SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 8-K
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CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of Earliest Event Reported):
August 13, 1999
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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
<PAGE> 2
Item 5 -- Other Events
As of June 30, 1999, the Company committed itself to a formal plan to dispose of
the operations and assets of its mortgage servicing business at Atlantic
Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary of the
Company. Accordingly, operating results of AMIC have been segregated and
reported as discontinued operations in the consolidated statements of income for
the quarters and six months ended June 30, 1999 and 1998. Net assets of
discontinued operations have also been separately classified in the consolidated
balance sheet at June 30, 1999, as filed in the Company's Quarterly Report on
Form 10-Q, on August 13, 1999. Pursuant to the treatment of AMIC as discontinued
operations as of June 30, 1999, the Company is restating Items 1, 2, 6, 7, 7A.
and 8, and Exhibits (12) and (27) of Item 14 in its Annual Report on Form 10-K
for the year ended December 31, 1998. The Company is also restating Items 1 and
2, and Exhibits (12) and (27) of Item 6 in its Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999. These items are included herein as Exhibits
and are incorporated by reference into this Item 5 and the foregoing description
of such documents is qualified in its entirety by reference to such Exhibits.
Item 7 -- Financial Statements and Exhibits
c. The following exhibits are furnished in accordance with Item 601 of
Regulation S-K:
<TABLE>
<S> <C> <C>
Exhibit Pages
(24) Consent of Independent Accountants 5
(99.01) Item 1 of Form 10-K for the year ended December 31, 1998, restated for the
treatment of AMIC as discontinued operations. 6-9
(99.02) Item 2 of Form 10-K for the year ended December 31, 1998, restated for the
treatment of AMIC as discontinued operations. 10
(99.03) Item 6 of Form 10-K for the year ended December 31, 1998, restated for the
treatment of AMIC as discontinued operations. 11
(99.04) Item 7 of Form 10-K for the year ended December 31, 1998, restated for the
treatment of AMIC as discontinued operations. 12-16
(99.05) Item 7A of Form 10-K for the year ended December 31, 1998, restated for the
treatment of AMIC as discontinued operations. 17
(99.06) Item 8 of Form 10-K for the year ended December 31, 1998, restated for the
treatment of AMIC as discontinued operations. 18-41
(99.07) Exhibit (12) of Item 14 of Form 10-K for the year ended December 31, 1998,
restated for the treatment of AMIC as discontinued operations. 42
(99.08) Item 1 of Form 10-Q for the quarter ended March 31, 1999, restated for the
treatment of AMIC as discontinued operations. 43-48
(99.09) Item 2 of Form 10-Q for the quarter ended March 31, 1999, restated for the
treatment of AMIC as discontinued operations. 49-52
</TABLE>
<PAGE> 3
Item 7 -- Financial Statements and Exhibits (continued)
c. The following exhibits are furnished in accordance with Item 601 of
Regulation S-K:
<TABLE>
<S> <C> <C>
Exhibit Pages
(99.10) Exhibit (12) of Item 6 of Form 10-Q for the quarter ended March 31, 1999,
restated for the treatment of AMIC as discontinued operations. 53
(99.11) Exhibit (27) of Item 14 of Form 10-K for the year ended December 31, 1998,
restated for the treatment of AMIC as discontinued operations. 54
(99.12) Exhibit (27) of Item 6 of Form 10-Q for the quarter ended March 31, 1999,
restated for the treatment of AMIC as discontinued operations. 55
</TABLE>
<PAGE> 4
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 30, 1999
By /s/ R. JEFFREY MACARTNEY
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R. Jeffrey Macartney
Controller
(Principal Accounting Officer)
Dated: August 30, 1999
<PAGE>5
Exhibit (24)
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-59181) of Pitney Bowes Credit Corporation (the
"Company") of our report dated January 21, 1999, except as to Note 2 which is as
of July 20, 1999, relating to the consolidated financial statements of the
Company for the year ended December 31, 1999, which report is included in
Exhibit (99.06) to this Form 8-K.
PricewaterhouseCoopers LLP
Stamford, Connecticut
August 30, 1999
<PAGE> 6
Exhibit (99.01)
PITNEY BOWES CREDIT CORPORATION
PART I
ITEM 1. -- BUSINESS
General
Pitney Bowes Credit Corporation (the "Company" or "PBCC") operates primarily
in the United States and is a wholly-owned subsidiary of Pitney Bowes Inc.
("PBI" or "Pitney Bowes"). As such, the Company is part of PBI's Mailing and
Integrated Logistics, Office Solutions and Capital Services segments. The
Company is principally engaged in the business of providing lease financing for
PBI products as well as other financial services to the capital services
markets.
The Internal Financing Division of PBCC provides marketing support to PBI.
Equipment leased or financed for Internal Division programs include mailing,
paper handling and shipping equipment, scales, copiers, and facsimile units.
Transaction sizes generally range from $500 to $500,000, although historically
most transactions have occurred in the $1,000 to $10,000 range, with lease terms
generally from 36 to 60 months. As part of its focus on new business
initiatives, the Company launched a revolving credit product called Purchase
PowerSM in August, 1996. This product allows Pitney Bowes customers to finance
postage as well as mailing, copier and facsimile supplies. The Company earns
income on balances from customers who elect to use this credit facility. In
1997, the Company piloted a co-branded credit card called the Pitney Bowes
Business RewardsSM Visa(R). The product is designed for the small business owner
and allows the customer to facilitate business purchases. PBCC earns income on
membership and transaction fees as well as interest on balances from customers
choosing to use the credit facility. The business owners receive air mileage
points based on purchases made under this, as well as the Purchase PowerSM
program.
