UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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, 1994
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 0-13497
PITNEY BOWES CREDIT CORPORATION
State of Incorporation IRS Employer Identification No.
Delaware 06-0946476
201 Merritt Seven
Norwalk, Connecticut 06856-5151
Telephone Number: (203) 846-5600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No 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
----- -----
The aggregate market value of voting stock held by non-affiliates of the
Registrant at March 29, 1995: None.
As of March 29, 1995, 460 shares of common stock with no par value were
outstanding, all of which were owned by Pitney Bowes Inc., the parent of
the Registrant.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
PITNEY BOWES CREDIT CORPORATION
FORM 10-K
1994 INDEX
-------------------------------
Part I
Item Page
---- ----
1. Business . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . 11
3. Legal proceedings . . . . . . . . . . . . . . . . . . 11
4. Submission of matters to a vote of security holders . 11
Part II
5. Market for the registrant's common equity and related
stockholder matters . . . . . . . . . . . . . . . . . 11
6. Selected financial data . . . . . . . . . . . . . . . 12
7. Management's discussion and analysis of financial
condition and results of operations . . . . . . . . . 13
8. Financial statements and supplementary data . . . . . 21
9. Changes in and disagreements with accountants on
accounting and financial disclosure . . . . . . . . . 48
Part III
10. Directors and executive officers of the Registrant . . 48
11. Executive compensation . . . . . . . . . . . . . . . . 48
12. Security ownership of certain beneficial owners and
management . . . . . . . . . . . . . . . . . . . . . 48
13. Certain relationships and related transactions . . . . 48
Part IV
14. Exhibits, financial statement schedules and reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . 48
Index to Exhibits . . . . . . . . . . . . . . . . . . 49
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . 51
Part I
Item 1. Business
--------
GENERAL
-------
Pitney Bowes Credit Corporation (the Company or PBCC) operates
primarily in the United States and is a wholly-owned subsidiary of
Pitney Bowes Inc. (PBI or Pitney Bowes). The Company is
principally engaged in the business of providing lease financing
for PBI products as well as other financial services for the
commercial and industrial markets.
The Internal Financing Division of PBCC provides marketing support
to PBI and its subsidiaries, including Dictaphone Corporation
(Dictaphone) and Monarch Marking Systems, Inc. (Monarch).
Equipment leased or financed for these Internal Division programs
include mailing, paper handling and shipping equipment, scales,
copiers, facsimile units, voice processing systems and retail price
marking and identification equipment. The transaction size for
this equipment generally ranges from $500 to $500,000, although
historically most transactions have occurred in the $1,000 to
$10,000 range, with lease terms generally from 36 to 60 months.
PBCC's External Financing Division operates in the large-ticket
external market by offering financial services to its customers for
products not manufactured or sold by PBI or its subsidiaries.
Products financed through these External Division programs include
both commercial and non-commercial aircraft, over-the-road trucks
and trailers, railcars and locomotives, and high-technology
equipment such as data processing and communications equipment.
Transaction sizes (other than aircraft leases) range from $50,000
to several million dollars, with lease terms generally from 36 to
180 months. Aircraft transaction sizes range from $1 million to
$27 million for non-commercial aircraft and up to $43 million for
commercial aircraft. Lease terms are generally between two and 12
years for non-commercial aircraft and from 10 to 25 years for
commercial aircraft. The Company has also participated in nine
commercial aircraft leveraged lease transactions. The Company's
investment in these transactions totaled $227.4 million at December
31, 1994. The Company's External Financing Division has also
participated, on a select basis, in certain other types of
financial transactions including: syndication of certain lease
transactions, senior secured loans in connection with acquisition,
leveraged buyout and recapitalization financings, and certain
project financings.
PBCC's External Financing Division is also responsible for managing
Pitney Bowes Real Estate Financing Corporation (PREFCO), a
wholly-owned subsidiary of PBCC providing lease financing for
commercial real estate properties. Both PBCC and Pitney Bowes have
provided capital for PREFCO's investments.
The Company's External Financing Division is also responsible for
managing the Custom Vendor Finance (CVF) programs. CVF provides
funding source financing programs for non-affiliated vendors
selling equipment with a cost generally in the range of $5,000 to
$250,000.
Colonial Pacific Leasing Corporation (Colonial Pacific or CPLC), a
wholly-owned subsidiary of PBCC, located near Portland, Oregon
operates in the small-ticket external market. Colonial Pacific
provides lease financing services to small- and medium-sized
businesses throughout the United States, marketing exclusively
through a nationwide network of brokers and independent lessors.
Transaction sizes range from $2,000 to $250,000, with lease terms
generally from 24 to 60 months.
CPLC and CVF are reported as "External small-ticket programs" in
this report.
Atlantic Mortgage & Investment Corporation (AMIC), a wholly-owned
subsidiary of PBCC, located in Jacksonville, Florida, specializes
in servicing residential first mortgages for a fee. AMIC does not
originate, or generally hold or assume the credit risk on mortgages
it services. In return for a servicing fee, AMIC provides billing
services and collects principal, interest and tax and insurance
escrow payments for mortgage investors such as Federal National
Mortgage Association, Federal Home Loan Mortgage Corporation,
Government National Mortgage Association and private investors.
Substantially all lease financing is done through full payout
leases or security agreements whereby PBCC recovers its costs plus
a return on investment over the initial, noncancelable term of the
contract. The Company has also entered into a limited amount of
leveraged and operating lease structures.
The Company's gross finance assets (contracts receivable plus
estimated residual values) outstanding for Internal and External
financing programs at December 31, 1990 through 1994 are presented
in Item 6, Selected Financial Data. Total Company gross finance
assets at December 31, 1994 were $5.0 billion of which
approximately 29 percent were related to mailing, paper handling
and shipping products, 19 percent were commercial aircraft, 12
percent were railcars, seven percent were data processing equipment
products and five percent were over-the-road trucks and trailers.
In 1994, total gross finance contracts acquired amounted to $1.6
billion compared to $1.4 billion in 1993. External large-ticket
programs accounted for 23 percent of gross finance contracts
acquired in 1994 compared to 22 percent in 1993.
As of December 31, 1994, PBCC had approximately 548,000 active
accounts compared with 516,000 active accounts at December 31,
1993.
At December 31, 1994, PBCC's largest customer accounted for $177.0
million, or 4.0 percent of gross finance receivables, and the
Company's ten largest customers accounted for $892.1 million in
gross finance receivables, or 20.3 percent of the receivable
portfolio.
CREDIT EXPERIENCE
-----------------
At December 31, 1994, 2.3 percent of receivables were over 30 days
delinquent compared with 1.9 percent at December 31, 1993 and 2.2
percent at December 31, 1992. Delinquencies were up in the
Internal small-ticket programs throughout 1994 partly due to the
support of the Company's new business initiatives.
CREDIT POLICIES
---------------
PBCC's management and Board of Directors establish credit approval
limits at region, division, subsidiary and corporate levels based
on the credit quality of the customer and the type of equipment
financed. The Company and PBI have established an Automatic
Approval Program (AAP) for certain products within the Internal
Financing Division. The AAP dictates the criteria under which PBCC
will accept a customer without performing the Company's usual
credit investigation. The AAP considers criteria such as maximum
equipment cost, a customer's time in business and current payment
experience with PBCC.
PBCC bases credit decisions primarily on a customer's financial
strength. However, with the Company's External Financing Division
programs, collateral values may also be considered.
LOSS EXPERIENCE
---------------
PBCC has charged against the allowance for credit losses $59.2
million, $51.1 million and $46.5 million in 1994, 1993 and 1992,
respectively. The increase in write-offs in 1994 was due to $25.2
million of write-offs related to assets purchased from the
Company's German affiliate, see Note 5 to the Company's
consolidated financial statements for further information.
Excluding the losses related to assets purchased from the Company's
German affiliate,losses as a percentage of average net lease
receivables (net investments before allowance for credit losses and
deferred investment tax credits plus the uncollected principal
balance of receivables sold) were .81 percent for 1994, 1.03
percent for 1993 and 1.27 percent for 1992. For further
information see Note 5 and Note 7 to the Company's consolidated
financial statements.
RELATIONSHIP WITH PITNEY BOWES INC.
-----------------------------------
PBCC is PBI's domestic finance subsidiary and the largest part of
PBI's Financial Services segment. Approximately 13 percent of
PBI's consolidated revenue from continuing operations in 1994, 14
percent in 1993 and 12 percent in 1992 resulted from continuing
operations' equipment sales made to PBCC for lease to third
parties.
Business relationships between PBCC and PBI are defined by several
agreements including an Operating Agreement, Finance Agreement and
Tax Sharing Agreement.
Operating Agreement: The Operating Agreement with PBI, dated March
3, 1977, as amended (the Operating Agreement), which can be
modified or cancelled on a prospective basis by either party upon
90 days prior written notice, governs among other things: the
terms and prices of equipment purchases by PBCC for lease to third
parties; computation and payment of fees for referrals and services
provided by PBI sales personnel; the AAP for PBI equipment; buyback
allowances; and the handling of contract terminations,
cancellations, trade-ups and trade-ins.
In connection with the sales of finance assets of the Internal
small-ticket financing programs, PBI agreed not to cancel or
modify, in any material respect, its obligations under the
Operating Agreement concerning the sold receivables, without the
prior written consent of PBCC and the transferee.
Pursuant to the Operating Agreement, the purchase of equipment by
the Company is contingent upon a lessee entering into a full payout
lease with the Company and delivery to and acceptance of the
equipment by the lessee. Service and maintenance of the equipment
leased is the responsibility of the lessee and is generally
arranged through a separate equipment maintenance agreement between
the lessee and PBI.
In connection with the buyback provisions of the Operating
Agreement, PBCC has the option to request a buyback from PBI for
non-copier equipment leased which is terminated or cancelled,
provided the equipment is available for repossession. Following
such buyback, PBI is responsible for the repossession and
disposition of equipment. The buyback provision sets forth a
stipulated amount that is payable by PBI to PBCC for certain
terminated leases; such amount is calculated on the basis of a
declining percentage, based upon the passage of time, of the
original total invoice value to PBCC. The difference between the
buyback amount received from PBI and the remaining value of the
lease usually results in a loss that is charged against PBCC's
allowance for credit losses.
The Pitney Bowes Copier Division does not remanufacture used copier
equipment, therefore copier equipment is excluded from the buyback
arrangement described above. There is no AAP for copier equipment,
all copier equipment lease transactions are subject to the
Company's standard credit review investigation.
PBCC has similar operating agreements with Pitney Bowes
subsidiaries, Dictaphone and Monarch, for the financing of certain
products.
Based on an extensive strategic review on how best to capitalize on
its strengths and competitive position, Pitney Bowes has decided to
concentrate its energies and resources on products and services
which facilitate the preparation, organization, movement, delivery,
tracking, storage and retrieval of documents, packages, letters and
other material, in hard copy and digital form for its customers.
Accordingly, in the third quarter of 1994, Pitney Bowes announced
its intent to seek buyers for its Dictaphone and Monarch
subsidiaries. Additionally, in connection with this change in
business focus, Dictaphone, in early 1995, paid PBCC $11.2 million
to terminate its obligations under the buyback agreement.
