........................ $141,823 $119,648
======== ========
<PAGE>
Page 70
Note 9:
- ------
Revenue and operating profit by business segment for the three months ended
March 31, 1999 and 1998 were as follows:
(Dollars in thousands) 1999 1998
----------- ---------
Revenue:
Mailing and Integrated Logistics................ $ 698,629 $ 626,240
Office Solutions................................ 314,580 291,182
Capital Services................................ 36,115 36,363
----------- ---------
Total revenue $ 1,049,324 $ 953,785
=========== =========
Operating Profit:
Mailing and Integrated Logistics................ $ 174,385 $ 144,407
Office Solutions................................ 58,545 52,459
Capital Services................................ 8,182 8,345
----------- ---------
Total operating profit............................. $ 241,112 $ 205,211
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions).............. (10,761) (1,284)
Corporate expense............................... (21,111) (17,873)
---------- --------
Income from continuing operations before
income taxes...................................... $ 209,240 $ 186,054
=========== =========
Note 10:
- -------
In June 1998 Statement of Financial Accounting Standards 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.
<PAGE>
Page 71
Exhibit (99.09)
- --------------
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Continuing Operations - first quarter of 1999 vs. first quarter of
- -----------------------------------------------------------------------------
1998
- ----
Revenue increased 10 percent in the first quarter of 1999 to $1,049.3 million
compared with $953.8 million in the first quarter of 1998. Revenue for the first
quarter of 1999 includes $10 million from the sale of PROM (memory) chips and
scale charts associated with the United States Postal Service rate increase.
Income from continuing operations increased 13 percent to $138.6 million from
$122.3 million for the same period in 1998. Diluted earnings per share from
continuing operations grew to 51 cents, a 16.9 percent increase from the first
quarter of 1998.
First quarter 1999 revenue included $510.4 million from sales, up 13 percent
from $450.4 million in the first quarter of 1998; $405.7 million from rentals
and financing, up seven percent from $380.4 million; and $133.2 million from
support services, up eight percent from $123.0 million.
The Mailing and Integrated Logistics Segment includes revenues and related
expenses from the rental, sale and financing of mailing and shipping equipment,
related supplies and service, and software. During the first quarter of 1999,
revenue grew 12 percent and operating profit increased 21 percent, which
included significant improvements in operating profit from international
operations. Excluding the sales of memory chips and scale charts related to the
U.S. postal rate increase, revenue grew 10 percent.
The Office Solutions Segment includes Pitney Bowes Office Systems and Pitney
Bowes Management Services. During the first quarter of 1999, revenue grew eight
percent and operating profit increased 12 percent.
Pitney Bowes Management Services' revenue grew nine percent as the company
pursued its strategy of disciplined, profitable expansion, while providing
superior customer service. These efforts, in conjunction with improved operating
efficiencies, continued to drive operating profit growth at a faster pace than
revenue growth.
The Capital Services Segment includes primarily asset- and fee-based income
generated by large ticket external assets. During the quarter, revenue decreased
by one percent and operating profit decreased two percent. The anticipated
revenue and operating profit declines relative to first quarter 1998 are
consistent with the company's previously announced strategy to shift from
asset-based income by lowering the asset base and concentrating on fee-based
income opportunities.
Cost of sales decreased to 58.1 percent of sales revenue in the first quarter of
1999 compared with 61.1 percent in the first quarter of 1998. This was due
primarily to higher PROM revenue and increased sales of higher margin products
at U.S. Mailing Systems.
Cost of rentals and financing increased to 27.3 percent of related revenues in
the first quarter of 1999 compared with 27.0 percent in the first quarter of
1998. This was due mainly to higher depreciation expense from increased
placements of digital and electronic meters.
Selling, service and administrative expenses were 34.4 percent of revenue in the
first quarter of 1999 compared with 34.7 percent in the first quarter of 1998.
This improvement was due primarily to the company's continued emphasis on
controlling operating expenses.
<PAGE>
Page 72
Research and development expenses increased 9.6 percent to $25.9 million in the
first quarter of 1999 compared with $23.6 million in 1998. The increase reflects
the company's continued commitment to developing new technologies for its
digital meters and other mailing and software products.
Net interest expense increased to $45.5 million in the first quarter of 1999
from $35.5 million in the first quarter of 1998. The increase is due mainly to
increased debt to fund the share repurchase program.
The effective tax rate for the first quarter of 1999 was 33.8 percent compared
with 34.2 percent in the first quarter of 1998.
Income from continuing operations and diluted earnings per share from continuing
operations increased 13.3 percent and 16.9 percent, respectively, compared to
the first quarter of 1998 due to the factors discussed above. 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.
Discontinued Operations
- -----------------------
On June 30, 1999, the company committed itself to a formal plan to dispose of
Atlantic Mortgage and Investment Corporation (AMIC), a wholly owned subsidiary
of the company, in a manner that maximizes long-term shareholder value.
Operating results of AMIC have been segregated and reported as discontinued
operations in the Consolidated Statements of Income for the three months ended
March 31, 1999. Prior year results have been reclassified to conform to the
current year presentation.
