UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
[FEE REQUIRED]
For the year ended December 31, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from ____________to _______________
Commission file number 1-3579
PITNEY BOWES INC.
State of Incorporation IRS Employer Identification No.
Delaware 06-0495050
World Headquarters
Stamford, Connecticut 06926-0700
Telephone Number: (203) 356-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock ($1 par value) New York Stock Exchange
$2.12 Convertible Cumulative New York Stock Exchange
Preference Stock (no par value)
Preference Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
4% Convertible Cumulative Preferred Stock ($50 par value)
The Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No ____
----
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock (common stock and $2.12 preference
stock) held by non-affiliates of the Registrant as of March 13, 1998 is
$13,864,709,736.
Number of shares of common stock, $1 par value, outstanding as of March 13, 1998
is 279,334,236.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Only the following portions of the Pitney Bowes Inc. 1997 Annual Report to
Stockholders are incorporated by reference into Parts I, II and IV of this
Form 10-K Annual Report.
(a) Financial Statements, pages 27 to 46.
(b) Management's Discussion and Analysis of Results of Operations and
Financial Condition and Summary of Selected Financial Data on pages 17
to 26 excluding the information on page 25 relating to Dividend Policy.
(c) Stock Exchanges and Stock Information, on page 47.
2. Pitney Bowes Inc. Notice of the 1998 Annual Meeting and Proxy Statement
dated April 3, 1998 pages 3, 4, 7, 8-13 and portions of pages 2, 6, 14,
17 and 18 are incorporated by reference into Part III of this Form 10-K
Annual Report.
PART I
------
Item 1. Business
--------
Pitney Bowes Inc. and its subsidiaries (the company) operate within three
industry segments: business equipment, business services, and commercial and
industrial financing. The company operates in two geographic areas: the United
States and outside the U.S. Financial information concerning revenue, operating
profit and identifiable assets by industry segment and geographic area appears
on pages 44 and 45 of the Pitney Bowes Inc. 1997 Annual Report to Stockholders
and is incorporated herein by reference.
Business Equipment. Business equipment consists of four product, supplies and
- ------------------
service classes: mailing systems, copier systems, facsimile systems and related
financing. The 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.
Mailing systems 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.
Copier systems include a wide range of copying systems and supplies. Facsimile
systems include a wide range of facsimile systems and supplies. The company has
recently combined its Copier Systems and Facsimile Systems businesses into a new
Office Systems division.
The financial services operations provide lease financing for the company's
products in the U.S., Canada, the United Kingdom, Germany, France, Norway,
Ireland and Australia.
Consolidated financial services operations financed 36 percent of consolidated
sales from continuing operations in 1997, and 39 percent in 1996 and 1995. The
lower percentage of sales financed compared to 1995 and 1996 is due mainly to
the impact of increased sales revenue from our facilities management business
which does not use traditional financing services used by the other businesses
within the company. Consolidated financial services operations financed
approximately 77 percent of leasable sales in 1997, 1996 and 1995.
The company sold its Dictaphone Corporation (Dictaphone) and Monarch Marking
Systems, Inc. (Monarch) subsidiaries in 1995. Dictaphone and Monarch have been
classified in the Consolidated Statements of Income as discontinued operations;
revenue and income from continuing operations exclude the results of Dictaphone
and Monarch for all periods
2
presented. (See Note 13, Discontinued operations, of the Notes to the
Consolidated Financial Statements in the Pitney Bowes Inc. 1997 Annual Report to
Stockholders.)
Business Services. Business services consists of facilities management and
- -----------------
mortgage servicing.
Facilities management services are provided by the company's Pitney Bowes
Management Services, Inc. subsidiary (P.B.M.S.). P.B.M.S. is a leader in
providing 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. P.B.M.S. provides customers with a
variety of business support services to manage mail, copy and reprographic
centers, facsimile, electronic printing and imaging services, and records
management.
Mortgage servicing is provided by Atlantic Mortgage & Investment Corporation
(A.M.I.C.), a wholly-owned subsidiary of Pitney Bowes Credit Corporation.
A.M.I.C. provides billing, collecting and processing services for major
investors in residential first mortgages.
Commercial and Industrial Financing. The commercial and industrial financing
- -----------------------------------
segment, which is shifting its strategic focus to fee-based financial services,
provides large-ticket financing 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.
The company also provides small-ticket lease financing services to small and
medium-sized businesses throughout the United States, marketing exclusively
through a nationwide network of brokers and independent lessors.
Support Services. The company maintains extensive field service organizations
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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 12 percent of revenue in 1997, 1996 and 1995.
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 business, 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
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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 market leader in
providing mail and related support services to the corporate, financial
3
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 $89.5 million, $81.7 million,
and $81.8 million in 1997, 1996 and 1995, 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.
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 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.
4
Regulatory Matters. In June 1995, the United States Postal Service (U.S.P.S.)
- ------------------
finalized and issued regulations governing the manufacture, distribution and use
of postage meters. These regulations cover four general categories: meter
security, administrative controls, Computerized Meter Resetting Systems and
other issues. The company continues to comply with these regulations in its
ongoing postage meter operations.
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 which better reflected the needs of existing mechanical meter users and
minimized any potential negative financial impact on the company. The final
schedule agreed to with the U.S.P.S. is as follows:
. as of June 1, 1996, new placements of mechanical meters would no longer be
permitted; replacements of mechanical meters previously licensed to customers
would be permitted prior to the applicable suspension date for that category
of mechanical meter
. as of March 1, 1997, use of mechanical meters by persons or firms who process
mail for a fee would be suspended and would have to be removed from service
. as of December 31, 1998, use of mechanical meters that interface with mail
machines or processors ("systems meters") would be suspended and would have
to be removed from service
. as of March 1, 1999, use of all other mechanical meters ("stand-alone
meters") would be suspended and have to be removed from service
Based on the foregoing schedule, the company believes that the phaseout of
mechanical meters will not cause a material adverse financial impact on the
company.
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
represented 25% of the company's installed U.S. meter base at December 31, 1997,
compared with 40% at December 31, 1996. At December 31, 1997, 75% of the
company's installed U.S. meter base was electronic or digital, compared to 60%
at December 31, 1996.
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:
. the Indicium specification - the technical specifications for the indicium to
be printed
. a Postal Security Device specification - the technical specification for the
device that would contain the accounting and security features of the system
. a Host specification
. a Vendor Infrastructure specification
5
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 specifications in November 1996. Revised
specifications were then published in 1997 which incorporated many of the
changes recommended by the company in its prior comments, including the
recommendation that IBIP apply only to the personal computer (PC) environment
and not apply at the present time to other digital postage evidencing systems.
The company submitted comments to these revised specifications. Also, in March
1997 the U.S.P.S. published for public comment the Vendor Infrastructure
specification to which the company responded on June 27, 1997. As of December
31, 1997, the U.S.P.S. had not yet finalized the four IBIP specifications;
however, the company has developed a PC product which satisfies the proposed
IBIP specifications. This product is currently undergoing testing by the
U.S.P.S. and is expected to be ready for market when final approval of the
specifications is issued.
Employee Relations. At December 31, 1997, 25,351 persons were employed by the
- ------------------
company in the U.S. and 4,550 outside the U.S. Employee relations are
considered to be satisfactory. The great 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.
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 business segments.
Business Equipment. Business equipment products are manufactured in a number of
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plants principally in Connecticut, as well as in Harlow, England. Most of these
facilities are owned by the company. At December 31, 1997, there were 173
sales, support services, and finance offices, substantially all of which are
leased, located throughout the U.S. and in a number of other countries.
Executive and administrative offices of the financing operations within the U.S.
are located in Shelton, Connecticut. Offices of the financing operations
outside the U.S. are maintained in London, England; Heppenheim, Germany; Paris,
France; Mississauga, Ontario, Canada; French's Forest, Australia; Oslo, Norway;
and Dublin, Ireland.
Business Services. The company's P.B.M.S. subsidiary is headquartered in
- -----------------
Stamford, Connecticut and leases facilities in 27 cities located throughout the
U.S. as well as in Toronto, Ontario, Canada; and London, England. The Atlantic
Mortgage and Investment Corporation operates in Jacksonville, Florida.
Commercial and Industrial Financing. Pitney Bowes Credit Corporation leases
- -----------------------------------
executive and administrative offices in Shelton, Connecticut and Portland,
Oregon. The executive and administrative office in Shelton, Connecticut is
owned by Pitney Bowes Inc. There are ten leased regional and district sales
offices located throughout the U.S.
6
Item 3. Legal Proceedings
-----------------
In the course of normal business, the company is occasionally party to lawsuits.
These may involve litigation by or against the company relating to, among other
things:
. contractual rights under vendor, insurance or other contracts
. intellectual property or patent rights
. equipment, service or payment disputes with customers
. disputes with employees
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.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Below are the final results of the voting at the special meeting of shareholders
held on December 18, 1997:
Proposal: Amendment of the company's Restated Certificate of Incorporation
increasing authorized shares of common stock from 240 million to 480 million,
and correspondingly reducing the par value of the common stock per share from
$2.00 to $1.00 in order to effect a two-for-one split of the company's common
stock.
FOR AGAINST ABSTAIN
- ----------- --------------- -------------
122,885,507 163,418 412,386
7
Executive Officers of the Registrant
- ------------------------------------
Executive
Officer
Name Age Title Since
- ----------------------------------- --- ----------------------------------- -------
Michael J. Critelli 49 Chairman and Chief 1988
Executive Officer
Marc C. Breslawsky 55 President and Chief 1985
Operating Officer
Amy C. Corn 44 Corporate Secretary and Senior 1996
Associate General Counsel
Meredith B. Fischer 45 Vice President, Corporate Marketing 1996
and Chief Communications Officer
Arlen F. Henock 41 Vice President - Controller and 1996
Chief Tax Counsel
Matthew S. Kissner 43 President, Pitney Bowes 1997
Financial Services
Murray D. Martin 50 President, Pitney Bowes 1998
International
John N. D. Moody 53 President, U.S. Mailing Systems 1997
Sara E. Moss 51 Vice President and General Counsel 1996
Murray L. Reichenstein 60 Vice President and Chief 1996
Financial Officer
Douglas A. Riggs 53 Vice President and Chief Corporate 1988
Affairs Officer
Dennis M. Roney 55 President, Pitney Bowes 1998
Office Systems
Johnna G. Torsone 47 Vice President and Chief 1993
Personnel Officer
Joseph E. Wall 46 Vice President and Chief Technology 1996
Officer
There is no family relationship among the above officers, all of which have
served in various corporate, division or subsidiary positions with the company
for at least the past five years except M.S. Kissner, S.E. Moss, M.L.
Reichenstein and J.E. Wall.
8
Mr. Kissner, who was President, Pitney Bowes Credit Corporation since 1995,
joined the company from Bankers Trust Company where he had been Managing
Director since 1993. Mr. Kissner assumed his duties as President, Pitney Bowes
Financial Services effective June, 1997.
Ms. Moss joined the company from the New York law firm of Howard, Darby & Levin,
where she had been a Senior Partner since 1985. Before joining Howard, Darby &
Levin, Ms. Moss was an Assistant United States Attorney in the Southern District
of New York. Ms. Moss served as a law clerk for the Honorable Constance Baker
Motley, United States District Judge, Southern District of New York.
Mr. Reichenstein joined the company with over 31 years of experience with Ford
Motor Company. During his time with Ford he held a variety of positions of
increasing responsibility in the U.S. and Europe, including Director of
Manufacturing Services, Vice President, Car Product Planning, and Chief
Financial Officer, Ford Europe; Vice President & Controller of Ford Automotive
Operations Worldwide; and Vice President & Controller of Ford Motor Company.
Dr. Wall was most recently the Vice President - Technology of Emerson Electric,
which he joined in 1986 as Director of Research and Development for its since-
divested Rosemount Aerospace Division. Prior to joining Emerson, Dr. Wall held
positions of increasing responsibility at Honeywell, including Section Chief and
Senior Principal Research Engineer.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Stockholders'
------------------------------------------------------------------
Matters
-------
The sections entitled "Stock Exchanges" and "Stock Information" on page 47 of
the Pitney Bowes Inc. 1997 Annual Report to Stockholders are incorporated herein
by reference. At December 31, 1997, the company had 31,092 common stockholders
of record.
Item 6. Selected Financial Data
-----------------------
The section entitled "Summary of Selected Financial Data" on page 26 of the
Pitney Bowes Inc. 1997 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The section entitled "Management's Discussion and Analysis" on pages 17 to 25 of
the Pitney Bowes Inc. 1997 Annual Report to Stockholders is incorporated herein
by reference, except for the section on page 25 relating to "Dividend Policy".
The section under "Legal, Environmental and Regulatory Matters" titled
"Regulation" on page 24 of the "Management's Discussion and Analysis"
incorporated herein by reference as mentioned above should be read in
conjunction with the discussion under "Regulatory Matters" in Part I, Item 1 on
page 5 of this Annual Report on Form 10-K.
9
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 10-K or made by company management involve risks and
uncertainties which may change based on various important factors. Some of the
factors which could cause future financial performance to differ materially from
the expectations as expressed in any forward-looking statement made by or on
behalf of the company include:
. changes in postal regulations
. timely development and acceptance of new products
. success in gaining product approval in new markets where regulatory
approval is required
. successful entry into new markets
. mailer's utilization of alternative means of communication or competitors'
products
. the company's success at managing customer credit risk
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements, together with the report thereon of Price Waterhouse
LLP dated January 26, 1998, appearing on pages 27 to 46 of the Pitney Bowes Inc.
1997 Annual Report to Stockholders are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Except for information regarding the company's executive officers (see
"Executive Officers of the Registrant" on page 8 of this Form 10-K), the
information called for by this Item is incorporated herein by reference to the
sections entitled "Election of Directors" and "Security Ownership of Directors
and Executive Officers" on pages 2 to 4 and 6 to 7 of the Pitney Bowes Inc.
Notice of the 1998 Annual Meeting and Proxy Statement.
Item 11. Executive Compensation
----------------------
The sections entitled "Directors' Compensation", "Stock Performance Graph",
"Executive Officer Compensation", "Severance and Change of Control Arrangements"
and "Pension Benefits" on pages 8 to 14 and 17 to 18 of the Pitney Bowes
Inc. Notice of the 1998 Annual Meeting and Proxy Statement are incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The section entitled "Security Ownership of Directors and Executive Officers" on
pages 6 to 7 of the Pitney Bowes Inc. Notice of the 1998 Annual Meeting and
Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
None.
10
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) 1. Financial statements - see Item 8 on page 10 and "Index to Financial
Schedules" on page 17.
2. Financial statement schedules - see "Index to Financial Schedules"
on page 17.
3. Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Reg. S-K Status or Incorporation
Exhibits Description by Reference
- -------- ------------------------- -----------------------------------------
(3)(a) Restated Certificate of Incorporated by reference to Exhibit (3a)
Incorporation, as amended to Form 10-K as filed with the Commission
on March 30, 1993. (Commission file number
1-3579)
(a.1) Certificate of Amendment Exhibit (i)
to the Restated Certifi-
cate of Incorporation (as
amended May 29, 1996)
(b) By-laws, as amended Incorporated by reference to Exhibit (3b)
to Form 10-K as filed with the Commission
on April 1, 1996. (Commission file number
1-3579)
(4)(a) Form of Indenture dated Incorporated by reference to Exhibit (4a)
as of November 15, 1987 to Form 10-K as filed with the Commission
between the company and on March 24, 1988. (Commission file number
Chemical Bank, as 1-3579)
Trustee
(b) Form of Debt Securities Incorporated by reference to Exhibit (4b)
to Form 10-K as filed with the Commission
on March 24, 1988. (Commission file number
1-3579)
(c) Form of First Supplemental Incorporated by reference to Exhibit (1)
Indenture dated as of June 1, to Form 8-K as filed with the Commission on
1989 between the company and June 16, 1989. (Commission file number 1-3579)
Chemical Bank, as Trustee
(d) Form of Indenture dated as Incorporated by reference to Exhibit (4.1)
of April 15, 1990 between to Registration Statement on Form S-3
the company and Chemical (No. 33-33948) as filed with the Commission
Bank, as successor to Man- on March 28, 1990.
ufacturers Hanover Trust
Company, as Trustee
11
(e) Forms of Debt Securities Incorporated by reference to Exhibit (4)
to Form 10-Q as filed with the Commission
on May 14, 1990. (Commission file number
1-3579)
(f) Form of Indenture dated as Incorporated by reference to Exhibit (4a)
of May 1, 1985 between Pitney to Registration Statement on Form S-3
Bowes Credit Corporation and (No. 2-97411) as filed with the Commission
Bankers Trust Company, as on May 1, 1985.
