SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-13497
PITNEY BOWES CREDIT CORPORATION
Incorporated pursuant to the Laws of the State of Delaware
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Internal Revenue Service -- Employer Identification No. 06-0946476
27 Waterview Drive, Shelton, CT 06484-4361
(203) 922-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
As of July 31, 1999, 460 shares of common stock, no par value, with a stated
value of $100,000 per share, were outstanding, all of which were owned by Pitney
Bowes Inc., the parent of the Registrant.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE> 2
PITNEY BOWES CREDIT CORPORATION
<TABLE>
<S> <C>
Part I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTs
Consolidated Statements of Income:
Three and Six Months Ended June 30, 1999 and 1998................................... 3
Consolidated Balance Sheets:
At June 30, 1999 and December 31, 1998.............................................. 4
Consolidated Statements of Cash Flow:
Six Months Ended June 30, 1999 and 1998............................................. 5
Notes to Consolidated Financial Statements............................................ 6
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIS Of
THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION............................................................................. 9
Part II -- OTHER INFORMATION
ITEM 1.-- LEGAL PROCEEDINGS............................................................... 14
ITEM 6.-- EXHIBITS AND REPORTS ON FORM 8-K................................................ 14
SignatureS................................................................................ 15
Exhibit (i) -- Computation of Ratio of Earnings from Continuing
Operations to Fixed Charges........................................................... 16
Exhibit (ii)-- Financial Data Schedule.................................................... 17
</TABLE>
<PAGE> 3
Part I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTs
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands of dollars)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Finance income............................................... $ 141,955 $ 126,728 $ 277,079 $ 246,257
------- ------- ------- -------
Expenses:
Selling, general and administrative.......................... 33,511 23,824 59,382 46,655
Interest..................................................... 32,781 31,968 64,561 62,279
Provision for credit losses.................................. 7,714 8,933 20,013 17,782
Depreciation and amortization................................ 7,165 3,041 14,882 6,166
------- ------- ------- -------
Total expenses............................................. 81,171 67,766 158,838 132,882
------- ------- ------- -------
Income from continuing operations before income taxes.......... 60,784 58,962 118,241 113,375
Provision for income taxes..................................... 17,982 16,118 34,692 31,034
------- ------- ------- -------
Income from continuing operations.............................. 42,802 42,844 83,549 82,341
Discontinued operations:
(Loss) income from discontinued operations (net of taxes
of $(1,963) and $5,785 for the three months ended
June 30, 1999 and 1998; and $177 and $10,376 for the
six months ended June 30, 1999 and 1998).................. (2,729) 9,248 971 16,600
Loss on disposal of discontinued operations (net of taxes
of $(17,062) for the three and six months ended
June 30, 1999............................................. (24,938) - (24,938) -
------- ------- ------- -------
Net income..................................................... $ 15,135 $ 52,092 $ 59,582 $ 98,941
======= ======= ======= =======
Ratio of earnings from continuing
operations to fixed charges.................................. 2.85X 2.84X 2.82X 2.81X
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<S> <C> <C>
June 30, December 31,
1999 1998
(unaudited)
----------- ------------
ASSETS
Cash................................................................. $ 32,505 $ 19,154
Investments:
Finance assets..................................................... 2,815,563 2,721,805
Investment in leveraged leases..................................... 849,476 764,145
Investment in operating leases, net of accumulated depreciation.... 31,515 33,261
Allowance for credit losses........................................ (111,524) (115,233)
--------- ---------
Net investments.................................................. 3,585,030 3,403,978
--------- ---------
Mortgage servicing rights, net of accumulated amortization........... - 364,071
Assets held for sale................................................. 294,846 337,757
Investment in partnership............................................ 168,730 165,950
Loans and advances to affiliates..................................... 360,431 611,625
Net assets of discontinued operations................................ 470,658 -
Other assets......................................................... 133,740 391,135
--------- ---------
Total assets.................................................. $ 5,045,940 $ 5,293,670
========= =========
LIABILITIES
Senior notes payable due within one year............................. $ 974,972 $ 991,853
Short-term notes payable to affiliates............................... 41,198 137,000
Accounts payable to affiliates....................................... 196,386 278,452
Accounts payable and accrued liabilities............................. 159,045 182,236
Deferred taxes....................................................... 490,034 486,906
Senior notes payable due after one year.............................. 1,332,000 1,382,000
Long-term notes payable to affiliates................................ 333,000 333,000