Finance Agreement: Under the Finance Agreement, dated July 5,
1978, PBI has agreed to make payments to PBCC, if necessary, to
enable PBCC to maintain a ratio of income available for fixed
charges as defined to such fixed charges of 1.25 to 1 as of the end
of each fiscal year. No such payments have ever been required.
The Finance Agreement, or any term, covenant, agreement or
condition thereof, may be amended or compliance may be waived
(either generally or in a particular instance and either
retroactively or prospectively) by either PBI or PBCC, with the
written consent of the other party, at any time. The agreement may
be terminated (i) by PBCC upon five days notice or (ii) by PBI
prior to the end of any fiscal year of PBCC and following the
making of the determination and payment, if any, required pursuant
to the provisions of the Finance Agreement, as described in the
preceding paragraph, with respect to the fiscal year of PBCC most
recently ended.
In connection with certain financing agreements, PBI has agreed
with PBCC's lenders that PBI will not modify or terminate the
Finance Agreement unless approval is received from holders of 66-
2/3 percent of the principal amount of the notes outstanding under
each such note agreement.
Under the Indenture dated as of May 1, 1985 (together with all
Supplemental Indentures as noted in Part IV Item 14(a) 3, the
Indenture) between PBCC and Bankers Trust Company as Trustee (the
Trustee), PBCC agreed it would not waive compliance with, or amend
in any material respect, the Finance Agreement without the consent
of the holders of a majority in principal amount of the outstanding
securities of each series of debt securities issued under the
Indenture. In addition, PBI has entered into a Letter Agreement
with the Trustee pursuant to which it agreed, among other things,
that it would not default under the Finance Agreement nor terminate
the Finance Agreement without the consent of the holders of a
majority in principal amount of the outstanding securities issued
under the Indenture.
Tax Sharing Agreement: The Company's taxable results are included
in the consolidated Federal and certain state income tax returns of
Pitney Bowes. Under the Tax Sharing Agreement, dated April 1,
1977, between the Company and Pitney Bowes, the Company makes
payment to Pitney Bowes for its share of consolidated income taxes,
or receives cash equal to the benefit of tax losses utilized in
consolidated returns in exchange for which it issues non-interest
bearing subordinated notes with a maturity one day after all senior
debt is repaid. PBI has reimbursed PBCC for investment tax credits
utilized in PBI's consolidated Federal income tax return. The Tax
Sharing Agreement can be cancelled by either PBI or PBCC upon
twelve months written notice.
Real Estate Transactions: During 1993, PBCC received $2.4 million
from PBI representing a contribution to capital surplus of the
Company in connection with investments in real estate financing
projects. When the Company entered into real estate lease
financing, PBI agreed to make capital contributions up to a maximum
of $15.0 million to provide a portion of the financing for such
transactions, of which $13.8 million has been received to date.
There is no formal agreement in place and PBI is under no
obligation to continue to make capital contributions. There were
no capital contributions made in 1994.
PITNEY BOWES INC.
-----------------
PBI, a Delaware corporation organized in 1920, is listed on the New
York Stock Exchange. Headquartered in Stamford, Connecticut, PBI
employs approximately 32,800 people throughout the United States,
Europe, Canada and other countries. PBI operates within two
industry segments: business equipment and services, and financial
services.
Business equipment and services includes: postage meters and
mailing, shipping and facsimile systems, copiers and copier
supplies, and mailroom, reprographics and related facilities
management services. In accordance with postal regulations,
postage meters may not be sold in the United States; they are
rented to users and therefore are not subject to lease by PBCC.
The financial services segment, of which PBCC is the largest
individual component, provides lease financing for PBI products as
well as other financial services for the domestic commercial and
industrial markets.
As of December 31, 1994, PBI and its consolidated subsidiaries had
total assets of $7.4 billion and stockholders' equity of $1.7
billion. For the year ended December 31, 1994, PBI's consolidated
revenue and income from continuing operations were $3.3 billion and
$348.4 million, respectively, compared with $3.0 billion and $305.7
million for 1993.
COMPETITION AND REGULATION
--------------------------
The finance 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 PBCC does 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 PBCC's competitive position in its markets.
While financing rates are generally considered by customers to be
the principal factor in choosing a financing source, the Company
believes there are additional important factors related to a
customer's decision, including simplicity of documentation,
flexibility and ease of doing business over the duration of the
contract. PBCC seeks to distinguish itself from its competition by
providing excellent service to its customers. PBCC considers its
documentation and systems to be among the best in the industry.
The Company has an established communication network in its region
offices to eliminate costly delays and to increase the quality of
service offered to vendors and customers.
PBI has historically been a leading supplier of certain products
and services in its business equipment and services segment,
particularly postage meters and mailing equipment. However, it has
strong competition from a number of companies. In the United
States, PBI is facing competition for new placements from several
postage meter and mailing equipment vendors, and its mailing
systems products face competition from products and services
offered as alternative means of message communications. PBI's
Shipping and Weighing division is experiencing competition from
carrier automation initiatives. PBI believes new communication-
capable product offerings provide its customers a broader range of
shipping options. PBI's long experience and reputation for product
quality, and its sales and support service organizations, along
with PBCC, are believed to be important factors in influencing
customer choices with respect to its products and services.
Several states have ceilings on interest rates which may be charged
to commercial customers on secured lending transactions. PBCC may
be required to charge lower interest rates in certain jurisdictions
than it charges elsewhere, or to cease offering secured lending
transactions in such states. PBCC does not extend consumer credit
as defined in the Federal Consumer Credit Protection Act.
Accordingly, PBCC's financing transactions are not subject to that
Act.
FUNDING POLICY
--------------
PBCC's borrowing strategy is to use a balanced mix of debt
maturities, variable- and fixed-rate debt and interest rate swap
agreements (interest rate swaps) to control its sensitivity to
interest rate volatility. The Company utilizes interest rate swaps
when it considers the economic benefits to be favorable. Interest
rate swaps 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. The Company may borrow
through the sale of commercial paper, under its confirmed bank
lines of credit and by private and public offerings of
intermediate- or long-term debt securities. The Company may also
issue debt securities having maturities ranging from nine months
to 30 years through a medium-term note program.
While the Company's funding strategy of balancing short-term and
longer-term borrowings and variable- and fixed-rate debt may reduce
sensitivity to interest rate changes over the long-term, effective
interest costs have been and will continue to be impacted by
interest rate changes. The Company periodically adjusts prices on
its new leasing and financing transactions to reflect changes in
interest rates; however, the impact of these rate changes on
revenue is usually less immediate than the impact on borrowing
costs.
EMPLOYEE RELATIONS
------------------
At December 31, 1994, 791 people were employed by PBCC and its
subsidiaries. Employee relations are considered highly
satisfactory.
Item 2. Properties
----------
All of the Company's office space is occupied under operating
leases with original terms ranging from one to ten years. PBCC's
executive and administrative offices are located in Norwalk,
Connecticut. PBCC has four regional offices located throughout the
United States and five district sales offices located in or near
major metropolitan areas. Colonial Pacific's executive and
administrative offices are located in Tualatin, Oregon. Atlantic
Mortgage & Investment Corporation's executive and administrative
offices are located in Jacksonville, Florida.
Item 3. Legal proceedings
-----------------
The Company is 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.
Pitney Bowes has been advised that the Antitrust Division of the
United States Department of Justice is conducting a civil
investigation of its postage equipment business (including
subsidiaries) to determine whether there is, has been, or may be a
violation of the surviving provisions of the 1959 consent decree
between Pitney Bowes and the U.S. Department of Justice, and or the
antitrust laws. The Company intends to cooperate with the
Department's investigation.
Item 4. Submission of matters to a vote of security holders
---------------------------------------------------
Omitted pursuant to General Instruction J.
Part II
Item 5. Market for the registrant's common equity and
related stockholder matters
------------------------------------------------
All of the Company's common stock is owned by PBI. Accordingly,
there is no public trading market for the Company's common stock.
The Board of Directors declared and the Company paid dividends to
PBI of $42.0 million in 1994, $36.0 million in 1993, and $31.0
million in 1992. The Company intends to continue to pay dividends
to PBI in 1995.
Item 6. Selected financial data
-----------------------
The following tables summarize selected financial data for the Company, and should be read in conjunction with the more
detailed financial statements and related notes thereto included under Item 8 of this report.
(Dollars in thousands) December 31
-----------------------------------------------------------------------
For the Year 1994 1993 1992 1991 1990
---------------- ---------- ---------- ---------- ---------- ----------
Gross finance contracts acquired $ 1,627,974 $ 1,405,516 $ 1,425,450 $ 1,472,575 $ 1,388,091
========== ========== ========== ========== ==========
Finance income $ 560,216 $ 513,454 $ 494,494 $ 460,644 $ 405,384
Equipment sales 45,747 - - - -
Selling, general and administrative expenses 113,453 99,332 90,079 82,969 67,198
Depreciation and amortization 26,497 16,545 13,936 12,750 5,284
Cost of equipment sales 43,039 - - - -
Provision for credit losses 56,133 70,245 58,181 48,943 36,621
Nonrecurring items, net (3,311) - - - -
---------- ---------- ---------- ---------- ----------
Operating income 370,152 327,332 332,298 315,982 296,281
Interest expense 151,239 137,372 146,594 167,236 164,699
Provision for income taxes 71,820 66,475 64,942 55,589 48,406
---------- ---------- ---------- ---------- ----------
Income before effect of accounting changes 147,093 123,485 120,762 93,157 83,176
Effect of accounting changes (1) (2,820) - (1,866) - -
---------- ---------- ---------- ---------- ----------
Net income $ 144,273 $ 123,485 $ 118,896 $ 93,157 $ 83,176
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges (2) 2.43X 2.37X 2.25X 1.88X 1.79X
At Year End
----------------
Gross finance assets
Internal small-ticket programs $ 1,697,890 $ 1,497,678 $ 1,342,622 $ 1,294,852 $ 1,144,035
External large-ticket programs 2,523,139 2,415,370 2,399,918 2,310,174 2,196,916
External small-ticket programs 746,689 670,771 623,403 541,837 470,517
---------- ---------- ---------- ---------- ----------
Total gross finance assets 4,967,718 4,583,819 4,365,943 4,146,863 3,811,468
Unearned income (1,234,928) (1,173,297) (1,204,261) (1,159,214) (1,101,682)
---------- ---------- ---------- ---------- ----------
Finance assets $ 3,732,790 $ 3,410,522 $ 3,161,682 $ 2,987,649 $ 2,709,786
========== ========== ========== ========== ==========
Investment in leveraged leases $ 478,650 $ 298,914 $ 274,846 $ 197,338 $ 135,224
========== ========== ========== ========== ==========
Investment in operating leases, net $ 95,684 $ 63,899 $ 45,432 $ 58,213 $ 43,306
========== ========== ========== ========== ==========
Allowance for credit losses $ (95,271) $ (98,311) $ (79,177) $ (67,515) $ (62,259)
========== ========== ========== ========== ==========
Total assets $ 4,451,837 $ 3,931,462 $ 3,618,164 $ 3,233,056 $ 2,864,516
========== ========== ========== ========== ==========
Senior notes payable
Within one year $ 2,075,591 $ 1,735,607 $ 1,475,630 $ 1,457,600 $1,246,515
After one year 745,500 775,295 857,278 775,000 727,000
---------- ---------- ---------- ---------- ----------
Total senior notes payable $ 2,821,091 $ 2,510,902 $ 2,332,908 $ 2,232,600 $ 1,973,515
========== ========== ========== ========== ==========
Subordinated notes payable $ 133,735 $ 108,834 $ 86,734 $ 75,487 $ 67,248
========== ========== ========== ========== ==========
Stockholder's equity $ 773,338 $ 671,065 $ 581,138 $ 489,914 $ 419,507
========== ========== ========== ========== ==========
Debt to equity 3.82:1 3.90:1 4.16:1 4.71:1 4.86:1
<FN>
(1) Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 112 entitled "Employers'
Accounting for Postemployment Benefits" (FAS 112). For further discussion, see Note 16 to the Company's consolidated financial
statements. Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 106 entitled
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106). For further discussion, see Note 16 to
the Company's consolidated financial statements. Also, effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 (FAS 109) entitled "Accounting for Income Taxes." For further discussion see Note 14 to the
Company's consolidated financial statements.