Trustee
(g) Letter Agreement between Incorporated by reference to Exhibit (4b)
Pitney Bowes Inc. and Bankers to Registration Statement on Form S-3
Trust Company, as Trustee (No. 2-97411) as filed with the Commission
on May 1, 1985.
(h) Form of First Supplemental Incorporated by reference to Exhibit (4b)
Indenture dated as of to Registration Statement on Form S-3
December 1, 1986 between (No. 33-10766) as filed with the Commission
Pitney Bowes Credit Corp- on December 12, 1986.
oration and Bankers Trust
Company, as Trustee
(i) Form of Second Supp- Incorporated by reference to Exhibit (4c) to Registration
lemental Indenture dated Statement on Form S-3 (No. 33-27244) as filed with the
as of February 15, 1989 Commission on February 24, 1989.
between Pitney Bowes
Credit Corporation and
Bankers Trust Company,
as Trustee
(j) Form of Third Supplemental Incorporated by reference to Exhibit (1) to Form 8-K as filed with
Indenture dated as of May 1, the Commission on May 16, 1989. (Commission file number 1-3579)
1989 between Pitney Bowes
Credit Corporation and
Bankers Trust Company, as
Trustee
(k) Indenture dated as of Incorporated by reference to Exhibit (4a) to Amendment No. 1 to
November 1, 1995 between Registration Statement on Form S-3 (No. 33-62485) as filed with
the company and Chemical Bank, the Commission on November 2, 1995.
as Trustee
(l) Preference Share Purchase Incorporated by reference to Exhibit (4) to Form 8-K as filed with
Rights Agreement dated the Commission on March 13, 1996. (Commission file number 1-3579)
December 11, 1995 between
the company and Chemical
Mellon Shareholder Services,
LLC., as Rights Agent
12
The company has outstanding certain other long-term indebtedness. Such long-term
indebtedness does not exceed 10% of the total assets of the company; therefore,
copies of instruments defining the rights of holders of such indebtedness are
not included as exhibits. The company agrees to furnish copies of such
instruments to the Securities and Exchange Commission upon request.
Executive Compensation Plans:
- ----------------------------
(10)(a) Retirement Plan for Directors of Pitney Incorporated by reference to Exhibit (10a) to Form 10-K as filed
Bowes Inc. with the Commission on March 30, 1993. (Commission file number
1-3579)
(b) Pitney Bowes Inc. Directors' Stock Plan Incorporated by reference to Exhibit (i) to Form 10-K as filed
(as amended and restated 1997) with the Commission on March 31, 1997. (Commission file number
1-3579)
(c) Pitney Bowes 1991 Stock Plan Incorporated by reference to Exhibit (10b) to Form 10-K as filed
with the Commission on March 25, 1992. (Commission file number
1-3579)
(c.1) First Amendment to Pitney Bowes 1991 Stock Incorporated by reference to Exhibit (ii) to Form 10-K as filed
Plan with the Commission on March 31, 1997. (Commission file 1-3579)
(c.2) Second Amendment to Pitney Bowes 1991 Stock Incorporated by reference to Exhibit (i) to Form 10-Q as filed
Plan with the Commission on November 13, 1997. (Commission file number
1-3579)
(d) Pitney Bowes Inc. Key Employees' Incentive Incorporated by reference to Exhibit (10c) to Form 10-K as filed
Plan (as amended and restated) with the Commission on March 25, 1992. (Commission file number
1-3579)
(d.1) First Amendment to Pitney Bowes Inc. Key Incorporated by reference to Exhibit (iii) to Form 10-K as filed
Employees' Incentive Plan (as amended and with the Commission on March 31, 1997. (Commission file number
restated June 10, 1991) 1-3579)
(e) 1979 Pitney Bowes Stock Option Plan (as Incorporated by reference to Exhibit (10d) to Form 10-K as filed
amended and restated) with the Commission on March 25, 1992. (Commission file number
1-3579)
13
(f) Pitney Bowes Severance Plan, as amended, Incorporated by reference to Exhibit (10) to Form 10-K as filed
dated December 12, 1988 with the Commission on March 23, 1989. (Commission file number
1-3579)
(g) Pitney Bowes Executive Severance Policy, Incorporated by reference to Exhibit (10h) to Form 10-K as filed
adopted December 11, 1995 with the Commission on April 1, 1996. (Commission file number
1-3579)
(h) Pitney Bowes Inc. Deferred Incentive Sav- Incorporated by reference to Exhibit (i) to Form 10-Q as filed
ings Plan for the Board of Directors with the Commission on May 15, 1997. (Commission file number
1-3579)
(i) Pitney Bowes Inc. Deferred Incentive Incorporated by reference to Exhibit (v) to Form 10-K as filed
Savings Plan with the Commission on March 31, 1997. (Commission file number
1-3579)
(12) Computation of ratio of earnings to fixed Exhibit (ii)
charges
(13) Portions of annual report to security hol- Exhibit (iii)
ders
(21) Subsidiaries of the registrant Exhibit (iv)
(23) Consent of experts and counsel Exhibit (v)
(27) Financial Data Schedule Exhibit (vi)
(b) No reports on Form 8-K were filed for the three months ended
December 31, 1997.
14
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Pitney Bowes Inc.
By /s/ Michael J. Critelli
-----------------------
(Michael J. Critelli)
Chairman and Chief
Executive Officer
Date March 27, 1998
------------------
15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Michael J. Critelli Chairman and Chief March 27, 1998
- ---------------------------- Executive Officer - Director --------------
Michael J. Critelli
/s/ Marc C. Breslawsky President and Chief March 27, 1998
- ---------------------------- Operating Officer - Director --------------
Marc C. Breslawsky
/s/ Murray L. Reichenstein Vice President and Chief March 27, 1998
- ---------------------------- Financial Officer (principal --------------
Murray L. Reichenstein financial officer)
/s/ Arlen F. Henock Vice President - Controller March 27, 1998
- ---------------------------- and Chief Tax Counsel --------------
Arlen F. Henock (principal accounting
officer)
/s/ Linda G. Alvarado Director March 27, 1998
- ---------------------------- --------------
Linda G. Alvarado
/s/ William E. Butler Director March 27, 1998
- ---------------------------- --------------
William E. Butler
/s/ Colin G. Campbell Director March 27, 1998
- ---------------------------- --------------
Colin G. Campbell
/s/ Ernie Green Director March 27, 1998
- ---------------------------- --------------
Ernie Green
/s/ Charles E. Hugel Director March 27, 1998
- ---------------------------- --------------
Charles E. Hugel
/s/ David T. Kimball Director March 27, 1998
- ---------------------------- --------------
David T. Kimball
/s/ Michael I. Roth Director March 27, 1998
- ---------------------------- --------------
Michael I. Roth
/s/ Phyllis S. Sewell Director March 27, 1998
- ---------------------------- --------------
Phyllis S. Sewell
16
INDEX TO FINANCIAL SCHEDULES
----------------------------
The financial schedules should be read in conjunction with the financial
statements in the Pitney Bowes Inc. 1997 Annual Report to Stockholders.
Schedules not included herein have been omitted because they are not applicable
or the required information is shown in the financial statements or notes
thereto. Also, separate financial statements of less than 100 percent owned
companies, which are accounted for by the equity method, have been omitted
because they do not constitute significant subsidiaries.
Page
----
Pitney Bowes Inc.:
Report of independent accountants on financial
statement schedule 18
Financial statement schedule for the years 1995 - 1997:
Valuation and qualifying accounts and
reserves (Schedule II) 19
17
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 26, 1998 appearing on page 46 of the Pitney Bowes Inc. 1997
Annual Report to Stockholders (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)2 of this Form 10-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.
Price Waterhouse LLP
Stamford, Connecticut
January 26, 1998
18
PITNEY BOWES INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995 TO 1997
(Dollars in thousands)
Additions
Balance at charged to Balance
beginning of costs and at end
Description year expenses Deductions of year
- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
Allowance for doubtful accounts
- -------------------------------
1997 $16,160 $ 9,269 $ 4,300 (3) $ 21,129
1996 $13,050 $ 9,894 $ 6,784 (3) $ 16,160
1995 $16,909 $ 4,126 (1) $ 7,985(2)(3) $ 13,050
Allowance for credit losses on finance receivables
- --------------------------------------------------
1997 $113,737 $ 85,628 $67,057 (3) $132,308
1996 $113,506 $ 74,785 $74,554 (3) $113,737
1995 $113,091 $ 68,275 $67,860 (3) $113,506
Reserve for transition costs (4)
- ----------------------------
1997 $ 5,728 $ - $ 5,728 $ -
1996 $ 22,986 $ - $17,258 (5) $ 5,728 (6)
1995 $ 64,893 $ 5,145 $47,052 (5) $ 22,986
Valuation allowance for deferred tax asset (4)
- ------------------------------------------
1997 $ 46,601 $ 1,233 $ 6,533 $ 41,301
1996 $ 48,693 $ 3,066 $ 5,158 $ 46,601
1995 $ 37,532 $ 12,076 $ 915 $ 48,693
(1) Includes $382 of additions applicable to a business at acquisition.
(2) Includes $2,406 of deductions applicable to a business disposition.
(3) Principally uncollectible accounts written off.
(4) Included in balance sheet as a liability.
(5) Includes amounts for asset write downs and amounts paid as well as
reclassifications.
(6) Remaining amount represents $4 million and $2 million for separation and
benefit costs and other.
19
EXHIBIT (i)
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
PITNEY BOWES INC.
Pitney Bowes Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Corporation,
duly noticed and held on October 6, 1997, resolutions were duly adopted setting
forth a proposed amendment to the Restated Certificate of Incorporation of the
Corporation, declaring said amendment to be advisable and directing that such
amendment be submitted to the stockholders for consideration thereof. The
resolution setting forth the proposed amendment is as follows:
FURTHER RESOLVED, That the Board of Directors hereby
declares it advisable that the first sentence of Article
FOURTH of the Restated Certificate of Incorporation be amended
to read as follows:
"The total number of shares of all classes
of stock which the Corporation shall have
authority to issue is 485,600,000 shares,
divided into 600,000 shares of Cumulative
Preferred Stock with the par value of
$50.00 per share (hereinafter called
`Preferred Stock'), 5,000,000 shares of
Preference Stock without par value
(hereinafter called `Preference Stock'),
and
480,000,000 shares of Common Stock
with the par value of $1.00 per share
(hereinafter called `Common Stock')."
and hereby directs that such amendment be submitted to the
stockholders for their consideration and approval at the
Special Meeting to be held on December 18, 1997, at 9:00 a.m.,
World Headquarters, Stamford, Connecticut
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
a special meeting of the stockholders of the Corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware, at which meeting the necessary number of shares as
required by law were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware and that pursuant to such amendment Article Fourth of the Restated
Certificate of Incorporation of the Corporation shall henceforth read, in its
entirety, as follows:
"Fourth: - The total number of shares of all classes of
stock which the Corporation shall have authority to issue
is 485,600,000 shares, divided into 600,000 shares of
Cumulative Preferred Stock with the par value of $50.00
per share (hereinafter called `Preferred Stock'), 5,000,000
shares of Preference Stock without par value (hereinafter
called `Preference Stock'), and 480,000,000 shares of
Common Stock with the par value of $1.00 per share
(hereinafter called `Common Stock'). Subject to the
provisions of law, the Corporation may issue shares of its
Preferred Stock, Preference Stock and Common Stock,
respectively, from time to time and any securities
convertible into, warrants, options or rights to subscribe
for, any such class or classes (or any series of any
thereof), for such consideration as may
2
be fixed from time to time by the Board of Directors,
which is hereby expressly authorized to fix the same
in its absolute and uncontrolled discretion subject
as aforesaid. Shares of Preference Stock without par
value for which consideration so fixed has been paid
or delivered to the Corporation shall be deemed fully
paid stock and shall not be liable to any further call
or assessment thereon and the holders of such shares
shall not be liable for any further demands in respect
of such shares. The Corporation may issue shares of
its Preferred Stock, Preference Stock and Common Stock
and any securities convertible into, or warrants, options
or rights to subscribe for, such class or classes (or
any series of any thereof) without offering the same to
the holders of its outstanding capital stock. The
minimum amount of capital with which the Corporation
shall commence business shall not be less than $100,000."
3
PITNEY BOWES INC. EXHIBIT (ii)
------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(1)
(Dollars in thousands)
Years Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993(2)
---------- -------- -------- -------- ---------
Income from continuing
operations before
income taxes..................... $ 803,098 $684,383 $618,931 $566,507 $498,860
Add:
Interest expense................. 209,194 203,877 226,110 194,115 189,292
Portion of rents
representative of
the interest factor............. 39,404 40,538 42,064 42,339 33,842
Amortization of
capitalized interest............ 973 914 914 914 914
Minority interest in
the income of
subsidiary with
fixed charges................... 11,322 8,121 5,013 - -
---------- -------- -------- -------- --------
Income as adjusted................ $1,063,991 $937,833 $893,032 $803,875 $722,908
========== ======== ======== ======== ========
Fixed charges:
Interest expense................ $ 209,194 $203,877 $226,110 $194,115 $189,292
Capitalized interest............. - 1,201 2,178 733 -
Portion of rents
representative of
the interest factor............. 39,404 40,538 42,064 42,339 33,842
Minority interest,
excluding taxes, in
the income of
subsidiary with
fixed charges................... 17,285 11,838 7,607 - -
---------- -------- -------- -------- --------
$ 265,883 $257,454 $277,959 $237,187 $223,134
========== ======== ======== ======== ========
Ratio of earnings to
fixed charges.................... 4.00 3.64 3.21 3.39 3.24
========== ======== ======== ======== ========
Ratio of earnings to
fixed charges
excluding minority
interest......................... 4.23 3.79 3.28 3.39 3.24
========== ======== ======== ======== ========
(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) Reclassified to reflect discontinued operations.
Exhibit (iii)
- --------------------------------------------------------------------------------
================================================================================
Management's Discussion and Analysis
================================================================================
Year ended December 31, 1997
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 within three industry segments: business equipment,
business services, and commercial and industrial financing.
Business equipment consists of four product, supplies and service classes:
mailing systems, copier systems, facsimile systems and related financing. The
products are sold, rented or financed by the company, while supplies and
services are sold. The financial services operations provide lease financing and
other credit options for the company's products in the U.S., Canada, the U.K.,
Germany, France, Norway, Ireland and Australia.
Business services consists of facilities management and mortgage servicing.
Facilities management services are provided for a variety of business support
and processing functions. Mortgage servicing provides billing, collecting and
processing services for major investors in residential first mortgages.
The commercial and industrial financing segment, which is shifting its strategic
focus to fee-based financial services, provides large-ticket financing programs
covering a broad range of products and other financial services to the
commercial and industrial markets in the U.S. It also provides small-ticket
lease financing services to small and medium-sized businesses throughout the
U.S., marketing exclusively through a nationwide network of brokers and
independent lessors.
