FORM 10-K/A
-----------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
AMENDMENT TO APPLICATION OR REPORT
Filed Pursuant to Section 12, 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
PITNEY BOWES CREDIT CORPORATION
-------------------------------
(Exact name of registrant as specified in charter)
--------------------------------------------------
AMENDMENT NO. 1
The undersigned registrant hereby amends the following item of
its December 31, 1993 Form 10-K as set forth in the pages attached
hereto:
Index to Form 10-K
Item 8. Financial statements and supplementary data
Exhibit (iii) Consent of Independent Accountants
This amendment is filed to incorporate information to the
table in Note 12 on page 35A related to Financial Guarantee
Contracts (filed herein) which was inadvertently omitted from the
registrant's Form 10-K filing for December 31, 1993.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to be signed on
its behalf by the undersigned, thereunto duly authorized.
PITNEY BOWES CREDIT CORPORATION
-------------------------------
(Registrant)
By /s/ G. Kirk Hudson
----------------------------
G. Kirk Hudson
Vice President - Finance
Date: July 22, 1994
<PAGE>
PITNEY BOWES CREDIT CORPORATION
FORM 10-K
1993 INDEX
-------------------------------
Part I
Item Page
- ---- --------
1. Business . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . 10
3. Legal proceedings . . . . . . . . . . . . . . . . . . 10
4. Submission of matters to a vote of security holders . 10
Part II
5. Market for the registrant's common equity and related
stockholder matters . . . . . . . . . . . . . . . . . 10
6. Selected financial data . . . . . . . . . . . . . . . 11
7. Management's discussion and analysis of financial
condition and results of operations . . . . . . . . . 12
8. Financial statements and supplementary data . . . . . 18* 18A**
9. Changes in and disagreements with accountants on
accounting and financial disclosure . . . . . . . . . 40
Part III
10. Directors and executive officers of the Registrant . . 40
11. Executive compensation . . . . . . . . . . . . . . . . 40
12. Security ownership of certain beneficial owners and
management . . . . . . . . . . . . . . . . . . . . . 40
13. Certain relationships and related transactions . . . . 40
Part IV
14. Exhibits, financial statement schedules and reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . 40
Index to Exhibits . . . . . . . . . . . . . . . . . . 41
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . 43
* Previously filed with Form 10-K.
** Filed herein.
2A
<PAGE>
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 40 and 41 present fairly,
in all material respects, the financial position of Pitney Bowes Credit
Corporation and its subsidiaries at December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1993, 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 14 to the consolidated financial statements, the
Company elected to adopt a new accounting standard for postretirement
benefits other than pensions in 1992.
PRICE WATERHOUSE
Stamford, Connecticut
February 1, 1994
18A
<PAGE>
<TABLE>
Pitney Bowes Credit Corporation
Consolidated Statement of Income
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31 1993 1992 1991
<S> <C> <C> <C>
Finance income $513,454 $494,494 $460,644
------- ------- -------
Expenses
Selling, general and administrative 99,332 90,079 82,969
Depreciation and amortization 16,545 13,936 12,750
Provision for credit losses 70,245 58,181 48,943
Interest 137,372 146,594 167,236
------- ------- -------
Total expenses 323,494 308,790 311,898
------- ------- -------
Income before income taxes 189,960 185,704 148,746
Provision for income taxes 66,475 64,942 55,589
------- ------- -------
Income before effect of a change in
accounting for nonpension
postretirement benefits 123,485 120,762 93,157
Effect of a change in accounting
for nonpension postretirement
benefits - (1,866) -
------- ------- -------
Net income $123,485 $118,896 $ 93,157
======= ======= =======
</TABLE>
<TABLE>
Consolidated Statement of Retained Earnings
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31 1993 1992 1991
<S> <C> <C> <C>
Retained earnings at beginning
of year $495,855 $407,959 $341,802
Net income for the year 123,485 118,896 93,157
Dividends paid to Pitney Bowes Inc. (36,000) (31,000) (27,000)
------- ------- -------
Retained earnings at end of year $583,340 $495,855 $407,959
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
19A
