- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
------------------
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, 1998
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 31, 1998, 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.
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<PAGE>
Page 2 of 15
PITNEY BOWES CREDIT CORPORATION
<TABLE>
Part I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTs
<S> <C>
Consolidated Statements of Income:
Three and Nine Months Ended September 30, 1998 and 1997............................. 3
Consolidated Balance Sheets:
As of September 30, 1998 and December 31, 1997...................................... 4
Consolidated Statements of Cash Flow:
Nine Months Ended September 30, 1998 and 1997....................................... 5
Notes to Consolidated Financial Statements............................................ 6
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIS Of
THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION............................................................................. 10
Part II -- OTHER INFORMATION
ITEM 1.-- LEGAL PROCEEDINGS............................................................... 12
ITEM 6.-- EXHIBITS AND REPORTS ON FORM 8-K................................................ 12
Signature................................................................................. 13
Exhibit (i) -- Computation of Ratio of Earnings
from Continuing Operations to Fixed Charges........................................... 14
Exhibit (ii)-- Financial Data Schedule................................................... 15
</TABLE>
<PAGE>
Page 3 of 15
Part I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTs
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands of dollars)
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenue:
<S> <C> <C> <C> <C>
Finance income........................................ $ 127,644 $ 131,821 $ 373,901 $ 394,567
Mortgage servicing revenue............................ 41,698 19,520 94,316 50,982
------- ------- ------- -------
Total revenue....................................... 169,342 151,341 468,217 445,549
------- ------- ------- -------
Selling, general and administrative................... 32,215 34,121 95,571 89,653
Interest.............................................. 28,542 39,081 88,245 118,210
Depreciation and amortization......................... 27,059 11,510 53,465 31,753
Provision for credit losses........................... 8,307 7,067 26,089 25,975
------- ------- ------- -------
Total expenses...................................... 96,123 91,779 263,370 265,591
------- ------- ------- -------
Income from continuing operations before income taxes... 73,219 59,562 204,847 179,958
Provision for income taxes.............................. 22,027 15,696 60,100 52,317
------- ------- ------- -------
Income from continuing operations....................... 51,192 43,866 144,747 127,641
Discontinued operations................................. 2,367 3,623 7,753 9,872
------- ------- ------- -------
Net income.............................................. $ 53,559 $ 47,489 $ 152,500 $ 137,513
======= ====== ======= =======
Ratio of earnings from continuing operations to fixed charges 3.54X 2.51X 3.30X 2.51X
======= ====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Page 4 of 15
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands of dollars)
<TABLE>
September 30, December 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Cash................................................................. $ 56,098 $ 36,320
Investments:
Finance assets..................................................... 2,594,005 3,475,538
Investment in leveraged leases..................................... 755,161 667,779
Investment in operating leases, net of accumulated depreciation.... 31,582 32,112
Allowance for credit losses........................................ (75,301) (116,588)
--------- ---------
Net investments.................................................. 3,305,447 4,058,841
--------- ---------
Mortgage servicing rights, net of accumulated amortization........... 366,657 220,912
Assets held for sale................................................. 397,976 305,228
Investment in partnership............................................ 204,935 158,327
Loans and advances to affiliates..................................... 319,310 290,488
Net assets of discontinued operation................................. 776,941 -
Other assets......................................................... 252,275 258,224
--------- ---------
Total assets................................................... $ 5,679,639 $ 5,328,340
========= =========
LIABILITIES
Senior notes payable within one year................................. $ 1,837,384 $ 1,970,110
Short-term notes payable to affiliates............................... 96,500 -
Accounts payable to affiliates....................................... 191,145 232,917
Accounts payable and accrued liabilities............................. 198,351 199,905
Deferred taxes....................................................... 505,512 510,060
Senior notes payable after one year.................................. 1,382,000 1,050,000
Subordinated notes payable........................................... 285,886 270,487
--------- ---------
Total liabilities.............................................. 4,496,778 4,233,479
--------- ---------
STOCKHOLDER'S EQUITY
Common stock......................................................... 46,000 46,000
Capital surplus...................................................... 41,725 41,725
Retained earnings.................................................... 1,095,136 1,007,136
--------- ---------
Total stockholder's equity...................................... 1,182,861 1,094,861
--------- ---------