(2) In computing the ratio of earnings to fixed charges, earnings have been calculated by adding to earnings before income taxes
the amount of fixed charges. Fixed charges consist of interest on debt and a portion of net rental expense deemed to represent
interest.
Item 7. Management's discussion and analysis of financial
condition and results of operations
-------------------------------------------------
Events Impacting Comparability
------------------------------
The Company adopted Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" (FAS 112),
as of January 1, 1994. FAS 112 required that postemployment
benefits be recognized on the accrual basis of accounting.
Postemployment benefits include primarily Company provided medical
benefits to disabled employees and Company provided life insurance
as well as other disability- and death-related benefits to former
or inactive employees, their beneficiaries and covered dependents.
The one-time effect of adopting FAS 112 was a non-cash, after-tax
charge of $2.8 million (net of approximately $1.9 million of income
taxes). Additional information with respect to accounting for
postemployment benefits is disclosed in Note 16 to the Company's
consolidated financial statements.
The Omnibus Budget Reconciliation Act of 1993 (the Tax Act),
enacted August 10, 1993, increased U.S. corporate income tax rates
from 34 percent to 35 percent, retroactive to January 1, 1993. The
liability method of accounting for income taxes requires the effect
of a change in tax laws or rates on current earnings or accumulated
deferred income taxes to be reflected in the period when the new
legislation is enacted. Consequently, the Company recorded $12.3
million of additional tax expense in 1993, $9.3 million of which
was the effect of the rate change on deferred tax balances at
January 1, 1993.
In the fourth quarter of 1992, the Company adopted retroactively to
January 1, 1992, Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (FAS 106), which addresses health care and other welfare
benefits provided to retirees. FAS 106 required a change from the
cash basis of accounting to the accrual basis of accounting for
nonpension postretirement benefits. The transition effect of
adopting this standard on the immediate recognition basis, which
was recorded in the first quarter of 1992, was a one-time,
after-tax charge of $1.9 million; the 1992 incremental after-tax
cost amounted to $.4 million. In early 1993, Pitney Bowes
announced several changes to its health care plans which have
significantly reduced the ongoing incremental impact of FAS 106 on
future earnings. Among these changes was the establishment of plan
cost maximums in order to more effectively control future medical
costs. Additional information with respect to accounting for
nonpension postretirement benefits is disclosed in Note 16 to the
Company's consolidated financial statements.
Accounting Changes
------------------
In addition to the adoptions of FAS 112 in 1994 and FAS 106 in 1992
as discussed in Events Impacting Comparability, the Company also
adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (FAS 109) in 1992, Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", and Statement of
Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments" in 1994. Other than the impacts of FAS 112 and FAS
106 discussed in Events Impacting Comparability, none of these
statements materially affected the Company's reported results. In
May 1993, Statement of Financial Accounting Standards No. 114, (FAS
114) "Accounting by Creditors for Impairment of a Loan" was issued.
Subsequently, in October 1994 an amendment of FAS 114, Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures" was
issued. Both statements must be adopted by January 1, 1995.
Neither of these pronouncements is expected to materially affect
the Company.
Results of Operations
---------------------
The Company's finance income increased 9.1 percent to $560.2
million in 1994 compared with $513.5 million in 1993, which was up
3.8 percent from 1992. Finance income for Internal small-ticket
financing programs increased 1.7 percent to $266.5 million in 1994
compared with $262.0 million in 1993, which was up 5.6 percent from
1992. The nominal increase in 1994 is primarily due to higher
investment levels and higher income from fee-based programs partly
offset by lower lease rates on new business. In addition, finance
income for Internal small-ticket financing programs for 1993
included the impacts from the sale of finance assets which
increased finance income $11.2 million. Excluding the sale of
finance assets in 1993, finance income for Internal small-ticket
financing programs would have increased 6.3 percent in 1994.
Finance income for External large-ticket financing programs
increased 12.6 percent to $166.9 million in 1994 compared with
$148.2 million in 1993, which was down 6.3 percent from 1992. The
increase in 1994 compared with 1993 is primarily due to higher
investment levels. Finance income for External small-ticket
financing programs increased 17.6 percent to $101.8 million in 1994
compared with $86.6 million in 1993, which was up 5.2 percent from
1992. The increase in 1994 as compared to 1993 is due to higher
investment levels and the impact from the sale of $55 million of
External small-ticket finance assets in 1994. Excluding the sale
of finance assets, finance income for External small-ticket
financing programs would have increased 7.4 percent in 1994.
Revenue generated from mortgage servicing was $25.0 million in 1994
compared to $16.7 million in 1993. The increase is due to a larger
mortgage servicing portfolio in 1994 and is consistent with the
Company's strategy to grow fee-based programs.
During 1994, the Company sold operating lease assets which
generated $45.7 million in revenue. The cost of such equipment
sales was $43.0 million.
Selling, general and administrative (SG&A) expenses increased 14.2
percent to $113.5 million in 1994 compared with $99.3 million in
1993, which was up 10.3 percent from 1992. SG&A expenses for
Internal small-ticket financing programs increased 2.3 percent to
$54.1 million in 1994 compared to $52.9 million in 1993, which were
3.0 percent below 1992. The increase in 1994 as compared to 1993
is principally due to higher personnel related costs. The decrease
in 1993, from 1992, is primarily due to lower marketing fees paid
to Pitney Bowes and cost savings related to organizational changes
made to the Company's Vendor Investment Program (VIP) in January
1993. VIP, which provided sales-aid and funding source financing
programs for non-affiliated vendors, was previously managed and
reported as part of the Internal small-ticket financing programs.
This operation was reorganized with funding source programs
consolidated into the operations of the Company's External
Financing Division and the sales-aid programs consolidated into the
operations of Colonial Pacific Leasing Corporation. SG&A expenses
for External large-ticket financing programs increased 8.2 percent
to $13.8 million in 1994 compared with $12.8 million in 1993, which
was down 3.7 percent from 1992. The increase in 1994 is due to
higher personnel related costs and higher amortization of deferred
initial direct costs. SG&A expenses for External small-ticket
financing programs increased 37.4 percent to $35.4 million in 1994
compared with $25.7 million in 1993, which was up 32.8 percent from
1992. The increase in 1994 as compared to 1993, is primarily due
to higher marketing fees paid to brokers and impacts of the sale of
finance assets in 1994. Excluding the sale of finance assets, SG&A
for External small-ticket financing programs would have increased
21.3 percent in 1994. The increase in 1993 was primarily due to
higher marketing fees paid to brokers and higher amortization of
deferred initial direct costs together with costs incurred in
connection with the assets transferred from the Company's German
affiliate, which is further discussed in the following paragraphs.
SG&A expenses related to mortgage servicing were $10.2 million in
1994 compared to $7.9 million in 1993. The increase in SG&A
expenses related to mortgage servicing are primarily due to a
larger mortgage servicing portfolio in 1994.
The Company entered the operating lease business on a limited basis
in 1990. Depreciation on operating leases was $11.6 million in
1994 and $8.8 million in 1993 reflecting a higher operating lease
investment balance during 1994. Amortization of purchased mortgage
servicing rights was $11.2 million in 1994 compared to $7.7 million
in 1993. This increase is principally due to a larger mortgage
servicing portfolio in 1994. In the fourth quarter of 1993, the
Company completed a transaction whereby it contributed certain
commercial aircraft, subject to direct finance leases, to a
majority-owned partnership. Partnership fees incurred in
connection with this transaction are amortized over the term of the
transaction. Amortization of such fees was $3.7 million in 1994.
The provision for credit losses in 1994 decreased 20.1 percent to
$56.1 million compared to $70.2 million for 1993, which was up 20.7
percent from 1992. The provision for credit losses for the
Internal small-ticket financing programs increased 5.6 percent to
$32.5 million in 1994 compared with $30.7 million in 1993. The
increase is principally due to higher earning asset levels. The
provision for credit losses for the External large-ticket financing
programs was $1.5 million in 1994 compared with $4.5 million in
1993. The lower provision in 1994 results from the favorable loss
experience in this portfolio. The provision for credit losses for
the External small-ticket financing programs was $22.1 million in
1994 compared with $35.0 million in 1993. The decrease in 1994 is
due to 1993 provisions totaling $14.4 million, recorded in
connection with assets purchased from the Company's German
affiliate, which is further discussed in the following paragraphs.
In December 1992, as part of the restructuring and reincorporation
of its German affiliate, Adrema Leasing Corporation (Adrema), the
Company purchased certain finance receivables and other assets from
Adrema. In connection with these assets, Pitney Bowes and the
Company (Companies) have completed their inquiry and evaluation,
begun in 1993, of the assets and liabilities of the German leasing
business. At this time, the Companies believe that sufficient
reserves for credit losses are in place to provide for currently
expected losses. As part of the orderly liquidation of assets from
leasing non-Pitney Bowes products in Germany, Adrema continues to
bill and collect accounts and repossess and remarket collateral
where possible. These activities are expected to continue for the
remainder of the lease terms.
The Companies are scrutinizing the circumstances surrounding the
losses. German authorities have undertaken criminal proceedings
with respect to the conduct of certain German lessees of non-Pitney
Bowes products and, at the request of the Companies, with respect
to the disposition of the Companies' German leasing business
assets. These proceedings include the former general manager of
the Companies' German leasing business and others involved in that
business. The principals of one of the Companies' large German
leasing accounts have been convicted of fraud against Adrema and
others. The Companies are party to certain civil litigation and
are continuing their evaluation of additional actions they can take
against former management personnel of their German leasing
business and others.
The Company's allowance for credit losses as a percentage of net
lease receivables (net investments before allowance for credit
losses and deferred investment tax credits plus the uncollected
principal balance of receivables sold) was 2.12 percent at December
31, 1994, 2.44 percent at December 31, 1993 and 2.05 percent at
December 31, 1992. PBCC charged $59.2 million, $51.1 million and
$46.5 million against the allowance for credit losses in 1994, 1993
and 1992, respectively. These write-offs include $25.2 million in
1994 and $11.2 million in 1993 related to assets purchased from
Adrema.
Interest expense was $151.2 million in 1994 compared with $137.4
million in 1993, an increase of 10.1 percent. The increase
reflects higher short-term interest rates in 1994, together with
higher average borrowings required to fund additional investment in
earning assets. The effective interest rate on short-term average
borrowings was 4.19 percent in 1994 compared to 3.05 percent in
1993. The Company does not match fund its financing investments
and does not apply different interest rates to its various
financing programs.