<PAGE>
<TABLE>
Pitney Bowes Credit Corporation
Consolidated Balance Sheet
(Dollars in thousands)
- -------------------------------------------------------------------------------------------
<CAPTION>
December 31 1993 1992
<S> <C> <C>
Assets
Cash $ 6,237 $ 4,855
---------- ----------
Investments:
Finance assets 3,410,522 3,161,682
Investment in leveraged leases 298,914 274,846
Assets transferred from affiliate 82,274 105,388
Investment in operating leases, net of
accumulated depreciation: 1993,
$33,181; 1992, $24,413 63,899 45,432
Allowance for credit losses (98,311) (79,177)
---------- ----------
Net investments 3,757,298 3,508,171
---------- ----------
Other assets 167,927 105,138
---------- ----------
Total assets $ 3,931,462 $ 3,618,164
========== ==========
Liabilities
Senior notes payable within one year $ 1,735,607 $ 1,475,630
Short-term notes payable to
Pitney Bowes Inc. - 31,025
Accounts payable to affiliates 162,914 108,896
Accounts payable and accrued liabilities 183,253 117,987
Deferred taxes 294,494 254,088
Note payable to affiliate - 105,388
Senior notes payable after one year 775,295 857,278
Subordinated notes payable 108,834 86,734
---------- ----------
Total liabilities 3,260,397 3,037,026
---------- ----------
Stockholder's Equity
Common stock 46,000 46,000
Capital surplus 41,725 39,283
Retained earnings 583,340 495,855
---------- ----------
Total stockholder's equity 671,065 581,138
---------- ----------
Total liabilities and stockholder's equity $ 3,931,462 $ 3,618,164
========== ==========
</TABLE>
See notes to consolidated financial statements.
20A
<PAGE>
<TABLE>
Pitney Bowes Credit Corporation
Consolidated Statement of Cash Flows
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31 1993 1992 1991
<S> <C> <C> <C>
Operating Activities
Net income $ 123,485 $ 118,896 $ 93,157
Effect of a change in accounting for
nonpension postretirement
benefits - 1,866 -
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for credit losses 70,245 58,181 48,943
Depreciation and amortization 16,545 13,936 12,750
Increase in deferred taxes 40,406 37,008 11,101
Increase in accounts payable to
affiliates 54,018 15,738 17,403
Increase (decrease) in accounts
payable and accrued liabilities 65,266 (10,188) 2,305
Decrease in investment tax
credits deferred (1,303) (2,683) (3,974)
Other, net (13,306) (7,817) (12,924)
---------- ---------- ----------
Net cash provided by operating
activities 355,356 224,937 168,761
---------- ---------- ----------
Investing Activities
Investment in net finance
assets (1,041,985) (1,015,498) (1,066,189)
Investment in leveraged leases (15,505) (68,705) (60,051)
Investment in operating leases (26,661) (4,537) (27,289)
Cash receipts collected under
lease contracts net of finance
income recognized 740,183 794,061 746,180
Investment in mortgage servicing
rights (14,218) (14,716) -
Purchase of Atlantic Mortgage &
Investment Corporation
represented by:
Purchased 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 (24,165) (7,343) 8,857
Additions to equipment and
leasehold improvements (1,747) (2,657) (4,110)
---------- ---------- ----------
Net cash provided in investment
activities (384,098) (332,333) (402,602)
---------- ---------- ----------
</TABLE>
21A
<PAGE>
<TABLE>
Pitney Bowes Credit Corporation
Consolidated Statement of Cash Flows
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31 1993 1992 1991
<S> <C> <C> <C>
Financing Activities
Investment in short-term debt 262,310 111,602 213,085
Proceeds from issuance of
medium- and long-term debt - 75,000 150,000
Short-term loans from Pitney Bowes Inc. - 31,025 -
Proceeds from issuance of
subordinated debt 22,810 11,957 8,949
Settlement of long-term debt (84,315) (104,918) (104,000)
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) (710)
Capital contribution from Pitney Bowes
Inc. 2,442 3,328 4,250
Dividends paid to Pitney Bowes Inc. (36,000) (31,000) (27,000)
---------- --------- ---------
Net cash provided by financing
activities 30,124 96,284 244,574
---------- --------- ---------
Increase (decrease) in cash 1,382 (11,112) 10,733
Cash at beginning of year 4,855 15,967 5,234
---------- --------- ---------
Cash at end of year $ 6,237 $ 4,855 $ 15,967
========== ========= =========
Interest paid $ 143,031 $ 145,899 $ 150,633
========== ========= =========
Net income taxes (refunded) paid $ (11,680) $ 34,709 $ 34,850
========== ========= =========
</TABLE>
22A
<PAGE>
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).