PBCC's Capital Services Division operates in the commercial and industrial
market by offering financial services to its customers for products not
manufactured or sold by PBI or its subsidiaries. Sales of lease transactions are
part of the Company's ongoing strategy to shift the foundation of the capital
services financing business from asset-based to service-based revenues. During
1997, the Company reduced capital services finance assets by approximately $1
billion, which represented approximately 50% of the portfolio balance before the
reductions. (See Note 3 to CONSOLIDATED FINANCIAL STATEMENTS.) Products financed
through Capital Services Division financing programs include both commercial and
non-commercial aircraft, over-the-road trucks and trailers, railcars and
locomotives, and high-technology equipment such as data processing and
communications equipment. Transaction sizes (other than aircraft leases) range
from $30,000 to several million dollars, with original lease terms generally
from 28 to 252 months. Aircraft transaction sizes range from less than $1
million to $25 million for non-commercial aircraft and up to $57 million for
commercial aircraft. Original lease terms are generally from two to 12 years for
non-commercial aircraft and from 15 to 23 years for commercial aircraft. The
Company has also participated in seven commercial aircraft leveraged lease
transactions with a net investment of $297.5 million at December 31, 1998. The
Company's Capital Services Division also participates, on a select basis, in
certain other types of financial transactions including: sales of lease
transactions, senior secured loans in connection with acquisition, leveraged
buyout and recapitalization financings, and certain project financings.
Equipment financed by former PBI subsidiaries Dictaphone and Monarch is also
reported as a component of the Capital Services Division
PBCC's Capital Services Division is also responsible for managing Pitney Bowes
Real Estate Financing Corporation ("PREFCO"), a wholly-owned subsidiary of PBCC
providing lease financing for commercial real estate properties. Both PBCC and
Pitney Bowes have provided capital for PREFCO's investments.
On October 30, 1998, the Company transferred the operations, employees and
substantially all related assets of its wholly-owned subsidiary, Colonial
Pacific Leasing Corporation ("CPLC"), to General Electric Capital Corporation, a
subsidiary of the General Electric Company. CPLC was the Company's
broker-oriented small-ticket financing business. (See Note 2 to CONSOLIDATED
FINANCIAL STATEMENTS.)
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. (See Note 2 to CONSOLIDATED FINANCIAL STATEMENTS.)
Substantially all lease financing is done through full payout leases or
security agreements whereby PBCC recovers its costs plus a return on investment
over the initial, noncancelable term of the contract. The Company has also
entered into a limited amount of leveraged and operating lease structures.
The Company's gross finance assets (contracts receivable plus estimated
residual values) outstanding for the internal and capital services programs at
December 31, 1994 through 1998 are presented in ITEM 6 - SELECTED FINANCIAL
DATA. Total Company gross finance assets at December 31, 1998 were $3.5 billion
of which approximately 56 percent were related to mailing, paper handling and
shipping products, 7 percent to commercial aircraft, 3 percent to railcars, 9
percent to copier and office equipment, 1 percent to both data processing
equipment and manufacturing products and 1 percent to over-the-road trucks and
trailers. Total gross finance contracts acquired amounted to $1.6 billion in
1998 and $1.9 billion in 1997. Capital services programs accounted for 38
percent of gross finance contracts acquired in 1998 compared to 51 percent in
1997.
<PAGE> 7
As of December 31, 1998, PBCC had approximately 738,000 active accounts
compared with 682,000 active accounts at December 31, 1997.
At December 31, 1998, PBCC's largest customer accounted for $78.8 million, or
2.6 percent of gross finance receivables, and the Company's ten largest
customers accounted for $500.7 million in gross finance receivables, or 16.4
percent of the receivable portfolio.
Credit Experience
The percentage of receivables over 30 days delinquent was 4.4 percent at
December 31, 1998 compared to 3.7 percent at December 31, 1997 and 2.9 percent
at December 31, 1996. Total Company delinquency at December 31, 1998 increased
over the prior year mainly due to a shift in business mix to a higher proportion
of Internal Financing Division business, which exhibits a higher average
delinquency rate than the capital services business.
Credit Policies
PBCC's management and Board of Directors establish credit approval limits at
regional, divisional, subsidiary and corporate levels based on the credit
quality of the customer and the type of equipment financed. The Company and PBI
have established an Automatic Approval Program ("AAP") for certain products
within the Internal Financing Division. The AAP dictates the criteria under
which PBCC will accept a customer without performing the Company's usual credit
investigation. The AAP considers criteria such as maximum equipment cost, a
customer's time in business and current payment experience with PBCC.
PBCC bases credit decisions primarily on a customer's financial strength.
However, with the Company's Capital Services Division programs, collateral
values may also be considered.
Loss Experience
PBCC has charged against the allowance for credit losses $66.8 million, $60.5
million and $69.2 million in 1998, 1997 and 1996, respectively. The increase in
write-offs in 1998 was primarily due to the write-off of assets at CPLC. For
further information see Note 6 to CONSOLIDATED FINANCIAL STATEMENTS.