Subordinated notes payable........................................... 285,886 285,886
--------- ---------
Total liabilities............................................... 3,812,521 4,077,333
--------- ---------
STOCKHOLDER'S EQUITY
Common stock......................................................... 46,000 46,000
Capital surplus...................................................... 41,725 41,725
Retained earnings.................................................... 1,145,694 1,128,612
--------- ---------
Total stockholder's equity...................................... 1,233,419 1,216,337
--------- ---------
Total liabilities and stockholder's equity.................... $ 5,045,940 $ 5,293,670
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(in thousands of dollars)
<TABLE>
<S> <C> <C>
Six Months Ended June 30,
--------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income................................................................. $ 59,582 $ 98,941
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for credit losses.............................................. 20,013 38,830
Depreciation and amortization............................................ 56,965 26,493
Cash effects of changes in:
Deferred taxes........................................................ 48,669 (653)
Other receivables..................................................... 12,352 15,493
Foreclosure claims receivable......................................... 6,845 4,657
Advances and deposits................................................. 8,375 6,401
Loans held for sale................................................... 68,453 (74,769)
Accounts payable to affiliates........................................ (82,066) (54,994)
Accounts payable and accrued liabilities.............................. 29,591 (3,119)
Other, net............................................................... (26,888) 10,054
--------- ---------
Net cash provided by operating activities.................................. 201,891 67,334
--------- ---------
INVESTING ACTIVITIES
Investment in net finance assets......................................... (430,288) (623,751)
Investment in leveraged leases........................................... (63,353) (50,217)
Investment in operating leases........................................... (510) (20,050)
Investment in assets held for sale....................................... (242,456) (170,245)
Cash receipts collected under lease contracts, net of finance
income recognized..................................................... 529,687 871,851
Investment in mortgage service rights.................................... (9,719) (170,882)
Loans and advances to affiliates, net.................................... 239,497 257,916
Additions to equipment and leasehold improvements........................ (5,213) (5,227)
--------- ---------
Net cash provided by investing activities.................................. 17,645 89,395
--------- ---------
FINANCING ACTIVITIES
Change in short-term debt, net........................................... (63,685) (226,764)
Proceeds from senior notes............................................... - 125,000
Short-term loans from affiliates......................................... (100,000) 277
Dividends paid to Pitney Bowes Inc....................................... (42,500) (43,000)
--------- ---------
Net cash used in financing activities...................................... (206,185) (144,487)
--------- ---------
Increase in cash........................................................... 13,351 12,242
Cash at beginning of period................................................ 19,154 36,320
--------- ---------
Cash at end of period...................................................... $ 32,505 $ 48,562
========= =========
Interest paid.............................................................. $ 73,166 $ 82,191
========= =========
Income taxes refunded, net................................................. $ (49,374) $ (12,892)
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 6
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 -- General
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of Pitney Bowes
Credit Corporation (the "Company" or "PBCC"), all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position at June 30, 1999 and December 31, 1998, the results of its operations
for the three and six months ended June 30, 1999 and 1998 and its cash flow for
the six months ended June 30, 1999 and 1998 have been included. Certain amounts
from prior periods have been reclassified to conform to current period
presentation. Operating results for the three and six months ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. These statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
Note 2 -- Discontinued Operations
On June 30, 1999, the Company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary
of the Company specializing in the servicing of residential first mortgages for
a fee. Accordingly, the Company recorded an expected loss of approximately $34.2
million (net of taxes of $22.8 million) on the disposal of AMIC.
On October 30, 1998, the Company's wholly-owned subsidiary, Colonial Pacific
Leasing Corporation ("CPLC"), transferred the operations, employees and
substantially all assets related to its broker-oriented small-ticket lease
financing business to General Electric Capital Corporation. The Company received
approximately $790 million at closing. The excess of the proceeds over the book
value of net assets sold or otherwise disposed of, together with related
transaction costs, resulted in a gain of approximately $9.3 million (net of
taxes of $5.7 million) in the second quarter of 1999.