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, 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. Deferred investment tax credits are amortized ($1.3
million, $3.3 million and $5.5 million in 1993, 1992 and 1991, respectively)
on a straight-line basis over the depreciable life of equipment manufactured
by Pitney Bowes and under the interest method for products not manufactured
by Pitney Bowes.
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.
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.
23A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Investment in operating leases: Equipment under operating leases is
depreciated over the firm term of the lease to its estimated residual value.
Rental revenue is recognized on a straight-line basis over the related lease
term.
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 1993 1992
---------- ----------
Gross finance receivables $ 4,086,739 $ 3,913,843
Unguaranteed residual valuation 497,080 452,100
Initial direct cost deferred 67,802 62,154
Unearned income (1,240,090) (1,264,103)
Investment tax credits deferred (1,009) (2,312)
---------- ----------
Finance assets $ 3,410,522 $ 3,161,682
========== ==========
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 24 years
and other non-commercial jet aircraft transactions with lease terms ranging
from two to 13 years. The balance due at December 31, 1993, including
estimated residual realizable at the end of the lease term, is payable as
follows:
<TABLE>
<CAPTION>
Gross Finance Assets
------------------------------------------------------------------------
Internal External External
small-ticket large-ticket small-ticket
programs programs programs Total
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
1994 $ 573,164 $ 278,221 $297,849 $1,149,234
1995 451,403 277,832 191,611 920,846
1996 296,733 212,810 113,478 623,021
1997 139,802 175,326 51,870 366,998
1998 35,284 170,252 15,843 221,379
Thereafter 1,292 1,300,929 120 1,302,341
--------- --------- ------- ---------
Total $1,497,678 $2,415,370 $670,771 $4,583,819
========= ========= ======= =========
</TABLE>
24A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Net equipment financed for Pitney Bowes and its subsidiaries' products were
$533.2 million, $447.7 million, and $416.9 million in 1993, 1992, and 1991,
respectively.
During 1993, the Company sold approximately $26 million of Internal
small-ticket finance assets with recourse in a privately-placed transaction
with a third-party investor. In 1992 and 1991, the Company sold
approximately $92 million and $90 million, respectively of finance assets in
similarly structured transactions. The uncollected principal balance of
receivables sold at December 31, 1993 and 1992 was $168 million and $281
million, respectively.
As of December 31, 1993, $588 million (17 percent) of the Company's finance
assets and $947.5 million (21 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.
The Company has issued a conditional commitment to guarantee the lease
payments of a third party for a corporate aircraft. In the event of default
under the lease by the third party, the Company has the right to take title
to the aircraft and to assume the obligation under the lease. The Company's
maximum exposure under the guarantee is $15.2 million. In addition, the
Company has sold receivables while retaining residual value exposure of $18.9
million. The Company does not anticipate any exposure in connection with
these financial agreements.
Note 4. - Net Investment in Leveraged Leases
The Company's net investment in leveraged leases is composed of the following
elements:
December 31 1993 1992
-------- --------
Net rents receivable $ 182,389 $ 184,078
Unguaranteed residual valuation 422,483 378,283
Unearned income (305,958) (287,515)
-------- --------
Investment in leveraged leases 298,914 274,846
Deferred taxes arising from leveraged leases (1) (110,959) (82,722)
-------- --------
Net investment in leveraged leases $ 187,955 $ 192,124
======== ========
(1) Includes amounts reclassed to subordinated debt.
25A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Leveraged lease assets acquired by the Company are financed primarily through
nonrecourse loans from third-party debt participants. These loans are
secured by the lessee's rental obligations and the leased property. Net
rents receivable represent gross rents less the principal and interest on the
nonrecourse debt obligations. Unguaranteed residual values are principally
based on independent appraisals of the values of leased assets remaining at
the expiration of the lease.