Relationship with Pitney Bowes Inc.
PBCC is PBI's domestic finance subsidiary and provides the largest financing
support of PBI's Mailing and Integrated Logistics, Office Solutions and Capital
Services. Equipment sales to PBCC as a percentage of PBI's consolidated revenue
from continuing operations was 14 percent in 1998 and 1997, and 13 percent in
1996.
Business relationships between PBCC and PBI are defined by several agreements
including an Operating Agreement, Finance Agreement and Tax Sharing Agreement.
Operating Agreement An operating agreement with PBI was initiated on March 3,
1977 and was subsequently amended. This agreement was terminated in its entirety
and superseded with a successor agreement on November 6, 1996 as the First
Amended and Restated Operating Agreement ("Operating Agreement"). The Operating
Agreement can be modified or canceled on a prospective basis by either party
upon 90 days prior written notice. PBI and PBCC have entered into detailed
written operating procedures ("Operating Procedures") which govern among other
things: the terms and prices of equipment purchases by PBCC for lease to third
parties; computation and payment of fees for referrals and services provided by
PBI sales personnel; the AAP for PBI equipment; buyback allowances; and the
handling of contract terminations, cancellations, trade-ups and trade-ins.
In connection with sales of finance assets of the internal small-ticket
financing programs, PBI agreed not to cancel or modify, in any material respect,
its obligations under the Operating Agreement concerning the sold receivables,
without the prior written consent of PBCC and the transferee.
Pursuant to the Operating Procedures, the purchase of equipment by the Company
is contingent upon a lessee entering into a full payout lease with the Company
and delivery to and acceptance of the equipment by the lessee. Service and
maintenance of the equipment leased is the responsibility of the lessee and is
generally arranged through a separate equipment maintenance agreement between
the lessee and PBI.
In connection with the buyback provision of the Operating Procedures, PBCC has
the option to request a buyback from PBI for non-copier equipment subject to a
lease which is terminated or canceled, provided the equipment is available for
repossession. Following such buyback, PBI is responsible for the repossession
and disposition of equipment. The buyback provision sets forth a stipulated
amount that is payable by PBI to PBCC for certain terminated leases; such amount
is calculated on the basis of a declining percentage, based upon the passage of
time, of the original total invoice value to PBCC. The difference between the
buyback amount received from PBI and the remaining value of the lease usually
results in a loss that is charged against PBCC's allowance for credit losses.
<PAGE> 8
The Pitney Bowes Copier Division does not remanufacture used copier equipment;
therefore copier equipment is excluded from the buyback arrangement described
above. However, under the Returned Copier Equipment Agreement (the "Agreement"),
the copier systems division issues an annual blanket purchase order for the
repurchase of certain copier models. These returns are made under conditions and
at rates specifically set forth in the Agreement. All copier equipment lease
transactions are subject to the Company's standard credit review procedures.
Finance Agreement Pursuant to the Amended and Restated Finance Agreement (the
"Finance Agreement") dated June 12, 1995, between PBI and PBCC, PBI has agreed
to retain, directly or indirectly, ownership of the majority of the outstanding
shares of capital stock of the Company having voting power in the election of
directors, to make payments, if necessary, to enable the Company to maintain a
ratio of income available for fixed charges as defined to such fixed charges of
1.25 to 1 as of the end of each fiscal quarter, and to provide or cause to be
provided funds sufficient to make timely payment of any principal, interest or
premium in respect of any of the Company's indebtedness for borrowed money that
has the benefit of the Finance Agreement if the Company is unable to make such
payment.
Under the terms of the Finance Agreement and the Indenture dated as of
November 1, 1995, between the Company and Chemical Bank, as Trustee (the "1995
Indenture"), the Finance Agreement may not be amended, in any material respect,
or terminated while the Company has any series of debt securities issued under
the 1995 Indenture or any series of other debt outstanding that is, by its
express terms, entitled to the provisions of the Finance Agreement unless at
least two nationally recognized statistical rating agencies that have been
rating such series of debt, confirm that their ratings for such series of debt
will not be downgraded as a result or the holders of at least a majority of the
outstanding principal amount of such series of debt have consented in writing.
Under the Indenture dated as of May 1, 1985 (together with all Supplemental
Indentures as noted in Part IV Item 14(a) 3, the "Indenture"), between PBCC and
the trustee (Sun Trust Bank effective December 16, 1996 replacing Bankers Trust
Company), as Trustee (the "Trustee"), PBCC agreed it would not waive compliance
with, or amend in any material respect, the Finance Agreement without the
consent of the holders of a majority in principal amount of the outstanding
securities of each series of debt securities issued under the Indenture. In
addition, PBI has entered into a Letter Agreement with the Trustee pursuant to
which it agreed, among other things, that it would not default under the Finance
Agreement nor terminate the Finance Agreement without the consent of the holders
of a majority in principal amount of the outstanding securities issued under the
Indenture.
Tax Sharing Agreement The Company's taxable results are included in the
consolidated Federal and certain state income tax returns of Pitney Bowes. Under
the Tax Sharing Agreement, dated April 1, 1977, between the Company and Pitney
Bowes (the "Tax Sharing Agreement"), the Company makes payment to Pitney Bowes
for its share of consolidated income taxes, or receives cash equal to the
benefit of tax losses utilized in consolidated returns in exchange for which it
issues non-interest bearing subordinated notes with a maturity one day after all
senior debt is repaid. The Tax Sharing Agreement can be canceled by either PBI
or PBCC upon twelve months written notice.
