SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-13497
PITNEY BOWES CREDIT CORPORATION
Incorporated pursuant to the Laws of the State of Delaware
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Internal Revenue Service -- Employer Identification No. 06-0946476
27 Waterview Drive, Shelton, CT 06484-4361
(203) 922-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
As of October 29, 1999, 460 shares of common stock, no par value, with a stated
value of $100,000 per share, 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 H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
2
PITNEY BOWES CREDIT CORPORATION
Part I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
Consolidated Statements of Income:
Three and Nine Months Ended September 30, 1999 and 1998............................. 3
Consolidated Balance Sheets:
At September 30, 1999 and December 31, 1998......................................... 4
Consolidated Statements of Cash Flow:
Nine Months Ended September 30, 1999 and 1998....................................... 5
Notes to Consolidated Financial Statements............................................ 6
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIS OF
THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION............................................................................. 9
Part II -- OTHER INFORMATION
ITEM 1.-- LEGAL PROCEEDINGS............................................................... 14
ITEM 6.-- EXHIBITS AND REPORTS ON FORM 8-K................................................ 14
SignatureS................................................................................ 15
Exhibit (i) -- Computation of Ratio of Earnings from Continuing
Operations to Fixed Charges........................................................... 16
Exhibit (ii)-- Financial Data Schedule.................................................... 17
3
Part I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTs
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands of dollars)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Finance income............................................... $ 140,119 $ 125,773 $ 417,197 $ 372,029
------- ------- ------- -------
Expenses:
Selling, general and administrative.......................... 29,833 22,105 89,214 68,760
Interest..................................................... 26,606 31,099 91,167 93,378
Provision for credit losses.................................. 8,030 8,307 28,043 26,089
Depreciation and amortization................................ 7,427 3,795 22,309 9,961
------- ------- ------- -------
Total expenses........................................... 71,896 65,306 230,733 198,188
------- ------- ------- -------
Income from continuing operations before income taxes.......... 68,223 60,467 186,464 173,841
Provision for income taxes..................................... 14,783 17,108 49,475 48,142
------- ------- ------- -------
Income from continuing operations.............................. 53,440 43,359 136,989 125,699
Discontinued operations:
Income from discontinued operations (net of taxes of $6,384
for the three months ended September 30, 1998 and $177 and
$16,760 for the nine months ended September 30, 1999 and 1998) - 10,201 971 26,801
Loss on disposal of discontinued operations (net of taxes of
$(17,062) for the nine months ended September 30, 1999)... - - (24,938) -
------- ------- ------- -------
Net income..................................................... $ 53,440 $ 53,560 $ 113,022 $ 152,500
======= ======= ======= =======
Ratio of earnings from continuing
operations to fixed charges.................................. 3.55X 2.94X 3.04X 2.85X
======= ======= ======= =======
See Notes to Consolidated Financial Statements
4
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands of dollars)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Cash................................................................. $ 25,442 $ 19,154
Investments:
Finance assets..................................................... 2,877,014 2,721,805
Investment in leveraged leases..................................... 865,760 764,145
Investment in operating leases, net of accumulated depreciation.... 29,672 33,261
Allowance for credit losses........................................ (86,599) (115,233)
--------- ---------
Net investments.................................................. 3,685,847 3,403,978
--------- ---------
Mortgage servicing rights, net of accumulated amortization........... - 364,071
Assets held for sale................................................. 269,751 337,757
Investment in partnership............................................ 167,496 165,950
Loans and advances to affiliates..................................... 359,454 611,625
Net assets of discontinued operations................................ 458,206 -
Other assets......................................................... 145,975 391,135
--------- ---------
Total assets.................................................. $ 5,112,171 $ 5,293,670
========= =========
LIABILITIES
Senior notes payable within one year................................. $ 931,129 $ 991,853
Short-term notes payable to affiliates............................... 40,550 137,000
Accounts payable to affiliates....................................... 200,122 278,452
Accounts payable and accrued liabilities............................. 217,165 182,236
Deferred taxes....................................................... 506,710 486,906
Senior notes payable after one year.................................. 1,332,000 1,382,000
Long-term notes payable to affiliates................................ 333,000 333,000
Subordinated notes payable........................................... 285,886 285,886