Results of Continuing Operations 1997 Compared to 1996
In 1997, revenue increased 6%, operating profit grew 18%, income from continuing
operations grew 12% and diluted earnings per share from continuing operations
increased 15% to $1.80 compared with $1.56 for 1996. Revenue growth was 8%,
after adjusting for the impacts of previously announced strategic actions in
Australia, asset sale activity and the strategic shift of the external
large-ticket business to more fee-based income sources.
- --------------------------------------------------------------------------------
Diluted Earnings Per Share from
Continuing Operations
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Dollars
-------
1995 .............................................................. 1.34
1996 .............................................................. 1.56
1997 .............................................................. 1.80
- --------------------------------------------------------------------------------
The revenue increase came primarily from growth in the business equipment and
business services segments of 7% and 16%, respectively, over 1996. Volume
increases in our U.S. Mailing Systems, Production Mail, U.S. Copier Systems,
worldwide Facsimile Systems, facilities management and mortgage servicing
businesses were the principal cause of the revenue growth. The impact of prices
and exchange rates was minimal. The revenue increase was partially offset by an
8% decline in revenue in the commercial and industrial financing segment. Within
this segment, external large-ticket revenue declined 17% due to our strategy to
reduce our external assets and shift to more fee-based revenue streams. The
reduction of external large-ticket assets included the effect of the agreement
with GATX Capital, more fully discussed under Other Matters. External
small-ticket revenue grew 2% on increased volume. Excluding the impact of
planned asset sales, revenue in the commercial and industrial financing segment
would have declined by 2%.
Approximately 75% of our total revenue in 1997 and 1996 is recurring revenue,
which we believe is a continuing good indicator of potential repeat business.
- --------------------------------------------------------------------------------
Revenue
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Dollars in millions
-------------------
1995
Sales .................................................... 1,546
Rentals & Financing ...................................... 1,575
Support Services ......................................... 433
1996
Sales .................................................... 1,675
Rentals & Financing ...................................... 1,718
Support Services ......................................... 466
1997
Sales .................................................... 1,834
Rentals & Financing ...................................... 1,783
Support Services ......................................... 484
- --------------------------------------------------------------------------------
Operating profit grew 18% over the prior year compared with growth of 9% in
1996, 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, excluding the 1996 charge for exiting the Australian copier
business, continued to significantly outpace revenue growth. Operating profit
grew 22% in the business equipment segment, 27% in the business services segment
and declined 14% in the commercial and industrial financing segment. Excluding
the 1996 charge for exiting the Australian copier
17
- --------------------------------------------------------------------------------
business, operating profit growth would have been 13%, with the business
equipment segment operating profit growth at 16%.
The operating profit growth in the business equipment segment came from strong
performances by U.S. Mailing Systems, worldwide Facsimile Systems and U.S.
Copier Systems. Our mortgage servicing business, Atlantic Mortgage and
Investment Corporation, contributed to the operating profit growth in the
business services segment. In the commercial and industrial financing segment,
the 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 and small-ticket asset sales in 1996. Excluding these items,
operating profit in the commercial and industrial financing segment would have
increased 9%.
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 facilities management services. 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 RIP(TM) 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 facilities management
services 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 4% 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. As
planned and in line with the United States Postal Service (USPS) guidelines, we
no longer place mechanical meters and the company has reduced the percentage of
mechanical meters in service to 25% of its U.S. meter population. Rentals
revenue in 1997 no longer included the administrative revenue associated with
the trust fund, because the USPS took control of the fund in 1996.
Double-digit contributions to rentals revenue growth came from our U.S. and U.K.
facsimile businesses, driven by an increased rental base of advanced products
introduced in 1997, such as model 9830, selected as the "Best Plain Paper Fax
Machine" by the American Facsimile Association, and model 9910.
Financing revenue, adjusted for planned asset sales, grew 7% in 1997 on
increased volume of leases of Pitney Bowes products and new product offerings
such as Purchase Power(SM). Including the impact of asset sales, which generated
more revenue in 1996 than in 1997, financing revenue grew 3% 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 decreased to 59% of sales revenue compared to 61% a year earlier.
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 remained flat, at 31% 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 33% of revenue in 1997
compared with 35% 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 34%.
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.
18
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Selling, Service and Administrative Rate
- -------------------------(excluding 1996 Australian charge)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Percentage of revenue
---------------------
1995 .................................................... 34.6%
1996 .................................................... 33.9%
1997 .................................................... 33.4%
- --------------------------------------------------------------------------------
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 increased 2% due mainly to higher average borrowings during
1997 to fund the company's stock repurchase program. Future changes in interest
rates could affect our borrowing strategies. We manage our interest rate risk,
most of which is in financial services, with a balanced mix of debt maturities,
variable and fixed rate debt and interest rate swap agreements. Our variable and
fixed rate debt mix, after adjusting for the effect of interest rate swaps, was
48% and 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.
- --------------------------------------------------------------------------------
Continuing Operations Margin
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Percentage
----------
1995 ............................................................... 11.5%
1996 ............................................................... 12.2%
1997 ............................................................... 12.8%
- --------------------------------------------------------------------------------
The effective tax rate was 34.5% for 1997 compared with 31.4% 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 34.3%.
Income from continuing operations and diluted earnings per share increased 12%
and 15%, respectively, in 1997. The reason for the increase in diluted earnings
per share outpacing the increase in net income was the company's share
repurchase program, under which 17.9 million shares, 6% of the average common
and potential common shares outstanding in 1996, were repurchased in 1997.
Income from continuing operations as a percentage of revenue increased to 12.8%
in 1997 from 12.2% in 1996.
- --------------------------------------------------------------------------------
Income from Continuing Operations
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Dollars in millions
-------------------
1995 ...................................................... 408
1996 ...................................................... 469
1997 ...................................................... 526
- --------------------------------------------------------------------------------
Results of Continuing Operations 1996 Compared to 1995
In 1996, revenue increased 9%, income from continuing operations grew 15% and
diluted earnings per share from continuing operations increased 16% to $1.56
compared to $1.34 for 1995.
Revenue growth came primarily from increased sales of facilities management
services, production mail and high-end mailing equipment and was principally
volume-driven, while prices and exchange rates remained relatively unchanged
from 1995. This growth was achieved despite lower revenue in Canada, where a new
management team was put in place to focus on profitable growth. Approximately
75% of our total revenue in 1996 was recurring revenue, which we believe is a
good indicator of potential repeat business.
The 15% growth in income from continuing operations was possible because of
continued emphasis on programs to increase efficiency and reduce operating
expenses, despite the fact that more revenues were coming from the lower-margin
business services sector. The fact that growth in income from continuing
operations significantly outpaced revenue growth is a measure of the success of
our emphasis on operating efficiencies.
19
- --------------------------------------------------------------------------------
Sales revenue increased 8% from the prior year, 10% if the comparison excludes
the approximately $30 million in upgrade revenue generated by the first-quarter
1995 USPS rate change. Facilities management led the company with a 17% sales
increase, as it continued to expand its commercial market contract base. Sales
of digital, software-based equipment were strong, with notable increases in
production mail, high-end mailing and copier placements. In total, financial
services financed 39% of all sales in 1996 and 1995. Our facilities management
business does not require the same traditional financing services used by the
other parts of the company, and its growth impacts this percentage.
Rentals and financing revenue increased 9% from 1995. Rentals revenue increased
6% from 1995. The company voluntarily halted mechanical meter placements in
early 1996 to comply with USPS pending guidelines on moving to electronic and
digital meters. This caused a slight decline in the 1996 installed U.S. meter
base. However, we expect rapid growth in the base of electronic and digital
meters to continue for the next few years, as these products attract new
categories of customers worldwide, including the small office/home office (SOHO)
market segment. Since the introduction of PostPerfect(TM) in 1995, the company's
first digital meter and the subsequent introduction of the Personal Post
Office(TM) meter in October 1996, more than 100,000 digital meters have been
placed in service. During 1996, the USPS took control of the postal payment
trust fund. This significantly lowered the administrative revenue included in
this category during 1996 and lowered the growth in rentals revenue. In December
1997, the company filed suit against the USPS charging that, in taking control
of the trust fund, the USPS unlawfully used its regulatory power to
misappropriate revenues which compensated the company for development,
maintenance, and administration of its Postage By Phone(R) system.
Financing revenue increased 15% in 1996. Increased volume in Pitney Bowes
product leases and small-ticket leases to credit-worthy businesses drove this
growth. A strategic shift to concentrate on fee-based income contributed as
well, though gains were offset by a planned reduction in the external
large-ticket financing business. Excluding the impact of external financial
asset sales, revenue growth would have been 10%.
Support service revenue grew 7%, driven by volume growth in equipment
maintenance contracts, manned on-site production mail service contracts and
chargeable service calls.
The ratio of cost of sales to sales revenue grew .3 percentage points due to the
change in sales revenue mix toward the lower-margin facilities management
business, which includes most of its expenses in cost of sales. The revenue mix
impact was balanced by lower product costs, increased sales of higher-margin
feature-rich products and the effect of a stronger U.S. dollar on equipment
purchases. The 1995 ratio also benefited from the lower costs associated with
the revenue related to the USPS rate change in the first quarter of 1995.
The ratio of cost of rentals and financing to the related revenue increased 1.4
percentage points to 30.8% in 1996. This is due to the effect of the sale of
external finance assets and a change in revenue mix. Excluding asset sales, this
ratio would have increased .8 percentage points. The strong growth in the
mortgage servicing and brokered small-ticket external leasing businesses, both
of which include a majority of their expenses in the cost of financing, also
increased this ratio.
The ratio of selling, service and administrative expenses to revenue remained
relatively unchanged from 1995 at 34.7% despite a $30 million charge (writing
off the remaining goodwill and other related expenses) resulting from the
company's decision to exit the Australian copier business and downsize its
Australian facsimile business. This will enable the company's Australian
operations to concentrate on the more profitable mailing and high-end facsimile
businesses. This charge was almost completely offset by associated tax benefits
and had a minimal impact on the results for the year. Without this charge,
selling, service and administrative expenses would have been reduced to 33.9% of
1996 revenues. Changes in the revenue mix helped to reduce this ratio. Various
reengineering programs within the company have resulted in operating
efficiencies and controlling costs, all of which have lowered the worldwide
expense ratio.
Research and development expenses in 1996 matched the previous year,
demonstrating the company's commitment to providing the global marketplace with
a continuous stream of innovative, high-quality products and services such as
the PostPerfect(TM) meter and the Personal Post Office(TM) meter. Development
spending is expected to increase in the future, as we invest in the new software
and digital products demanded by the marketplace.
Net interest expense decreased 10% as a result of lower interest rates and lower
average debt. Overall, borrowing levels remained steady with those in the latter
half of 1995. Financial services did borrow more to support more Pitney Bowes
product placements and small-ticket external leases. Future changes in interest
rates could affect our borrowing strategies. We manage our interest rate risk,
most of which is in financial services, with a balanced mix of debt maturities,
variable and fixed rate debt and interest rate swap agreements. Our variable and
fixed rate debt mix, after adjusting for the effect of interest rate swaps, was
41% and 59%, respectively, at December 31, 1996.
Operating profit, excluding the Australian charge, grew 14% with 11% coming from
the business equipment segment, 31% from the business services segment and 26%
from the commercial and industrial financing segment. Including the Australian
charge, overall operating profit increased 9% with business equipment
contributing a 6% increase.
The operating profit growth in the business equipment segment came from strong
performances by mailing and facsimile globally, and the copier business in the
U.S. All businesses contributed to the operating profit growth in the business
services segment.
20
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In the commercial and industrial financing segment, operating profit growth was
helped by a decreasing interest rate environment and from the asset sales
described earlier.
The effective tax rate for 1996, including the tax benefits associated with the
company's actions in Australia and the related write-off of its Australian
investment, was 31.4%. Excluding such benefits, the effective tax rates for 1996
and 1995 were 34.3% and 34.1%, respectively.
Income from continuing operations grew 15% for all of 1996. Strong growth in
income from worldwide mailing and facsimile systems as well as good results from
all other businesses led to the overall increase.
Other Matters
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 when completed, will reduce 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. At December 31,
1997, the company had received approximately $800 million of the approximately
$900 million in cash it expects to receive. The company will also retain
approximately $200 million of equity investment in a limited liability company
along with GATX Capital.
On June 29, 1995, the company sold Monarch Marking Systems, Inc. (Monarch) for
approximately $127 million in cash to a new company jointly formed by Paxar
Corporation and Odyssey Partners, L.P. On August 11, 1995, the company sold
Dictaphone Corporation (Dictaphone) for approximately $450 million in cash to an
affiliate of Stonington Partners, Inc. The sales of Dictaphone and Monarch
resulted in gains approximating $155 million, net of approximately $130 million
of income taxes. Dictaphone and Monarch have been classified in the Consolidated
Statements of Income as discontinued operations; revenue and income from
continuing operations exclude the results of Dictaphone and Monarch for all
periods presented. See Note 13 to the Consolidated Financial Statements.
Accounting Changes
In 1996, Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(FAS 125), was issued for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The company
adopted FAS 125 on January 1, 1997. As of December 31, 1997, there was no
material impact on the financial statements of the company due to the adoption
of this statement.
In 1997, the company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (FAS 128). Under FAS 128, the company disclosed basic
and diluted earnings per share (EPS) on the face of the Consolidated Statements
of Income. In addition, a reconciliation of the basic and diluted EPS
computation is presented in Note 9 to the Consolidated Financial Statements.
In 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued. It will require the company to disclose, in
financial statement format, all non-owner changes in equity. This statement is
effective for fiscal years beginning after December 15, 1997 and requires
reclassification of prior period financial statements for comparability
purposes. The company expects to adopt this statement in 1998.
Also in 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued, effective
for fiscal years beginning after December 15, 1997. It establishes standards for
reporting information about operating segments in annual financial statements
and interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The company expects to adopt this statement beginning with its 1998 consolidated
financial statements.
Liquidity and Capital Resources
Our ratio of current assets to current liabilities improved to .73 to 1 at
December 31, 1997 compared to .67 to 1 at December 31, 1996.
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 1997, we entered into interest rate swap agreements, primarily
through our financial services business. Swap agreements are used to fix or
lower interest rates on commercial loans than we would otherwise have been able
to get without the swap.
- --------------------------------------------------------------------------------
Current Ratio
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1995 .............................................................. .60
1996 .............................................................. .67
1997 .............................................................. .73
- --------------------------------------------------------------------------------
21
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The ratio of total debt to total debt and stockholders' equity was 64.2% at
December 31, 1997, versus 60.5% at December 31, 1996, 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 62.0% at December 31, 1997 versus
59.0% at December 31, 1996. The $663 million repurchase of 17.9 million shares
of common stock in 1997 increased this ratio. The company's strong results and
proceeds from the sale of external leasing assets and the GATX transaction
described previously 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 $100 million in
debt securities with maturities ranging from more than one year to 30 years of
which $32 million remained available at December 31, 1997. We also had an
additional $300 million remaining on our non-financial services shelf
registration statement filed with the Securities and Exchange Commission (SEC).
On January 22, 1998, the company issued notes amounting to $300 million
available under this 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 will be used for
general corporate purposes, including the repayment of short-term debt. We
intend to file a new non-financial services shelf registration statement with
the SEC as soon as possible.
Pitney Bowes Credit Corporation (PBCC), a wholly-owned subsidiary of the
company, had $250 million of unissued debt securities available under a shelf
registration statement filed with the SEC in September 1995. On January 16,
1998, PBCC issued notes amounting to $250 million available under this shelf
registration. These unsecured notes bear annual interest at 5.65% and mature in
January 2003. The proceeds will be used to meet PBCC's financing needs over the
next 12 months. PBCC intends to file a new shelf registration statement with the
SEC as soon as possible.