During the third quarter of 1994, the Company recorded a
nonrecurring $3.3 million pretax credit resulting mainly from a
$3.5 million credit to income due to changes made by the Company's
parent, Pitney Bowes, related to certain postemployment benefits
partly offset by charges related to Pitney Bowes' continued
refinement of its strategic focus as outlined in Note 17 to the
Company's consolidated financial statements.
Excluding ITC amortization, the effective tax rate for 1994 was
32.9 percent compared to 35.2 percent for 1993. The 1993 effective
tax rate reflects the impacts of the Tax Act discussed in Events
Impacting Comparability and the tax impact of a partnership lease
transaction. These impacts effectively offset each other.
In the fourth quarter of 1994, the Company completed the purchase
of a lease portfolio whereby it receives all rights to the value of
the underlying equipment at lease termination. The transaction
will have the effect of reducing the current period tax liabilities
and associated effective tax rates over the portfolio life.
Excluding the retroactive impact of the Tax Act in 1993, income
before effect of accounting changes increased 10.8 percent to
$147.1 million in 1994 compared with $132.8 million in 1993, which
was up 10.0 percent from 1992. The increase in 1994 is primarily
attributable to higher investment levels and additional fee-based
income in 1994, partly offset by lower lease rates on new business
volume and higher short-term interest rates in 1994. Including the
impact of the Tax Act in 1993, 1994 income before effect of
accounting changes increased 19.1 percent.
The Company's ratio of earnings to fixed charges was 2.43 times for
1994 compared with 2.37 times for 1993 and 2.25 times for 1992.
Liquidity and Capital Resources
-------------------------------
The Company's principal sources of funds are from operations and
borrowings. It has been PBCC's practice to use a balanced mix of
debt maturities, variable- and fixed-rate debt and interest rate
swap agreements (interest rate swaps) to control its sensitivity to
interest rate volatility. PBCC's debt mix was 70 percent short-
term and 30 percent long-term at December 31, 1994 and 66 percent
short-term and 34 percent long-term at December 31, 1993. The
Company utilizes interest rate swaps when it considers the economic
benefits to be favorable. Interest rate swaps have been
principally utilized to fix interest rates on commercial paper
and/or obtain a lower cost on debt than would otherwise be
available without the interest rate swap. PBCC's swap-adjusted
fixed rate versus variable rate debt mix was 59 percent variable
rate and 41 percent fixed rate at December 31, 1994 and 58 percent
variable rate and 42 percent fixed rate at December 31, 1993. The
Company may borrow through the sale of commercial paper, under its
confirmed bank lines of credit, and by private and public offerings
of intermediate- or long-term debt securities.
In March 1994, the Company issued $200 million of 5.625 percent
notes due in February 1997. In April 1994, the Company redeemed
$100 million of 10.65 percent notes due in April 1999. The Company
had previously sold an option on a notional principal amount of
$100 million to enable a counterparty to require the Company to pay
a fixed rate of 10.67 percent for five years starting April 1,
1994. The counterparty exercised that option. In September 1994,
the Company redeemed $100 million of 10.125 percent notes due in
1997.
The Company has $400 million available from a $500 million shelf
registration statement filed with the Securities and Exchange
Commission in October 1992. This should meet the Company's long-
term financing needs for the next two years. The Company also had
unused lines of credit and revolving credit facilities totaling
$1.63 billion at December 31, 1994, largely supporting commercial
paper borrowings. In November 1994, the Company renegotiated its
revolving credit facilities totaling $1.55 billion for five years,
thereby reducing its annual costs by $1.2 million and reducing the
size of its banking group by fifteen banks.
In January 1994, the Company sold approximately $88 million of
assets with recourse in a privately-placed transaction with a
third-party investor. These assets, representing finance
receivables and other assets, were previously transferred in
December 1992 from the Company's German affiliate, Adrema Leasing
Corporation. This transaction had no material effect on the
Company's results. Additionally, during 1994, the Company sold
approximately $55 million of External small-ticket finance assets
with recourse in a privately-placed transaction with a third-party
investor. In 1993 and 1992, the Company sold approximately $26
million and $92 million, respectively, of finance assets in
similarly structured transactions. The uncollected principal
balance of receivables sold at December 31, 1994 and 1993 was $160
million and $168 million, respectively.
The proceeds from the sale of these assets were used to repay a
portion of the Company's commercial paper borrowings. The Company
continues to develop strategies in support of ongoing debt level
management. Emphasis on fee-based transactions and consideration
of the sale of certain financing transactions are expected to
continue to control the growth of External large-ticket investments
and debt levels.
Additional financing will continue to be arranged as deemed
necessary. Borrowing requirements will be primarily dependent upon
the level of equipment purchases from Pitney Bowes and its
subsidiaries, the level of External Division financing activity and
the refinancing of maturing debt.
The Company's utilization of derivative instruments is currently
limited to interest rate swap agreements (interest rate swaps) and
foreign currency exchange forward contracts (foreign currency
contracts). The Company periodically enters into interest rate
swaps as a means of managing interest rate exposure. The interest
rate 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 loss in the event of non-performance
by the counterparties to the interest rate swaps to the extent of
the differential between fixed- and variable-rates; such exposure
is considered minimal. The Company has entered into foreign
currency contracts for the purpose of minimizing its risk of loss
from fluctuations in exchange rates in connection with certain
intercompany loans and certain transfers to the Company by foreign
affiliates of foreign currency denominated lease receivables. The
Company is exposed to credit loss in the event of non-performance
by the counterparties to the foreign currency contracts to the
extent of the difference between the spot rate at the date of the
contract delivery and the contracted rate; such exposure is
considered minimal. See Note 11 to the Company's consolidated
financial statements for further information regarding derivative
instruments.
As previously reported, the Company has made senior secured loans
and commitments in connection with acquisition, leveraged buyout
and recapitalization financings. At December 31, 1994, the Company
had a total of $2.5 million of such senior secured loans and
commitments outstanding compared to $13.9 million at December 31,
1993. In March 1994, the Company sold its $11.3 million senior
secured loan with a company that had previously filed under Chapter
11 of the Federal Bankruptcy Code and recovered 100 percent of its
carrying value. The Company has not participated in unsecured or
subordinated debt financing in any highly leveraged transactions.
The Company's liquidity ratio (finance contracts receivable plus
residuals expected to be realized in cash over the next 12 months
to current maturities of debt over the same period) was .61 times
and .66 times at December 31, 1994 and 1993, respectively. The
decrease is principally due to higher short-term borrowing levels.
Under the Finance Agreement between Pitney Bowes and the Company,
Pitney Bowes is obligated to make payments to the extent necessary,
so that the Company's income available for fixed charges shall not
be less than 1.25 times its fixed charges. No such payments have
ever been required.
The Company will continue to use cash to invest in finance assets
with emphasis on Internal and External small-ticket leasing
transactions and controlled investment in External large-ticket
financing programs. The Company believes that cash generated from
operations and collections on existing lease contracts will provide
the majority of cash needed for such investment activities.
Additional cash, to the extent needed, is expected to be provided
from commercial paper and intermediate- or long-term debt
securities. While the Company expects that market acceptance of
its short- and long-term debt will continue to be strong,
additional liquidity is available, if needed, under revolving
credit facilities and credit lines.
Item 8. Financial statements and supplementary data
-------------------------------------------
Report of Independent Accountants
To the Stockholder and Board of Directors of
Pitney Bowes Credit Corporation
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on pages 48 and 49
present fairly, in all material respects, the financial position of
Pitney Bowes Credit Corporation and its subsidiaries at December
31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December
31, 1994, 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.
As discussed in Note 16 to the consolidated financial statements,
the Company adopted a new accounting standard for postemployment
benefits in 1994 and elected to adopt a new accounting standard for
postretirement benefits other than pensions in 1992.
PRICE WATERHOUSE LLP
Stamford, Connecticut
January 31, 1995
Pitney Bowes Credit Corporation
Consolidated Statement of Income
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1994 1993 1992
Revenue
Finance income $560,216 $513,454 $494,494
Equipment sales 45,747 - -
------- ------- -------
Total revenue 605,963 513,454 494,494
------- ------- -------
Expenses
Selling, general and administrative 113,453 99,332 90,079
Depreciation and amortization 26,497 16,545 13,936
Cost of equipment sales 43,039 - -
Provision for credit losses 56,133 70,245 58,181
Interest 151,239 137,372 146,594
Nonrecurring items, net (3,311) - -
------- ------- -------
Total expenses 387,050 323,494 308,790
------- ------- -------
Income before income taxes 218,913 189,960 185,704
Provision for income taxes 71,820 66,475 64,942
------- ------- -------
Income before effect of accounting
changes 147,093 123,485 120,762
Effect of accounting changes (2,820) - (1,866)
------- ------- -------
Net income $144,273 $123,485 $118,896
======= ======= =======
Consolidated Statement of Retained Earnings
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1994 1993 1992
Retained earnings at beginning
of year $583,340 $495,855 $407,959
Net income for the year 144,273 123,485 118,896
Dividends paid to Pitney Bowes Inc. (42,000) (36,000) (31,000)
------- ------- -------
Retained earnings at end of year $685,613 $583,340 $495,855
======= ======= =======
See notes to consolidated financial statements.
Pitney Bowes Credit Corporation
Consolidated Balance Sheet
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------
December 31 1994 1993
Assets
Cash $ 11,250 $ 6,237
---------- ----------
Investments:
Finance assets 3,732,790 3,410,522
Investment in leveraged leases 478,650 298,914
Assets transferred from affiliate 30,033 82,274
Investment in operating leases, net of
accumulated depreciation: 1994,
$40,500; 1993, $33,181 95,684 63,899
Allowance for credit losses (95,271) (98,311)
---------- ----------
Net investments 4,241,886 3,757,298
---------- ----------
Other assets 198,701 167,927
---------- ----------
Total assets $ 4,451,837 $ 3,931,462
========== ==========
Liabilities
Senior notes payable within one year $ 2,075,591 $ 1,735,607
Accounts payable to affiliates 153,360 162,914
Accounts payable and accrued liabilities 228,279 183,253
Deferred taxes 342,034 294,494
Senior notes payable after one year 745,500 775,295
Subordinated notes payable 133,735 108,834
---------- ----------
Total liabilities 3,678,499 3,260,397
---------- ----------
Stockholder's Equity
Common stock 46,000 46,000
Capital surplus 41,725 41,725
Retained earnings 685,613 583,340
---------- ----------
Total stockholder's equity 773,338 671,065
---------- ----------
Total liabilities and stockholder's equity $ 4,451,837 $ 3,931,462
========== ==========
See notes to consolidated financial statements.