Real Estate Transactions When the Company entered into real estate lease
financing, PBI agreed to make capital contributions up to a maximum of $15.0
million to provide a portion of the financing for such transactions, of which
$13.8 million has been received to date. There is no formal agreement in place
and PBI is under no obligation to continue to make capital contributions. There
have been no capital contributions received since 1993.
Pitney Bowes Inc.
PBI, a Delaware corporation organized in 1920, is listed on the New York Stock
Exchange. Headquartered in Stamford, Connecticut, PBI employs approximately
31,300 people throughout the United States, Europe, Canada, Australia and other
countries. PBI operates within three industry segments: Mailing and Integrated
Logistics, Office Solutions and Capital Services.
The Mailing and Integrated Logistics segment includes revenues from the sale
and financing of mailing equipment, related supplies and services, and the
rental of postage meters. In accordance with postal regulations, postage meters
may not be sold in the United States; they are rented to users and therefore are
not subject to lease by PBCC.
Office Solutions includes revenues from the sale, financing, rental and
service of reprographic and facsimile equipment including related supplies, and
facilities management services which provides reprographic business support, and
other processing functions.
Capital Services provides large-ticket financing and fee-based programs
covering a broad range of products and other financial services to the capital
services markets in the U.S.
At December 31, 1998, PBI and its consolidated subsidiaries had total assets
of $7.7 billion and stockholders' equity of $1.6 billion. For the year ended
December 31, 1998, PBI's consolidated revenue and income from continuing
operations were $4.1 billion and $542.5 million, respectively, compared with
$3.8 billion and $492.4 million for 1997.
<PAGE> 9
Competition and Regulation
The finance business is highly competitive with aggressive rate competition.
Leasing companies, commercial finance companies, commercial banks and other
financial institutions compete in varying degrees in the several markets in
which PBCC does business and range from very large diversified financial
institutions to many small, specialized firms. In view of the market
fragmentation and absence of any dominant competitors which result from such
competition, it is not possible to provide a meaningful description of PBCC's
competitive position in its markets. While financing rates are generally
considered by customers to be the principal factor in choosing a financing
source, the Company believes there are additional important factors related to a
customer's decision, including simplicity of documentation, flexibility and ease
of doing business over the duration of the contract. PBCC seeks to distinguish
itself from its competition by providing excellent service to its customers.
PBCC considers its documentation and systems to be among the best in the
industry. The Company has an established communication network in its regional
offices to eliminate costly delays and to increase the quality of service
offered to customers and vendors.
PBI has historically been a leading supplier of certain products and services
in its business segments, particularly postage meters and mailing machines.
However, all segments have strong competition from a number of companies. In
particular, PBI is facing competition in many countries for new placements from
several postage meter and mailing machine suppliers, and its mailing systems
products face some competition from products and services offered as alternative
means of message communications. Pitney Bowes believes that its long experience
and reputation for product quality, and its sales and support service
organizations, along with PBCC, are important factors in influencing customer
choices with respect to its products and services.
Several states have ceilings on interest rates which may be charged to
commercial customers on secured lending transactions. PBCC may be required to
charge lower interest rates in certain jurisdictions than it charges elsewhere,
or to cease offering secured lending transactions in such states. PBCC does not
extend consumer credit as defined in the Federal Consumer Credit Protection Act.
Accordingly, PBCC's financing transactions are not subject to that Act.
Funding Policy
PBCC's borrowing strategy is to use a balanced mix of debt maturities,
variable- and fixed-rate debt and interest rate swap agreements ("interest rate
swaps") to control its sensitivity to interest rate volatility. The Company
utilizes interest rate swaps when it considers the economic benefits to be
favorable. Interest rate swaps have been principally utilized to fix interest
rates on commercial paper and/or obtain a lower cost on debt than would
otherwise be available absent the swap. (See ITEM 7A.- QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK for information regarding market
risk.) 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 expects to have in place
shortly, a medium-term note program which will allow it to issue debt securities
having maturities ranging from nine months to 30 years.
While the Company's funding strategy of balancing short-term and longer-term
borrowings and variable- and fixed-rate debt may reduce sensitivity to interest
rate changes over the long-term, effective interest costs have been and will
continue to be impacted by interest rate changes. The Company periodically
adjusts prices on its new leasing and financing transactions to reflect changes
in interest rates; however, the impact of these rate changes on revenue is
usually less immediate than the impact on borrowing costs.
Employee Relations
At December 31, 1998, there were 1,040 individuals employed by the Company and
its subsidiaries. Employee relations are considered to be highly satisfactory.
Management follows the policy of keeping employees informed of its decisions,
and encourages and implements suggestions whenever practicable.
<PAGE> 10
Exhibit (99.02)
PITNEY BOWES CREDIT CORPORATION
ITEM 2. -- PROPERTIES
PBCC's executive and administrative offices are located in Shelton, Connecticut,
which it leases from its parent, PBI. The lease term is for 14 years, cancelable
upon mutual agreement. Except for its executive offices, all of the Company's
remaining office space is occupied under operating leases with original terms
ranging from one to ten years. PBCC has three regional offices located
throughout the United States and seven district sales offices located in or near
major metropolitan areas.