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 1997 and 1996 was 4.1% and 4.0%, respectively.
Dividends are recorded in the Consolidated Statements of Income as minority
interest, and are included in selling, service and administrative expenses.
At December 31, 1997, the company had unused lines of credit and revolving
credit facilities of $1.8 billion (including $1.5 billion at its financial
services businesses) in the U.S. and $75.6 million outside the U.S., largely
supporting commercial paper debt. We believe our financing needs for the next
few years 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 5 to the Consolidated Financial Statements.
Total financial services assets decreased to $5.5 billion at December 31, 1997,
down 2.6% from $5.6 billion in 1996. To fund finance assets, borrowings were
$3.3 billion in 1997 and $3.6 billion in 1996. Approximately $1.1 billion and
$430 million in cash was generated from the sale of finance assets in 1997 and
1996, 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. See Note 7 to the Consolidated
Financial Statements.
We spent $17 million and $45 million in cash in 1996 and 1995, respectively, on
severance and benefits to support the company's strategic focus initiative plan
that was adopted during 1994. As of December 31, 1996, the company had
successfully completed its plan.
Market Risk
The company is exposed to the impact of interest rate changes and foreign
currency fluctuations due to its investing and funding 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.
22
- --------------------------------------------------------------------------------
The company's objective in managing the exposure to foreign currency
fluctuations is to reduce the volatility in earnings and cash flow 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 derivatives
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, 1997, 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
The company is working to resolve the potential impact of the year 2000 on the
processing of date-sensitive information by the company's computerized
information systems, manufacturing systems and certain products developed by the
company. As part of its ongoing investment in advanced information technology,
the company's systems and applications acquired in recent years as well as
recently developed products are year 2000 compliant. The company has committed
internal and external resources to identify systems, applications and products
that are not year 2000 compliant, and developed a plan and timetable to address
the issues identified, including implementation and testing. The company
continuously monitors its progress in ensuring timely resolution of year 2000
issues.
A substantial portion of this work is planned to be completed in 1998 with
remaining work expected to be completed in 1999.
At this time, the company is not aware of any reason or situation that would
impede the achievement of its plan and timetable, nor do we anticipate that the
cost of addressing this issue will have a material adverse impact on the
company's financial position, results of operations or cash flows in future
periods.
However, the company recognizes its limitations in influencing third-party
constituents (i.e., vendors, customers, financial institutions, etc.) and the
complexity of the year 2000 issue. As a result, the full impact of the year 2000
issue cannot be determined with complete certainty.
Capital Investment
During 1997, net investments in fixed assets included net additions of $98
million to property, plant and equipment and $146 million to rental equipment
and related inventories compared with $75 million and $200 million,
respectively, in 1996. 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, 1997, 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 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.
23
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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 financial provision as appropriate. Based on the
facts we presently know, we believe that the outcome of any current proceeding
will not have a material adverse effect on our financial condition or results of
operations.
Regulation In June 1995, the USPS finalized and issued regulations governing the
manufacture, distribution and use of postage meters. These regulations cover
four general categories: meter security, administrative controls, Computerized
Meter Resetting Systems and other issues. The company continues to comply with
these regulations in its ongoing postage meter operations.
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 which better
reflected the needs of existing mechanical meter users and minimized any
potential negative financial impact on the company. 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
Based on the foregoing schedule, the company believes that the phaseout of
mechanical meters will not cause a material adverse financial impact on the
company.
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 25% of the company's installed U.S. meter base at December 31, 1997,
compared with 40% at December 31, 1996. At December 31, 1997, 75% of the
company's installed U.S. meter base is electronic or digital, compared to 60% at
December 31, 1996.
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 specifications in November 1996. Revised
specifications were then published in 1997 which incorporated many of the
changes recommended by the company in its prior comments, including the
recommendation that IBIP apply only to the personal computer (PC) environment
and not apply at the present time to other digital postage evidencing systems.
The company submitted comments to these revised specifications. Also, in March
1997 the USPS published for public comment the Vendor Infrastructure
specification to which the company responded on June 27, 1997. As of December
31, 1997, the USPS had not yet finalized the four IBIP specifications; however,
the company has developed a PC product which satisfies the proposed IBIP
specifications. This product is currently undergoing testing by the USPS and is
expected to be ready for market when final approval of the specifications is
issued.
24
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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 $(32) million, $16 million and $(5) million in 1997, 1996 and 1995,
respectively. In 1997, the translation loss resulted from the strengthening of
the U.S. dollar against most other currencies except for the pound sterling. In
1996, the translation gains resulted primarily from the strengthening of the
pound sterling and the Canadian dollar. In 1995, translation losses resulted
primarily from the weakening of the pound sterling.
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, 1997, the company had approximately $290.8 million of foreign
exchange contracts outstanding, most of which mature in 1998, to buy or sell
various currencies. Risks arise from the possible non-performance by
counterparties in meeting the terms of their contracts and from movements in
securities values, interest and/or exchange rates. However, the company does not
anticipate non-performance by the counterparties as they are composed of a
number of major international financial institutions. Maximum risk of loss on
these contracts is limited to the amount of the difference between the spot rate
at the date of the contract delivery and the contracted rate.
Dividend Policy
The company's Board of Directors has a policy to pay a cash dividend on common
stock each quarter when feasible. In setting dividend payments, the board
considers the dividend rate in relation to the company's recent and projected
earnings and its capital investment opportunities and requirements. The company
has paid a dividend each year since 1934.
Forward-Looking Statements
The company wants to caution readers that any forward-looking statements (those
which talk about the company's or management's current expectations as to the
future) in this Annual Report or made by the company management involve risks
and uncertainties which may change based on various important factors. Some of
the factors which could cause future financial performance to differ materially
from the expectations as expressed in any forward-looking statement made by or
on behalf of the company include:
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
25
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================================================================================
Summary of Selected Financial Data
================================================================================
(Dollars in thousands, except per share data)
Years ended December 31
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue $4,100,464 $3,858,579 $3,554,754 $3,270,613 $3,000,386
Costs and expenses 3,297,366 3,174,196 2,935,823 2,729,472 2,501,526
Nonrecurring items, net -- -- -- (25,366) --
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 803,098 684,383 618,931 566,507 498,860
Provision for income taxes 277,071 214,970 211,222 218,077 193,166
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 526,027 469,413 407,709 348,430 305,694
Discontinued operations -- -- 175,431 45,161 47,495
Effect of accounting changes -- -- -- (119,532) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 526,027 $ 469,413 $ 583,140 $ 274,059 $ 353,189
===================================================================================================================================
Basic earnings per share:
Continuing operations $1.82 $1.57 $1.35 $1.11 $.97
Discontinued operations -- -- .58 .15 .15
Effect of accounting changes -- -- -- (.38) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $1.82 $1.57 $1.93 $.88 $1.12
===================================================================================================================================
Diluted earnings per share:
Continuing operations $1.80 $1.56 $1.34 $1.10 $.96
Discontinued operations -- -- .57 .15 .15
Effect of accounting changes -- -- -- (.38) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $1.80 $1.56 $1.91 $.87 $1.11
===================================================================================================================================
Total dividends on common, preference
and preferred stock $231,392 $206,115 $181,657 $162,714 $142,142
Dividends per share of common stock $.80 $.69 $.60 $.52 $.45
Average common and potential common
shares outstanding 292,517,116 301,303,356 304,739,952 315,485,784 318,784,232
Balance sheet at December 31
Total assets $7,893,389 $8,155,722 $7,844,648 $7,399,720 $6,793,816
Long-term debt $1,068,395 $1,300,434 $1,048,515 $779,217 $847,316
Capital lease obligations $10,142 $12,631 $14,241 $23,147 $29,462
Stockholders' equity $1,872,577 $2,239,046 $2,071,100 $1,745,069 $1,871,595
Book value per common share $6.69 $7.56 $6.90 $5.76 $5.91
Ratios
Profit margin -- continuing operations:
Pretax earnings 19.6% 17.7% 17.4% 17.3% 16.6%
After-tax earnings 12.8% 12.2% 11.5% 10.7% 10.2%
Return on stockholders' equity --
before accounting changes 28.1% 21.0% 28.2% 22.6% 18.9%
Debt to total capital 64.2% 60.5% 62.2% 66.3% 61.3%
Other
Common stockholders of record 31,092 32,258 32,859 31,226 31,189
Total employees 29,901 28,625 27,723 32,792 32,539
Postage meters in service in the U.S.,
U.K. and Canada 1,561,668 1,494,157 1,517,806 1,480,692 1,445,689
See notes, pages 31 through 46
26
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================================================================================
Consolidated Statements of Income
================================================================================
(Dollars in thousands, except per share data)
Years ended December 31
------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from:
Sales $1,834,057 $1,675,090 $1,546,393
Rentals and financing 1,782,851 1,717,738 1,575,094
Support services 483,556 465,751 433,267
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 4,100,464 3,858,579 3,554,754
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,081,537 1,025,250 941,124
Cost of rentals and financing 557,769 529,740 463,601
Selling, service and administrative 1,367,862 1,340,276 1,230,671
Research and development 89,463 81,726 81,800
Interest expense 209,194 203,877 226,110
Interest income (8,459) (6,673) (7,483)
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 3,297,366 3,174,196 2,935,823
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes 803,098 684,383 618,931
Provision for income taxes 277,071 214,970 211,222
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 526,027 469,413 407,709
Income, net of income tax, from
discontinued operations -- -- 21,483
Net gains on sale of discontinued operations -- -- 153,948
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 526,027 $ 469,413 $ 583,140
===================================================================================================================================
Basic earnings per share:
Income from continuing operations $1.82 $1.57 $1.35
Discontinued operations -- -- .58
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $1.82 $1.57 $1.93
===================================================================================================================================
Diluted earnings per share:
Income from continuing operations $1.80 $1.56 $1.34
Discontinued operations -- -- .57
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $1.80 $1.56 $1.91
===================================================================================================================================
See notes, pages 31 through 46
27
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================================================================================
Consolidated Balance Sheets
================================================================================
(Dollars in thousands, except per share data)
December 31
------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 137,073 $ 135,271
Short-term investments, at cost which approximates market 1,722 1,500
Accounts receivable, less allowances: 1997, $21,129; 1996, $16,160 348,792 340,730
Finance receivables, less allowances: 1997, $54,170; 1996, $40,176 1,546,542 1,339,286
Inventories 249,207 281,942
Other current assets and prepayments 180,179 123,337
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 2,463,515 2,222,066
Property, plant and equipment, net 497,261 486,029
Rental equipment and related inventories, net 788,035 815,306
Property leased under capital leases, net 4,396 5,848
Long-term finance receivables, less allowances: 1997, $78,138; 1996, $73,561 2,581,349 3,450,231
Investment in leveraged leases 727,783 633,682
Goodwill, net of amortization: 1997, $40,912; 1996, $34,372 203,419 205,802
Other assets 627,631 336,758
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 7,893,389 $ 8,155,722
===================================================================================================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 878,759 $ 849,789
Income taxes payable 147,921 212,155
Notes payable and current portion of long-term obligations 1,982,988 1,911,481
Advance billings 363,565 331,864
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,373,233 3,305,289
Deferred taxes on income 905,768 720,840
Long-term debt 1,068,395 1,300,434
Other noncurrent liabilities 373,416 390,113
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,720,812 5,716,676
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stockholders' equity in a subsidiary company 300,000 200,000
Stockholders' equity:
Cumulative preferred stock, $50 par value, 4% convertible 39 46
Cumulative preference stock, no par value, $2.12 convertible 2,220 2,369
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 28,028 30,260
Retained earnings 2,744,929 2,450,294
Cumulative translation adjustments (63,348) (31,297)
Treasury stock, at cost (43,664,034 shares) (1,162,629) (535,964)
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,872,577 2,239,046
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 7,893,389 $ 8,155,722
===================================================================================================================================
See notes, pages 31 through 46
28
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================================================================================
Consolidated Statements of Cash Flows
================================================================================
(Dollars in thousands)
Years ended December 31
-------------------------------------
1997 1996(a) 1995(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 526,027 $ 469,413 $ 583,140
Net gains on sale of discontinued operations -- -- (153,948)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 300,086 278,168 271,648
Net change in the strategic focus initiative -- (16,826) (45,078)
Increase in deferred taxes on income 185,524 106,298 148,828
Change in assets and liabilities:
Accounts receivable (11,295) 49,187 (18,696)
Sales-type lease receivables (192,365) (225,565) (146,010)
Inventories 30,526 35,256 9,788
Other current assets and prepayments (58,135) (14,467) (7,519)
Accounts payable and accrued liabilities 33,622 43,125 28,517
Income taxes payable (62,910) (21,281) (96,436)
Advance billings 33,607 16,715 22,637
Other, net (81,274) (28,543) (20,391)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 703,413 691,480 576,480
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Short-term investments (388) 548 (2,553)
Net investment in fixed assets (244,065) (271,972) (337,718)
Net investment in direct-finance lease receivables 672,148 50,494 (316,343)
Investment in leveraged leases (95,600) (63,320) (141,898)
Investment in mortgage servicing rights (105,955) (50,407) (63,533)
Proceeds from sales of subsidiaries -- -- 577,000
Other investing activities 432 (9,493) (4,415)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 226,572 (344,150) (289,460)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in notes payable 89,536 (467,838) (432,418)
Proceeds from long-term obligations -- 500,000 275,000
Principal payments on long-term obligations (256,326) (12,181) (66,734)
Proceeds from issuance of stock 33,396 31,201 26,999
Stock repurchases (662,758) (144,475) (98,038)
Proceeds from preferred stock issued by a subsidiary 100,000 -- 200,000
Dividends paid (231,392) (206,115) (181,657)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (927,544) (299,408) (276,848)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (639) 1,997 74
- ---------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 1,802 49,919 10,246
Cash and cash equivalents at beginning of year 135,271 85,352 75,106
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 137,073 $ 135,271 $ 85,352
=================================================================================================================================
Interest paid $ 203,870 $ 204,596 $ 228,460
=================================================================================================================================
Income taxes paid, net $ 159,854 $ 111,176 $ 163,745
=================================================================================================================================
(a) Certain prior year amounts have been reclassified to conform with the 1997
presentation.
See notes, pages 31 through 46
29
- --------------------------------------------------------------------------------
================================================================================
Consolidated Statements of Stockholders' Equity
================================================================================
(Dollars in thousands, except per share data)
Capital in Cumulative Treasury
Preferred Preference Common excess of Retained translation stock,
stock stock stock par value earnings adjustments at cost
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 $48 $2,790 $323,338 $35,200 $1,785,513 $(41,617) $ (360,203)
Net income 583,140
Cash dividends:
Preferred ($2.00 per share) (1)
Preference ($2.12 per share) (261)
Common ($.60 per share) (181,395)
Issuances under dividend
reinvestment and stock plans (4,047) 30,594
Conversions to common stock (1) (243) (2,267) 2,511
Repurchase of common stock (98,038)
Translation adjustments (5,374)
Tax credits relating to stock options 1,413
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 47 2,547 323,338 30,299 2,186,996 (46,991) (425,136)
Net income 469,413
Cash dividends:
Preferred ($2.00 per share) (1)
Preference ($2.12 per share) (194)
Common ($.69 per share) (205,920)
Issuances under dividend
reinvestment and stock plans (2,441) 31,649
Conversions to common stock (1) (178) (1,819) 1,998
Repurchase of common stock (144,475)
Translation adjustments 15,694
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
Cash dividends:
Preferred ($2.00 per share) (1)
Preference ($2.12 per share) (179)
Common ($.80 per share) (231,212)
Issuances under dividend
reinvestment and stock plans (2,741) 33,997
Conversions to common stock (7) (149) (1,940) 2,096
Repurchase of common stock (662,758)
Translation adjustments (32,051)
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)
===================================================================================================================================
See notes, pages 31 through 46
30
- --------------------------------------------------------------------------------
================================================================================
Notes to Consolidated Financial Statements
================================================================================
(Dollars in thousands, except per share data or as otherwise indicated)
1. Summary of significant accounting policies
Consolidation
The consolidated financial statements include the accounts of Pitney Bowes Inc.
and all of its subsidiaries (the company). All significant intercompany
transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents, short-term investments
and accounts receivable
Cash equivalents include short-term, highly liquid investments with a maturity
of three months or less from the date of acquisition. The company places its
temporary cash and short-term investments with financial institutions and limits
the amount of credit exposure with any one financial institution. Concentrations
of credit risk with respect to accounts receivable are limited due to the large
number of customers and relatively small account balances within the majority of
the company's customer base, and their dispersion across different businesses
and geographic areas.