--------- ---------
Total liabilities............................................... 3,846,562 4,077,333
--------- ---------
STOCKHOLDER'S EQUITY
Common stock......................................................... 46,000 46,000
Capital surplus...................................................... 41,725 41,725
Retained earnings.................................................... 1,177,884 1,128,612
--------- ---------
Total stockholder's equity...................................... 1,265,609 1,216,337
--------- ---------
Total liabilities and stockholder's equity.................... $ 5,112,171 $ 5,293,670
========= =========
See Notes to Consolidated Financial Statements
5
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(in thousands of dollars)
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income................................................................. $ 113,022 $ 152,500
Loss on disposal of discontinued operations................................ 24,938 -
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses.............................................. 28,043 53,085
Depreciation and amortization............................................ 64,392 53,567
Cash effects of changes in:
Deferred taxes........................................................ 82,407 40,993
Other current assets.................................................. 69,536 (85,707)
Other assets and deferred charges..................................... (3,090) (230)
Accounts payable to affiliates........................................ (78,330) (41,772)
Accounts payable and accrued liabilities.............................. 53,623 20,446
Other, net............................................................... (4,398) (686)
--------- ---------
Net cash provided by operating activities.................................. 350,143 192,196
--------- ---------
INVESTING ACTIVITIES
Investment in net finance assets......................................... (790,892) (1,060,483)
Investment in leveraged leases........................................... (63,543) (80,412)
Investment in operating leases........................................... (552) (21,560)
Investment in assets held for sale....................................... (125,952) (367,932)
Cash receipts collected under lease contracts, net of finance
income recognized..................................................... 689,083 1,328,592
Investment in mortgage service rights.................................... (21,800) (180,080)
Loans and advances to affiliates, net.................................... 244,953 (29,564)
Additions to equipment and leasehold improvements........................ (4,228) (7,652)
--------- ---------
Net cash used in investing activities...................................... (72,931) (419,091)
--------- ---------
FINANCING ACTIVITIES
Change in short-term debt, net........................................... (32,174) (107,726)
Proceeds from senior notes............................................... 125,000 532,000
Settlement of long-term debt............................................. (200,000) (225,000)
Short-term notes payable to affiliates................................... (100,000) 96,500
Proceeds from issuance of subordinated debt.............................. - 15,399
Dividends paid to Pitney Bowes Inc....................................... (63,750) (64,500)
--------- ---------
Net cash (used in) provided by financing activities........................ (270,924) 246,673
--------- ---------
Increase in cash........................................................... 6,288 19,778
Cash at beginning of period................................................ 19,154 36,320
--------- ---------
Cash at end of period...................................................... $ 25,442 $ 56,098
========= =========
Interest paid.............................................................. $ 124,692 $ 125,003
========= =========
Income taxes refunded, net................................................. $ (47,486) $ (23,680)
========= =========
See Notes to Consolidated Financial Statements
6
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 -- General
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of Pitney Bowes
Credit Corporation (the "Company" or "PBCC"), all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position at September 30, 1999 and December 31, 1998, the results of its
operations for the three and nine months ended September 30, 1999 and 1998 and
its cash flow for the nine months ended September 30, 1999 and 1998 have been
included. Certain amounts from prior periods have been reclassified to conform
to current period presentation. Operating results for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999. These statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Note 2 -- Discontinued Operations
On June 30, 1999, the Company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary
of the Company specializing in the servicing of residential first mortgages for
a fee. Accordingly, the Company recorded an expected loss of approximately $34.2
million (net of taxes of $22.8 million) on the disposal of AMIC.
On October 30, 1998, the Company's wholly-owned subsidiary, Colonial Pacific
Leasing Corporation ("CPLC"), transferred the operations, employees and
substantially all assets related to its broker-oriented small-ticket lease
financing business to General Electric Capital Corporation. The Company received
approximately $790 million at closing. The excess of the proceeds over the book
value of net assets sold or otherwise disposed of, together with related
transaction costs, resulted in a gain of approximately $9.3 million (net of
taxes of $5.7 million) in the second quarter of 1999.