Total liabilities and stockholder's equity.................... $ 5,679,639 $ 5,328,340
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Page 5 of 15
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(in thousands of dollars)
<TABLE>
Nine Months Ended September 30,
----------------------------------
1998 1997
---- ----
Operating Activities
<S> <C> <C>
Income from continuing operations.......................................... $ 144,747 $ 127,641
Income from discontinued operations........................................ 7,753 9,872
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses............................................. 53,085 44,352
Depreciation and amortization........................................... 53,567 31,893
Changes in assets and liabilities:
Other current assets................................................. 702 (12,658)
Other non-current assets............................................. (15,602) (24,733)
Accounts payable to affiliates....................................... (41,772) (2,167)
Deferred taxes....................................................... 40,993 25,254
Accounts payable and accrued liabilities............................. 20,446 10,650
Other, net............................................................... 11,878 5,915
--------- ---------
Net cash provided by operating activities.................................. 275,797 216,019
--------- ---------
Investing Activities
Investment in net finance assets........................................... (1,087,555) (1,496,038)
Investment in operating leases............................................. (80,412) (11,807)
Investment in leveraged leases............................................. (21,560) (23,934)
Investment in assets held for sale......................................... (367,932) (509,060)
Investment in partnership.................................................. (23,435) -
Cash receipts collected under lease contracts, net of finance
income recognized........................................................ 1,303,928 1,947,084
Investment in mortgage service rights...................................... (189,252) (71,589)
Loans and advances to affiliates, net...................................... (28,822) (12,397)
Additions to equipment and leasehold improvements.......................... (7,652) (6,711)
--------- ---------
Net cash used in investing activities...................................... (502,692) (184,452)
--------- ---------
Financing Activities
(Decrease) increase in short-term debt..................................... (107,726) 388,021
Settlement of long-term debt............................................... (225,000) (245,500)
Proceeds from issuance of senior notes..................................... 532,000 -
Proceeds from issuance of subordinated debt................................ 15,399 41,333
Short-term notes payable to affiliates..................................... 96,500 (139,400)
Dividends paid to Pitney Bowes Inc......................................... (64,500) (58,500)
--------- ---------
Net cash provided by (used in) financing activities........................ 246,673 (14,046)
--------- ---------
Increase in cash........................................................... 19,778 17,521
Cash at beginning of period................................................ 36,320 20,937
--------- ---------
Cash at end of period...................................................... $ 56,098 $ 38,458
========= =========
Interest paid.............................................................. $ 125,003 $ 150,420
========= =========
Income taxes refunded, net................................................. $ (23,680) $ (18,155)
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Page 6 of 15
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 as of September 30, 1998 and December 31, 1997, the results of
operations for the three and nine months ended September 30, 1998 and 1997 and
cash flows for the nine months ended September 30, 1998 and 1997 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, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
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, 1997.
Note 2 -- Discontinued Operations
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 external financing
business to General Electric Capital Corporation ("GECC"). The Company received
approximately $790 million at closing, which approximates the book value of net
assets sold or otherwise disposed of together with related transaction costs.
The transaction is subject to post-closing adjustments pursuant to the terms of
the purchase agreement with GECC executed on October 12, 1998.
Operating results of CPLC have been segregated and reported as discontinued
operations for the three and nine months ended September 30, 1998 and 1997.
Prior year results have been reclassified to conform to the current year
presentation. Net assets of discontinued operation have been separately
classified in the accompanying balance sheet at September 30, 1998. Cash flow
impacts of discontinued operations have not been segregated in the accompanying
statements of cash flows for the nine months ended September 30, 1998 and 1997.
Finance income of CPLC was $32.0 million and $38.1 million for the three months
ended September 30, 1998 and 1997, respectively, and $117.0 million and $110.4
million for the nine months ended September 30, 1998 and 1997, respectively.
Interest expense allocated to discontinued operations was $9.6 million and $12.1
million for the three months ended September 30, 1998 and 1997, respectively,
and $30.6 million and $34.0 million for the nine months ended September 30, 1998
and 1997, respectively. Interest expense has been allocated based on the level
of CPLC's intercompany borrowing, charged at the Company's weighted average
borrowing rate.