Inventory valuation
Inventories are valued at the lower of cost or market. Cost is determined on the
last-in, first-out (LIFO) basis for most U.S. inventories, and on the first-in,
first-out (FIFO) basis for most non-U.S. inventories.
Fixed assets and depreciation
Property, plant and equipment are stated at cost and depreciated principally
using the straight-line method over appropriate periods: machinery and equipment
principally three to 15 years and buildings up to 50 years. Major improvements
which add to productive capacity or extend the life of an asset are capitalized
while repairs and maintenance are charged to expense as incurred. Rental
equipment is depreciated on the straight-line method over appropriate periods,
principally three to ten years. Other depreciable assets are depreciated using
either the straight-line method or accelerated methods. Properties leased under
capital leases are amortized on a straight-line basis over the primary lease
terms.
Rental arrangements and advance billings
The company rents equipment to its customers, primarily postage meters and
mailing, shipping, copier and facsimile systems under short-term rental
agreements, generally for periods of three months to three years. Charges for
equipment rental and maintenance contracts are billed in advance; the related
revenue is included in advance billings and taken into income as earned.
Asset valuation
The company periodically reviews the fair value of long-lived assets and
capitalized mortgage servicing rights for impairment.
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
31
- --------------------------------------------------------------------------------
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. The recoverability of
goodwill is assessed by determining whether the unamortized balance can be
recovered from expected future cash flows from the applicable operation.
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 $385 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
$12 million.
Nonpension postretirement benefits and
postemployment benefits
The company provides certain health care and life insurance benefits to eligible
retirees and their dependents. The cost of these benefits are recognized over
the period the employee provides credited service to the company. Substantially
all of the company's U.S. and Canadian employees become eligible for retiree
health care benefits after reaching age 55 and with the completion of the
required service period. Postemployment benefits include primarily
company-provided medical benefits to disabled employees and company-provided
life insurance as well as other disability- and death-related benefits to former
or inactive employees, their beneficiaries and covered dependents. It is the
company's practice to fund amounts for these nonpension postretirement and
postemployment benefits as incurred.
Earnings per share
In December 1997, the company adopted FAS No. 128, "Earnings per Share." Under
FAS No. 128, 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.
Postage deposits
The company's U.S. customers using the Pitney Bowes Postage By Phone(R) meter
setting system, a computerized system developed by the company for the resetting
of postage meters via telephone, can elect to make deposits directly with the
United States Postal Service (USPS) to cover expected postage usage. Such
customers can also elect, for a fee, to have the company pay the postage to the
USPS under a revolving credit product called Purchase Power(SM). The company
earns income on balances from customers who elect to use our credit facilities.
Resetting fees received by the company are not affected by the customers' choice
of payment method.
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 accumulated 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, 1997, the company had approximately $290.8 million
of foreign exchange contracts outstanding, most of which mature in 1998, 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
32
- --------------------------------------------------------------------------------
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 $.5 million,
$(.5) million and $1.6 million in 1997, 1996 and 1995, respectively.
2. Inventories
Inventories consist of the following:
December 31 1997 1996
- --------------------------------------------------------------------------------
Raw materials
and work in process $ 51,429 $ 58,536
Supplies and service parts 93,064 103,182
Finished products 104,714 120,224
- --------------------------------------------------------------------------------
Total $249,207 $281,942
================================================================================
Had all inventories valued at LIFO been stated at current costs, inventories
would have been $33.8 million and $37.3 million higher than reported at December
31, 1997 and 1996, respectively.
3. Fixed assets
December 31 1997 1996
- --------------------------------------------------------------------------------
Land $ 34,844 $ 34,859
Buildings 307,341 304,631
Machinery and equipment 778,140 754,011
- --------------------------------------------------------------------------------
1,120,325 1,093,501
Accumulated depreciation (623,064) (607,472)
- --------------------------------------------------------------------------------
Property, plant and equipment, net $ 497,261 $ 486,029
================================================================================
Rental equipment
and related inventories $ 1,577,370 $ 1,634,111
Accumulated depreciation (789,335) (818,805)
- --------------------------------------------------------------------------------
Rental equipment and
related inventories, net $ 788,035 $ 815,306
================================================================================
Property leased
under capital leases $ 20,507 $ 24,124
Accumulated amortization (16,111) (18,276)
- --------------------------------------------------------------------------------
Property leased
under capital leases, net $ 4,396 $ 5,848
================================================================================
4. Current liabilities
Accounts payable and accrued liabilities and notes payable and current portion
of long-term obligations are comprised as follows:
December 31 1997 1996
- --------------------------------------------------------------------------------
Accounts payable - trade $ 263,416 $ 245,274
Accrued salaries,
wages and commissions 106,670 90,452
Accrued pension benefits 84,005 77,323
Accrued nonpension
postretirement benefits 15,500 15,500
Accrued postemployment benefits 6,900 6,884
Miscellaneous accounts
payable and accrued liabilities 402,268 414,356
- --------------------------------------------------------------------------------
Accounts payable
and accrued liabilities $ 878,759 $ 849,789
================================================================================
Notes payable and overdrafts $1,747,377 $1,656,574
Current portion of long-term debt 234,080 253,190
Current portion of
capital lease obligations 1,531 1,717
- --------------------------------------------------------------------------------
Notes payable and current
portion of long-term obligations $1,982,988 $1,911,481
================================================================================
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, $1.5 million and
$1.8 million in 1997, 1996 and 1995, respectively.
At December 31, 1997, overdrafts outside the U.S. totaled $2.8 million and U.S.
notes payable totaled $1.7 billion. Unused credit facilities outside the U.S.
totaled $75.6 million at December 31, 1997 of which $31.9 million were for
finance operations. In the U.S., the company had unused credit facilities of
$1.8 billion at December 31, 1997, largely in support of commercial paper
borrowings, of which $1.5 billion were for its finance operations. The weighted
average interest rates were 4.8% and 4.9% on notes payable and overdrafts
outstanding at December 31, 1997 and 1996, 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
33
- --------------------------------------------------------------------------------
losses in the event of non-performance by swap counterparties to the extent of
the differential between the fixed and variable rates; such exposure is
considered minimal.
The company enters into interest rate swap agreements primarily through its
Pitney Bowes Credit Corporation (PBCC) subsidiary. 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 48% and 52%,
respectively, at December 31, 1997. 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, 1997, the company had outstanding
interest rate swap agreements with notional principal amounts of $268.5 million
and terms expiring at various dates from 1999 to 2007. The company exchanged
variable commercial paper rates on an equal notional amount of notes payable and
overdrafts for fixed rates ranging from 5.9% to 10.75%.
5. Long-term debt
December 31 1997 1996
- --------------------------------------------------------------------------------
Non-financial services debt:
Due 1998-2003
(3.88% to 5.50%) $ 3,175 $ 3,730
Financial services debt:
Senior notes:
5.84% to 6.305% notes due 1998 -- 225,000
6.54% notes due 1999 200,000 200,000
6.06% to 6.11% notes due 2000 50,000 50,000
6.78% to 6.80% notes due 2001 200,000 200,000
6.63% notes due 2002 100,000 100,000
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
1998-2000 (11.05% to 12.50%) 15,220 21,020
Other -- 684
- --------------------------------------------------------------------------------
Total long-term debt $1,068,395 $1,300,434
================================================================================
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 $100 million in
debt securities, of which $32 million remained available at December 31, 1997.
Securities issued under this medium-term note facility would have maturities
ranging from more than one year up to 30 years. The company also had an
additional $300 million remaining on a shelf registration statement filed with
the Securities and Exchange Commission (SEC). On January 22, 1998, the company
issued notes amounting to $300 million available under this 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 will be used for general corporate purposes, including the repayment
of short-term debt.
PBCC had $250 million of unissued debt securities available from a shelf
registration statement filed with the SEC in September 1995. On January 16,
1998, PBCC issued notes amounting to $250 million available under this shelf
registration. These unsecured notes bear annual interest at 5.65% and mature in
January 2003. The proceeds will be used to meet PBCC's financing needs over the
next 12 months.
The annual maturities of the outstanding debt during each of the next five years
are as follows: 1998, $234.1 million; 1999, $204.9 million; 2000, $62.0 million;
2001, $200.7 million and 2002, $100.2 million.
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.
6. Preferred stockholders' equity in a subsidiary company
Preferred stockholders' equity in a subsidiary company represents 3,000,000
shares of variable term voting preferred stock issued by Pitney Bowes
International Holdings, Inc., a subsidiary of the company, which are owned by
certain outside institutional investors. These preferred shares are entitled to
25% of the combined voting power of all classes of capital stock. All
outstanding common stock of Pitney Bowes International Holdings, Inc.,
representing the remaining 75% of the combined voting power of all classes of
capital stock, is owned directly or indirectly by Pitney Bowes Inc. The
preferred stock, $.01 par value, is entitled to cumulative dividends at rates
set at auction. The weighted average dividend rate in 1997 and 1996 was 4.1% and
4.0%, respectively. 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, 1997 or 1996.
34
- --------------------------------------------------------------------------------
7. Capital stock and capital in excess of par value
On December 18, 1997, the company's stockholders voted to amend the Restated
Certificate of Incorporation to increase the number of authorized common shares
from 240,000,000 to 480,000,000 shares and reduce the par value per common share
from $2 to $1. This action resulted in a two-for-one split of the company's
common stock as previously approved by the Board of Directors. All previously
reported common share and per common share data has been restated.
At December 31, 1997, 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 279,673,878 shares of common stock (net of 43,664,034 shares of
treasury stock), 788 shares of 4% Convertible Cumulative Preferred Stock (4%
preferred stock) and 81,975 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
(599,212 shares) and preference stock (4,918,025 shares). This will determine
the dividend rate, terms of redemption, terms of conversion (if any) and other
pertinent features. At December 31, 1997, unreserved and unissued common stock
(exclusive of treasury stock) amounted to 129,310,772 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, 1997, a total of 1,330,701 shares of common stock were reserved
for issuance upon conversion of the 4% preferred stock (19,101 shares) and $2.12
preference stock (1,311,600 shares). In addition, 2,608,136 shares of common
stock were reserved for issuance under the company's dividend reinvestment and
other corporate plans.
Each share of common stock outstanding has attached one preference share
purchase right. Each right entitles each holder to purchase 1/200th of a share
of Series A Junior Participating Preference Stock for $97.50 and will expire in
February 2006. Following a merger or certain other transactions, the rights will
entitle the holder to purchase common stock of the company or the acquirers at a
50% discount.
8. Stock plans
The company has the following stock plans which are described below: the U.S.
and U.K. Stock Option Plans (ESP), the U.S. and U.K. Employee Stock Purchase
Plans (ESPP), and the Directors' Stock Plan.
The company adopted FAS No. 123, "Accounting for Stock-Based Compensation," on
January 1, 1996. Under FAS No. 123, companies can, but are not required to,
elect to recognize compensation expense for all stock-based awards using a fair
value methodology. The company has adopted the disclosure-only provisions, as
permitted by FAS No. 123. The company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock-based
plans. Accordingly, no compensation expense has been recognized for the ESP or
the ESPP, except for the compensation expense recorded for its performance-based
awards under the ESP and the Directors' Stock Plan as discussed herein. If the
company had elected to recognize compensation expense based on the fair value
method as prescribed by FAS No. 123, net income and earnings per share for the
years ended 1997, 1996 and 1995 would have been reduced to the following pro
forma amounts:
1997 1996 1995
- --------------------------------------------------------------------------------
Net income
As reported $526,027 $469,413 $583,140
Pro forma $523,400 $467,742 $582,510
Basic earnings per share
As reported $1.82 $1.57 $1.93
Pro forma $1.81 $1.57 $1.93
Diluted earnings per share
As reported $1.80 $1.56 $1.91
Pro forma $1.79 $1.55 $1.91
- --------------------------------------------------------------------------------
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:
1997 1996 1995
- -------------------------------------------------------------------------------
Expected dividend yield 2.0% 2.5% 2.5%
Expected stock price volatility 17% 17% 17%
Risk-free interest rate 6% 6% 6%
Expected life (years) 5 5 5
- -------------------------------------------------------------------------------
Stock Option Plans
Under the company's stock option plans, certain officers and employees of the
U.S. and the company's participating U.K. 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
35
- --------------------------------------------------------------------------------
the first three years following their grant and expire after ten years. At
December 31, 1997, there were 6,314,258 options available for future grants
under these plans. The per share weighted average fair value of options granted
was $7 in 1997, $5 in 1996 and $4 in 1995.
The following table summarizes information about stock option transactions:
Per share
weighted
average
exercise
Shares price
- --------------------------------------------------------------------------------
Options outstanding
at January 1, 1995 4,044,772 $15
Granted 1,025,504 $17
Exercised (649,940) $11
Canceled (59,334) $18
- --------------------------------------------------------------------------------
Options outstanding
at December 31, 1995 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
================================================================================
Options exercisable
at December 31, 1995 2,823,052 $15
================================================================================
Options exercisable
at December 31, 1996 2,017,702 $15
================================================================================
Options exercisable
at December 31, 1997 2,703,734 $18
================================================================================
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding
- --------------------------------------------------------------------------------
Weighted Per share
Range of average weighted
per share remaining average
exercise contractual exercise
prices Number life price
- --------------------------------------------------------------------------------
$9-$20 2,340,638 5.6 years $16
$21-$30 2,862,392 9.2 years $27
$36-$45 170,094 10.0 years $39
- --------------------------------------------------------------------------------
5,373,124 7.7 years
================================================================================
At December 31, 1997, there were 2,075,066 and 628,668 options exercisable with
per share exercise prices ranging from $9 to $20 and $21 to $30, respectively.
The per share weighted average exercise prices of these options were $16 and
$23, respectively.
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. At December 31, 1997, there were 90,904 options outstanding
under this plan 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 $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 1997, 100,500 shares awarded in 1996 and 112,600
shares awarded in 1995 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 $4.1 million, $2.0 million
and $.8 million in 1997, 1996 and 1995, respectively. The per share weighted
average fair value of shares awarded was $23 in 1996 and $16 in 1995.
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 1997, 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 1997, 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 10,626,634 common shares to its
regular employees under these plans. The company granted rights to purchase
855,916 shares in 1997, 764,088 shares in 1996, and 852,678 shares in 1995. The
per share fair value of rights granted was $4 in 1997, $3 in 1996 and $3 in 1995
for the U.S. ESPP and $9 in 1997, $7 in 1996 and $5 in 1995 for the U.K. ESPP.
36
- --------------------------------------------------------------------------------
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 10,900 in 1997, 7,200 in 1996 and 6,400 in
1995. Compensation expense recorded by the company was $370,000, $175,000 and
$118,000 for 1997, 1996 and 1995, 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 $28
in 1997, $19 in 1996 and $14 in 1995.
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. At
December 31, 1997, there were 1,994 options outstanding under this plan. The per
share weighted average fair value of options granted was $9 in 1997.