Operating results of both AMIC and CPLC have been segregated and reported as
discontinued operations in the consolidated statements of income. Prior year
results have been reclassified to conform to the current year presentation. Net
assets of discontinued operations have been separately classified in the
consolidated balance sheets as of June 30, 1999. Cash flow impacts of
discontinued operations have not been segregated in the accompanying statements
of cash flow. Details of the (loss) income from discontinued operations are as
follows (in thousands of dollars):
<TABLE>
<S> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
AMIC.......................................... $ (2,729) $ 6,615 $ 971 $ 11,214
CPLC.......................................... - 2,633 - 5,386
------- ------- ------- -------
(Loss) income from discontinued operations $ (2,729) $ 9,248 $ 971 $ 16,600
======= ======= ======= =======
</TABLE>
Mortgage servicing revenue of AMIC was $30.0 and $62.5 million for the three
and six months ended June 30, 1999, and $29.3 and $52.6 million for the three
and six months ended June 30, 1998. Net interest expense allocated to AMIC's
discontinued operations was $1.8 and $3.7 million for the three and six months
ended June 30, 1999, and $1.6 and $2.9 million for the three and six months
ended June 30, 1998. Interest has been allocated based on the level of
intercompany borrowings by AMIC, charged at the Company's weighted average
borrowing rate, partially offset by the interest savings the Company realized
due to borrowing against AMIC's escrow deposits as opposed to regular commercial
paper borrowings.
Finance income of CPLC was $50.5 and $85.0 million for the three and six
months ended June 30, 1998. Interest expense allocated to CPLC's discontinued
operations was $10.6 and $21.1 million for the three and six months ended June
30, 1998. Interest expense has been allocated based on the level of net
intercompany borrowings of CPLC, charged at the Company's weighted average
borrowing rate.
<PAGE> 7
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3 -- Finance Assets
The composition of the Company's finance assets is (in thousands of dollars):
<TABLE>
<S> <C> <C>
June 30, December 31,
1999 1998
--------- ---------
Gross finance receivables...................................... $ 3,117,489 $ 3,050,572
Unguaranteed residual valuation................................ 401,634 412,569
Initial direct costs deferred.................................. 44,967 46,224
Unearned income................................................ (748,527) (787,560)
--------- ---------
Total finance assets......................................... $ 2,815,563 $ 2,721,805
========= =========
</TABLE>
Note 4 -- Notes Payable
The composition of the Company's notes payable is as follows (in thousands of
dollars):
<TABLE>
<S> <C> <C>
June 30, December 31,
1999 1998
---- ----
Senior Notes Payable:
Commercial paper at the weighted average
interest rate of 4.82% (4.90% in 1998).......................... $ 184,500 $ 173,700
Notes payable against bank lines of credit and others at weighted
average interest rates of 1.15% (1.16% in 1998)................. 540,472 618,153
Current installment of long-term debt due within one year at
an interest rate of 6.45% (6.54% in 1998)...................... 250,000 200,000
--------- ---------
Total senior notes payable due within one year................... 974,972 991,853
Senior notes payable due after one year at interest rates of
5.65% to 9.25% in 1999 and 1998................................ 1,332,000 1,382,000
--------- ---------
Total senior notes payable....................................... 2,306,972 2,373,853
Notes Payable to Affiliates:
Due within one year at an interest rate of 5.38% in 1999 and 1998 41,198 137,000
Due after one year at an interest rate of 5.38% in 1999 and 1998. 333,000 333,000
--------- ---------
Total notes payable to affiliates................................ 374,198 470,000
--------- ---------
Subordinated Notes Payable:
Non-interest bearing notes due Pitney Bowes Inc.................. 285,886 285,886
--------- ---------
Total notes payable................................................. $ 2,967,056 $ 3,129,739
========= =========
</TABLE>
<PAGE> 8
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5 -- Business Segment Information
Segment revenue and operating profit are as follows (in thousands of dollars):
<TABLE>
<S> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Internal financing...................................... $ 104,261 $ 87,184 $ 204,743 $ 173,563