Note 3 -- New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires that 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
and the resulting designation. PBCC will be required to implement this statement
beginning January 1, 2000. The Company is currently in the process of evaluating
the impact of implementing this statement.
Note 4 -- Finance Assets
<TABLE>
The composition of the Company's finance assets from continuing operations is as
follows:
September 30, December 31,
(in thousands of dollars) 1998 1997
--------- ---------
<S> <C> <C>
Gross finance receivables...................................... $ 2,913,373 $ 3,926,540
Unguaranteed residual valuation................................ 403,255 461,051
Initial direct costs deferred.................................. 43,213 85,497
Unearned income................................................ (765,836) (997,550)
--------- ---------
Total finance assets......................................... $ 2,594,005 $ 3,475,538
========= =========
</TABLE>
<PAGE>
Page 7 of 15
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5 -- Mortgage Servicing Rights
Mortgage servicing rights ("MSR") are recorded at the lower of amortized cost
or present value of the estimated net servicing income, which does not exceed
fair market value, and are amortized in proportion to and over the period of,
estimated net servicing income. Fair value is estimated using a discounted cash
flow model which incorporates market discount and prepayment rates as well as
other assumptions that market participants would use in their estimates of
future servicing income and expense. The Company's policy for evaluating MSR for
impairment is to stratify the mortgage servicing rights based on the predominant
risk characteristics of the underlying loans. Upon evaluation, adjustments to
current period operations and the valuation allowance are made if any individual
portfolio stratum is deemed impaired. Based on the evaluation performed at
September 30, 1998, an $8.9 million valuation allowance adjustment was
recognized in the Company's MSR portfolio.
Note 6 -- Notes Payable
The composition of the Company's notes payable is as follows:
<TABLE>
September 30, December 31,
(in thousands of dollars) 1998 1997
--------- ---------
Senior Notes Payable:
Commercial paper at the weighted average
<S> <C> <C>
interest rate of 5.51% (5.66% in 1997)........................ $ 1,055,200 $ 1,361,110
Notes payable against bank lines of credit and others at weighted
average interest rates of 1.16% (1.68% in 1997)............... 582,184 384,000
Current installment of long-term debt due within one year at
an interest rate of 6.54% (5.84% to 6.31% in 1997)........... 200,000 225,000
--------- ---------
Total senior notes payable due within one year................. 1,837,384 1,970,110
Senior notes payable due after one year at interest rates of
5.65% to 9.25% (6.06% to 9.25% in 1997)...................... 1,382,000 1,050,000
--------- ---------
Total senior notes payable..................................... 3,219,384 3,020,110
Short-term Notes Payable to Affiliates:
Notes payable to Pitney Bowes Inc. at an
interest rate of 5.67%......................................... 96,500 -
Subordinated Notes Payable:
Non-interest bearing notes due Pitney Bowes Inc................ 285,886 270,487
--------- ---------
Total notes payable............................................... $ 3,601,770 $ 3,290,597
========= =========
</TABLE>
On September 30, 1998, certain partnerships controlled by affiliates of the
Company issued a total of $282,000,000 of Series A and Series B Secured Floating
Rate Senior Notes (the "Notes"). The Notes are due in 2001 and bear interest at
a floating rate of LIBOR plus 0.65%, set as of the quarterly interest payment
dates. The proceeds from the Notes were used to purchase subordinated debt
obligations from Pitney Bowes Inc. ("PBI Obligations"). The PBI Obligations have
a principal amount of $282,000,000 and bear interest at a floating rate of LIBOR
plus 1.0%, set as of the quarterly interest payment dates.
In July 1998, the Company filed a shelf registration statement on Form S-3
with the Securities and Exchange Commission. The registration statement allows
PBCC to offer, in one or more series, its unsecured debt securities at an
aggregate initial offering price not to exceed $750,000,000. The debt securities
will be offered in amounts, at prices and at terms to be determined at the time
of sale and which will be set forth in supplements to the prospectus forming
part of the shelf registration statement.