<PAGE>11
Exhibit (99.03)
PITNEY BOWES CREDIT CORPORATION
Item 6. -- Selected financial data
The following tables summarize selected financial data for the Company, and
should be read in conjunction with the more detailed financial statements and
related notes thereto included under Item 8 of this report.
<TABLE>
(Dollars in thousands) December 31,
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended (3) 1998 1997 1996 1995 1994
------------------------ ---- ---- ---- ---- ----
Gross finance contracts acquired............. $ 1,584,864 $ 1,879,084 $ 1,908,105 $ 2,158,549 $ 1,627,974
======== ======== ======== ======== ========
Finance income............................... $ 514,287 $ 524,913 $ 529,987 $ 507,413 $ 441,487
Equipment sales.............................. - - 26,666 2,687 45,747
Selling, general and administrative expenses. 99,067 98,542 92,737 83,618 72,115
Depreciation and amortization................ 10,040 15,218 19,155 16,897 16,286
Cost of equipment sales...................... - - 22,821 2,214 43,039
Provision for credit losses.................. 36,080 34,076 35,617 33,661 36,251
Interest expense............................. 124,411 154,634 163,860 173,745 129,016
Non-recurring items, net..................... - - - - (3,311)
-------- -------- -------- -------- --------
Income from continuing operations
before income taxes 244,689 222,443 222,463 199,965 193,838
Provision for income taxes................... 69,946 61,285 70,114 61,648 61,874
-------- -------- -------- -------- --------
Income from continuing operations
before effect of accounting changes........ 174,743 161,158 152,349 138,317 131,964
Discontinued operations, net of tax.......... 32,733 33,675 26,885 20,339 15,129
Effect of accounting changes (1)............. - - - - (2,820)
-------- -------- -------- -------- --------
Net income................................... $ 207,476 $ 194,833 $ 179,234 $ 158,656 $ 144,273
======== ======== ======== ======== ========
Ratio of earnings from continuing
operations to fixed charges (2) 2.96X 2.43X 2.35X 2.14X 2.49X
At Year End
Gross finance assets
Internal programs............................ $ 2,560,524 $ 2,222,735 $ 2,039,567 $ 1,872,593 $ 1,697,890
Capital services............................. 902,617 2,162,083 3,520,395 3,631,757 3,262,141
-------- -------- -------- -------- --------
Total gross finance assets................... 3,463,141 4,384,818 5,559,962 5,504,350 4,960,031
Unearned income.............................. (741,336) (909,280) (1,285,778) (1,333,280) (1,234,928)
-------- -------- -------- -------- --------
Finance assets............................... $ 2,721,805 $ 3,475,538 $ 4,274,184 $ 4,171,070 $ 3,725,103
======== ======== ======== ======== ========
Investment in leveraged leases............... $ 764,145 $ 667,779 $ 617,970 $ 562,500 $ 478,650
======== ======== ======== ======== ========
Investment in operating leases, net.......... $ 33,261 $ 32,112 $ 86,634 $ 114,587 $ 95,684
======== ======== ======== ======== ========
Allowance for credit losses.................. $ (115,233) $ (116,588) $ (98,721) $ (101,355) $ (95,271)
======== ======== ======== ======== ========
Total assets................................. $ 5,293,670 $ 5,328,340 $ 5,347,002 $ 5,057,874 $ 4,451,837
======== ======== ======== ======== ========
Senior notes payable
Within one year.............................. $ 991,853 $ 1,970,110 $ 1,901,581 $ 2,122,880 $ 2,075,591
After one year............................... 1,382,000 1,050,000 1,275,000 1,020,500 745,500
-------- -------- -------- -------- --------
Total senior notes payable................... $ 2,373,853 $ 3,020,110 $ 3,176,581 $ 3,143,380 $ 2,821,091
======== ======== ======== ======== ========
Short-term notes payable to affiliates....... $ 137,000 $ - $ 139,400 $ 149,709 $ -
======== ======== ======== ======== ========
Lonf-term notes payable to affiliates....... $ 333,000 $ - $ - $ - $ -
======== ======== ======== ======== ========
Subordinated notes payable................... $ 285,886 $ 270,487 $ 229,154 $ 170,857 $ 133,735
======== ======== ======== ======== ========
Stockholder's equity......................... $ 1,216,337 $ 1,094,861 $ 978,028 $ 869,994 $ 773,338
======== ======== ======== ======== ========
Debt to equity............................... 2.57:1 3.01:1 3.62:1 3.98:1 3.82:1
(1) Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112 "Employers' Accounting for Postemployment
Benefits."
(2) In computing the ratio of earnings from continuing operations to fixed
charges, earnings have been calculated by adding to earnings before income taxes
the amount of fixed charges. Fixed charges consist of interest on debt and a
portion of net rental expense deemed to represent interest.
(3) AMIC and CPLC have been accounted for as discontinued operations on the
consolidated statements of income for the year ended December 31, 1998.
Consequently, prior years' consolidated statements of income have been restated
to conform to current year presentation.