Operating results of both AMIC and CPLC have been segregated and reported as
discontinued operations in the consolidated statements of income. Prior year
results have been reclassified to conform to the current year presentation. Net
assets of discontinued operations have been separately classified in the
consolidated balance sheet at September 30, 1999. Cash flow impacts of
discontinued operations have not been segregated in the accompanying statements
of cash flow. Details of income from discontinued operations, net are as follows
(in thousands of dollars):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
AMIC (net of taxes of $4,919 for the three months ended
September 30, 1998; and $177 and $11,958 for the
nine months ended September 30, 1999 and 1998) $ - $ 7,834 $ 971 $ 19,048
CPLC (net of taxes of $1,465 and $4,802 for the three
and nine months ended September 30, 1998)...... - 2,367 - 7,753
------- ------- ------- -------
Income from discontinued operations, net..... $ - $ 10,201 $ 971 $ 26,801
======= ======= ======= =======
Mortgage servicing and sales revenue of AMIC was $26.3 and $88.8 million
for the three and nine months ended September 30, 1999, and $43.6 and $96.2
million for the three and nine months ended September 30, 1998. Net interest
expense allocated to AMIC's discontinued operations was $0.8 and $4.5 million
for the three and nine months ended September 30, 1999, and $0.5 and $3.4
million for the three and nine months ended September 30, 1998. Interest has
been allocated based on the level of intercompany borrowings by AMIC, charged at
the Company's weighted average borrowing rate, partially offset by the interest
savings the Company realized due to borrowing against AMIC's escrow deposits as
opposed to the Company's composite cost of funds rate.
Finance income of CPLC was $32.0 and $117.0 million for the three and nine
months ended September 30, 1998. Interest expense allocated to CPLC's
discontinued operations was $9.6 and $30.6 million for the three and nine months
ended September 30, 1998. Interest expense has been allocated based on the level
of net intercompany borrowings of CPLC, charged at the Company's weighted
average borrowing rate.
7
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3 -- Finance Assets
The composition of the Company's finance assets is (in thousands of dollars):
September 30, December 31,
1999 1998
---- ----
Gross finance receivables...................................... $ 3,143,344 $ 3,050,572
Unguaranteed residual valuation................................ 413,143 412,569
Initial direct costs deferred.................................. 44,298 46,224
Unearned income................................................ (723,771) (787,560)
--------- ---------
Total finance assets........................................... $ 2,877,014 $ 2,721,805
========= =========
Note 4 -- Notes Payable
The composition of the Company's notes payable is as follows (in thousands of
dollars):
September 30, December 31,
1999 1998
---- ----
Senior Notes Payable:
Commercial paper at the weighted average
interest rate of 5.25% (4.90% in 1998).......................... $ 194,525 $ 173,700
Notes payable against bank lines of credit and others at weighted
average interest rates of 1.03% (1.16% in 1998)................. 561,604 618,153
Current installment of long-term debt due within one year at
interest rates of 5.95% to 6.11% (6.54% in 1998)............... 175,000 200,000
--------- ---------
Total senior notes payable due within one year................... 931,129 991,853
Senior notes payable due after one year at interest rates of
5.65% to 9.25% in 1999 and 1998................................ 1,332,000 1,382,000
--------- ---------
Total senior notes payable....................................... 2,263,129 2,373,853
Notes Payable to Affiliates:
Due within one year at an interest rate of 5.38% in 1999 and 1998 40,550 137,000
Due after one year at an interest rate of 5.38% in 1999 and 1998. 333,000 333,000
--------- ---------
Total notes payable to affiliates................................ 373,550 470,000
--------- ---------
Subordinated Notes Payable:
Non-interest bearing notes due Pitney Bowes Inc.................. 285,886 285,886
--------- ---------
Total notes payable................................................. $ 2,922,565 $ 3,129,739
========= =========
8
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5 -- Business Segment Information
Segment revenue and operating profit are as follows (in thousands of dollars):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Internal financing...................................... $ 103,318 $ 90,156 $ 308,060 $ 263,696
Capital services........................................ 36,801 35,617 109,137 108,333
------- ------- ------- -------
Total revenue for reportable segments.............. $ 140,119 $ 125,773 $ 417,197 $ 372,029
======= ======= ======= =======
Operating Profit:
Internal financing...................................... $ 59,728 $ 51,132 $ 171,540 $ 147,272
Capital services........................................ 7,523 12,026 16,600 34,154
------- ------- ------- -------
Total operating profit for reportable segments............ 67,251 63,158 188,140 181,426
Unallocated amounts:
Corporate interest income (expense), net.............. 1,009 (2,418) (1,421) (6,765)
Corporate expenses.................................... (37) (273) (255) (820)
------- ------- ------- -------
Income from continuing operations before income taxes... $ 68,223 $ 60,467 $ 186,464 $ 173,841
======= ======= ======= =======
9
PITNEY BOWES CREDIT CORPORATION
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIs
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Continuing Operations
Third Quarter of 1999 Compared to Third Quarter of 1998
On June 30, 1999, the Company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary
of the Company specializing in the servicing of residential first mortgages for
a fee. Accordingly, the Company recorded an expected loss of approximately $34.2
million (net of taxes of $22.8 million) on the disposal of AMIC. Operating
results of AMIC have been segregated and reported as discontinued operations in
the consolidated statements of income. Prior year results have been reclassified
to conform to the current year presentation. See Note 2 to the CONSOLIDATED
FINANCIAL STATEMENTS.