9. Earnings per share
A reconciliation of the basic and diluted earnings per share computations for
income from continuing operations for the years ended December 31, 1997, 1996
and 1995 is as follows:
1997
-----------------------------------
Per
Income Shares Share
- --------------------------------------------------------------------------------
Income from
continuing operations $526,027
Less:
Preferred stock dividends (1)
Preference stock dividends (179)
- --------------------------------------------------------------------------------
Basic earnings per share $525,847 288,782,996 $1.82
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock 1 21,420
Preference stock 179 1,355,116
Stock options 2,068,442
Employee stock
purchase plan shares 289,142
- --------------------------------------------------------------------------------
Diluted earnings per share $526,027 292,517,116 $1.80
================================================================================
1996
-----------------------------------
Per
Income Shares Share
- --------------------------------------------------------------------------------
Income from
continuing operations $469,413
Less:
Preferred stock dividends (1)
Preference stock dividends (194)
- --------------------------------------------------------------------------------
Basic earnings per share $469,218 298,233,766 $1.57
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock 1 22,882
Preference stock 194 1,453,512
Stock options 1,344,634
Employee stock
purchase plan shares 248,562
- --------------------------------------------------------------------------------
Diluted earnings per share $469,413 301,303,356 $1.56
================================================================================
1995
-----------------------------------
Per
Income Shares Share
- --------------------------------------------------------------------------------
Income from
continuing operations $407,709
Less:
Preferred stock dividends (1)
Preference stock dividends (261)
- --------------------------------------------------------------------------------
Basic earnings per share $407,447 302,280,548 $1.35
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock 1 23,004
Preference stock 261 1,570,710
Stock options 757,988
Employee stock
purchase plan shares 107,702
- --------------------------------------------------------------------------------
Diluted earnings per share $407,709 304,739,952 $1.34
================================================================================
37
- --------------------------------------------------------------------------------
10. Taxes on income
Income from continuing operations before income taxes and the provision for
income taxes consist of the following:
Years ended December 31
---------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Income from continuing
operations before
income taxes:
U.S. $ 717,867 $ 656,862 $ 566,806
Outside the U.S. 85,231 27,521 52,125
- -------------------------------------------------------------------------------
Total $ 803,098 $ 684,383 $ 618,931
===============================================================================
Provision for income taxes:
U.S. federal:
Current $ 117,146 $ 42,257 $ (17,024)
Deferred 102,145 111,943 168,297
- -------------------------------------------------------------------------------
219,291 154,200 151,273
- -------------------------------------------------------------------------------
U.S. state and local:
Current 43,159 11,853 13,691
Deferred (7,946) 29,562 26,221
- -------------------------------------------------------------------------------
35,213 41,415 39,912
- -------------------------------------------------------------------------------
Outside the U.S.:
Current 33,596 28,694 28,233
Deferred (11,029) (9,339) (8,196)
- -------------------------------------------------------------------------------
22,567 19,355 20,037
- -------------------------------------------------------------------------------
Total current 193,901 82,804 24,900
Total deferred 83,170 132,166 186,322
- -------------------------------------------------------------------------------
Total $ 277,071 $ 214,970 $ 211,222
===============================================================================
Including discontinued operations, current provisions for 1995 federal, state
and local and outside the U.S. would have been $87.6 million, $39.9 million and
$41.9 million, respectively. Total tax provision would have been $355.7 million.
In 1995 through 1997, the company recognized a reduction in tax expense on
account of its investment in a life insurance program. In 1996, the company
recognized U.S. tax benefits from the write-off of its Australian investment and
from restructuring its Australian operations.
A reconciliation of the U.S. federal statutory rate to the company's effective
tax rate for continuing operations follows:
1997 1996 1995
- ------------------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes 2.8 3.9 4.2
Australian write-off -- (2.4) --
Life insurance investment (0.7) (1.7) (2.1)
Other, net (2.6) (3.4) (3.0)
- ------------------------------------------------------------------------------
Effective income tax rate 34.5% 31.4% 34.1%
==============================================================================
The effective tax rate for discontinued operations in 1995 differs from the
statutory rate due primarily to state and local income taxes and nondeductible
goodwill.
Deferred tax liabilities and (assets)
December 31 1997 1996
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 97,988 $ 72,930
Deferred profit
(for tax purposes) on
sales to finance subsidiaries 393,645 367,490
Lease revenue and
related depreciation 843,422 816,831
Other 109,621 103,471
- -------------------------------------------------------------------------------
Deferred tax liabilities 1,444,676 1,360,722
- -------------------------------------------------------------------------------
Deferred tax assets:
Nonpension postretirement
benefits (125,377) (130,422)
Pension liability (17,351) (17,995)
Inventory and
equipment capitalization (38,191) (33,145)
Net operating loss carryforwards (43,602) (47,481)
Alternative minimum tax
(AMT) credit carryforwards (27,325) (80,773)
Postemployment benefits (18,350) (19,963)
Other (181,145) (124,263)
Valuation allowance 41,301 46,601
- -------------------------------------------------------------------------------
Deferred tax assets (410,040) (407,441)
- -------------------------------------------------------------------------------
Net deferred taxes $ 1,034,636 $ 953,281
===============================================================================
Net deferred taxes includes $128.9 million and $232.4 million for 1997 and 1996,
respectively, of current deferred taxes, which are included in income taxes
payable in the Consolidated Balance Sheets.
The decrease in the deferred tax asset for net operating loss carryforwards and
related valuation allowance was due mainly to the decrease in foreign exchange
rates, particularly the German mark. The decrease was partially offset by losses
incurred by certain foreign subsidiaries. At December 31, 1997 and 1996,
approximately $94.5 million and $98.1 million, respectively, of net operating
loss carryforwards were available to the company. Most of these losses, as well
as the company's alternative minimum tax credit, can be carried forward
indefinitely.
38
- --------------------------------------------------------------------------------
11. Retirement plans
The company has several defined benefit and defined contribution pension plans
covering substantially all employees worldwide. Benefits are primarily based on
employees' compensation and years of service. Company contributions are
determined based on the funding requirements of U.S. federal and other
governmental laws and regulations.
During 1997, the company announced that it amended its U.S. defined benefit
pension plan to a pay equity plan for most of its active U.S. employees and
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.
Total ongoing pension expense amounted to $29.9 million in 1997, $45.6 million
in 1996 and $52.2 million in 1995. Net pension expense for defined benefit plans
for 1997, 1996 and 1995 included the following components:
United States Foreign
-------------------------------------- --------------------------------------
1997 1996 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost - benefits
earned during period $ 22,780 $ 31,952 $ 33,061 $ 6,771 $ 6,046 $ 5,952
Interest cost on projected
benefit obligations 67,111 69,292 68,027 12,515 10,882 10,317
Actual return on plan assets (136,629) (114,641) (124,866) (34,525) (22,512) (17,594)
Net amortization and deferral 55,143 44,574 58,831 19,719 9,885 5,237
- -----------------------------------------------------------------------------------------------------------------------------------
Ongoing net periodic defined
benefit pension expense 8,405 31,177 35,053 4,480 4,301 3,912
Curtailment (gain) loss charge(a) -- -- (13,974) -- -- 2,921
- -----------------------------------------------------------------------------------------------------------------------------------
Total pension expense $ 8,405 $ 31,177 $ 21,079 $ 4,480 $ 4,301 $ 6,833
===================================================================================================================================
(a) The company merged the pension plans of Monarch Marking Systems, Inc. and
Dictaphone Corporation into the Pitney Bowes Retirement Plan. Benefits ceased to
be accrued for active employees of Monarch and Dictaphone as of the respective
dates of the sale of these companies resulting in a net curtailment gain of
approximately $14.0 million. There was a $2.9 million curtailment charge to the
Pitney Bowes, Ltd. pension plan due primarily to actions taken by Pitney Bowes,
Ltd.
The funded status at December 31, 1997 and 1996 for the company's defined
benefit plans was:
United States Foreign
---------------------------- ---------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of:
Vested benefits $ 818,931 $ 777,064 $ 150,232 $ 139,300
===================================================================================================================================
Accumulated benefit obligations $ 901,924 $ 858,590 $ 150,471 $ 139,569
===================================================================================================================================
Projected benefit obligations $ 968,950 $ 995,009 $ 179,713 $ 162,613
- -----------------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value, primarily
stocks and bonds, adjusted by: 959,632 868,752 209,629 179,040
Unrecognized net (gain) loss (7,854) 49,539 (20,317) (12,983)
Unrecognized net asset (9,457) (12,636) (9,283) (11,096)
Unamortized prior service costs
from plan amendments (49,845) 20,655 5,789 7,316
- -----------------------------------------------------------------------------------------------------------------------------------
892,476 926,310 185,818 162,277
- -----------------------------------------------------------------------------------------------------------------------------------
Net pension liability (asset) $ 76,474 $ 68,699 $ (6,105) $ 336
===================================================================================================================================
Assumptions for defined benefit plans:(a)
Discount rate 7.25% 7.25% 4.0%-7.8% 4.0%-8.5%
Rate of increase in future
compensation levels 4.25% 4.25% 2.0%-5.0% 2.0%-5.5%
Expected long-term rate of
return on plan assets 9.50% 9.50% 4.0%-9.0% 4.0%-9.5%
(a) Pension costs are determined using assumptions as of the beginning of the
year while the funded status of the plans is determined using assumptions as of
the end of the year.
39
- --------------------------------------------------------------------------------
12. Nonpension postretirement benefits
Net nonpension postretirement benefit costs consisted of the following
components:
Years ended December 31
--------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Service cost -
benefits earned
during the period $ 9,688 $ 10,445 $ 8,688
Interest cost on
accumulated
postretirement
benefit obligations 18,770 17,654 18,917
Net deferral
and amortization (16,045) (15,946) (17,920)
- -------------------------------------------------------------------------------
Net periodic
postretirement
benefit costs $ 12,413 $ 12,153 $ 9,685
===============================================================================
The company's nonpension postretirement benefit plans are not funded. The status
of the plans was as follows:
December 31 1997 1996
- --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligations:
Retirees and dependents $208,368 $206,114
Fully eligible active
plan participants 48,570 53,810
Other active plan participants 49,784 44,832
Unrecognized net gain 1,057 2,047
Unrecognized prior service cost 23,141 37,463
- --------------------------------------------------------------------------------
Accrued nonpension
postretirement benefits $330,920 $344,266
================================================================================
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations was 7.25% and 8.25% in 1997 and 1996,
respectively. This was assumed to gradually decline to 3.75% by the year 2000
and remain at that level thereafter for 1997 and 1996. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligations by approximately $13.7 million at
December 31, 1997 and the net periodic postretirement health care cost by $1.1
million in 1997.
The assumed weighted average discount rate used in determining the accumulated
postretirement benefit obligations was 7.25% in 1997 and 1996.
During 1997, the company amended its retiree medical program for current and
future retirees of Pitney Bowes Management Services who will now have increased
participant contributions.
13. Discontinued operations
During 1995, the company sold its Monarch Marking Systems, Inc. (Monarch) and
Dictaphone Corporation (Dictaphone) subsidiaries. The sales resulted in gains
approximating $155 million, net of approximately $130 million of income taxes,
from $577 million in proceeds. Dictaphone and Monarch have been classified in
the Consolidated Statements of Income as discontinued operations.
For the year ended December 31, 1995, Monarch and Dictaphone had revenues of
$306 million. Net income was $21.5 million, net of $14.5 million of income taxes
in 1995.
14. Commitments, contingencies and regulatory matters
The company's finance subsidiaries had no unfunded commitments to extend credit
to customers at December 31, 1997. The company evaluates each customer's
creditworthiness on a case-by-case basis. Upon extension of credit, the amount
and type of collateral obtained, if deemed necessary by the company, is based on
management's credit assessment of the customer. Fees received under the
agreements are recognized over the commitment period. The maximum risk of loss
arises from the possible non-performance of the customer to meet the terms of
the credit agreement. As part of the company's review of its exposure to risk,
adequate provisions are made for finance assets which may be uncollectible.
From time to time, the company is a party to lawsuits that arise in the ordinary
course of its business. These lawsuits may involve litigation by or against the
company to enforce contractual rights under vendor, insurance, or other
contracts; lawsuits relating to intellectual property or patent rights;
equipment, service or payment disputes with customers; disputes with employees;
or other matters. The company is currently a defendant in a number of lawsuits,
none of which should have, in the opinion of management and legal counsel, a
material adverse effect on the company's financial position or results of
operations.
The company is subject to federal, state and local laws and regulations
concerning the environment, and is currently participating in administrative or
court proceedings as a participant in various groups of potentially responsible
parties. As previously announced by the company, in 1996 the Environmental
Protection Agency (EPA) issued an administrative order directing the company to
be part of a soil cleanup program at the Sarney Farm site in Amenia, New York.
The site was operated as a landfill between the years 1968 and 1970 by parties
unrelated to the company, and wastes from a number of industrial sources were
disposed there. The company does not concede liability for the condition of the
site, but is working with the EPA to identify and
40
- --------------------------------------------------------------------------------
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 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 June 1995, the USPS finalized and issued regulations governing the
manufacture, distribution and use of postage meters. These regulations cover
four general categories: meter security, administrative controls, Computerized
Meter Resetting Systems and other issues. The company continues to comply with
these regulations in its ongoing postage meter operations.
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 which better
reflected the needs of existing mechanical meter users and minimized any
potential negative financial impact on the company. 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.
Based on the foregoing schedule, the company believes that the phaseout of
mechanical meters will not cause a material adverse financial impact on the
company.
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 25% of the company's installed U.S. meter base at December 31, 1997,
compared with 40% at December 31, 1996. At December 31, 1997, 75% of the
company's installed U.S. meter base is electronic or digital, compared to 60% at
December 31, 1996.
In May 1995, the USPS publicly announced its concept of its Information Based
Indicia Program (IBIP) for future postage evidencing devices. As initially
stated by the USPS, the purpose of the program was to develop a new standard for
future digital postage evidencing devices which significantly enhanced postal
revenue security and supported expanded USPS value-added services to mailers.
The program would consist of the development of four separate specifications:
(i) the Indicium specification--the technical specifications for the indicium to
be printed; (ii) a Postal Security Device specification--the technical
specification for the device that would contain the accounting and security
features of the system; (iii) a Host specification; and (iv) a Vendor
Infrastructure specification.
In July 1996, the USPS published for public comment draft specifications for the
Indicium, Postal Security Device and Host specifications. The company submitted
extensive comments to these specifications in November 1996. Revised
specifications were then published in 1997 which incorporated many of the
changes recommended by the company in its prior comments including the
recommendation that IBIP apply only to the personal computer (PC) environment
and not apply at the present time to other digital postage evidencing systems.
The company submitted comments to these revised specifications. Also, in March
1997 the USPS published for public comment the Vendor Infrastructure
specification to which the company responded on June 27, 1997. As of December
31, 1997, the USPS had not yet finalized the four IBIP specifications; however,
the company has developed a PC product which satisfies the proposed IBIP
specifications. This product is currently undergoing testing by the USPS and is
expected to be ready for market introduction when final approval of the
specifications is issued.
41
- --------------------------------------------------------------------------------
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, 1997 are as follows:
Capital Operating
Years ending December 31 leases leases
- --------------------------------------------------------------------------------
1998 $ 3,247 $ 55,869
1999 3,238 41,357
2000 2,880 29,686
2001 2,739 20,348
2002 2,334 13,328
Thereafter 4,046 43,875
- --------------------------------------------------------------------------------
Total minimum lease payments $18,484 $204,463
========
Less amount representing interest (6,811)
- ------------------------------------------------------------
Present value of net minimum
lease payments $11,673
============================================================
Rental expense was $118.2 million, $121.6 million and $129.3 million in 1997,
1996 and 1995, 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 and Australia, as well as other commercial and
industrial transactions in the U.S.