</TABLE>
<PAGE>12
Exhibit (99.04)
PITNEY BOWES CREDIT CORPORATION
Item 7. -- Management's discussion and analysis of financial condition and
results of operations
Results of Operations
As of June 30, 1999, the Company committed itself to a formal plan to dispose
of the operations and assets of its mortgage servicing business at Atlantic
Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary of the
Company. 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 $132.1, $73.2 and $53.0 million for 1998,
1997 and 1996, respectively. (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 capital services
financing business to General Electric Capital Corporation ("GECC"). As a
result, CPLC has been accounted for as discontinued operations in the
accompanying consolidated statements of income. Finance income of CPLC was
$128.8 million for the ten month period ended October 31, 1998, and $180.5 and
$163.0 million for the years ended December 31, 1997 and December 31, 1996,
respectively. (See Note 2 to the CONSOLIDATED FINANCIAL STATEMENTS.)
Accordingly, the discussion that follows concerns only the results of
continuing operations.
The Company's finance income from continuing operations decreased 2.0 percent
to $514.3 million in 1998 compared with $524.9 million in 1997, which was down
1.0 percent from 1996. Finance income for internal financing programs increased
8.0 percent to $358.3 million in 1998 compared with $331.8 million in 1997,
which was up 7.7 percent from 1996. These increases are primarily due to higher
income from fee-based programs and higher investment levels for the mailing and
copier programs. Finance income for capital services financing programs
decreased 19.2 percent to $156.0 million in 1998 compared with $193.1 million in
1997, which decreased 22.3 percent from 1996. The decreases for both 1998 and
1997 are primarily due to lower capital services investment levels in accordance
with the Company's strategy to shift the foundation of the capital services
financing business from asset-based to fee- and service- based revenues. (See
Note 3 to CONSOLIDATED FINANCIAL STATEMENTS.) This is partially offset by higher
revenue from income- and fee-based programs. Included in these revenues are
gains on asset sales of $7.7 million in 1998, $1.0 million in 1997 and $4.0
million in 1996. Also included are revenues from the Dictaphone and Monarch
portfolios of $9.2 million, $9.9 million, and $14.3 million in 1998, 1997 and
1996, respectively.
The Company had no equipment sales in 1998 and 1997 compared to $26.7
million in 1996. The book value of such equipment sold was $22.8 million in
1996.
Selling, general and administrative ("SG&A") expenses increased 0.5 percent
to $99.1 million in 1998 compared with $98.5 million in 1997, which was up 6.3
percent from 1996. SG&A expenses for internal financing programs increased 8.9
percent to $71.0 million in 1998 compared to $65.2 million in 1997, which was
7.8 percent above 1996. These increases are 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 expenses for
capital services financing programs decreased 16.0 percent to $27.7 million in
1998 compared with $32.9 million in 1997, up 3.4 percent from 1996. Included in
the prior year amount is a charge of approximately $5.0 million for costs
related to the transfer of certain capital services finance assets made in 1997.
(See Note 3 to CONSOLIDATED FINANCIAL STATEMENTS.) Also included in these
amounts are expenses related to asset sales of $0.4 million in 1998, none in
1997, and $0.3 million in 1996, as well as SG&A expenses of the Dictaphone and
Monarch portfolios of $0.7 million, $0.9 million and $1.2 million in 1998, 1997,
and 1996, respectively.
Depreciation on operating leases was $6.0 million in 1998 and $11.4 million in
1997 reflecting a lower operating lease average investment balance during 1998.
Costs associated with the Company's participation in partnership transactions
were $5.6 million in 1998 compared to $2.6 million in 1997. The increase is
primarily due to a partnership created in connection with an asset transfer made
during the fourth quarter of 1997.
The provision for credit losses in 1998 increased 5.9 percent to $36.1 million
compared to $34.1 million for 1997, which decreased 4.3 percent from 1996. The
provision for the internal financing programs increased 2.4 percent to $32.5
million in 1998 compared to $31.7 million in 1997, which had increased 2.4
percent from 1996. The increases are mainly due to increased provisions for the
Company's Purchase PowerSM and Business RewardsSM programs.
The provision for capital services financing programs was $3.6 million in 1998
compared with $2.4 million in 1997 and $4.7 million in 1996. Included in these
amounts were credit loss provisions related to asset sales of $1.1 million in
1998, none in 1997 and $0.9 million in 1996. Also included are provisions for
the Dictaphone and Monarch portfolios of $1.3 million, $1.8 million and $2.6
million for 1998, 1997 and 1996, respectively.
<PAGE>13
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, exclusive of assets held for
sale) was 2.87 percent at December 31, 1998, 2.55 percent at December 31, 1997
and 1.88 percent at December 31, 1996. PBCC charged $66.8 million, $60.5 million
and $69.2 million against the allowance for credit losses in 1998, 1997 and
1996, respectively.
Interest expense was $124.4 million in 1998 compared with $154.6 million in
1997, a decrease of 19.5 percent. The decrease in 1998 reflects lower average
borrowings combined with lower short-term interest rates. The effective interest
rate on short-term average borrowings was 4.00 percent in 1998 compared to 5.00
percent in 1997 and 4.89 percent in 1996. The Company does not match fund its
financing investments and does not apply different interest rates to its various
financing programs.
The effective tax rate for 1998 was 28.6 percent compared to 27.6 percent for
1997 and 31.5 percent in 1996. The higher effective tax rate is principally due
to higher state tax requirements related to certain leveraged lease
transactions.