Pitney Bowes Credit Corporation
Consolidated Statement of Cash Flows
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1994 1993 1992
Operating Activities
Net income $ 144,273 $ 123,485 $ 118,896
Effect of accounting changes 2,820 - 1,866
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for credit losses 56,133 70,245 58,181
Depreciation and amortization 26,497 16,545 13,936
Cost of equipment sales 43,039 - -
Increase in deferred taxes 49,420 40,406 37,008
(Decrease) increase in accounts
payable to affiliates (9,554) 54,018 15,738
Increase (decrease) in accounts
payable and accrued liabilities 40,326 65,266 (10,188)
(Decrease) increase in assets
transferred from affiliate (61,255) 23,114 -
Other, net (4,639) (37,723) (10,500)
---------- ---------- ----------
Net cash provided by operating
activities 287,060 355,356 224,937
---------- ---------- ----------
Investing Activities
Investment in net finance
assets (1,217,728) (1,041,985) (1,015,498)
Investment in leveraged leases (174,622) (15,505) (68,705)
Investment in operating leases (85,435) (26,661) (4,537)
Cash receipts collected under
lease contracts net of finance
income recognized 944,274 740,183 794,061
Investment in mortgage servicing
rights (27,003) (14,218) (14,716)
Investment in affiliate (2,160) - -
Purchase of Atlantic Mortgage &
Investment Corporation
represented by:
Purchased mortgage servicing
rights acquired - - (18,522)
Liabilities and debt assumed - - 20,115
Other assets acquired, net of
$2.7 million of cash acquired - - (14,531)
Loans and advances to affiliated
companies, net (8,462) (24,165) (7,343)
Additions to equipment and
leasehold improvements (4,001) (1,747) (2,657)
---------- ---------- ----------
Net cash used in investment
activities (575,137) (384,098) (332,333)
---------- ---------- ----------
Pitney Bowes Credit Corporation
Consolidated Statement of Cash Flows
(Dollars in thousands)
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1994 1993 1992
Financing Activities
Increase in short-term debt 311,405 262,310 111,602
Short-term loans from Pitney Bowes Inc. - - 31,025
Proceeds from issuance of senior
notes payable after one year 200,000 - 75,000
Proceeds from issuance of
subordinated debt 24,901 22,810 11,957
Settlement of long-term debt (201,216) (84,315) (104,918)
Settlement of note payable to
affiliate - (105,388) -
Settlement of short-term loan from
Pitney Bowes Inc. - (31,025) -
Payments to settle subordinated debt - (710) (710)
Capital contribution from Pitney Bowes
Inc. - 2,442 3,328
Dividends paid to Pitney Bowes Inc. (42,000) (36,000) (31,000)
---------- --------- ---------
Net cash provided by financing
activities 293,090 30,124 96,284
---------- --------- ---------
Increase (decrease) in cash 5,013 1,382 (11,112)
Cash at beginning of year 6,237 4,855 15,967
---------- --------- ---------
Cash at end of year $ 11,250 $ 6,237 $ 4,855
========== ========= =========
Interest paid $ 164,181 $ 143,031 $ 145,899
========== ========= =========
Income taxes (refunded) paid, net $ (9,900) $ (11,680) $ 34,709
========== ========= =========
See notes to consolidated financial statements.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Note 1. - Summary of Significant Accounting Policies
Consolidation: The consolidated financial statements include the
accounts of Pitney Bowes Credit Corporation and all of its
subsidiaries (the Company or PBCC). All significant intercompany
transactions have been eliminated.
Basis of accounting for financing transactions: At the time a finance
transaction is consummated, the Company records on its balance sheet
the total receivable, unearned income and the estimated residual value
of leased equipment. Unearned income represents the excess of the
total receivable plus the estimated residual value and deferred
investment tax credits over the cost of equipment or contract
acquired. Unearned income is recognized as finance income under the
interest method over the term of the transaction. Initial direct
costs incurred in consummating transactions, including fees paid to
Pitney Bowes Inc. (Pitney Bowes or PBI), are accounted for as part of
the investment in a direct financing lease and amortized to income
using the interest method over the term of the lease.
The Company has, from time-to-time, sold selected finance assets. The
Company follows Statement of Financial Accounting Standards No. 77,
"Reporting by Transferors for Transfers of Receivables with Recourse",
when accounting for its sale of finance assets. The difference
between the sale price and the net receivable, exclusive of residuals,
is recognized as a gain or loss.
Allowance for credit losses: The Company evaluates the collectibility
of its net investment in finance assets based upon its loss experience
and assessment of prospective risk, and does so through ongoing
reviews of its exposures to net asset impairment. The Company adjusts
the carrying value of its net investment in finance assets to the
estimated collectible amount through adjustments to the allowance for
credit losses. Losses are charged against the allowance for credit
losses. For further information see Note 7 - Allowance for Credit
Losses.
Income taxes: The Company's taxable results are included in the
consolidated Federal and certain state income tax returns of Pitney
Bowes. For tax purposes, income from leases is recognized under the
operating method and represents the difference between gross rentals
billed and operating expenses. Under a tax-sharing agreement between
the Company and Pitney Bowes, the Company makes payment to Pitney
Bowes for its share of consolidated income taxes, or receives cash
equal to the benefit of tax losses utilized in consolidated returns in
exchange for which it issues non-interest bearing subordinated notes.
Deferred taxes reflected in the Company's balance sheet represent the
difference between Federal and state income taxes reported for
financial and tax reporting purposes, less non-interest bearing
subordinated notes issued, including those capitalized.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Investment in operating leases: Equipment under operating leases is
depreciated over the initial term of the lease to its estimated
residual value. Rental revenue is recognized on a straight-line basis
over the related lease term.
Purchased mortgage servicing rights: Purchased mortgage servicing
rights are recorded at the lower of cost or the present value of the
estimated future net servicing income and are being amortized in
proportion to, and over the period of, estimated net servicing income.
The Company employs the aggregate, discounted method to evaluate the
recoverability of the cost of the purchased mortgage servicing rights.
The portfolio is reevaluated periodically for further amortization due
to actual and anticipated prepayment, foreclosure, delinquency and
cost experience. This evaluation is made at an aggregate level by
discounting the projected net future income stream using market
discount rates. Upon reevaluation, adjustments are made if the
portfolio is deemed impaired.
Note 2. - Business Combination
In July 1992, the Company purchased 100 percent of the common stock of
Atlantic Mortgage & Investment Corporation (AMIC) for a total purchase
price of $15.6 million. On a pro forma basis, had the two companies
been combined at the beginning of 1992, total revenue and net income
for the year ending December 31, 1992, would have been $499.6 million
and $119.3 million, respectively.
Note 3. - Finance Assets
The composition of the Company's finance assets is as follows:
December 31 1994 1993
---------- ----------
Gross finance receivables $ 4,393,826 $ 4,086,739
Unguaranteed residual valuation 573,892 497,080
Initial direct cost deferred 76,322 67,802
Unearned income (1,310,812) (1,240,090)
Investment tax credits deferred (438) (1,009)
---------- ----------
Finance assets $ 3,732,790 $ 3,410,522
========== ==========
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Gross finance receivables are generally due in monthly, quarterly or
semi-annual installments over periods ranging from 36 to 180 months.
In addition, gross finance receivables for the Company's External
large-ticket programs include commercial jet aircraft transactions
with lease terms up to 25 years and other non-commercial jet aircraft
transactions with lease terms ranging from two to 12 years. The
balance due at December 31, 1994, including estimated residual value
realizable at the end of the lease term, is payable as follows:
Gross Finance Assets
---------------------------------------------------------------------------------
Internal External External
small-ticket large-ticket small-ticket
programs programs programs Total
------------ ------------ ------------ ---------
1995 $ 631,304 $ 328,048 $312,398 $1,271,750
1996 492,444 265,549 211,781 969,774
1997 339,400 222,674 129,260 691,334
1998 187,122 207,288 66,142 460,552
1999 44,303 198,374 25,689 268,366
Thereafter 3,317 1,301,206 1,419 1,305,942
--------- --------- ------- ---------
Total $1,697,890 $2,523,139 $746,689 $4,967,718
========= ========= ======= =========
Net equipment financed for Pitney Bowes and its subsidiaries' products
were $551.8 million, $533.2 million, and $447.7 million in 1994, 1993,
and 1992, respectively.
During 1994, the Company sold approximately $55 million of External
small-ticket finance assets with recourse in a privately-placed
transaction with a third-party investor. In 1993 and 1992, the
Company sold approximately $26 million and $92 million, respectively
of finance assets in similarly structured transactions. The
uncollected principal balance of receivables sold at December 31, 1994
and 1993 was $160 million and $168 million, respectively. In
addition, the Company has sold receivables while retaining residual
value exposure of $18.9 million. The maximum risk of loss in these
transactions 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.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
As of December 31, 1994, $579.1 million (15.5 percent) of the
Company's finance assets and $901.8 million (18.2 percent) of the
Company's gross finance assets were related to aircraft leased to
commercial airlines. The Company considers its credit risk for these
leases to be minimal since all commercial aircraft lessees are making
payments in accordance with lease agreements. The Company believes
any potential exposure in commercial aircraft investment is mitigated
by the value of the collateral as the Company retains a security
interest in the leased aircraft.
Note 4. - Net Investment in Leveraged Leases
The Company's net investment in leveraged leases is composed of the
following elements:
December 31 1994 1993
-------- --------
Net rents receivable $ 476,369 $ 182,389
Unguaranteed residual valuation 550,516 422,483
Unearned income (548,235) (305,958)
-------- --------
Investment in leveraged leases 478,650 298,914
Deferred taxes arising from
leveraged leases (1) (165,341) (110,959)
-------- --------
Net investment in leveraged leases $ 313,309 $ 187,955
======== ========
(1) Includes amounts reclassed to subordinated debt.
Following is a summary of the components of income from leveraged
leases:
December 31 1994 1993 1992
------ ------ ------
Pretax leveraged lease income $ 6,606 $ 3,795 $ 3,278
Income tax benefit 5,091 5,376 5,491
------ ------ ------
Income from leveraged leases $11,697 $ 9,171 $ 8,769
====== ====== ======
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.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Leveraged lease investments totaling $234.4 million are related to
commercial real estate facilities, with original lease terms ranging
from 17 to 25 years. Also included are nine aircraft transactions
with major commercial airlines, with a total investment of $227.4
million and with original lease terms ranging from 22 to 25 years and
one transaction involving locomotives with a total investment of $16.8
million with an original lease term of 38 years.
Note 5. - Transfer of Assets from Affiliate
In December 1992, as part of the restructuring and reincorporation of
its German affiliate, Adrema Leasing Corporation (Adrema), the Company
purchased certain finance receivables and other assets from Adrema.
In connection with these assets, Pitney Bowes Inc. and the Company
(Companies) have completed their inquiry and evaluation, begun in
1993, of the assets and liabilities of the German leasing business.
At this time, the Companies believe that sufficient reserves for
credit losses are in place to provide for currently expected losses.
As part of the orderly liquidation of assets from leasing non-Pitney
Bowes products in Germany, Adrema continues to bill and collect
accounts and repossess and remarket collateral where possible. These
activities are expected to continue for the remainder of the lease
terms.
The Companies are scrutinizing the circumstances surrounding the
losses. German authorities have undertaken criminal proceedings with
respect to the conduct of certain German lessees of non-Pitney Bowes
products and, at the request of the Companies, with respect to the
disposition of the Companies' German leasing business assets. These
proceedings include the former general manager of the Companies'
German leasing business and others involved in that business. The
principals of one of the Companies' large German leasing accounts have
been convicted of fraud against Adrema and others. The Companies
are party to certain civil litigation and are continuing their
evaluation of additional actions they can take against former
management personnel of their German leasing business and others.
Note 6. - Investment in Operating Leases, Net
The Company is the lessor of various types of equipment under
operating leases including data processing, transportation and
production equipment.