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 when completed, will reduce 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. At December 31,
1997, the company had received approximately $800 million of the approximately
$900 million in cash it expects to receive. The company will also retain
approximately $200 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 1997 1996 1995
- --------------------------------------------------------------------------------
Revenue $789,092 $794,819 $713,909
- --------------------------------------------------------------------------------
Costs and expenses 286,779 294,147 238,457
Interest, net 213,691 216,220 217,499
- --------------------------------------------------------------------------------
Total expenses 500,470 510,367 455,956
- --------------------------------------------------------------------------------
Income before
income taxes 288,622 284,452 257,953
Provision for
income taxes 82,825 91,638 81,422
- --------------------------------------------------------------------------------
Net income $205,797 $192,814 $176,531
================================================================================
Condensed balance sheet
December 31 1997 1996(a)
- -----------------------------------------------------------------------------
Cash and cash equivalents $ 41,637 $ 22,506
Finance receivables, net 1,546,542 1,339,286
Accounts receivable 263,738 --
Other current assets and
prepayments 54,753 52,169
- -----------------------------------------------------------------------------
Total current assets 1,906,670 1,413,961
Long-term finance receivables, net 2,581,349 3,450,231
Investment in leveraged leases 727,783 633,682
Other assets 281,244 143,023
- -----------------------------------------------------------------------------
Total assets $5,497,046 $5,640,897
=============================================================================
Accounts payable and
accrued liabilities $ 423,462 $ 359,157
Income taxes payable 102,110 156,340
Notes payable and
current portion
of long-term obligations 1,897,915 2,021,987
- -----------------------------------------------------------------------------
Total current liabilities 2,423,487 2,537,484
- -----------------------------------------------------------------------------
Deferred taxes on income 423,832 330,847
Long-term debt 1,378,827 1,570,549
Other noncurrent liabilities 4,042 4,974
- -----------------------------------------------------------------------------
Total liabilities 4,230,188 4,443,854
- -----------------------------------------------------------------------------
Equity 1,266,858 1,197,043
- -----------------------------------------------------------------------------
Total liabilities and equity $5,497,046 $5,640,897
=============================================================================
(a) Certain prior year amounts have been reclassified to conform with the 1997
presentation.
Finance receivables are generally due in monthly, quarterly or semiannual
installments over periods ranging from three to 15 years. In addition, 16.5% of
the company's net finance assets represent secured commercial and private jet
aircraft transactions
42
- --------------------------------------------------------------------------------
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 and
Years ending December 31 receivables subordinated debt
- --------------------------------------------------------------------------------
1998 $1,898,534 $1,897,915
1999 1,095,875 203,615
2000 784,534 61,900
2001 410,173 200,000
2002 157,946 100,000
Thereafter 409,885 813,312
- --------------------------------------------------------------------------------
Total $4,756,947 $3,276,742
================================================================================
Finance operations' net purchases of Pitney Bowes equipment amounted to $667.3
million, $645.4 million and $618.6 million in 1997, 1996 and 1995, respectively.
The components of net finance receivables were as follows:
December 31 1997 1996
- -------------------------------------------------------------------------------
Gross finance receivables $ 4,756,947 $ 5,579,517
Residual valuation 527,503 735,978
Initial direct cost deferred 93,438 99,023
Allowance for credit losses (132,308) (113,737)
Unearned income (1,117,689) (1,511,264)
- -------------------------------------------------------------------------------
Net finance receivables $ 4,127,891 $ 4,789,517
===============================================================================
The company's net investment in leveraged leases is composed of the following
elements:
December 31 1997 1996
- -------------------------------------------------------------------------------
Net rents receivable $ 810,750 $ 556,058
Unguaranteed residual
valuation 609,737 651,385
Unearned income (692,704) (573,761)
- -------------------------------------------------------------------------------
Investment in leveraged leases 727,783 633,682
Deferred taxes arising from
leveraged leases (300,164) (239,192)
- -------------------------------------------------------------------------------
Net investment in
leveraged leases $ 427,619 $ 394,490
===============================================================================
Following is a summary of the components of income from leveraged leases:
Years ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Pretax leveraged
lease income $ 6,797 $ 8,497 $11,667
Income tax effect 16,110 6,501 4,408
- --------------------------------------------------------------------------------
Income from
leveraged leases $22,907 $14,998 $16,075
================================================================================
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 $289.2 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 $293.5 million and original lease terms ranging from 22 to
25 years and transactions involving locomotives, railcars and rail and bus
facilities, with a total investment of $145.1 million and original lease terms
ranging from 15 to 44 years.
The company has sold net finance receivables with varying amounts of recourse in
privately placed transactions with third-party investors. The uncollected
principal balance of receivables sold and residual guarantee contracts totaled
$502.0 million and $328.0 million at December 31, 1997 and 1996, 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, 1997 and 1996 was not significant.
43
- --------------------------------------------------------------------------------
17. Business segment information
For a description of the company's segments, see "Overview" on page 17. That
information is incorporated herein by reference. The information set forth below
should be read in conjunction with such information. 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 other than that
related to the financial services businesses. General corporate expenses were
$86.6 million in 1997, $79.4 million in 1996 and $63.5 million in 1995. Revenue
and operating profit by business segment and geographic area for the years ended
1995 to 1997 were as follows:
Revenue
-----------------------------------
(in millions) 1997 1996 1995
- -------------------------------------------------------------------------------
Industry segments:
Business equipment $ 3,157 $ 2,956 $ 2,799
Business services 557 482 403
Commercial and
industrial financing
Large-ticket external 195 235 207
Small-ticket external 191 186 146
- -------------------------------------------------------------------------------
386 421 353
- -------------------------------------------------------------------------------
Total $ 4,100 $ 3,859 $ 3,555
- -------------------------------------------------------------------------------
Geographic areas:
United States $ 3,603 $ 3,370 $ 3,108
Outside the
United States 651 619 573
Interarea revenue (154) (130) (126)
- -------------------------------------------------------------------------------
Total $ 4,100 $ 3,859 $ 3,555
===============================================================================
Operating Profit
-------------------------------
(in millions) 1997 1996 1995
- -------------------------------------------------------------------------------
Industry segments:
Business equipment(a) $ 755 $ 621 $ 586
Business services 50 40 30
Commercial and
industrial financing
Large-ticket external 56 62 54
Small-ticket external 19 25 15
- -------------------------------------------------------------------------------
75 87 69
- -------------------------------------------------------------------------------
Total $ 880 $ 748 $ 685
- -------------------------------------------------------------------------------
Geographic areas:
United States $ 800 $ 719 $ 643
Outside the
United States(a) 95 38 56
Interarea operating profit (15) (9) (14)
- -------------------------------------------------------------------------------
Total $ 880 $ 748 $ 685
===============================================================================
(a) In 1996, excluding the Australian charge of $30 million, the business
equipment segment would have been $651 million, and the geographic area outside
the United States would have been $68 million. See discussion of selling,
service and administrative expenses on page 20.
Additional segment information is as follows:
Years ended December 31
-------------------------------
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Depreciation and
amortization:
Business equipment $ 233 $ 220 $ 224
Business services 46 32 23
Commercial and
industrial financing
Large-ticket external 15 14 13
Small-ticket external 2 1 1
- --------------------------------------------------------------------------------
17 15 14
- --------------------------------------------------------------------------------
Total $ 296 $ 267 $ 261
================================================================================
Net additions to property,
plant and equipment
and rental equipment
and related inventories:
Business equipment $ 241 $ 258 $ 256
Business services 31 20 7
Commercial and
industrial financing
Large-ticket external (44) (11) 31
Small-ticket external 9 7 5
- --------------------------------------------------------------------------------
(35) (4) 36
- --------------------------------------------------------------------------------
Total $ 237 $ 274 $ 299
================================================================================
44
- --------------------------------------------------------------------------------
Identifiable assets are those used in the company's operations in each segment
and exclude cash and cash equivalents and short-term investments. Identifiable
assets of geographic areas include intercompany profits on inventory and rental
equipment transferred between segments and intercompany accounts.
Identifiable assets by business segment and geographic area for the years 1995
to 1997 were as follows:
Identifiable Assets
--------------------------------
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Industry segments:
Business equipment $4,099 $3,776 $3,612
Business services 632 471 374
Commercial and
industrial financing
Large-ticket external 1,966 2,747 2,868
Small-ticket external 921 874 770
- --------------------------------------------------------------------------------
2,887 3,621 3,638
- --------------------------------------------------------------------------------
Total $7,618 $7,868 $7,624
================================================================================
Geographic areas:
United States $6,957 $7,188 $6,928
Outside the
United States 867 831 828
- --------------------------------------------------------------------------------
Total $7,824 $8,019 $7,756
================================================================================
A reconciliation of identifiable assets to consolidated assets is as follows:
December 31
------------------------
(in millions) 1997 1996
- -------------------------------------------------------------------------------
Identifiable assets by
geographic area $ 7,824 $ 8,019
Interarea profits (12) (18)
Intercompany accounts (194) (133)
- -------------------------------------------------------------------------------
Identifiable assets by
industry segment 7,618 7,868
Cash and cash equivalents and
short-term investments 139 137
General corporate assets 136 151
- -------------------------------------------------------------------------------
Consolidated assets $ 7,893 $ 8,156
===============================================================================
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.
Long-term debt
The fair value of long-term debt is estimated based on quoted dealer prices for
the same or similar issues.
Interest rate swap agreements and foreign currency exchange
contracts
The fair values of interest rate swaps and foreign currency exchange contracts
are obtained from dealer quotes. These values represent the estimated amount the
company would receive or pay to terminate agreements taking into consideration
current interest rates, the creditworthiness of the counterparties and current
foreign currency exchange rates.
Residual, conditional commitment and financial
guarantee contracts
The fair values of residual and conditional commitment guarantee contracts are
based on the projected fair market value of the collateral as compared to the
guaranteed amount plus a commitment fee generally required by the counterparty
assuming the guarantee. The fair value of financial guarantee contracts
represents the estimate of expected future losses.
Transfer of receivables with recourse
The fair value of the recourse liability represents the estimate of expected
future losses. The company periodically evaluates the adequacy of reserves and
estimates of expected losses; if the resulting evaluation of expected losses
differs from the actual reserve, adjustments are made to the reserve.
The estimated fair value of the company's financial instruments at December 31,
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.
45
- --------------------------------------------------------------------------------
The estimated fair value of the company's financial instruments at December 31,
1996 is as follows:
Carrying Fair
value(a) value
- -------------------------------------------------------------------------------
Investment securities $2,681 $2,691
Loans receivable $381,790 $365,560
Long-term debt $(1,577,277) $(1,629,527)
Interest rate swaps $(1,639) $(27,969)
Foreign currency
exchange contracts $806 $385
Residual, conditional
commitment and financial
guarantee contracts $(5,068) $(6,003)
Transfer of receivables with
recourse $(10,885) $(11,093)
- -------------------------------------------------------------------------------
(a) Carrying value includes accrued interest and deferred fee income.
19. Quarterly financial data (unaudited)
Summarized quarterly financial data (dollars in millions, except per share data)
for 1997 and 1996 follows:
Three Months Ended
-----------------------------------------
1997 March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
Total revenue $ 961 $1,006 $1,013 $1,120
Cost of sales and rentals
and financing $ 381 $ 398 $ 405 $ 455
Net income $ 120 $ 131 $ 128 $ 147
================================================================================
Basic earnings per share $ .41 $ .45 $ .44 $ .52
================================================================================
Diluted earnings per share $ .40 $ .45 $ .44 $ .51
================================================================================
Three Months Ended
-----------------------------------------
1996 March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------
Total revenue $ 906 $ 943 $ 951 $1,059
Cost of sales and rentals
and financing $ 365 $ 373 $ 382 $ 435
Net income $ 106 $ 118 $ 117 $ 128
================================================================================
Basic earnings per share $ .35 $ .40 $ .39 $ .43
================================================================================
Diluted earnings per share $ .35 $ .39 $ .39 $ .43
================================================================================
- --------------------------------------------------------------------------------
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Stamford, Connecticut
January 26, 1998
46
- --------------------------------------------------------------------------------
================================================================================
Stockholder Information
================================================================================
World Headquarters
Pitney Bowes Inc.
1 Elmcroft Rd.
Stamford, CT 06926-0700
(203)356-5000
www.pitneybowes.com
Annual Meeting
Stockholders are cordially invited to attend the 1998 Annual Meeting at 9:30
a.m., Monday, May 11, 1998, at Pitney Bowes World Headquarters in Stamford,
Connecticut. A notice of the meeting, proxy statement and proxy will be mailed
to each stockholder under separate cover.
10-K Report
The Form 10-K report, to be filed by Pitney Bowes with the Securities and
Exchange Commission, will provide certain additional information. Stockholders
may obtain copies of this report without charge by writing to:
MSC 6140
Investor Relations
Pitney Bowes Inc.
1 Elmcroft Rd.
Stamford, CT 06926-0700
Stock Exchanges
Pitney Bowes common stock is traded under the symbol "PBI." The principal market
it is listed on is the New York Stock Exchange. The stock is also traded on the
Chicago, Philadelphia, Boston, Pacific and Cincinnati stock exchanges.
Comments concerning the Annual Report should be sent to:
MSC 6309
Director Investor Communications and Advertising
Pitney Bowes Inc.
1 Elmcroft Rd.
Stamford, CT 06926-0700
For lost securities and certificate replacement:
ChaseMellon Shareholder Services LLC
Estoppel Department
PO Box 3317
South Hackensack, NJ 07606-1917
For change of address, account consolidations, legal transfer inquiries,
replacement checks, tax information and other inquiries:
ChaseMellon Shareholder Services LLC
PO Box 3315
South Hackensack, NJ 07606-1915
For certificate transfers:
ChaseMellon Shareholder Services LLC
Stock Transfer Department
PO Box 3312
South Hackensack, NJ 07606-1912
For dividend reinvestment information:
The Chase Manhattan Bank
c/o ChaseMellon Shareholder Services LLC
PO Box 3336
South Hackensack, NJ 07606-1936
Transfer Agent and Registrar:
ChaseMellon Shareholder Services LLC
Overpeck Centre
85 Challenger Rd.
Ridgefield, NJ 07660
Stockholders may call:
ChaseMellon Shareholder Services at (800) 648-8170 or Pitney Bowes Stockholder
Services at (203) 351-6088 or (203) 351-7200.
Investor Inquiries
All investor inquiries about Pitney Bowes should be addressed to:
MSC 6140
Investor Relations
Pitney Bowes Inc.
1 Elmcroft Rd.
Stamford, CT 06926-0700
Stock Information (restated to reflect the stock split)
Dividends per common share
Quarter 1997 1996
- --------------------------------------------------------------------------------
First $.20 $.1725
Second .20 .1725
Third .20 .1725
Fourth .20 .1725
- --------------------------------------------------------------------------------
Total $.80 $.6900
================================================================================
Quarterly price ranges of common stock
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
1996
Quarter High Low
- --------------------------------------------------------------------------------
First 25 13/16 20 15/16
Second 25 3/4 23 1/4
Third 27 1/4 21 5/8
Fourth 30 11/16 26 1/4
================================================================================
Trademarks
AddressRight, Arrival, Ascent, DirectNet, DocuMatch, ForwardTrak, Fulfillment,
Galaxy, Paragon, Personal Post Office, Postage by Phone, PostPerfect, Smart
Image RIP and StreamWeaver are trademarks or service marks of Pitney Bowes Inc.
Business Rewards, Postal Privilege, Purchase Power and ValueMax are service
marks of Pitney Bowes Credit Corporation.
OnLine is a trademark of United Parcel Service.
47
EXHIBIT (iv)
------------
Page 1 of 4
PITNEY BOWES INC.
SUBSIDIARIES OF THE REGISTRANT
------------------------------
The Registrant, Pitney Bowes Inc., a Delaware Corporation, has no parent.