Capital services........................................ 37,694 39,544 72,336 72,694
------- ------- ------- -------
Total revenue for reportable segments.............. $ 141,955 $ 126,728 $ 277,079 $ 246,257
======= ======= ======= =======
Operating Profit:
Internal financing...................................... $ 56,789 $ 48,436 $ 111,841 $ 96,156
Capital services........................................ 3,951 13,202 8,545 21,950
------- ------- ------- -------
Total operating profit for reportable segments............ 60,740 61,638 120,386 118,106
Unallocated amounts:
Corporate interest expense, net....................... (594) (2,404) (2,429) (4,347)
Corporate income (expenses)........................... 638 (272) 284 (384)
------- ------- ------- -------
Income from continuing operations before income taxes... $ 60,784 $ 58,962 $ 118,241 $ 113,375
======= ======= ======= =======
</TABLE>
<PAGE> 9
PITNEY BOWES CREDIT CORPORATION
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIs
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three Months of 1999 Compared to Three Months of 1998
On June 30, 1999, the Company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary
of the Company specializing in the servicing of residential first mortgages for
a fee. Accordingly, the Company recorded an expected loss of approximately $34.2
million (net of taxes of $22.8 million) on the disposal of AMIC. Operating
results of AMIC have been segregated and reported as discontinued operations in
the consolidated statements of income. Prior year results have been reclassified
to conform to the current year presentation. Mortgage servicing revenue of AMIC
was $30.0 and $62.5 million for the three and six months ended June 30, 1999,
and $29.3 and $52.6 million for the three and six months ended June 30, 1998.
See Note 2 to the CONSOLIDATED FINANCIAL STATEMENTS.
On October 30, 1998, the Company's wholly-owned subsidiary, Colonial Pacific
Leasing Corporation ("CPLC"), transferred the operations, employees and
substantially all assets related to its broker-oriented small-ticket lease
financing business to General Electric Capital Corporation. The Company received
approximately $790 million at closing. The excess of the proceeds over the book
value of net assets sold or otherwise disposed of, together with related
transaction costs, resulted in a gain of approximately $9.3 million (net of
taxes of $5.7 million) in the second quarter of 1999. Operating results of CPLC
have been segregated and reported as discontinued operations in the consolidated
statements of income for the three and six months ended June 30, 1998. Finance
income of CPLC was $50.5 and $85.0 million for the three and six months ended
June 30, 1998. See Note 2 to the CONSOLIDATED FINANCIAL STATEMENTS.
Accordingly, the discussion that follows concerns only the results of
continuing operations.
Finance income in the second quarter of 1999 increased 12.0 percent to $142.0
million compared to $126.7 million in 1998. Finance income for internal
financing programs increased 19.6 percent to $104.3 million from $87.2 million
primarily due to higher income from fee- and service-based programs and
investment levels for the mail and copier financing programs. Finance income for
Capital Services financing programs decreased to $37.7 million from $39.5
million primarily due to lower investment levels in accordance with the
Company's strategy to shift the foundation of the external financing business
from asset-based to fee- and service- based revenues. Included in finance income
for Capital Services financing programs were gains on asset sales of $1.4 and
$6.2 million for the quarters ended June 30, 1999 and 1998.
Selling, general and administrative ("SG&A") expenses increased 40.7 percent
to $33.5 million in the second quarter of 1999 compared to $23.8 million in
1998. SG&A for internal financing programs increased to $23.8 million from $16.5
million principally due to higher professional fees and outsourcing expenses
related to new business initiatives as well as consulting services in support of
strategic initiatives such as improvements to information technology and
customer service. SG&A for Capital Services financing programs increased to $9.6
million in 1999 from $7.0 million in 1998 largely due to costs incurred in
finalizing the sale of CPLC made in the second quarter of 1999.
Depreciation on operating leases was $1.1 million in the second quarter of
1999 compared to $1.6 million in 1998 reflecting a lower operating lease
investment balance at June 30, 1999 compared to June 30, 1998.