On October 30, 1998, the Company's wholly-owned subsidiary, Colonial Pacific
Leasing Corporation ("CPLC"), transferred the operations, employees and
substantially all assets related to its broker-oriented small-ticket lease
financing business to General Electric Capital Corporation. The Company received
approximately $790 million at closing. The excess of the proceeds over the book
value of net assets sold or otherwise disposed of, together with related
transaction costs, resulted in a gain of approximately $9.3 million (net of
taxes of $5.7 million) in the second quarter of 1999. Operating results of CPLC
have been segregated and reported as discontinued operations in the consolidated
statements of income. See Note 2 to the CONSOLIDATED FINANCIAL STATEMENTS.
Finance income in the third quarter of 1999 increased 11.4 percent to $140.1
million compared to $125.8 million in 1998. Finance income for internal
financing programs increased 14.6 percent to $103.3 million from $90.2 million
primarily due to higher income from fee- and service-based programs as well as
higher investment levels for the mail and copier financing programs. Finance
income for Capital Services financing programs increased to $36.8 million from
$35.6 million primarily due to the Company's strategy to shift the foundation of
the Capital Services financing business from asset-based to fee- and service-
based revenues, somewhat offset by the lower investment levels in accordance
this strategy.
Selling, general and administrative ("SG&A") expenses increased 35.0 percent
to $29.8 million in the third quarter of 1999 compared to $22.1 million in 1998.
SG&A for internal financing programs increased to $21.6 million from $17.2
million principally due to higher professional fees and outsourcing expenses
related to new business initiatives as well as consulting services in support of
strategic initiatives such as improvements to information technology and
customer service. SG&A for Capital Services financing programs increased to $8.2
million in 1999 from $4.8 million in 1998.
Depreciation on operating leases was $1.2 million in the third quarter of 1999
compared to $1.5 million in 1998 reflecting a lower operating lease investment
balance at September 30, 1999 compared to September 30, 1998.
The provision for credit losses was $8.0 million for the third quarter of 1999
compared with $8.3 million in 1998. The provision for internal financing
programs decreased to $7.1 million from $7.6 million due to lower reserve
requirements caused by stronger portfolio performance. The decrease is partly
offset by increased provisions for Small Business SolutionsSM programs. The
provision for Capital Services financing programs was $1.0 million in the third
quarter of 1999 compared to $0.7 million in 1998.
The Company's allowance for credit losses as a percentage of net lease
receivables (net investments before allowance for credit losses plus the
uncollected principal balance of receivables sold) decreased from 2.87 percent
at December 31, 1998 to 2.00 percent at September 30, 1999. PBCC charged $56.7
million and $54.9 million against the allowance for credit losses for the nine
months ended September 30, 1999 and 1998, respectively.
Interest expense was $26.6 million in the third quarter of 1999 compared with
$31.1 million in 1998. The decrease reflects lower effective interest rates
during 1999. The effective interest rate on average borrowings was 5.61 percent
for the third quarter of 1999 compared to 5.70 percent for the same period in
1998.
Net interest expense for the three months ended September 30, 1999 includes a
gain of $3.6 million from the assignment of an interest rate swap in September
1999. The swap was for a notional principal amount of $125 million, at a fixed
interest rate of 5.83 percent and a floating rate equal to the Money Market
Yield of Commercial Paper - Nonfinancial. Under the terms of the swap agreement
the Company was the fixed rate payer. The swap would have been effective through
February 2, 2005.