On October 30, 1998, Pitney Bowes Inc. (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 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. The company does not expect the effect of
any adjustments to be significant. Operating results of CPLC have been reported
separately as discontinued operations in the Consolidated Statements of Income.
New Pronouncements
- ------------------
In June 1998 Statement of Financial Accounting Standards 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
- -------------------------------
The ratio of current assets to current liabilities of .92 to 1 at March 31,
1999 remained the same as at December 31, 1998.
In April 1999, the company issued notes amounting to $200 million from its shelf
registration filed with the SEC in April 1998. These unsecured notes bear annual
interest at 5.5% and mature in April 2004. The net proceeds from these notes are
being used for general corporate purposes, including the repayment of commercial
paper.
<PAGE>
Page 73
The company has a medium-term note facility which was established as part of the
company's shelf registrations, which currently permits issuance of up to $300
million in debt securities with a minimum maturity of nine months.
Pitney Bowes Credit Corporation (PBCC), a wholly owned subsidiary of the
company, has $750 million of unissued debt securities available from a shelf
registration statement filed with the SEC in July 1998.
The company believes that its financing needs for the next 12 months can be met
with cash generated internally, money from existing credit agreements, debt
issued under new and existing shelf registration statements and existing
commercial and medium-term note programs.
The ratio of total debt to total debt and stockholders' equity including the
preferred stockholders' equity in a subsidiary company in total debt was 68.9
percent at March 31, 1999 compared with 66.6 percent at December 31, 1998. Book
value per common share decreased to $5.90 at March 31, 1999 from $6.09 at
December 31, 1998 driven primarily by the repurchase of common shares. During
the quarter ended March 31, 1999, the company repurchased approximately 2.2
million common shares for $142.4 million.
To control the impact of interest rate swings on its business, the company uses
a balanced mix of debt maturities, variable and fixed rate debt and interest
rate swap agreements. The company enters into interest rate swap agreements,
primarily through its financial services business. Swap agreements are used to
fix or obtain lower interest rates on commercial loans than the company would
otherwise have been able to get without the swap.
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 includes 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, tested and moved to production by year-end 1998. Final
system integration testing is underway and 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 percent of our installed
product base, including all postage meters and copier and facsimile systems,
are already Year 2000 compliant. For products not compliant, upgrades or
replacements are available. Detailed product compliance information is
available on the company's Web site (www.pitneybowes.com/year2000).
<PAGE>
Page 74
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 $25 million was incurred through March 31, 1999. 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 finalizing 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 Investments
- -------------------
In the first quarter of 1999, net investments in fixed assets included $22.1
million in net additions to property, plant and equipment and $69.7 million in
net additions to rental equipment and related inventories compared with $22.3
million and $56.8 million, respectively, in the same period in 1998. These
additions include 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 both new
placements and upgrade programs.
At March 31, 1999, 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.
Regulatory Matters
- ------------------
In May 1996, the United States Postal Service (U.S.P.S.) issued a proposed
schedule for the phaseout of mechanical meters in the U.S. In accordance with
the schedule, the company voluntarily halted new placements of mechanical meters
in the U.S. as of June 1, 1996.
As a result of the company's aggressive efforts to meet the U.S.P.S. mechanical
meter migration schedule combined with the company's ongoing and continuing
investment in advanced postage evidencing technologies, mechanical meters
represent approximately 5% of the company's installed U.S. meter base at March
31, 1999, compared with approximately 10% at December 31, 1998. At March 31,
1999, approximately 95% of the company's installed U.S. meter base was
electronic or digital, as compared to 90% at December 31, 1998 and 78% at March
31, 1998. The company continues to work in close cooperation with the U.S.P.S.,
to convert those mechanical meter customers who have not migrated to digital or
electronic meters by the applicable U.S.P.S. deadline.
<PAGE>
Page 75
In May 1995, the U.S.P.S. publicly announced its concept of its Information
Based Indicia Program (IBIP), the purpose of which was to develop a new standard
for future digital postage evidencing devices.
In July 1996, the U.S.P.S. published for public comment draft specifications for
the Indicum, Postal Security Device and Host specifications. The company
submitted extensive comments to these specifications. In March 1997, the
U.S.P.S. published for public comment the Vendor Infrastructure specification.
In August 1998, the U.S.P.S. 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 March 31, 1999, 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 phase II beta testing and is
expected to be ready for market upon final approval from the U.S.P.S.
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 Form 8-K 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:
o changes in postal regulations
o timely development and acceptance of new products
o success in gaining product approval in new markets where regulatory approval
is required
o successful entry into new markets
o mailers' utilization of alternative means of communication or competitors'
products
o the company's success at managing customer credit risk
o changes in interest rates
o 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
<PAGE>
Page 76
Exhibit (99.10)
- --------------
Pitney Bowes Inc.