The provision for credit losses was $7.7 million for the second quarter of
1999 compared with $8.9 million in 1998. The provision for internal financing
programs decreased to $7.2 million from $8.0 million due to lower reserve
requirements caused by strong historical portfolio performance. This is partly
offset by increased provisions for new business initiatives. The provision for
Capital Services financing programs was $0.5 million in the second quarter of
1999 compared to $0.9 million in 1998.
The Company's allowance for credit losses as a percentage of net lease
receivables (net investments before allowance for credit losses plus the
uncollected principal balance of receivables sold) decreased from 2.87 percent
at December 31, 1998 to 2.67 percent at June 30, 1999. PBCC charged $23.7
million and $33.5 million against the allowance for credit losses in the first
half of 1999 and 1998, respectively.
<PAGE> 10
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three Months of 1999 Compared to Three Months of 1998 (continued)
Interest expense was $32.8 million in the second quarter of 1999 compared with
$32.0 million in 1998. The decrease reflects lower average borrowings in 1999
combined with lower interest rates. The lower borrowing levels were due to
decreased Capital Services asset levels offset by higher internal asset levels.
The effective interest rate on average borrowings was 5.64 percent for the
second quarter of 1999 compared to 5.70 percent for the same period in 1998. 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 second quarter of 1999 was 29.6 percent compared
with 27.4 percent for the same period of 1998. The increase is primarily due to
the diminishing tax benefits of certain leveraged lease transactions.
The Company's ratio of earnings to fixed charges was 2.85 times for the second
quarter of 1999 compared with 2.84 times for the same period of 1998. The
increase reflects the disposition of external large-ticket assets, proceeds from
which were used for debt reduction.
Six Months of 1999 Compared to Six Months of 1998
For the six months of 1999 compared to the same period of 1998, finance
revenue increased 12.5 percent to $277.1 million, SG&A expenses increased 27.3
percent to $59.4 million, depreciation and amortization increased 141.4 percent
to $14.9 million, the provision for credit losses increased 12.5 percent to
$20.0 million, interest expense increased 3.7 percent to $64.6 million and the
provision for income taxes increased 11.8 percent to $34.7 million, generating
an increase in income from continuing operations of 1.5 percent to $83.5
million. The results of discontinued operations were net losses of $24.0 million
through June, 1999 compared to income of $16.6 million for the same period of
1998. This was mainly due to the recognition of an estimated net loss on the
disposal of AMIC of $34.2 million. Net income decreased by 39.8 percent to $59.6
million.
Except for the estimated loss on the disposal of discontinued operations, the
costs incurred in finalizing the CPLC sale and the decreased provision for
credit losses, all attributable to the second quarter of 1999, the factors that
affected the change in each of the above income or expense items were
essentially the same as those affecting the second quarter of 1999 versus 1998.
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 44 percent short-term and 56
percent long-term at June 30, 1999 and 45 percent short-term and 55 percent
long-term at December 31, 1998. PBCC's swap-adjusted variable-rate versus
fixed-rate debt mix was 23 percent variable-rate and 77 percent fixed-rate at
June 30, 1999 and 24 percent variable-rate and 76 percent fixed-rate at December
31, 1998. The Company may borrow through the sale of commercial paper, under its
confirmed bank lines of credit, and by private and public offerings of
intermediate- or long-term debt securities. The Company had unused lines of
credit and revolving credit facilities totaling $1.2 billion at June 30, 1999,
largely supporting its commercial paper borrowings.
<PAGE> 11
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition
Liquidity and Capital Resources (continued)
The Company's utilization of derivative instruments is normally limited to
interest rate swap agreements ("interest rate swaps") and foreign currency
exchange forward contracts ("foreign currency contracts"). The Company
periodically enters into interest rate swaps as a means of managing interest
rate exposure. The interest rate differential paid or received is recognized as
an adjustment to interest expense. The interest differential on the swap will be
offset against changes in valuation of the assets resulting from interest rate
movements. The Company is exposed to credit loss in the event of non-performance
by the counterparties to the interest rate swaps to the extent of the
differential between fixed- and variable-rates; such exposure is considered
minimal. The Company has entered into foreign currency contracts for the purpose
of minimizing its risk of loss from fluctuations in exchange rates in connection
with certain intercompany loans and certain transfers to the Company by foreign
affiliates of foreign currency denominated lease receivables. The Company is
exposed to credit loss in the event of non-performance by the counterparties to
the foreign currency contracts to the extent of the difference between the spot
rate at the date of the contract delivery and the contracted rate; such exposure
is 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.