Net income from continuing operations increased 8.4 percent to $174.7 million
in 1998 compared with $161.2 million in 1997, which was up 5.8 percent from
1996. The increase in 1998 is primarily attributable to higher Internal
Financing Division investment levels, additional fee-based income, and lower
borrowing levels partly offset by higher SG&A.
The Company's ratio of earnings from continuing operations to fixed charges
was 2.96 times for 1998 compared with 2.43 times for 1997 and 2.35 times for
1996. The increase reflects the disposition of capital services assets, the
proceeds from which were used for debt reduction.
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 45 percent short-term and 55
percent long-term at December 31, 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 24 percent variable-rate and 76 percent fixed-rate at
December 31, 1998 and 47 percent variable-rate and 53 percent fixed-rate at
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.
In January 1998, the Company issued $250 million of 5.65% unsecured notes (the
"Notes") available under a shelf registration filed with the Securities and
Exchange Commission in September 1995. The Notes are due January 15, 2003, with
interest payable on January 15 and July 15 of each year, commencing July 15,
1998. The Notes are not redeemable at the option of the Company or repayable at
the option of any holder prior to maturity. The Company also entered into an
interest rate swap for a notional amount of $125 million, at a fixed interest
rate of 5.83% and a floating rate equal to the Money Market Yield of Commercial
Paper-Nonfinancial. Under the terms of the interest rate swap the Company is the
fixed rate payer. The interest rate swap is effective through February 2, 2005.
On September 30, 1998, certain partnerships controlled by affiliates of the
Company issued a total of $282 million 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 .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 million and bear interest at a floating rate of LIBOR
plus one percent, set as of the quarterly interest payment dates. (See Note 10
to CONSOLIDATED FINANCIAL STATEMENTS).
In July 1998, the Company filed a new 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 million. The Company expects
to have in place shortly, a medium-term note program which will allow it to
issue debt securities having maturities ranging from nine months to 30 years.
(See Note 10 to CONSOLIDATED FINANCIAL STATEMENTS). The Company also had unused
lines of credit and revolving credit facilities totaling $1.2 billion at
December 31, 1998, largely supporting its commercial paper borrowings.
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.
<PAGE>14
The Company is periodically exposed to credit loss in the event of
non-performance by the counterparties to the interest rate swaps to the extent
of the differential between fixed- and variable-rates; such exposure is
considered minimal. The Company periodically enters into a foreign currency
contract for the purpose of minimizing its risk of loss from fluctuations in
exchange rates in connection with certain intercompany transactions. When in
effect, the Company is exposed to credit loss in the event of non-performance by
the counterparties to the foreign currency contracts to the extent of the
difference between the spot rate at the date of the contract delivery and the
contracted rate; such exposure is also considered minimal. At December 31, 1998
there were no foreign currency contracts outstanding.
Since the Company normally enters into derivative transactions only with
members of its banking group, the credit risk of these transactions is monitored
as part of the normal credit review of the banking group. The Company monitors
the market risk of derivative instruments through periodic review of fair market
values.
The Company continues to actively pursue a strategy of asset sales, thereby
allowing it to focus on fee- and service-based revenue rather than asset-based
income. In keeping with this strategy, during 1997 the Company entered into a
transaction with GATX Capital Corporation which reduced capital services finance
assets by approximately $1 billion. As part of this transaction, the Company
holds approximately $166 million of equity investment in a limited liability
company. (See Note 3 to CONSOLIDATED FINANCIAL STATEMENTS.) Additionally, in
1998, 1997 and 1996, the Company sold approximately $384 million, $264 million
and $409 million, respectively, of capital services finance assets. Sales of
these asset portfolios were made with limited recourse in privately-placed
transactions with third-party investors. The proceeds from the sales of these
assets were used to repay a portion of the Company's commercial paper
borrowings. The uncollected principal balance of receivables sold at December
31, 1998 and 1997 was $501.2 million and $391.0 million, respectively.
The Company's liquidity ratio (finance contracts receivable plus residuals
expected to be realized in cash over the next 12 months to current maturities of
debt over the same period) was 1.47 and .89 times at December 31, 1998 and 1997,
respectively.
Under the Finance Agreement between Pitney Bowes and the Company, Pitney Bowes
is obligated on a quarterly basis to make payments, to the extent necessary, so
that the Company's earnings available for fixed charges for the preceding one
year period shall not be less than 1.25 times its fixed charges. Pitney Bowes
has also agreed to make any past due principal, interest or premium payments on
behalf of PBCC in respect to all approved debt and/or commercial paper, in the
event that PBCC is unable to make such payments. To date, no such payments from
Pitney Bowes have been required.
The Company will continue to use cash to invest in finance assets with
emphasis on internal leasing transactions and controlled investment in capital
services financing transactions. 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
dependent on the level of equipment purchases from PBI, the level of capital
services financing activity, capital requirements for new business initiatives,
intercompany loans and the refinancing of maturing debt. Additional cash, to the
extent needed, is expected to be provided from commercial paper, intermediate-
or long-term debt securities and intercompany funds, when available. While the
Company expects that market acceptance of its short- and long-term debt will
continue to be strong, additional liquidity is available, if needed, under
revolving credit facilities and credit lines.
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 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.
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 has completed its worldwide inventory and assessment of all business
systems and supporting infrastructure. Required modifications are still in
progress but were substantially completed 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 whether such third
parties will be able to address their Year 2000 problems on a timely basis. .