Leveraged lease investments totaling $176.7 million are related to commercial
real estate facilities, with original lease terms ranging from 17 to 24
years. Also included are five aircraft transactions with major commercial
airlines, with a total investment of $122.2 million and with original lease
terms ranging from 22 to 24 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 and the Company are continuing an inquiry and
evaluation of the conduct by former management personnel of the German
leasing business. The results of this inquiry to date indicate that former
management caused the German leasing operation to enter into transactions
which were not consistent with Company policy and guidelines and, in certain
cases, lacked appropriate documentation and collateral. Additionally, in
certain instances, Pitney Bowes and the Company are continuing to locate,
repossess and remarket collateral where possible. These circumstances,
together with deteriorating economic conditions in Germany, caused
management, in the second quarter of 1993, to conclude that losses would be
larger than previously anticipated. Accordingly, at that time, the Company
recorded additional loss provisions of $14.4 million in the second quarter of
1993, the effect of which was substantially offset by a gain on the sale of
finance assets.
At the current time, the Company believes that with the additional loss
provisions taken in the second quarter of 1993, sufficient reserves for
expected losses are in place. As the inquiry continues, the Company may
determine that additional loss provisions are necessary. If such additional
provisions are required, it is anticipated that resulting charges against
income would be offset by gains on additional asset sales. Pitney Bowes and
the Company expect to complete their inquiry by the end of the second quarter
of 1994.
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.
26A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Minimum future rental payments to be received in each of the next five years
under noncancelable operating leases are $14.1 million in 1994, $10.1 million
in 1995, $8.9 million in 1996, $7.5 million in 1997, $5.9 million in 1998 and
$19.2 million in later years.
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:
1993 1992 1991
------ ------ ------
Balance at beginning of period $79,177 $67,515 $62,259
------ ------ ------
Additions charged to operations 70,245 58,181 48,943
------ ------ ------
Amounts written-off:
Internal small-ticket programs 24,255 28,712 27,693
External large-ticket programs 724 1,594 1,611
External small-ticket programs 26,132 16,213 14,383
------ ------ ------
Total write-offs 51,111 46,519 43,687
------ ------ ------
Balance at end of period $98,311 $79,177 $67,515
====== ====== ======
The increase in the amount of additions charged to operations in 1993 versus
1992 is due to 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, partly offset by provisions recorded
in 1992 in conjunction with the sale of Internal small-ticket finance assets.
The increase in the amounts written-off in 1993 compared to 1992 reflect
$11.2 million of write-offs related to assets purchased from Adrema.
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 improving economy.
27A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
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 rating
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.
For transactions in the Internal Financing Division, 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, such as in the event of bankruptcy, that the obligor will not
be making payments in accordance with lease terms. In small-ticket
external financing, income recognition is discontinued when accounts are
past due over 90 days.
Finance receivables are charged to the allowance for credit losses (i.e.
written-off) 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 performed 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 has occurred after the Company has had sufficient experience
on resumption of payments to be satisfied that such payments will
continue in accordance with the original or restructured contract terms.
28A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
The carrying values of non-performing, restructured and troubled finance
assets are outlined below. There are no leveraged leases falling under
these categories.
<CAPTION>
December 31 1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Non-performing (non-accrual) transactions
- -----------------------------------------
Internal small-ticket programs $ 6,107 $ 6,567 $ 7,809
External large-ticket programs 1,934 11,102 27,007
External small-ticket programs 24,371 9,274 7,473
------ ------ ------
Total $32,412 $26,943 $42,289
====== ====== ======
Restructured transactions
- -------------------------
Internal small-ticket programs $ - $ - $ -
External large-ticket programs 5,869 9,942 10,948
External small-ticket programs - - -
------ ------ ------
Total $ 5,869 $ 9,942 $10,948
====== ====== ======
Troubled (potential problem) transactions
- -----------------------------------------
Internal small-ticket programs $ - $ - $ -
External large-ticket programs 8,129 6,110 7,997
External small-ticket programs 8,819 - -
------ ------ ------
Total $16,948 $ 6,110 $ 7,997
====== ====== ======
</TABLE>
The increase in non-performing and troubled transactions in 1993 relates to
assets purchased from Adrema in December 1992, which is further discussed in
Note 5.
For non-performing (non-accrual) transactions, the amount of finance income
that would have been recorded in 1993 if the transactions had been current in
accordance with their original contract terms was $2.8 million.