Gross finance assets at the end of the second quarter of 1999 increased 1.62
percent from December 31, 1998. The increase is principally due to higher
investment levels for new business initiatives, offset by decreased investments
in Capital Services financing programs. Overall levels of lease receivables are
in line with management's expectations. The Company continues to actively pursue
a Capital Services financing strategy based on external large-ticket asset
sales, thereby allowing it to focus on fee- and service-based revenue rather
than asset-based income.
The Company's liquidity ratio (finance contracts receivable, including
residuals, expected to be realized in cash over the next 12 months to current
maturities of debt over the same period) was 1.67 times at June 30, 1999 and
1.47 times at December 31, 1998.
The Company will continue to use cash to invest in finance assets with
emphasis on internal small-ticket leasing transactions and controlled investment
in external large-ticket financing programs. The Company believes that cash
generated from operations and collections on existing lease contracts will
provide the majority of cash needed for such investment activities. Borrowing
requirements will be primarily dependent upon the level of equipment purchases
from Pitney Bowes Inc., the level of external financing activity, capital
requirements for new business initiatives, and the refinancing of maturing debt.
Additional cash, to the extent needed, is expected to be provided from
commercial paper and intermediate- or long-term debt securities. While the
Company expects that market acceptance of its short- and long-term debt will
continue to be strong, additional liquidity is available under revolving credit
facilities and credit lines.
Year 2000
General
In 1997, the Company's parent, Pitney Bowes Inc., established a formal
worldwide program to identify and resolve the impact of the Year 2000 date
processing issue on its business systems, products and supporting
infrastructure. PBCC is included as part of this program. This program includes
a comprehensive review of information technology ("IT") and non-IT systems,
software, and embedded processors. The program structure has strong executive
sponsorship and consists of a Year 2000 steering committee comprised of senior
business and technology management, a Year 2000 program office staffed with
full-time project management, and subject matter experts and dedicated business
unit project teams. The Company has also engaged independent consultants to
perform periodic program reviews and assist in systems assessment and test plan
development.
<PAGE> 12
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATION AND FINANCIAL CONDITION
Year 2000
State of Readiness
The program encompasses the following phases: an inventory of affected
technology and critical third party suppliers, an assessment of Year 2000
readiness, resolution, unit and integrated testing, and contingency planning. As
of June 30, 1999, the company has substantially completed these phases across
all aspects of its businesses. Specific project status in our more critical
process areas is summarized below: Computer Systems and Infrastructure:
These include computer networks, systems and applications supporting worldwide
business operations, including sales order processing, manufacturing,
distribution, billing, collections, leasing, financial management, and human
resources. All core systems have been remediated, tested, and reinstalled into
the production environment. Unit and integration testing was successfully
completed at June 30, 1999. Suppliers and Critical Vendors:
PBCC relies on third parties for many systems, products and services. The
Company could be adversely impacted if third parties do not make necessary
changes to their own systems and products successfully and in a timely manner.
The Company has established a formal process to identify, assess and monitor the
Year 2000 readiness of critical third parties. Critical third parties with which
the Company interacts include, among others, customers and business partners
(supply chains, technology vendors and service providers); the global financial
market infrastructure (payment and clearing systems); and the utility
infrastructure (power, transportation and telecommunications) on which all
corporations rely. PBCC has contacted its critical vendors and believe they are
also Year 2000 ready. However, the Company cannot predict whether such third
parties will encounter any difficulties in their being Year 2000 ready.
Year 2000 Costs
PBCC estimates the total cost of the program from inception in 1997 through
the Year 2000 to be approximately $2 million, of which approximately $1.6
million was incurred through June 30, 1999. These costs, which are funded
through the Company's cash flows, include both internal labor costs as well as
consulting and other external costs. These costs are incorporated in the
Company's budgets and are being expensed as incurred. Year 2000 Risks and
Contingency Plan
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from
uncertainty about the Year 2000 readiness of third parties, PBCC is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on its results of operations, liquidity or financial
condition. However, a Year 2000 business resumption plan has been developed
which identifies and evaluates potential Year 2000 failure scenarios and
establishes both preemptive and reactive measures. These measures, including
plans to address failures of critical vendors, internal systems and processes,
are expected to be finalized by September 1999.