<PAGE>
Page 8 of 15
PITNEY BOWES CREDIT CORPORATION
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIs
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
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 external financing
business to General Electric Capital Corporation ("GECC"). As a result, CPLC is
being accounted for as discontinued operations in the accompanying financial
statements. Accordingly, the discussion that follows concerns only the results
of continuing operations The Company received approximately $790 million at
closing, which approximates the book value of net assets sold or otherwise
disposed of together with related transaction costs. The transaction is subject
to post-closing adjustments pursuant to the terms of the purchase agreement with
GECC executed on October 12, 1998.
Third Quarter of 1998 Compared to Third Quarter of 1997
Finance income from continuing operations in the third quarter of 1998
decreased 3.2 percent to $127.6 million compared to $131.8 million in 1997.
Finance income for internal financing programs increased 10.8 percent to $90.2
million from $81.3 million primarily due to higher income from fee- and
service-based programs and a higher earning asset base. Finance income for
commercial and industrial financing programs decreased to $37.5 million from
$50.5 million primarily due to lower external investment levels in accordance
with the Company's strategy to shift the foundation of the commercial and
industrial financing business from asset-based to fee- and service- based
revenues. Included in this amount is a gain of $0.7 million on an asset sale
made in the third quarter of 1998 as well as finance income from the Dictaphone
and Monarch portfolios of $2.2 million and $2.4 million in the third quarters of
1998 and 1997, respectively. Revenue generated from mortgage servicing increased
to $41.7 million in the third quarter of 1998 compared with $19.5 million in the
third quarter of 1997, due to a larger mortgage servicing portfolio, the sale of
selected investments and mortgage refinancing fees, in keeping with the
Company's fee-based income growth strategy.
Selling, general and administrative ("SG&A") expenses decreased to $32.2
million in the third quarter of 1998 compared to $34.1 million in 1997. SG&A for
internal financing programs increased to $17.0 million from $16.0 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 commercial and industrial financing programs decreased to $6.9 million
in 1998 from $12.3 million in 1997. Included in the prior year amount is a
charge of approximately $5.0 million for costs related to the transfer of
certain commercial and industrial finance assets made in 1997. SG&A expenses
related to mortgage servicing increased to $8.3 million in 1998 from $5.9
million in 1997 primarily due to the administration of a larger mortgage
servicing portfolio.
Depreciation on operating leases was $1.5 million in the third quarter of
1998 compared to $2.7 million in 1997 reflecting a lower operating lease
investment balance at September 30, 1998 compared to September 30, 1997.
Amortization of mortgage servicing rights was $23.4 million in the third quarter
of 1998 compared to $8.2 million in 1997. The increase is due to a larger
mortgage servicing portfolio and the valuation allowance adjustment recorded in
the third quarter of 1998. Costs associated with the Company's participation in
partnership transactions were $1.6 million for the third quarter of 1998
compared to $0.6 million for the third quarter of 1997. This increase is
primarily due to a partnership created in connection with the asset transfer
made during the fourth quarter of 1997.
The provision for credit losses was $8.3 million for the third quarter of
1998 compared with $7.1 million in 1997. The provision for internal financing
programs increased to $7.6 million for the third quarter of 1998 from $6.7
million primarily due to increased provisions for new business initiatives. The
provision for commercial and industrial financing programs was $0.7 million for
the third quarter of 1998 compared to $0.4 million in 1997, mainly attributable
to the Dictaphone and Monarch portfolios.
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 2.55 percent
at December 31, 1997 to 2.4 percent at September 30, 1998. PBCC charged $54.9
million and $38.7 million against the allowance for credit losses in the first
nine months of 1998 and 1997, respectively.
<PAGE>
Page 9 of 15
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Third Quarter of 1998 Compared to Third Quarter of 1997 (continued)
Interest expense was $28.5 million in the third quarter of 1998 compared with
$39.1 million in 1997. The decrease reflects lower average borrowings in 1998
combined with lower interest rates. The lower borrowing levels were due to
decreased commercial and industrial asset levels offset by higher internal
financing asset levels as well as an increased mortgage servicing portfolio. The
effective interest rate on average borrowings was 5.57 percent for the third
quarter of 1998 compared to 6.05 percent for the same period in 1997. The
Company does not match fund its financing investments and does not apply
different interest rates to its various financing portfolios.