29A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
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 area 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 certain non-performing large-ticket external transactions, the Company
has adjusted the face value of these receivables through the following
adjustments:
December 31 1993 1992 1991
------ ------ ------
Face value of receivables $ 2,862 $13,353 $31,715
Interest payments applied
to principal (501) (1,824) (1,969)
Charge-off to allowance for
credit losses (427) (427) (2,739)
------ ------ ------
Carrying value $ 1,934 $11,102 $27,007
====== ====== ======
Note 8. - Other Assets
December 31 1993 1992
------- -------
Purchased mortgage servicing rights, net $ 41,313 $ 31,417
Loans and advances to affiliated companies 34,776 10,611
Mortgage receivables 19,566 853
Deferred partnership fees 13,388 -
Net equipment and leasehold improvements
(accumulated depreciation was $11,012
in 1993 and $8,743 in 1992) 7,751 8,657
Investment securities 4,550 13,381
Deferred debt placement fees 3,803 4,920
Interest discount on commercial paper 3,319 2,976
Prepaid expenses and other assets 35,392 27,867
Goodwill, net of amortization: 1993, $387;
1992, $194 4,069 4,456
------- -------
Total other assets $167,927 $105,138
======= =======
Purchased mortgage servicing rights are recorded at cost and are being
amortized in proportion to, and over the period of, estimated net servicing
income.
Mortgage receivables represent loans in the process of payoff and are
recorded at cost.
30A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
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.
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 1993 1992
------- -------
Accounts payable $ 41,958 $ 21,148
Accrued interest payable 23,472 26,091
Sales and use, property and sundry taxes 8,696 8,117
Advances and deposits from customers 31,147 21,106
Accrued salary and benefits payable 6,232 5,873
Minority interest in partnership 20,758 -
Other liabilities 50,990 35,652
------- -------
Total accounts payable and accrued liabilities $183,253 $117,987
======= =======
Note 10. - Notes Payable
Short-term notes payable at December 31, 1993 and 1992 totaled $1.7
billion and $1.5 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 1993, the Company had unused lines of credit and revolving
credit facilities totaling $1.525 billion largely supporting commercial
paper borrowings. The Company paid fees of $2.5 million, $1.8 million
and $1.2 million in 1993, 1992 and 1991 to maintain its lines of credit.
31A
<PAGE>
<TABLE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
The composition of the Company's notes payable is as follows:
<CAPTION>
December 31 1993 1992
--------- ---------
<S> <C> <C>
Senior Notes Payable
Commercial paper at a weighted average interest
rate of 3.27% (3.46% in 1992) $1,574,999 $1,389,876
Notes payable against bank lines of credit and
others at a weighted average interest rate
of 2.13% (3.31% in 1992) 159,687 82,500
Current installment of long-term debt due within
one year at interest rates of 2.00% to 10.50% 921 3,254
--------- ---------
Total senior notes payable within one year 1,735,607 1,475,630
Senior notes payable after one year at interest
rates of 2.00% to 10.65% through 2009 775,295 857,278
--------- ---------
Total senior notes payable $2,510,902 $2,332,908
========= =========
Subordinated Notes Payable
Non-interest bearing notes due
Pitney Bowes $ 108,094 $ 85,284
12.75% note due through 1994 740 1,450
--------- ---------
Total subordinated notes payable $ 108,834 $ 86,734
========= =========
</TABLE>
Senior and subordinated notes payable at December 31, 1993 mature as follows:
$1,736.3 million in 1994, $29.8 million in 1995, $145.5 million in 1997 and
$708.1 million thereafter.
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.
In March 1993, the Company redeemed $75 million of 8.75 percent notes due in
1996. The Company has also exercised the option to redeem $100 million of
10.65 percent notes due in 1999, on April 1, 1994. 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 has
exercised that option.
32A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
In October 1992, the Company filed a $500 million shelf registration
statement with the Securities and Exchange Commission. This registration
statement, together with the carryover of $100 million from a previous shelf
registration, should meet the Company's long-term financing needs for the
next two years.
The Company has entered into interest rate swap agreements as a means of
managing interest rate exposure. The interest differential to be paid or
received is recognized over the life of the agreements as an adjustment to
interest expense. At December 31, 1993, outstanding notional principal
amounts were $621 million for interest rate swap agreements. The Company is
exposed to credit loss in the event of nonperformance by the other parties to
the interest rate swap agreements to the extent of the differential between
the fixed- and variable-rates; such exposure is considered minimal.