The Company does not match fund its financing investments and does not apply
different interest rates to its various financing portfolios.
10
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Continuing Operations
Third Quarter of 1999 Compared to Third Quarter of 1998 (continued)
The effective tax rate for the third quarter of 1999 was 21.7 percent compared
with 28.3 percent for the same period of 1998. The decrease is primarily due to
certain Capital Services external financial transactions entered into during the
third quarter of 1999.
The Company's ratio of earnings from continuing operations to fixed charges
was 3.55 times for the third quarter of 1999 compared with 2.94 times for the
same period of 1998. The increase reflects the company's higher earnings as well
as the effect of the swap assignment on net interest expense referred to above.
Nine Months of 1999 Compared to Nine Months of 1998
For the nine months of 1999 compared to the same period of 1998, finance
income increased 4.9 percent to $354.0 million, fee income increased 83.5
percent to $63.2 million, SG&A expenses increased 29.7 percent to $89.2 million,
depreciation and amortization increased 124.0 percent to $22.3 million, the
provision for credit losses increased 7.5 percent to $28.0 million, interest
expense decreased 2.4 percent to $91.2 million and the provision for income
taxes increased 2.8 percent to $49.5 million, generating an increase in income
from continuing operations of 9.0 percent to $137.0 million. The results of
discontinued operations was a net loss of $24.0 million through September 30,
1999 versus income of $26.8 million for the same period of 1998. The decrease
was mainly due to the recognition of an estimated net loss on the disposal of
AMIC of $34.2 million. Net income decreased by 25.9 percent to $113.0 million.
Financial Condition
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 to control sensitivity to
interest rate volatility. PBCC's debt mix was 43 percent short-term and 57
percent long-term at September 30, 1999 and 45 percent short-term and 55 percent
long-term at December 31, 1998. PBCC's swap-adjusted variable-rate versus
fixed-rate debt mix was 36 percent variable-rate and 64 percent fixed-rate at
September 30, 1999 and 24 percent variable-rate and 76 percent fixed-rate at
December 31, 1998. 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 had unused lines of
credit and revolving credit facilities totaling $1.2 billion at September 30,
1999, largely supporting its commercial paper borrowings.
On August 30, 1999, the Company established a medium-term note program for the
issuance from time to time of up to $500 million aggregate principal amount of
Medium-Term Notes, Series D. Under this program, in September 1999 the Company
issued $125 million of 5.95% unsecured notes (the "Notes") available under a
shelf registration filed with the Securities and Exchange Commission in July
1998. The proceeds from the Notes will be used for general corporate purposes,
including the repayment of short-term debt. The Notes are due September 29,
2000, with interest payable on March 29, 2000 and at maturity.
During August 1999 the Company also entered into three interest rate swaps for
an aggregate notional amount of $350 million.
Notional Effective
Amount Through Fixed Rate Floating Rate
$100,000,000 February 2008 8.625% See below
$100,000,000 June 2008 9.250% See below
$150,000,000 September 2009 8.550% See below
The floating rates for each swap are based on six month LIBOR plus a spread,
equal to the difference between the fixed rate of the debt and the fixed rate
currently available for similar debt. Under the terms of the swap agreements the
Company is the floating rate payer.
11
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition
Liquidity and Capital Resources (continued)
The Company's utilization of derivative instruments is normally 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 paid or received is recognized as
an adjustment to interest expense. The interest differential on the swap will be
offset against changes in valuation of the assets resulting from interest rate
movements. 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 periodically enters 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. When in
effect, 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 also considered minimal. At September 30, 1999
there were no foreign currency contracts outstanding.
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 fair market
values.
Gross finance assets at the end of the third quarter of 1999 increased 2.7
percent from December 31, 1998. The increase is principally due to higher
investment levels for new business initiatives, offset by decreased investments
in Capital Services financing programs. Overall levels of lease receivables are
in line with management's expectations. The Company continues to actively pursue
a Capital Services financing strategy based on external large-ticket asset
sales, thereby allowing it to focus on fee- and service-based revenue rather
than asset-based income.
The Company's liquidity ratio (finance contracts receivable, including
residuals, expected to be realized in cash over the next 12 months to current
maturities of debt over the same period) was 1.75 times at September 30, 1999
and 1.47 times at December 31, 1998.