The effective tax rate for the third quarter of 1998 was 30.1 percent
compared with 26.4 percent for the same period of 1997. The increase is
primarily due to lower state tax provisions related to certain commercial and
industrial transactions during the third quarter of 1997.
The Company's ratio of earnings from continuing operations to fixed charges
was 3.54 times for the third quarter of 1998 compared with 2.51 times for the
same period of 1997. The increase reflects the disposition of commercial and
industrial assets, proceeds from which were used for debt reduction.
Nine Months of 1998 Compared to Nine Months of 1997
For the nine months of 1998 compared to the same period of 1997, total
revenue from continuing operations increased 5.1 percent to $468.2 million, SG&A
expenses increased 6.6 percent to $95.6 million, depreciation and amortization
increased 68.4 percent to $53.5 million, the provision for credit losses
increased 0.4 percent to $26.1 million, interest expense decreased 25.3 percent
to $88.2 million and the provision for income taxes increased 14.9 percent to
$60.1 million, generating a net income from continuing operations increase of
13.4 percent to $144.7 million. Income from discontinued operations decreased
21.5 percent to $7.8 million. Total net income increased 10.9 percent to $152.5
million.
The fluctuations above include certain non-recurring transactions which
affect the comparability of results between periods. These include the effect of
asset sales made during the second and third quarters of 1998 and the MSR
valuation allowance adjustment recognized during the third quarter of 1998.
Results for 1997 include a charge of approximately $5.0 million for costs and
asset valuation related to an asset transfer completed during 1997.
Except for these non-recurring transactions, the factors that affected the
change in each of the above income or expense items were essentially the same as
those affecting the third quarter of 1998 versus 1997.
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 62 percent short-term and 38
percent long-term at September 30, 1998 and 60 percent short-term and 40 percent
long-term at December 31, 1997. PBCC's swap-adjusted variable-rate versus
fixed-rate debt mix was 47 percent variable-rate and 53 percent fixed-rate at
both September 30, 1998 and December 31, 1997. 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.
On September 30, 1998, certain partnerships controlled or owned by affiliates
of the Company issued a total of $282,000,000 of Series A and Series B Secured
Floating Rate Senior Notes (the "Notes"). The Notes are due in 2001 and bear
interest at a floating rate of LIBOR plus 0.65%, set as of the quarterly
interest payment dates. The proceeds from the Notes were used to purchase
subordinated debt obligations from Pitney Bowes Inc. ("PBI Obligations"). The
PBI Obligations have a principal amount of $282,000,000 and bear interest at a
floating rate of LIBOR plus 1.0%, set as of the quarterly interest payment
dates. (See Note 6 to CONSOLIDATED FINANCIAL STATEMENTS).
In July 1998, the Company filed a shelf registration statement on Form S-3
with the Securities and Exchange Commission. The registration statement allows
PBCC to offer, in one or more series, its unsecured debt securities at an
aggregate initial offering price not to exceed $750,000,000. (See Note 6 to
CONSOLIDATED FINANCIAL STATEMENTS).
<PAGE>
Page 10 of 15
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 has entered into a foreign currency contract for the purpose of
minimizing its risk of loss from fluctuations in exchange rates in connection
with certain intercompany transactions. 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.
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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires that 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
and the resulting designation. PBCC will be required to implement this statement
beginning January 1, 2000. The Company is currently in the process of evaluating
the potential impact of implementing this statement.
Gross finance assets at the end of the third quarter of 1998 decreased 2.4
percent from December 31, 1997. The decrease is principally due to the shift in
emphasis from asset-based investments in the commercial and industrial segment
to fee-based transactions. Overall levels of lease receivables are in line with
management's expectations. The Company continues to actively pursue a strategy
of commercial and industrial 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 1.00 times at September 30, 1998
and .89 times at December 31, 1997.
The Company will continue to use cash to invest in finance assets with
emphasis on internal leasing transactions and controlled investment in
commercial and industrial 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 commercial and industrial 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 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.