In 1993 and 1992, the Company issued $22.8 million and $12.0 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 1992 and 1991 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. - Stockholder's Equity
<TABLE>
The following is a reconciliation of stockholder's equity:
<CAPTION>
Total
Common Capital Retained Stockholder's
Stock Surplus Earnings Equity
------ ------- -------- -------------
<S> <C> <C> <C> <C>
Balance January 1, 1991 $46,000 $31,705 $341,802 $419,507
Net income - 1991 93,157 93,157
Dividends paid to PBI (27,000) (27,000)
Capital contribution from PBI 4,250 4,250
------ ------ ------- -------
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
====== ====== ======= =======
</TABLE>
At December 31, 1993, 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, 1993 and 1992. All
of the Company's stock is owned by Pitney Bowes.
33A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Contributions to capital surplus from PBI for 1991 to 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.
Note 12. - 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.
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 swap and swap option agreements and foreign currency exchange
contracts. The fair values of interest rate swaps, swap options and foreign
currency exchange 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 credit
worthiness 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, a $100 million revolving line of credit, and in connection with
receivable transfers with recourse. Aggregate exposure under the guarantees
at December 31, 1993 and 1992 was $153 million and $349 million,
respectively. The fair value of the European commercial paper program and
the revolving letter of credit is based on the cost to the Company for
obtaining a letter of credit to support performance under the guarantees.
The fair value of the guarantees under the receivable transfers with recourse
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 below.
34A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
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.
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 present credit worthiness of
the counterparties.
The estimated fair values of the Company's financial instruments are as
follows:
December 31 1993 1992
--------------------- ---------------------
Carrying Fair Carrying Fair
Value(1) Value Value(1) Value
-------- -------- -------- --------
Investment securities $ 4,550 $ 4,668 $ 13,381 $ 13,445
Loans receivable (2) 206,630 213,509 180,850 185,953
Senior notes payable with
original maturities
greater than one year (795,727) (880,397) (882,927) (925,781)
Interest rate swap options - - (10,950) (10,950)
Interest rate swaps (13,781) (64,846) (3,399) (32,594)
Foreign currency exchange
contracts - 2,247 - 2,932
Transfers of receivables
with recourse (6,060) (6,060) (8,742) (8,742)
Financial guarantee
contracts (23,342) (25,011) - (3,057)
Residual and conditional
commitment guarantee
contracts (2,679) (2,687) (2,431) (3,692)
Commitments to extend credit - (2,003) (61) (2,166)
(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.
35A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Note 13. - 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.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted
increasing 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
or accumulated deferred income taxes to be reflected in the period that
includes the enactment date of the new legislation. Accordingly, in the
third quarter of 1993, the Company recorded additional tax expense reflecting
the retroactive tax law changes, $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 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 has been recognized as a reduction in 1993 income
tax expense.
<TABLE>
Income before income taxes and the provision for income taxes were as
follows:
<CAPTION>
Years ended December 31 1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Income before income taxes $189,960 $185,704 $148,746
======= ======= =======
Provisions for income taxes:
Federal:
Current $ 5,424 $ 12,809 $ 28,956
Deferred 47,141 38,415 15,282
------- ------- -------
Total Federal 52,565 51,224 44,238
------- ------- -------
State and Local:
Current 3,605 1,522 192
Deferred 10,305 12,196 11,159
------- ------- -------
Total state and local 13,910 13,718 11,351
------- ------- -------
Total $ 66,475 $ 64,942 $ 55,589
======= ======= =======
</TABLE>
36A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
Deferred tax liabilities and (assets):
<CAPTION>
December 31 1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Deferred tax liabilities:
Lease revenue and related
depreciation $359,013 $338,972 $303,150
------- ------- -------
Gross deferred tax
liabilities 359,013 338,972 303,150
------- ------- -------
Deferred tax assets:
Alternative minimum tax (AMT)
credit carryforwards (64,519) (84,884) (84,884)
------- ------- -------
Gross deferred tax assets (64,519) (84,884) (84,884)
------- ------- -------
Total $294,494 $254,088 $218,266
======= ======= =======
</TABLE>
<TABLE>
A reconciliation of the U.S. federal statutory rate to the Company's effective
income tax rate follows:
<CAPTION>
Percent of Pretax Income 1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
U.S. federal statutory rate 35.0% 34.0% 34.0%
State and local income taxes 4.8 4.9 5.1
Investment tax credits .1 .1 .3
Rate adjustment for deferred
taxes 4.9 - -
Partnership tax benefits (6.1) - -
Tax-exempt foreign trade income (3.9) (3.3) (1.0)
Tax-exempt finance income (.3) (.5) (.6)
Other .5 (.2) (.4)
---- ---- ----
Effective income tax rate 35.0% 35.0% 37.4%
==== ==== ====
</TABLE>
Note 14. - Retirement Plan and Nonpension Postretirement Benefit Plan
The Company participates in the Pitney Bowes retirement plan which covers
substantially all PBCC employees. Colonial Pacific employees are covered
under a separate plan. The assets of these plans fully fund vested benefits.