Minimum future rental payments to be received in each of the next five
years under noncancelable operating leases are $15.5 million in 1995,
$14.3 million in 1996, $13.2 million in 1997, $11.4 million in 1998,
$9.8 million in 1999 and $30.3 million in later years.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Note 7. - Allowance for Credit Losses
The following is a summary of the allowance for credit losses,
substantially all of which relates to lease financing:
1994 1993 1992
------ ------ ------
Balance at beginning of period $98,311 $79,177 $67,515
------ ------ ------
Additions charged to operations 56,133 70,245 58,181
------ ------ ------
Amounts written-off:
Internal small-ticket programs 20,177 24,255 28,712
External large-ticket programs 668 724 1,594
External small-ticket programs 38,328 26,132 16,213
------ ------ ------
Total write-offs 59,173 51,111 46,519
------ ------ ------
Balance at end of period $95,271 $98,311 $79,177
====== ====== ======
The decrease in the amount of additions charged to operations in 1994
compared to 1993 results from additional provisions for losses
totaling $14.4 million recorded in the second quarter of 1993 relating
to assets purchased from the Company's German affiliate, Adrema
Leasing Corporation.
Write-offs related to assets purchased from Adrema totaled $25.2
million in 1994 and $11.2 million in 1993. Excluding the impact of
the write-offs related to assets purchased from Adrema, the lower
level of write-offs is due to continued strong collection and asset
management efforts and an improved economy.
In establishing the provision for credit losses, the Company utilizes
an asset based percentage. This percentage varies depending on the
nature of the asset, recent historical experience, vendor recourse,
management judgement, and for large-ticket external transactions, the
credit ratings assigned by Moody's and Standard & Poor's. In
evaluating the adequacy of reserves, estimates of expected losses,
again by nature of the asset, are utilized. While historical
experience is the principal factor in determining loss percentages,
adjustments will also be made for current economic conditions,
deviations from historical aging patterns, seasonal write-off patterns
and levels of non-earning assets. If the resulting evaluation of
expected losses differs from the actual aggregate reserve, adjustments
are made to the reserve.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
For transactions in the Internal small-ticket programs, the Company
discontinues income recognition for finance receivables past due over
120 days. The Company has utilized this period because historically
internal collection efforts have continued for this time period. In
large-ticket External financing, income recognition is discontinued as
soon as it is apparent that the obligor will not be making payments in
accordance with lease terms, such as in the event of bankruptcy. In
small-ticket External financing, income recognition is discontinued
when accounts are past due over 90 days.
Finance receivables are written-off to the allowance for credit losses
after collection efforts are exhausted and the account is deemed
uncollectible. For Internal and External small-ticket transactions,
this usually occurs near the point in time when the transaction is
placed in a non-earning status. For large-ticket External
transactions, write-offs are normally made after efforts are made to
repossess the underlying collateral, the repossessed collateral is
sold, and efforts to recover remaining balances are exhausted. On
large-ticket External transactions, periodic adjustments also may be
made and/or a cost recovery approach for cash proceeds utilized to
reduce the face value to an estimated present value of future expected
recovery. All write-offs and adjustments are recorded on a
transaction by transaction basis.
Resumption of income recognition on Internal and External small-ticket
non-earning accounts occurs when payments are reduced to 60 days or
less past due. On large-ticket External transactions, resumption of
income recognition occurs after the Company has had sufficient
experience on resumption of payments and is satisfied that such
payments will continue in accordance with the original or restructured
contract terms.
The carrying values of non-performing, restructured and troubled
finance assets are outlined below. There are no leveraged leases
falling under these categories.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
December 31 1994 1993 1992
------ ------ ------
Non-performing (non-accrual) transactions
-----------------------------------------
Internal small-ticket programs $10,148 $ 6,107 $ 6,567
External large-ticket programs 1,998 1,934 11,102
External small-ticket programs 9,240 24,371 9,274
------ ------ ------
Total $21,386 $32,412 $26,943
====== ====== ======
Restructured transactions
-------------------------
Internal small-ticket programs $ - $ - $ -
External large-ticket programs 2,642 5,869 9,942
External small-ticket programs - - -
------ ------ ------
Total $ 2,642 $ 5,869 $ 9,942
====== ====== ======
Troubled (potential problem) transactions
-----------------------------------------
Internal small-ticket programs $ - $ - $ -
External large-ticket programs 6,991 8,129 6,110
External small-ticket programs - 8,819 -
------ ------ ------
Total $ 6,991 $16,948 $ 6,110
====== ====== ======
The decrease in non-performing and troubled transactions in 1994 relates
to write-offs in 1994 associated with the assets purchased from Adrema in
December 1992, which is further discussed in Note 5 - Transfer of Assets
from Affiliate.
For non-performing (non-accrual) transactions, the amount of finance
income that would have been recorded in 1994 if the transactions had been
current in accordance with their original contract terms was $2.9 million.
Historically, the Company has not allocated a specific amount of credit
loss reserve to non-performing and troubled transactions. This is due to
the historically low level of write-offs in the large-ticket external
segment and the limited number of transactions with material credit loss
exposure in other areas. As stated above, the Company evaluates its
aggregate reserve position in comparison to estimates of aggregate
expected losses. However, for non-performing large-ticket external
transactions, the Company has adjusted the face value of these receivables
through the following adjustments:
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
December 31 1994 1993 1992
------ ------ ------
Face value of receivables $ 4,512 $ 2,862 $13,353
Cash collections applied
to principal (2,087) (501) (1,824)
Write-offs to allowance for
credit losses (427) (427) (427)
------ ------ ------
Carrying value $ 1,998 $ 1,934 $11,102
====== ====== ======
Note 8. - Other Assets
December 31 1994 1993
------- -------
Purchased mortgage servicing rights, net of
accumulated amortization: 1994, $29,635;
1993, $18,381 $ 58,317 $ 41,313
Loans and advances to affiliated companies 45,367 34,776
Mortgage receivables 12,085 19,566
Deferred partnership fees 11,429 13,388
Net equipment and leasehold improvements,
net of accumulated depreciation:
1994, $13,233; 1993, $11,012 8,930 7,751
Investment securities 3,490 4,550
Deferred debt placement fees 3,364 3,803
Interest discount on commercial paper 7,408 3,319
Prepaid expenses and other assets 44,629 35,392
Goodwill, net of accumulated amortization:
1994, $969; 1993, $581 3,682 4,069
------- -------
Total other assets $198,701 $167,927
======= =======
Amortization of purchased mortgage servicing rights for the years 1994,
1993 and 1992 were $11.2 million, $7.7 million and $1.9 million,
respectively.
Mortgage receivables represent loans in the process of payoff and are
recorded at cost.
In the fourth quarter of 1993, the Company completed a transaction whereby
it contributed certain commercial aircraft, subject to direct finance
leases, to a majority-owned partnership. Partnership fees incurred in
connection with this transaction are amortized on a straight-line basis
over the term of the transaction.
Equipment and leasehold improvements are stated at cost. Leasehold
improvements are amortized on a straight-line basis over the remaining
lease terms. Equipment is depreciated on a straight-line basis over the
anticipated useful life generally ranging from 5 to 10 years.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Deferred debt placement fees incurred in connection with placing senior
and subordinated notes are amortized on a straight-line basis over the
term of the notes.
Note 9. - Accounts Payable and Accrued Liabilities
December 31 1994 1993
------- -------
Accounts payable $102,228 $ 41,958
Accrued interest payable 31,030 23,472
Sales and use, property and sundry taxes 11,665 8,696
Advances and deposits from customers 32,981 31,147
Accrued salary and benefits payable 6,672 6,232
Minority interest in partnership 8,804 20,758
Other liabilities 34,899 50,990
------- -------
Total accounts payable and accrued liabilities $228,279 $183,253
======= =======
The increase in accounts payable is principally due to $51.4 million of
additional investment payable in the first quarter of 1995, in connection
with certain financing transactions completed in 1994.
Note 10. - Notes Payable
Short-term notes payable at December 31, 1994 and 1993 totaled $2.1
billion and $1.7 billion, respectively. These notes were issued as
commercial paper, loans against bank lines of credit, or to trust
departments of banks and others at below the prevailing prime rate.
At year-end 1994, the Company had unused lines of credit and revolving
credit facilities totaling $1.63 billion largely supporting commercial
paper borrowings. The Company recorded fees of $2.2 million, $2.5 million
and $1.8 million in 1994, 1993 and 1992 to maintain its lines of credit.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
The composition of the Company's notes payable is as follows:
December 31 1994 1993
--------- ---------
Senior Notes Payable
Commercial paper at a weighted average interest
rate of 5.84% (3.27% in 1993) $1,865,110 $1,574,999
Notes payable against bank lines of credit and
others at a weighted average interest rate
of 3.63% (2.13% in 1993) 180,981 159,687
Current installment of long-term debt due within
one year at interest rates of 6.56% to 10.50% 29,500 921
--------- ---------
Total senior notes payable within one year 2,075,591 1,735,607
Senior notes payable after one year at interest
rates of 5.625% to 10.65% through 2009 745,500 775,295
--------- ---------
Total senior notes payable $2,821,091 $2,510,902
========= =========
Subordinated Notes Payable
Non-interest bearing notes due
Pitney Bowes $ 132,995 $ 108,094
12.75% note due in 1995 740 740
--------- ---------
Total subordinated notes payable $ 133,735 $ 108,834
========= =========
Senior and subordinated notes payable at December 31, 1994 mature as
follows: $2,076.3 million in 1995, $245.5 million in 1997, and $633.0
million beyond 1999.
Lending Arrangements: Under terms of its senior and subordinated loan
agreements, the Company is required to maintain earnings before taxes and
interest charges at prescribed levels. With respect to such loan
agreements, Pitney Bowes will endeavor to have the Company maintain
compliance with such terms and, under certain loan agreements, is
obligated, if necessary, to pay to the Company amounts sufficient to
maintain a prescribed ratio of income available for fixed charges. No such
payments have ever been required to maintain income available for fixed
charge coverage.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
In March 1994, the Company issued $200 million of 5.625 percent notes
due in February 1997. In April 1994, the Company redeemed $100
million of 10.65 percent notes due in April 1999. The Company had
previously sold an option on a notional principal amount of $100
million to enable a counterparty to require the Company to pay a fixed
rate of 10.67 percent for five years starting April 1, 1994. The
counterparty exercised that option. In September 1994, the Company
redeemed $100 million of 10.125 percent notes due in 1997.
The Company has $400 million available from a $500 million shelf
registration statement filed with the Securities and Exchange
Commission in October 1992. This should meet the Company's long-term
financing needs for the next two years.
In 1994 and 1993, the Company issued $24.9 million and $22.8 million,
respectively, of non-interest bearing subordinated notes to Pitney
Bowes in exchange for funds equal to tax losses generated by the
Company and utilized by Pitney Bowes in the 1993 and 1992 consolidated
tax returns. Any non-interest bearing subordinated notes payable to
Pitney Bowes mature after all senior notes now outstanding and
executed hereafter are paid.