Other Matters
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires an entity
recognize all derivative instruments as either assets or liabilities on its
balance sheet and measure those instruments at fair market value. Changes in the
fair value of those instruments will be reflected as gains or losses. The
accounting for the gains or losses depends on the intended use of the derivative
instrument and the resulting designation. Under SFAS 133, PBCC would have been
required to implement this statement beginning January 1, 2000. In June 1999,
the FASB issued Statement of Financial Accounting Standards No 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of SFAS Statement No. 133". This statement deferred the effective date of
SFAS 133 thereby extending the Company's implementation date to January 1, 2001.
The Company is currently in the process of evaluating the impact of implementing
this statement.
<PAGE> 13
PITNEY BOWES CREDIT CORPORATION
MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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> 14
PART II - OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
From time to time, the Company is a party to lawsuits that arise in the
ordinary course of its business. These lawsuits may involve litigation by or
against the Company to enforce contractual rights under vendor, insurance or
other contracts; lawsuits by or against the Company relating to equipment,
service or payment disputes with customers; disputes with employees; or other
matters. The Company is currently a defendant in a number of lawsuits, none of
which should have, in the opinion of management and legal counsel, a material
adverse effect on the Company's financial position or results of operations.
In June 1999, the Company's parent, Pitney Bowes Inc. (PBI), was served
with a Civil Investigation Demand ("CID") from the U.S. Justice Department's
Antitrust Division. A CID is a tool used by the Antitrust Division for gathering
information and documents. PBI believes that the Justice Department may be
reviewing its efforts to protect its intellectual property rights. Both PBI and
the Company believe they have complied fully with the antitrust laws and intend
to cooperate fully with the investigation.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a. Financial Statements - see index on page 2
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<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 16
(27) Financial Data Schedule See Exhibit (ii)
on page 17
</TABLE>
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. No reports on Form 8-K were filed during the quarter ended June 30, 1999.
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PITNEY BOWES CREDIT CORPORATION
By /s/ NANCY E. COOPER
----------------------
Nancy E. Cooper
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
Dated: August 13, 1999
By /s/ R. JEFFREY MACARTNEY
----------------------
R. Jeffrey Macartney
Controller
(Principal Accounting Officer)
Dated: August 13, 1999
<PAGE> 16
Exhibit (i)
Computation of Ratio of Earnings from Continuing Operations to Fixed Charges
(in thousands of dollars)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Income from continuing operations
before income taxes................ $ 60,784 $ 58,962 $ 118,241 $ 113,375
------- ------- -------- --------
Fixed charges:
Interest on debt................... 32,781 31,968 64,561 62,279
One third rent expense............. 157 123 308 255
------- ------- -------- -------
Total fixed charges.................. 32,938 32,091 64,869 62,534
------- ------- -------- -------
Earnings from continuing operations
before fixed charges............... $ 93,722 $ 91,053 $ 183,110 $ 175,909
======= ======= ======== =======
Ratio of earnings from continuing
operations to fixed charges (1).... 2.85X 2.84X 2.82X 2.81X
======= ======= ======== =======
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit (ii)
Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 6/30/99
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,505
<SECURITIES> 0
<RECEIVABLES> 3,696,554
<ALLOWANCES> (111,524)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,045,940
<CURRENT-LIABILITIES> 1,371,601
<BONDS> 0
<COMMON> 46,000
0
0
<OTHER-SE> 1,187,419
<TOTAL-LIABILITY-AND-EQUITY> 5,045,940
<SALES> 0
<TOTAL-REVENUES> 277,079
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 74,264
<LOSS-PROVISION> 20,013
<INTEREST-EXPENSE> 64,561
<INCOME-PRETAX> 118,241
<INCOME-TAX> 34,692
<INCOME-CONTINUING> 83,549
<DISCONTINUED> (23,967)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,582
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