The Company will continue to use cash to invest in finance assets with
emphasis on internal 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. Borrowing
requirements will be primarily dependent upon the level of equipment purchases
from Pitney Bowes Inc., the level of external financing activity, capital
requirements for new business initiatives, and the refinancing of maturing debt.
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 under revolving credit
facilities and credit lines.
12
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATION AND FINANCIAL CONDITION
Year 2000
General
In 1997, the Company's parent, Pitney Bowes Inc., established a formal
worldwide program to identify and resolve the impact of the Year 2000 date
processing issue on its business systems, products and supporting
infrastructure. PBCC is included as part of this program. This program includes
a comprehensive review of information technology ("IT") and non-IT systems,
software, and embedded processors. The program structure has strong executive
sponsorship and consists of a Year 2000 steering committee comprised of senior
business and technology management, a Year 2000 program office staffed with
full-time project management, and subject matter experts and dedicated business
unit project teams. The Company has also engaged independent consultants to
perform periodic program reviews and assist in systems assessment and test plan
development.
State of Readiness
The program encompasses the following phases: an inventory of affected
technology and critical third party suppliers, an assessment of Year 2000
readiness, resolution, unit and integrated testing, and contingency planning. As
of September 30, 1999, the Company had substantially completed these phases
across all aspects of its businesses. Specific project status in our more
critical process areas is summarized below: Computer Systems and Infrastructure:
These include computer networks, systems and applications supporting worldwide
business operations, including sales order processing, manufacturing,
distribution, billing, collections, leasing, financial management, and human
resources. All core systems have been remediated, tested, and reinstalled into
the production environment. All unit and integration testing has been
successfully completed. Suppliers and Critical Vendors:
PBCC relies on third parties for many systems, products and services. The
Company could be adversely impacted if third parties do not make necessary
changes to their own systems and products successfully and in a timely manner.
The Company has established a formal process to identify, assess and monitor the
Year 2000 readiness of critical third parties. Critical third parties with which
the Company interacts include, among others, customers and business partners
(supply chains, technology vendors and service providers); the global financial
market infrastructure (payment and clearing systems); and the utility
infrastructure (power, transportation and telecommunications) on which all
corporations rely. PBCC has contacted its critical vendors and has been informed
that they are also Year 2000 ready. However, the Company cannot predict whether
such third parties will encounter any difficulties in their being Year 2000
ready.
Year 2000 Costs
PBCC estimates the total cost of the program from inception in 1997 through
the Year 2000 to be approximately $2 million, of which approximately $1.7
million was incurred through September 30, 1999. These costs, which are funded
through the Company's cash flows, include both internal labor costs as well as
consulting and other external costs. These costs are incorporated in the
Company's budgets and are being expensed as incurred.
Year 2000 Risks and Contingency Plan
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from
uncertainty about the Year 2000 readiness of third parties, PBCC is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on its results of operations, liquidity or financial
condition. However, a Year 2000 business resumption plan has been developed
which identifies and evaluates potential Year 2000 failure scenarios and
establishes both preemptive and reactive measures. As of September 30, 1999
these measures, including plans to address failures of critical vendors,
internal systems and processes, have been finalized and will be monitored for
any necessary changes that may be required.
13
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other Matters
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires an entity
recognize all derivative instruments as either assets or liabilities on its
balance sheet and measure those instruments at fair market value. Changes in the
fair value of those instruments will be reflected as gains or losses. The
accounting for the gains or losses depends on the intended use of the derivative
instrument and the resulting designation. Under SFAS 133, PBCC would have been
required to implement this statement beginning January 1, 2000. In June 1999,
the FASB issued Statement of Financial Accounting Standards No 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of SFAS Statement No. 133". This statement deferred the effective date of
SFAS 133 thereby extending the Company's implementation date to January 1, 2001.
The Company is currently in the process of evaluating the impact of implementing
this statement.