Note 11. - Derivative Instruments
The Company's utilization of derivative instruments is currently
limited to interest rate swap agreements (interest rate swaps) and
foreign currency exchange forward contracts (foreign currency
contracts). The Company periodically enters into interest rate swaps
as a means of managing interest rate exposure. The interest rate
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 loss in the event of non-performance by the
counterparties to the interest rate swaps to the extent of the
differential between fixed- and variable-rates; such exposure is
considered minimal. The Company has entered into foreign currency
contracts for the purpose of minimizing its risk of loss from
fluctuations in exchange rates in connection with certain intercompany
loans and certain transfers to the Company by foreign affiliates of
foreign currency denominated lease receivables. The Company is
exposed to credit loss in the event of non-performance by the
counterparties to the foreign currency contracts to the extent of the
difference between the spot rate at the date of the contract delivery
and the contracted rate; such exposure is considered minimal.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
The aggregate amount of interest rate swaps categorized by type, and the
related weighted average interest rate paid and received assuming current
market conditions is reflected below:
Weighted Average
Major Type Total Interest Rates
of Interest Hedged Notional ------------------------
Rate Swap Liability Amount Fixed Variable(A)
----------- --------- -------- ----- --------
Pay Fixed Commercial Paper $415,700 9.34% 5.93%
Pay Fixed Transfer of Receivables
with Recourse 25,000 7.76% 6.04%
Pay Variable Senior Notes Payable
with original maturity
greater than one year 14,000 8.42% 6.31%
------- ---- ----
Total $454,700 9.23% 5.94%
======= ==== ====
<FN>
(A) The variable rate is indexed from the 30 day Fed AA composite
commercial paper rate. The Fed AA composite rate at December 31, 1994
was used to calculate the weighted average interest rate.
The aggregate notional amount of interest rate swaps categorized by annual
maturity is reflected below:
Annual Maturity
----------------------------------------------------------
Pay Fixed Pay Variable Total
--------- ------------ --------
1995 $135,000 $ - $135,000
1996 5,700 - 5,700
1997 100,000 14,000 114,000
1998 - - -
1999 100,000 - 100,000
Thereafter 100,000 - 100,000
------- ------ -------
Total $440,700 $14,000 $454,700
======= ====== =======
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
The following is a reconciliation of interest rate swap activity by major
type of swap:
Pay Fixed Pay Variable Total
--------- ------------ ---------
Balance December 31, 1992 $475,700 $ 100,000 $ 575,700
New contracts 100,000 - 100,000
Expired contracts (55,000) - (55,000)
------- -------- --------
Balance December 31, 1993 520,700 100,000 620,700
New contracts - 14,000 14,000
Expired contracts (80,000) (100,000) (180,000)
------- -------- --------
Balance December 31, 1994 $440,700 $ 14,000 $ 454,700
======= ======== ========
Interest rate swaps are used in the majority of circumstances to convert
variable rate commercial paper interest payments to fixed rate interest
payments. The impact of interest rate swaps on interest expense and the
weighted average borrowing rate is as follows:
1994 1993 1992
------- ------- -------
Impact of interest rate swaps
on interest expense $13,930 $12,650 $10,221
Weighted average borrowing rate
excluding interest rate swaps 5.44% 5.07% 5.65%
Weighted average borrowing rate
including interest rate swaps 6.01% 5.60% 6.08%
The Company has entered into foreign currency contracts for the purpose of
minimizing its risk of loss from fluctuations in exchange rates in
connection with certain intercompany loans and certain sales of receivables
with recourse of foreign currency denominated lease receivables.
The following summarizes the contractual amounts of the Company's foreign
currency contracts as of December 31, 1994:
Hedged Currency Maturity Contract
Transaction Sold Date Amount
------------------ ------------- ------------- --------
Intercompany Loans British Pound January, 1995 $20,600
Intercompany Loans French Franc January, 1995 900
Intercompany Loans U.S. Dollar January, 1995 700
Transfer of receivables
with recourse U.S. Dollar January, 1997 22,000
Since the Company normally enters into derivative transactions only with
members of its banking group, the credit risk of these transactions is
monitored as part of the normal credit review of the banking group. The
Company monitors the market risk of derivative instruments through periodic
review of the fair market values.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
There were no deferred gains or losses relating to terminated interest rate
swaps or foreign currency contracts at December 31, 1994 and 1993. The
fair value of interest rate swaps and foreign currency contracts is
disclosed in Note 13 - Fair Value of Financial Instruments.
Note 12. - Stockholder's Equity
The following is a reconciliation of stockholder's equity:
Total
Common Capital Retained Stockholder's
Stock Surplus Earnings Equity
------- ------- -------- -------------
Balance December 31, 1991 $46,000 $35,955 $407,959 $489,914
Net income - 1992 118,896 118,896
Dividends paid to PBI (31,000) (31,000)
Capital contribution from PBI 3,328 3,328
------ ------ ------- -------
Balance December 31, 1992 46,000 39,283 495,855 581,138
Net income - 1993 123,485 123,485
Dividends paid to PBI (36,000) (36,000)
Capital contribution from PBI 2,442 2,442
------ ------ ------- -------
Balance December 31, 1993 46,000 41,725 583,340 671,065
Net income - 1994 144,273 144,273
Dividends paid to PBI (42,000) (42,000)
------ ------ ------- -------
Balance December 31, 1994 $46,000 $41,725 $685,613 $773,338
====== ====== ======= =======
At December 31, 1994, 10,000 shares of common stock, no-par with a stated
value of $100,000 per share were authorized and 460 shares were issued and
outstanding and amounted to $46.0 million at December 31, 1994 and 1993.
All of the Company's stock is owned by Pitney Bowes.
Contributions to capital surplus from PBI for 1992 and 1993 were made in
connection with investments in real estate financing projects. When the
Company entered into real estate lease financing, PBI agreed to make
capital contributions up to a maximum of $15.0 million to provide a portion
of the financing for such transactions, of which $13.8 million has been
received to date. There is no formal agreement in place and PBI is under
no obligation to continue with capital contributions. There were no
capital contributions made in 1994.
Note 13. - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash, accounts payable and senior notes payable with original maturities
less than one year. The carrying amounts approximate fair value because of
the short maturity of these instruments.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Investment securities. The fair value of investment securities is
estimated based on quoted market prices, dealer quotes and other estimates.
Loans receivable. The fair value of loans receivable is estimated based on
quoted market prices, dealer quotes or by discounting the future cash flows
using current interest rates at which similar loans would be made to
borrowers with similar credit ratings and similar remaining maturities.
Senior notes payable with original maturities greater than one year. The
fair value of long-term debt is estimated based on quoted dealer prices for
the same or similar issues.
Interest rate swaps and foreign currency contracts. The fair values of
interest rate swaps and foreign currency contracts are obtained from dealer
quotes. These values represent the estimated amount the Company would
receive or pay to terminate the agreements taking into consideration
current interest rates, the creditworthiness of the counterparties and
current foreign currency exchange rates.
Transfers 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.
Financial guarantee contracts. The Company has provided standby guarantees
for its foreign affiliates under a $250 million European commercial paper
program and in connection with receivable transfers with recourse. The
Company also has recourse obligations in connection with certain mortgages
it services. Aggregate exposure under the guarantees at December 31, 1994
and 1993 was $74 million and $191 million, respectively. The fair value of
the European Commercial Paper program is based on the cost to the Company
for obtaining a letter of credit to support performance under the
guarantee. The fair value of the guarantees under the receivable transfers
with recourse and the recourse obligations on certain mortgages serviced
represents the estimate of expected future losses. In certain instances,
reserves established in connection with these receivable transfers have
been established on the affiliated companies financial statements
approximately equal to the fair value disclosures presented on the
following page.
Residual and conditional commitment guarantee contracts. The fair value of
residual and conditional commitment guarantee contracts is 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 to
assume the guarantee.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Commitments to extend credit. The fair value of commitments to extend
credit is estimated by comparing current market conditions taking into
account the remaining terms of existing agreements and the creditworthiness
of the counterparties.
The estimated fair value of the Company's financial instruments is as
follows:
December 31 1994 1993
--------------------- ---------------------
Carrying Fair Carrying Fair
Value(1) Value Value(1) Value
-------- -------- -------- --------
Investment securities $ 3,490 $ 3,553 $ 4,550 $ 4,668
Loans receivable (2) 265,795 268,342 206,630 213,509
Senior notes payable with
original maturities
greater than one year (788,819) (782,453) (795,727) (880,397)
Interest rate swaps (2,822) (15,948) (13,781) (64,846)
Foreign currency contracts - 1,120 - 2,247
Transfers of receivables
with recourse (27,056) (27,056) (6,060) (6,060)
Financial guarantee
contracts (4,206) (4,341) (23,342) (25,011)
Residual and conditional
commitment guarantee
contracts (2,729) (2,657) (2,679) (2,687)
Commitments to extend credit - (450) - (2,003)
<FN>
(1) Carrying value includes accrued interest and deferred fee income, where
applicable.
(2) Carrying value for loans receivable and other debt financing is net of
applicable allowance for credit losses.
Note 14. - Taxes on Income
In 1992, the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (FAS 109), effective retroactively
to January 1, 1992. Application of FAS 109 required no cumulative effect
adjustment primarily due to the Company's previous use of the liability
method of accounting for income taxes. The adoption of this standard had
no significant effect on the Company's tax provision for 1992.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Income before income taxes and the provision for income taxes were as
follows:
Years ended December 31 1994 1993 1992
------- ------- -------
Income before income taxes $218,913 $189,960 $185,704
======= ======= =======
Provisions for income taxes:
Federal:
Current $(29,325) $ 5,424 $ 12,809
Deferred 86,169 47,141 38,415
------- ------- -------
Total Federal 56,844 52,565 51,224
------- ------- -------
State and Local:
Current (4,215) 3,605 1,522
Deferred 19,191 10,305 12,196
------- ------- -------
Total state and local 14,976 13,910 13,718
------- ------- -------
Total $ 71,820 $ 66,475 $ 64,942
======= ======= =======
Deferred tax liabilities and (assets):
December 31 1994 1993 1992
-------- ------- -------
Deferred tax liabilities:
Lease revenue and related
depreciation $400,468 $359,013 $338,972
------- ------- -------
Deferred tax assets:
Alternative minimum tax (AMT)
credit carryforwards (58,434) (64,519) (84,884)
------- ------- -------
Total $342,034 $294,494 $254,088
======= ======= =======
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
In 1993, the Company completed a transaction whereby it contributed
certain commercial aircraft, subject to direct finance leases, to a
majority owned partnership. The partnership transaction had the effect of
reducing the Company's obligation for previously accrued deferred taxes.
The reduction in deferred taxes was recognized as a reduction in 1993
income tax expense.
Also in 1993, the Company recorded additional tax expense as a result of
the Omnibus Budget Reconciliation Act of 1993, which increased U.S.
corporate income tax rates from 34 percent to 35 percent.
In the fourth quarter of 1994, the Company completed the purchase of a
lease portfolio whereby it receives all rights to the value of the
underlying equipment at lease termination. The transaction will have the
effect of reducing the current period tax liabilities and associated
effective tax rates over the portfolio life.