The following are subsidiaries of the Registrant
(as of December 31, 1997)
Country or
state of
Company name incorporation
- ------------ -------------
ACN003606611 Australia
Adrema Leasing Corporation Delaware
Adrema Maschinen - und - Auto Leasing GmbH Germany
Adrema Maschinenbau Inc. Delaware
Adrema Mobilien Leasing GmbH Germany
Andeen Enterprises, Inc. Panama
Artec International Corporation California
Atlantic Mortgage & Investment Corporation Florida
B. Williams Holdings Corp. Delaware
Canadian Office Services (Toronto) Limited Canada
Cascade Microfilm Systems, Inc. California
Chas. P. Young Health Fitness & Management, Inc. New York
Colonial Pacific Leasing Corporation Massachusetts
Datarite Systems Ltd. England
ECL Finance Company, N.V. Netherlands
Elmcroft Road Realty Corporation Connecticut
Financial Structures Limited Bermuda
Financial Structures Insurance Company New York
FSL Holdings Inc. Connecticut
FSL Risk Managers Inc. New York
FSL Valuation Services Inc. Connecticut
Harlow Aircraft Inc. Delaware
Informatech California
La Agricultora Ecuatoriana S.A. Ecuador
Lease Continental GmbH Germany
MXT Corporation (68% owned) Canada
Norlin Australia Investments Pty. Ltd. Australia
Norlin Industries Ltd. Canada
Norlin Music (U.K.) Ltd. England
Oy Adrema Helsinki Finland
PB Canada Funding Ltd. Canada
PB Forms, Inc. Nebraska
PB Funding Corporation Delaware
PB Global Holdings Inc. Connecticut
PB Global Holdings II Inc. Connecticut
PB Global Holdings III Inc. Connecticut
PB Global Holdings IV Inc. Connecticut
PB Leasing Corporation Delaware
PB Leasing (March), (June), (September) Ltd. England
PB Leasing International Corporation Delaware
PB Leasing Services Inc. Nevada
PB Public Finance Inc. Delaware
PBA Foreign Sales Corporation Inc. Barbados
PB World Trade Corporation (Disc) Delaware
EXHIBIT (iv)
------------
Page 2 of 4
SUBSIDIARIES OF THE REGISTRANT (continued)
- ------------------------------
Country or
state of
Company name incorporation
- ------------ -------------
PB CFSC I Inc. Virgin Islands
PBL Holdings Inc. Nevada
PB Nikko FSC Ltd. Bermuda
PB Nihon FSC Ltd. Bermuda
Pitney Bowes A.G. Switzerland
Pitney Bowes Australia Pty. Australia
Pitney Bowes Australia FAS Pty. Limited Australia
Pitney Bowes Australia Funding Pty. Ltd. Australia
Pitney Bowes Austria Ges.m.b.H Austria
Pitney Bowes Business to Business Inc. Delaware
Pitney Bowes of Canada Ltd. Canada
Pitney Bowes Canada Holdings Limited Canada
Pitney Bowes China Inc. Delaware
Pitney Bowes Credit Australia Limited Australia
Pitney Bowes Credit Corporation Delaware
Pitney Bowes Data Systems, Ltd. Delaware
Pitney Bowes de Mexico, S.A. de C.V. Mexico
Pitney Bowes Deutschland GmbH Germany
Pitney Bowes Espana, S.A. Spain
Pitney Bowes Finance S.A. France
Pitney Bowes Finans Norge AS Norway
Pitney Bowes Finance PLC (formerly PB Leasing Ltd.) England
Pitney Bowes Finance Ireland Limited Ireland
Pitney Bowes France S.A. France
Pitney Bowes Holdings Ltd. England
Pitney Bowes Holding SNC France
Pitney Bowes Hong Kong Inc. Delaware
Pitney Bowes India Inc. Delaware
Pitney Bowes Insurance Agency, Inc. Connecticut
Pitney Bowes International Ireland
Pitney Bowes International Holdings, Inc. Delaware
Pitney Bowes Italia S.r.l. Italy
Pitney Bowes Japan Corporation Japan
Pitney Bowes (Ireland) Limited Ireland
Pitney Bowes Macau Limited Macau
Pitney Bowes Management Services, Inc. Delaware
Pitney Bowes Management Services Canada, Inc. Canada
Pitney Bowes Management Services Limited England
Pitney Bowes Marking Systems Ltd. Delaware
Pitney Bowes Oy Finland
Pitney Bowes Limited England
Pitney Bowes Properties Inc. Connecticut
Pitney Bowes Real Estate Financing Corporation Delaware
Pitney Bowes Servicios, S.A. de C.V. Mexico
Pitney Bowes Shelton Realty Inc. Connecticut
Pitney Bowes Svenska Aktiebolag Sweden
Pitney Bowes World Trade Corporation (FSC) Virgin Islands
Pitney Structured Funding I Inc. Delaware
EXHIBIT (iv)
------------
Page 3 of 4
SUBSIDIARIES OF THE REGISTRANT (continued)
- ------------------------------
Country or
state of
Company name incorporation
- ------------ -------------
PREFCO I Inc. Delaware
PREFCO I LP Inc. Delaware
PREFCO II Inc. Delaware
PREFCO II LP Inc. Delaware
PREFCO III Inc. Delaware
PREFCO III LP Inc. Delaware
PREFCO IV Inc. Delaware
PREFCO IV LP Inc. Delaware
PREFCO V Inc. Delaware
PREFCO V LP Inc. Delaware
PREFCO VI Inc. Delaware
PREFCO VI LP Inc. Delaware
PREFCO VII Inc. Delaware
PREFCO VII LP Inc. Delaware
PREFCO VIII Inc. Delaware
PREFCO VIII LP Inc. Delaware
PREFCO IX Inc. Delaware
PREFCO IX LP Inc. Delaware
PREFCO X Inc. Delaware
PREFCO X LP Inc. Delaware
PREFCO XI Inc. Delaware
PREFCO XI LP Inc. Delaware
PREFCO XII Inc. Delaware
PREFCO XII LP Inc. Delaware
PREFCO XIII Inc. Delaware
PREFCO XIII LP Inc. Delaware
PREFCO XIV Inc. Delaware
PREFCO XIV LP Inc. Delaware
PREFCO XV Inc. Delaware
PREFCO XV LP Inc. Delaware
PREFCO XVI Inc. Delaware
PREFCO XVI LP Inc. Delaware
PREFCO XVII Inc. Delaware
PREFCO XVII LP Inc. Delaware
PREFCO XVIII Inc. Delaware
PREFCO XVIII LP Inc. Delaware
PREFCO XIX Inc. Delaware
PREFCO XIX LP Inc. Delaware
PREFCO XX Inc. Delaware
PREFCO XXI Inc. Delaware
PREFCO XXI LP Inc. Delaware
PREFCO XXII Inc. Delaware
PREFCO XXII LP Inc. Delaware
PREFCO - Dayton Community Urban Renewal Corporation Ohio
RE Properties Management Corporation Delaware
Remington Customer Finance Pty. Limited Australia
ROM Holding Pty. Limited Australia
ROM Securities Pty. Limited Australia
Sales & Service Training Center Inc. Georgia
Techno Mail Service K.K. Japan
EXHIBIT (iv)
------------
Page 4 of 4
SUBSIDIARIES OF THE REGISTRANT (continued)
- ------------------------------
Country or
state of
Company name incorporation
- ------------ -------------
TECO Pitney Bowes Co., Ltd. (50% owned) Taiwan
Teco Tension Supply Co., Ltd. Taiwan
The Pitney Bowes Bank, Inc.
(formerly Pitney Bowes Financial Corporation) Utah
Time-Sensitive Delivery Guide Inc. Delaware
Towers FSC, Ltd. Bermuda
Universal Postal Frankers Ltd. England
Wheeler Insurance, Ltd. Vermont
1136 Corporation Delaware
75 V Corp. Delaware
EXHIBIT (v)
-----------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of 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-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
of Pitney Bowes Inc. of our report dated January 26, 1998 appearing on page 46
of the Pitney Bowes Inc. 1997 Annual Report to Stockholders which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference in the aforementioned Registration Statements of our
report on the financial statement schedule, which appears on page 18 of this
Form 10-K.
Price Waterhouse LLP
Stamford, Connecticut
March 27, 1998
5
1,000
12-MOS
DEC-31-1997
DEC-31-1997
137,073
1,722
1,970,633
75,299
249,207
2,463,515
2,697,695
1,412,399
7,893,389
3,373,233
1,068,395
323,338
300,000
2,259
1,546,980
7,893,389
1,834,057
4,100,464
1,081,537
1,639,306
89,463
0
209,194
803,098
277,071
526,027
0
0
0
526,027
1.82
1.80
Receivables are comprised of trade receivables of $369,921 and short-term
finance receivables of $1,600,712. Allowances are comprised of allowance for
trade receivables of $21,129 and for short-term finance receivables of $54,170.
Property, plant and equipment are comprised of fixed assets of $1,120,325
and rental equipment and related inventories of $1,577,370. Depreciation is
comprised of depreciation on fixed assets of $623,064 and on rental equipment
and related inventories of $789,335.
5
1,000
9-MOS
DEC-31-1997
SEP-30-1997
125,140
1,955
1,962,045
64,737
251,287
2,419,017
2,740,447
1,433,331
8,242,294
3,513,749
1,171,301
300,000
2,291
323,338
1,663,166
8,242,294
1,317,483
2,980,209
788,861
1,184,250
64,061
0
157,825
578,915
200,094
378,821
0
0
0
378,821
1.30
1.29
Receivables are comprised of trade receivables of $347,726 and short-term
finance receivables of $1,614,319. Allowances are comprised of allowance for
trade receivables of $19,532 and for short-term finance receivables of $45,205.
Property, plant and equipment are comprised of fixed assets of $1,104,553
and rental equipment and related inventories of $1,635,894. Depreciation is
comprised of depreciation on fixed assets of $619,558 and on rental equipment
and related inventories of $813,773.
5
1,000
6-MOS
DEC-31-1997
JUN-30-1997
130,743
1,474
1,807,475
60,937
255,791
2,266,322
2,735,770
1,429,037
8,288,497
3,514,281
1,172,053
300,000
2,337
323,338
1,763,156
8,288,497
867,579
1,967,481
523,298
779,013
42,483
0
104,597
383,745
132,729
251,016
0
0
0
251,016
.86
.85
Receivables are comprised of trade receivables of $340,102 and short-term
finance receivables of $1,467,373. Allowances are comprised of allowance for
trade receivables of $17,423 and for short-term finance receivables of $43,514.
Property, plant and equipment are comprised of fixed assets of $1,093,043
and rental equipment and related inventories of $1,642,727. Depreciation is
comprised of depreciation on fixed assets of $608,161 and on rental equipment
and related inventories of $820,876.
5
1,000
3-MOS
DEC-31-1997
MAR-31-1997
142,718
12,336
1,788,128
58,549
263,947
2,283,824
2,751,271
1,458,816
8,184,794
3,363,115
1,299,155
200,000
2,375
323,338
1,810,800
8,184,794
417,822
961,370
253,808
381,482
20,648
0
51,905
183,635
63,690
119,945
0
0
0
119,945
.41
.40
Receivables are comprised of trade receivables of $342,661 and short-term
finance receivables of $1,445,467. Allowances are comprised of allowance for
trade receivables of $15,952 and for short-term finance receivables of $42,597.
Property, plant and equipment are comprised of fixed assets of $1,102,196
and rental equipment and related inventories of $1,649,075. Depreciation is
comprised of depreciation on fixed assets of $619,493 and on rental equipment
and related inventories of $839,323.
5
1,000
12-MOS
DEC-31-1996
DEC-31-1996
135,271
1,500
1,736,352
56,336
281,942
2,222,066
2,727,612
1,426,277
8,155,722
3,305,289
1,300,434
323,338
200,000
2,415
1,913,293
8,155,722
1,675,090
3,858,579
1,025,250
1,554,990
81,726
0
203,877
684,383
214,970
469,413
0
0
0
469,413
1.57
1.56
Receivables are comprised of trade receivables of $356,890 and short-term
finance receivables of $1,379,462. Allowances are comprised of allowance for
trade receivables of $16,160 and for short-term finance receivables of $40,176.
Property, plant and equipment are comprised of fixed assets of $1,093,501
and rental equipment and related inventories of $1,634,111. Depreciation is
comprised of depreciation on fixed assets of $607,472 and on rental equipment
and related inventories of $818,805.
5
1,000
9-MOS
DEC-31-1996
SEP-30-1996
134,032
1,327
1,764,485
52,409
275,374
2,233,198
2,749,364
1,446,378
7,983,258
3,233,697
1,300,221
2,461
200,000
323,338
1,847,755
7,983,258
1,198,847
2,799,916
745,560
1,119,001
58,487
0
151,095
522,085
180,338
341,747
0
0
0
341,747
1.14
1.13
Receivables are comprised of trade receivables of $366,720 and short-term
finance receivables of $1,397,765. Allowances are comprised of allowance for
trade receivables of $13,934 and for short-term finance receivables of $38,475.
Property, plant and equipment are comprised of fixed assets of $1,095,719
and rental equipment and related inventories of $1,653,645. Depreciation is
comprised of depreciation on fixed assets of $601,178 and on rental equipment
and related inventories of $845,200.
5
1,000
6-MOS
DEC-31-1996
JUN-30-1996
92,787
996
1,755,600
52,035
289,310
2,190,927
2,724,583
1,440,700
7,888,458
3,694,080
801,455
323,338
200,000
2,504
1,812,670
7,888,458
794,653
1,849,202
496,803
737,130
39,347
0
98,883
345,635
120,593
225,042
0
0
0
225,042
.75
.74
Receivables are comprised of trade receivables of $370,630 and short-term
finance receivables of $1,384,970. Allowances are comprised of allowance for
trade receivables of $13,880 and for short-term finance receivables of $38,155.
Property, plant and equipment are comprised of fixed assets of $1,086,105
and rental equipment and related inventories of $1,638,478. Depreciation is
comprised of depreciation on fixed assets of $591,887 and on rental equipment
and related inventories of $848,813.
5
1,000
3-MOS
DEC-31-1996
MAR-31-1996
88,511
2,160
1,674,284
50,813
303,843
2,155,646
2,699,516
1,419,405
7,860,043
3,684,848
849,172
200,000
2,549
323,338
1,782,694
7,860,043
384,004
906,265
238,764
364,516
18,710
0
49,912
163,439
56,930
106,509
0
0
0
106,509
.35
.35
Receivables are comprised of trade receivables of $393,304 and short-term
finance receivables of $1,280,980. Allowances are comprised of allowance for
trade receivables of $12,654 and for short-term finance receivables of $38,159.
Property, plant and equipment are comprised of fixed assets of $1,083,437
and rental equipment and related inventories of $1,616,079. Depreciation is
comprised of depreciation on fixed assets of $586,972 and on rental equipment
and related inventories of $832,433.
5
1,000
12-MOS
DEC-31-1995
DEC-31-1995
85,352
3,201
1,646,008
50,749
311,271
2,101,097
2,663,550
1,395,212
7,844,648
3,501,576
1,048,515
200,000
2,594
323,338
1,745,168
7,844,648
1,546,393
3,554,754
941,124
1,404,725
81,800
0
226,110
618,931
211,222
407,709
175,431
0
0
583,140
1.93
1.91
Receivables are comprised of trade receivables of $399,777 and short-term
finance receivables of $1,246,231. Allowances are comprised of allowance for
trade receivables of $13,050 and for short-term finance receivables of $37,699.
Property, plant and equipment are comprised of fixed assets of $1,072,229 and
rental equipment and related inventories of $1,591,321. Depreciation is
comprised of depreciation on fixed assets of $577,228 and on rental equipment
and related inventories of $817,984.