In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Based Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" ("FAS 134"). FAS 134 requires
that an entity classify mortgage-based securities or other interests retained
after the securitization of mortgage loans held-for-sale, as a current or
non-current investment based on the entity's ability and intent to hold those
investments. The classification of the investment determines whether changes in
its market value will be included in current earnings. PBCC will be required to
implement this statement beginning January 1, 1999. The Company is currently in
the process of evaluating the potential impact of implementing this statement.
<PAGE>
Page 11 of 15
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Year 2000
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 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 of senior business
and technology management, a Year 2000 program office of full-time project
management, and subject matter experts and dedicated business unit project
teams. The Company has also engaged independent consultants to perform periodic
program reviews and assist in systems assessment and test plan development.
The program encompasses the following phases: an inventory of affected
technology and critical third party suppliers, an assessment of Year 2000
readiness, resolution, unit and integrated testing and contingency planning. The
Company completed its worldwide inventory and assessment of all business systems
and supporting infrastructure. Required modifications are in progress and will
be substantially complete by year-end 1998. Tests are performed as software is
remediated, upgraded, or replaced. Integrated testing is expected to be complete
by mid-1999.
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, telecommunications) on which all
corporations rely. However, the Company is unable to predict with certainty
whether such third parties will be able to address their Year 2000 problems on a
timely basis.
PBCC estimates the total cost of the worldwide program from inception in 1997
through the Year 2000 to be approximately $3 million, of which approximately $2
million is expected to be incurred through December 31, 1998. These costs, which
are funded through the Company's cash flows, include both internal labor costs
as well as consulting and other external costs. These costs are incorporated in
the Company's budgets and current forecasts and are being expensed as incurred.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from
uncertainty about the Year 2000 readiness of third parties, 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, the Company continues to evaluate its Year 2000 risks and is
developing contingency plans to mitigate the impact of any potential Year 2000
disruptions. PBCC expects to complete contingency plans by the second quarter of
1999.
- - --------------------------------------------------------------------------------
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; 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.
<PAGE>
Page 12 of 15
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.
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)
<TABLE>
<S> <C> <C> <C>
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 14
(27) Financial Data Schedule See Exhibit (ii)
on page 15
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. During October and November, 1998, reports were filed under Items 5 and 2,
respectively, of Form 8-K, relating to the sale of the operations of Colonial
Pacific Leasing Corporation.
</TABLE>
<PAGE>
Page 13 of 15
SIGNATURE
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 and Accounting Officer)
Dated: November 16, 1998
<PAGE>
Page 14 of 15
Exhibit (i)
Computation of Ratio of Earnings from Continuing Operations to Fixed Charges
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------ ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
Income from continuing operations
<S> <C> <C> <C> <C>
before income taxes................... $ 73,219 $ 59,562 $ 204,847 $ 179,958
------- ------- -------- --------
Fixed charges:
Interest on debt...................... 28,542 39,081 88,245 118,210
One third rent expense................ 247 446 701 1,102
------- ------- -------- --------
Total fixed charges..................... 28,789 39,527 88,946 119,312
------- ------- -------- --------
Earnings from continuing operations
before fixed charges.................. $ 102,008 $ 99,089 $ 293,793 $ 299,270
======= ======= ======== ========
Ratio of earnings from continuing
operations to fixed charges (1)....... 3.54X 2.51X 3.30X 2.51X
======= ======= ======== =======
</TABLE>
(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.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Page 15 of 15
Exhibit (ii)
Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 9/30/98
INCOME STATEMENT AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 56,098
<SECURITIES> 0
<RECEIVABLES> 3,380,748
<ALLOWANCES> (75,301)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,679,639
<CURRENT-LIABILITIES> 2,323,380
<BONDS> 0
<COMMON> 46,000
0
0
<OTHER-SE> 1,136,861
<TOTAL-LIABILITY-AND-EQUITY> 5,679,639
<SALES> 0
<TOTAL-REVENUES> 468,217
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 149,036
<LOSS-PROVISION> 26,089
<INTEREST-EXPENSE> 88,245
<INCOME-PRETAX> 204,847
<INCOME-TAX> 60,100
<INCOME-CONTINUING> 144,747
<DISCONTINUED> 7,753
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,500
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