Pitney Bowes' plan assumptions were 7.50 percent in 1993 and 8.50 percent in
1992 for the discount rate, 5.00 percent in 1993 and 6.00 percent in 1992 for
the expected rate of increase in future compensation levels and 9.50 percent
in 1993 and 1992 for the expected long-term rate of return on plan assets.
The Company's pension expense was $1.4 million in 1993, $1.0 million in 1992
and $.9 million in 1991.
37A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
The Company also 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.
In November 1992, Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (FAS 112), was issued
addressing benefits provided by an employer to former or inactive employees
after employment but before retirement. FAS 112 requires that postemployment
benefit costs be recognized on the accrual basis of accounting effective for
fiscal years beginning after December 15, 1993. Postemployment benefits
include the continuation of salary, health care, life insurance and
disability-related benefits to former or inactive employees, their
beneficiaries and covered dependents. The Company will adopt FAS 112 during
the first quarter of 1994, as required. Upon adoption, Pitney Bowes
anticipates recognizing a one-time, non-cash after-tax charge of approximately
$60 to $120 million for the cumulative effect on prior years of such adoption,
some of which may be allocated back to the Company.
Note 15. - Legal Proceedings
The Company is not currently involved in any material litigation.
Note 16. - 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: $4.8 million in 1994, $4.5 million in 1995, $4.0 million in 1996,
$3.3 million in 1997, $3.0 million in 1998, and $8.7 million thereafter.
Rental expense under operating leases was $4.7 million, $4.5 million and $4.2
million in 1993, 1992 and 1991, respectively.
The Company has $10.8 million in unfunded loan commitments. 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 $22.8 million.
38A
<PAGE>
Pitney Bowes Credit Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands)
Note 17. - Quarterly Financial Information
<TABLE>
Summarized quarterly financial information for 1993 and 1992 follows:
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------- ------------------- ------------------- ------------------
1993 1992 1993 1992 1993 1992 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total finance income $125,469 $116,100 $138,000 $120,518 $125,626 $124,760 $124,359 $133,116
-------- -------- -------- -------- -------- -------- -------- --------
Expenses:
Interest 36,510 36,768 33,930 36,914 33,383 37,407 33,549 35,505
Selling, general and
administrative 25,224 21,081 25,749 21,060 24,799 23,717 23,560 24,221
Depreciation and
amortization 3,576 3,682 3,929 3,517 3,752 3,386 5,288 3,351
Provision for credit
losses 13,964 12,100 27,854 13,315 14,157 13,503 14,270 19,263
Provision for income
taxes 15,638 15,159 15,822 15,810 27,942 16,248 7,073 17,725
-------- -------- -------- -------- -------- -------- -------- --------
Total expenses 94,912 88,790 107,284 90,616 104,033 94,261 83,740 100,065
-------- -------- -------- -------- -------- -------- -------- --------
Income before effect of
a change in accounting
for nonpension
postretirement
benefits 30,557 27,310 30,716 29,902 21,593 30,499 40,619 33,051
Effect of a change in
accounting for nonpension
postretirement
benefits - (1,866) - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 30,557 $ 25,444 $ 30,716 $ 29,902 $ 21,593 $ 30,499 $ 40,619 $ 33,051
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
39A
Exhibit (iii)
-------------
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (No.
33-27244 and No. 33-53736) of Pitney Bowes Credit Corporation of our
report dated February 1, 1994 appearing on page 18A of this Form 10-K.
PRICE WATERHOUSE
Stamford, Connecticut
July 21, 1994