Computation of Ratio of Earnings to Fixed Charges (1)
<TABLE>
(Dollars in thousands)
Three Months Ended March 31,
-------------------------------
1999 (2) 1998 (2)
-------- ---------
<S> <C> <C>
Income from continuing operations before income
taxes......................................... $209,240 $186,054
Add:
Interest expense............................ 46,059 36,508
Portion of rents
representative of the
interest factor........................... 10,782 10,115
Amortization of capitalized
interest.................................. 243 243
Minority interest
in the income of
subsidiary with
fixed charges............................. 2,873 3,059
--------- --------
Income as adjusted............................ $ 269,197 $235,979
========= ========
Fixed charges:
Interest expense............................ $ 46,059 $ 36,508
Portion of rents
representative of the
interest factor........................... 10,782 10,115
Minority interest, excluding
taxes, in the income of
subsidiary with fixed
charges................................... 4,338 4,652
-------- --------
Total fixed charges.......................... $ 61,179 $ 51,275
======== ========
Ratio of earnings to fixed
charges..................................... 4.40 4.60
======== ========
Ratio of earnings to fixed
charges excluding minority
interest.................................. 4.69 5.00
========= ========
</TABLE>
(1) The computation of the ratio of earnings to fixed charges has been computed
by dividing income from continuing operations before income taxes as
adjusted by fixed charges. Included in fixed charges is one-third of rental
expense as the representative portion of interest.
(2) Amounts reclassified to reflect CPLC and AMIC as discontinued operations.
Interest expense and the portion of rents representative of the interest
factor of these discontinued operations have been excluded from fixed
charges in the computation.
Including these amounts in fixed charges, the ratio of earnings to fixed
charges would be 4.28 and 3.94 for the three months ended March 31, 1999
and 1998, respectively. The ratio of earnings to fixed charges excluding
minority interest would be 4.55 and 4.20 for the three months ended March
31, 1999 and 1998, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM PITNEY BOWES INC.
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME AND CORRESPONDING
FOOTNOTE #3 FIXED ASSETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 125,684
<SECURITIES> 3,302
<RECEIVABLES> <F1> 1,859,089
<ALLOWANCES> <F1> 75,897
<INVENTORY> 266,734
<CURRENT-ASSETS> 2,508,963
<PP&E> <F2> 2,860,568
<DEPRECIATION> <F2> 1,576,507
<TOTAL-ASSETS> 7,661,039
<CURRENT-LIABILITIES> 2,721,812
<BONDS> 1,712,937
<COMMON> 323,338
310,097
2,065
<OTHER-SE> 1,322,599
<TOTAL-LIABILITY-AND-EQUITY> 7,661,039
<SALES> 1,993,546
<TOTAL-REVENUES> 4,090,915
<CGS> 1,146,404
<TOTAL-COSTS> 1,565,527
<OTHER-EXPENSES> 100,806
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 162,092
<INCOME-PRETAX> 824,604
<INCOME-TAX> 282,092
<INCOME-CONTINUING> 542,512
<DISCONTINUED> 33,882
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 576,394
<EPS-BASIC> 2.10
<EPS-DILUTED> 2.06
<FN>
<F1> Receivables are comprised of trade receivables of $407,071 and short-term
finance receivables of $1,452,018. Allowances are comprised of allowance for
trade receivables of $24,665 and for short-term finance receivables of $51,232.
<F2> Property, plant and equipment are comprised of fixed assets of $1,153,573
and rental equipment and related inventories of $1,706,995. Depreciation is
comprised of depreciation on fixed assets of $676,097 and on rental equipment
and related inventories of $900,410.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM PITNEY BOWES INC.
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME, CORRESPONDING
FOOTNOTE #4 FIXED ASSETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 129,687
<SECURITIES> 1,654
<RECEIVABLES> <F1> 2,039,111
<ALLOWANCES> <F1> 76,781
<INVENTORY> 260,727
<CURRENT-ASSETS> 2,705,057
<PP&E> <F2> 2,887,401
<DEPRECIATION> <F2> 1,582,946
<TOTAL-ASSETS> 7,842,303
<CURRENT-LIABILITIES> 2,932,377
<BONDS> 1,710,427
<COMMON> 323,338
310,000
2,010
<OTHER-SE> 1,260,028
<TOTAL-LIABILITY-AND-EQUITY> 7,842,303
<SALES> 510,382
<TOTAL-REVENUES> 1,049,324
<CGS> 296,719
<TOTAL-COSTS> 407,652
<OTHER-EXPENSES> 25,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,059
<INCOME-PRETAX> 209,240
<INCOME-TAX> 70,669
<INCOME-CONTINUING> 138,571
<DISCONTINUED> 3,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,271
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.52
<FN>
<F1> Receivables are comprised of gross trade receivables of $444,669 and
short-term finance receivables of $1,594,442. Allowances are comprised of
allowances for trade receivables of $25,667 and for short-term finance
receivables of $51,114.
<F2> Property, plant and equipment are comprised of gross fixed assets of
$1,160,064 and rental equipment and related inventories of $1,727,337.
Depreciation is comprised of depreciation on fixed assets of $685,079 and on
rental equipment and related inventories of $897,867.
</FN>
</TABLE>