- --------------------------------------------------------------------------------
The Company wishes to caution readers that any forward-looking statements
(those which talk about the Company's or management's current expectations as to
the future), contained in this Form 10-Q or made by the management of the
Company involve risks and uncertainties which may change based on various
important factors. Some of these factors which could cause the Company's
financial performance to differ materially from the expectations expressed in
any forward-looking statement made by or on behalf of the Company include: the
level of business and financial performance of Pitney Bowes, including the
impact of changes in postal regulations and of competition in the new market for
postage metering services via the internet; the impact of governmental financing
regulations; the success of the Company in developing strategies to manage debt
levels, including the ability of the Company to access the capital markets; the
strength of worldwide economies; the effects of and changes in trade, monetary
and fiscal policies and laws, and inflation and monetary fluctuations, including
changes in interest rates; the willingness of customers to substitute financing
sources; the success of the Company at managing customer credit risk and
associated collection and asset management efforts; and the impact of the Year
2000 issue, including the effect of third parties' inability to address the Year
2000 problem as well as the Company's own readiness.
14
PART II - OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
From time to time, the Company is a party to lawsuits that arise in the
ordinary course of its business. These lawsuits may involve litigation by or
against the Company to enforce contractual rights under vendor, insurance or
other contracts; lawsuits by or against the Company relating to equipment,
service or payment disputes with customers; disputes with employees; or other
matters. The Company is currently a defendant in a number of lawsuits, none of
which should have, in the opinion of management and legal counsel, a material
adverse effect on the Company's financial position or results of operations.
In June 1999, the Company's parent, Pitney Bowes Inc. ("PBI"), was
served with a Civil Investigation Demand ("CID") from the U.S. Justice
Department's Antitrust Division. A CID is a tool used by the Antitrust Division
for gathering information and documents. PBI believes that the Justice
Department may be reviewing its efforts to protect its intellectual property
rights. Both PBI and the Company believe they have complied fully with the
antitrust laws and are cooperating fully with the investigation.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a. Financial Statements - see index on page 2
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Reg S-K Incorporation
Exhibits Description by Reference
--------- ---------------------------------------- ---------------
(12) Computation of Ratio of Earnings from Continuing See Exhibit (i)
Operations to Fixed Charges on page 16
(27) Financial Data Schedule See Exhibit (ii)
on page 17
There are no unregistered debt instruments in which the total
amount of securities authorized thereunder exceeds 10 percent of
the total assets of the Company. Copies of all instruments
defining the rights of securities holders are available on
request.
b. On July 26, 1999, a report was filed under Items 5 and 7 of Form 8-K,
relating to the decision to dispose of Atlantic Mortgage & Investment
Corporation.
On August 30, 1999, a report was filed under Items 5 and 7 of Form 8-K,
reclassifying certain Items filed in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and its Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, including the consolidated
balance sheets at December 31, 1998 and 1997 and the related consolidated
statements of income, of retained earnings and of cash flows for each of
the three years in the period ended December 31, 1998 and the unaudited
consolidated balance sheet at March 31, 1999 and the related unaudited
consolidated statements of income and of cash flows for the three month
periods ended March 31, 1999 and March 31, 1998.
On September 3, 1999, a report was filed under Items 5 and 7 of Form 8-K,
relating to the establishment of the Company's medium-term note program.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PITNEY BOWES CREDIT CORPORATION
By /s/ NANCY E. COOPER
----------------------
Nancy E. Cooper
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
Dated: November 15, 1999
By /s/ R. JEFFREY MACARTNEY
----------------------
R. Jeffrey Macartney
Controller
(Principal Accounting Officer)
Dated: November 15, 1999
Exhibit (i)
Computation of Ratio of Earnings from Continuing Operations to Fixed Charges
(in thousands of dollars)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Income from continuing operations
before income taxes................ $ 68,223 $ 60,467 $ 186,464 $ 173,841
------- ------- -------- --------
Fixed charges:
Interest on debt................... 26,606 31,099 91,167 93,378
One third rent expense............. 148 145 456 400
------- ------- -------- --------
Total fixed charges.................. 26,754 31,244 91,623 93,778
------- ------- -------- --------
Earnings from continuing operations
before fixed charges............... $ 94,977 $ 91,711 $ 278,087 $ 267,619
======= ======= ======== ========
Ratio of earnings from continuing
operations to fixed charges (1).... 3.55X 2.94X 3.04X 2.85X
======= ======= ======== ========
(1) The ratio of earnings from continuing operations to fixed charges is
computed by dividing earnings from continuing operations before fixed
charges by fixed charges. Fixed charges consist of interest on debt and one
third of rent expense as representative of the interest portion.