A reconciliation of the U.S. federal statutory rate to the Company's
effective income tax rate follows:
Percent of Pretax Income 1994 1993 1992
----- ----- -----
U.S. Federal statutory rate 35.0% 35.0% 34.0%
State and local income taxes 4.4 4.8 4.9
Rate adjustment for deferred taxes - 4.9 -
Partnership tax benefits (1.6) (6.1) -
Tax-exempt foreign trade income (3.0) (3.9) (3.3)
Tax-exempt finance income (.3) (.3) (.5)
Residual portfolio acquisition (.4) - -
Other (1.3) .6 (.1)
---- ---- ----
Effective income tax rate 32.8% 35.0% 35.0%
==== ==== ====
Note 15. - Retirement Plan
The Company participates in the Pitney Bowes retirement plan which covers
substantially all PBCC employees. Colonial Pacific Leasing Corporation
employees are covered under a separate plan. The assets of these plans
fully fund vested benefits. Pitney Bowes' plan assumptions were 8.75
percent in 1994 and 7.50 percent in 1993 for the discount rate, 5.75
percent in 1994 and 5.00 percent in 1993 for the expected rate of increase
in future compensation levels and 9.50 percent in 1994 and 1993 for the
expected long-term rate of return on plan assets. The Company's pension
expense was $1.6 million in 1994, $1.4 million in 1993 and $1.0 million in
1992.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Note 16. - Nonpension Postretirement and Postemployment Benefits
The Company participates in the Pitney Bowes nonpension postretirement
benefit plan which provides certain health care and life insurance
benefits to eligible retirees and their dependents. In the fourth quarter
of 1992, the Company adopted Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (FAS 106). This statement requires that the cost of these
benefits be recognized over the period the employee provides credited
service to the Company rather than recognized on a cash basis, when
incurred.
The transition effect of adopting FAS 106 on the immediate recognition
basis, as of January 1, 1992, was a one-time, after-tax charge of $1.9
million (net of approximately $1.2 million of income taxes). In the first
quarter of 1993, Pitney Bowes announced certain changes to its health care
plans, including plan cost maximums, which should significantly reduce the
ongoing incremental impact of FAS 106 on future earnings.
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS 112) as of
January 1, 1994. FAS 112 requires that postemployment benefits be
recognized on the accrual basis of accounting. The effect of adopting FAS
112 was a one-time non-cash, after-tax charge of $2.8 million (net of
approximately $1.9 million of income taxes).
Note 17. - Nonrecurring Items, Net
In 1994, a net nonrecurring credit of $3.3 million resulted from a $3.5
million credit to income for changes made to certain postemployment
benefits and Pitney Bowes' decision to undertake certain strategic actions
which resulted in the Company's establishment of a $.2 million reserve.
Since the first quarter of 1994, the Company's parent Pitney Bowes, as
part of its employee work-life initiatives, has actively sought employee
input regarding benefits and it was concluded that employees prefer
benefits more closely related to their changing work-life needs. As a
result, in the third quarter of 1994, Pitney Bowes significantly reduced
or eliminated certain postemployment benefits, specifically service-
related company-subsidized life insurance, salary continuance and medical
benefits, resulting in an after-tax credit to income of $2.1 million (net
of approximately $1.4 million of income taxes).
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Note 18. - Legal Proceedings
The Company is 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.
Pitney Bowes has been advised that the Antitrust Division of the United
States Department of Justice is conducting a civil investigation of its
postage equipment business (including subsidiaries) to determine whether
there is, has been, or may be a violation of the surviving provisions of
the 1959 consent decree between Pitney Bowes and the U.S. Department of
Justice, and or the antitrust laws. The Company intends to cooperate
with the Department's investigation.
Note 19. - Commitments and Contingent Liabilities
The Company is the lessee under noncancelable operating leases for
office space and automobiles. Future minimum lease payments under these
leases are as follows: $4.7 million in 1995, $4.3 million in 1996, $3.7
million in 1997, $3.4 million in 1998, $2.6 million in 1999, and $6.3
million thereafter.
Rental expense under operating leases was $4.4 million, $4.7 million and
$4.5 million in 1994, 1993 and 1992, respectively.
At December 31, 1994, the Company had unfunded commitments of $3.0
million to extend credit to customers. 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. 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. The
Company has also entered into agreements with another leasing company to
guarantee a portion of the leasing company's residual position in lease
contracts. In consideration for these guarantees, the Company received
a fee. The aggregate exposure under these guarantees is $22.3 million.
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Note 20. - Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for 1994 and 1993 follows:
Three Months Ended
----------------------------------------------------------------
1994 March 31 June 30 Sept. 30 Dec. 31
---- -------- -------- -------- --------
Total revenue $130,186 $162,041 $147,984 $165,752
------- ------- ------- -------
Expenses:
Interest 33,324 36,806 39,825 41,284
Selling, general and
administrative 26,365 26,635 31,582 28,871
Depreciation and
amortization 5,863 6,533 6,762 7,339
Cost of equipment sales - 25,217 - 17,822
Nonrecurring items, net - - (3,311) -
Provision for credit losses 14,097 13,877 16,108 12,051
Provision for income taxes 16,912 17,958 19,122 17,828
------- ------- ------- -------
Total expenses 96,561 127,026 110,088 125,195
------- ------- ------- -------
Income before effect of
accounting changes 33,625 35,015 37,896 40,557
Effect of accounting changes (2,820) - - -
------- ------- ------- -------
Net Income $ 30,805 $ 35,015 $ 37,896 $ 40,557
======= ======= ======= =======
Three Months Ended
----------------------------------------------------------------
1993 March 31 June 30 Sept. 30 Dec. 31
---- -------- -------- -------- --------
Total revenue $125,469 $138,000 $125,626 $124,359
------- ------- ------- -------
Expenses:
Interest 36,510 33,930 33,383 33,549
Selling, general and
administrative 25,224 25,749 24,799 23,560
Depreciation and
amortization 3,576 3,929 3,752 5,288
Provision for credit losses 13,964 27,854 14,157 14,270
Provision for income taxes 15,638 15,822 27,942 7,073
------- ------- ------- -------
Total expenses 94,912 107,284 104,033 83,740
------- ------- ------- -------
Net Income $ 30,557 $ 30,716 $ 21,593 $ 40,619
======= ======= ======= =======
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
--------------------------------------------------
Omitted pursuant to General Instruction J.
Item 11. Executive compensation
----------------------
Omitted pursuant to General Instruction J.
Item 12. Security ownership of certain beneficial owners and management
--------------------------------------------------------------
Omitted pursuant to General Instruction J.
Item 13. Certain relationships and related transactions
----------------------------------------------
Omitted pursuant to General Instruction J.
Part IV
Item 14. Exhibits, financial statement schedules and reports on Form 8-K
---------------------------------------------------------------
(a) Index of documents filed as part of this report:
1. Consolidated Financial Statements Page(s)
--------------------------------- -------
Included in Part II of this report:
Report of Independent Accountants 21
Consolidated Statements of Income and of
Retained Earnings for each of the three years
in the period ended December 31, 1994 22
Consolidated Balance Sheet at December 31, 1994
and 1993 23
Consolidated Statement of Cash Flows for each of
the three years in the period ended
December 31, 1994 24-25
Notes to Consolidated Financial Statements 26-47
2. Financial Statement Schedules
-----------------------------
Valuation and qualifying accounts and reserves
(Schedule II) 52
The additional financial data should be read in conjunction with the
financial statements included in Item 8 to this Form 10-K. Schedules
not included with this additional financial data have been omitted
because they are not applicable or the required information is shown
in the financial statements or notes thereto.
3. Index to Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
---------------------------------------------------------------------
Reg. S-K State or Incorporation
Exhibits Description by Reference
-------- ----------------------------- -------------------------
(3) .1 Articles of Incorporation, Incorporation by reference
as amended to Exhibits (3.1) and (3.2)
.2 By-Laws, as amended respectively, to Form 10
on Registration Statement
No. 0-13497 as filed with
the Commission on May 1,
1985.
(4) (a) Form of Indenture dated Incorporated by reference
as of May 1, 1985 between to Exhibit (4a) to
the Company and Bankers Registration Statement on
Trust Company, as Trustee Form S-3 (No. 2-97411) as
filed with the Commission
on May 1, 1985.
(b) Form of First Supplemental Incorporated by reference
Indenture dated as of to Exhibit (4b) to
December 1, 1986 between Registration Statement on
the Company and Bankers Form S-3 (No. 33-10766)
Trust Company, as Trustee as filed with the
Commission on December 12,
1986.
(c) Form of Second Supplemental Incorporated by reference
Indenture dated as of to Exhibit (4c) to
February 15, 1989 between Registration Statement on
the Company and Bankers Form S-3 (No. 33-27244)
Trust Company, as Trustee as filed with the
Commission on February 24,
1989.
(d) Form of Third Supplemental Incorporated by reference
Indenture dated as of May 1, to Exhibit (1) on Form 8-K
1989 between the Company and as filed with the
Bankers Trust Company, as Commission on May 16,
Trustee. 1989.
(e) Letter Agreement between Incorporated by reference
Pitney Bowes Inc. and to Exhibit (4b) to
Bankers Trust Company, Registration Statement on
as Trustee Form S-3 (No. 2-97411) as
filed with the Commission
on May 1, 1985.
(10) Material contracts
.1 Operating Agreement dated Incorporated by reference
March 3, 1977, as amended, to Exhibits (10.1),
between Pitney Bowes (10.2), and (10.3),
Credit Corporation and respectively, to
Pitney Bowes Inc. Form 10 as filed with the
Commission on May 1, 1985.
.2 Finance Agreement, dated
July 5, 1978 between Pitney
Bowes Credit Corporation and
Pitney Bowes Inc.
.3 Tax Sharing Agreement, dated
April 1, 1977 between Pitney
Bowes Credit Corporation and
Pitney Bowes Inc.
(12) Computation of ratio of earnings
to fixed charges Exhibit (i)
(21) Subsidiaries of the registrant Exhibit (ii)
(23) Consent of independent Exhibit (iii)
accountants
(b) No reports on Form 8-K were filed for the three months ended
December 31, 1994.
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 Credit Corporation
By /s/ Matthew S. Kissner
--------------------------------
Matthew S. Kissner
President and Chief Executive Officer
Date March 29, 1995
-------------------------------
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.
By /s/ Matthew S. Kissner Date 3/29/95 Matthew S. Kissner
-------------------------- ------- Director, President and
Chief Executive Officer
By /s/ G. Kirk Hudson Date 3/29/95 G. Kirk Hudson
-------------------------- ------- Vice President-Finance
(principal financial officer)
By /s/ Thomas P. Santora Date 3/29/95 Thomas P. Santora
-------------------------- ------- Controller
(principal accounting officer)
By /s/ Carmine F. Adimando Date 3/29/95 Carmine F. Adimando-Director
-------------------------- -------
By /s/ Marc C. Breslawsky Date 3/29/95 Marc C. Breslawsky-Director
-------------------------- -------
By /s/ Michael J. Critelli Date 3/29/95 Michael J. Critelli-Director
-------------------------- -------
By /s/ George B. Harvey Date 3/29/95 George B. Harvey-Director
-------------------------- -------
By /s/ John N. D. Moody Date 3/29/95 John N. D. Moody-Director
-------------------------- -------
By Date Harry W. Neinstedt-Director
-------------------------- -------
By /s/ Douglas A. Riggs Date 3/29/95 Douglas A. Riggs-Director
-------------------------- -------
PITNEY BOWES CREDIT CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1992 TO 1994
(Dollars in thousands)
Additions Deductions -
Balance at charged to uncollectible
beginning costs and accounts Balance at
of year expenses written off end of year
---------- ---------- ------------- -----------
Allowance for credit
losses (shown on
balance sheet as
deduction from net
investments)
1994 $98,311 $56,133 $59,173 $95,271
1993 $79,177 $70,245 $51,111 $98,311
1992 $67,515 $58,181 $46,519 $79,177