<PAGE>15
PBCC estimates the total cost of the program from inception in 1997 through
the Year 2000 to be approximately $2 million, of which approximately $1.2
million was 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.
Other Matters
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). Under SFAS 131, the Company has two reportable segments: Internal
Financing programs and Capital Services programs. (See Note 12 to CONSOLIDATED
FINANCIAL STATEMENTS.)
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.
Legal, Environmental and Regulatory Matters
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 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 condition, results of operations or cash flows.
Pitney Bowes is subject to Federal, state and local laws and regulations
related to the environment, and is currently named as a member of various groups
of potentially responsible parties in administrative or court proceedings. Based
on facts presently known, PBI believes that the outcome of any current
proceeding will not have a material adverse effect on its financial condition,
results of operations or cash flows.
In June 1995, the United States Postal Service ("USPS") finalized and issued
regulations governing the manufacture, distribution and use of postage meters.
These regulations cover four general categories: meter security, administrative
controls, Computerized Meter Resetting Systems and other issues. Pitney Bowes
continues to comply with these regulations in its ongoing postage meter
operations.
In May 1996, the USPS issued a proposed schedule for the phaseout of
mechanical meters in the United States. Between May 1996 and March 1997, PBI
worked with the USPS to negotiate a revised mechanical meter migration schedule
which better reflected the needs of existing mechanical meter users and
minimized any potential negative financial impact. The final schedule agreed to
with the USPS is as follows:
o as of June 1, 1996, new placements of mechanical meters would no longer be
permitted; replacements of mechanical meters previously licensed to
customers would be permitted prior to the applicable suspension date for
that category of mechanical meter
o as of March 1, 1997, use of mechanical meters by persons or firms who process
mail for a fee would be suspended and would have to be removed from service o as
of December 31, 1998, use of mechanical meters that interface with mail machines
or processors ("systems meters") would be suspended and would have to be
removed from service
o as of March 1, 1999, use of all other mechanical meters ("stand-alone meters")
would be suspended and have to be removed from service
Based on the foregoing schedule, PBI believes that the phaseout of mechanical
meters will not have a material adverse financial impact.
As a result of the PBI's aggressive efforts to meet the USPS mechanical meter
migration schedule combined with its ongoing and continuing investment in
advanced postage evidencing technologies, mechanical meters represent less than
10% of PBI's installed U.S. meter base as of December 31, 1998, compared with
25% as of December 31, 1997.
<PAGE>16
In May 1995, the USPS publicly announced its concept of its Information Based
Indicia Program ("IBIP") for future postage evidencing devices. As initially
stated by the USPS, the purpose of the program was to develop a new standard for
future digital postage evidencing devices which significantly enhanced postal
revenue security and supported expanded USPS value-added services to mailers.
The program would consist of the development of four separate specifications:
o the Indicium specification- the technical specifications for the Indicium to
be printed
o a Postal Security Device specification- the technical specification for the
device that would contain the accounting and security features of the system
o a Host specification
o a Vendor Infrastructure specification
In July 1996, the USPS published for public comment draft specifications for
the Indicium, Postal Security Device and Host specifications. Pitney Bowes
submitted extensive comments to these specifications. In March 1997, the USPS
published for public comment the Vendor Infrastructure specification.
On August 26, 1998, the USPS published for public comment a consolidated and
revised set of IBIP specifications entitled "Performance Criteria for
Information Based Indicia and Security Architecture for IBI Postage Metering
Systems" (the "IBI Performance Criteria"). The IBI Performance Criteria
consolidated the aforementioned IBIP specifications and incorporated many of the
comments previously submitted by the Company. PBI submitted comments to the IBI
Performance Criteria on November 30, 1998.
As of December 31, 1998, PBI is in the process of finalizing the development
of a PC project, which satisfies the proposed IBI Performance Criteria. This
product is currently undergoing beta testing and is expected to be ready for
market upon final approval from the USPS.
- --------------------------------------------------------------------------------
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), in this Form 10-K or made by Company management involve risks and
uncertainties which may change based on various important factors. Some of the
factors which could cause future financial performance to differ materially from
the expectations as 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 in the
United States; 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; and 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 effects of third parties' inability to address the Year 2000
problem, as well as the Company's own readiness.
<PAGE>17
Exhibit (99.05)
PITNEY BOWES CREDIT CORPORATION
Item 7A. -- quantitative and qualitative disclosures about market risk
Market Risk
In the normal course of business, PBCC is exposed to the impact of market
risk. Market risk is the sensitivity of income to variations in interest rates,
foreign exchange rates, and other market-driven rates or prices.
Interest-rate risk is the most significant market risk to which the Company is
exposed. Interest-rate risk is the sensitivity of income to variations in
interest rates.
The Company manages its interest-rate risk mainly by using a variety of
off-balance sheet instruments. The most frequently used off-balance sheet
instruments are interest-rate swaps and options (particularly interest-rate
floors).
At December 31, 1998, interest-rate swaps totaling $325 million (notional
amount) were being used to manage risk due to interest-rate risk.
A second major source of the Company's interest-rate risk is the sensitivity
of its mortgage servicing rights ("MSRs") to prepayments. The mortgage borrower
has the option to repay the mortgage loan at any time. When mortgage interest
rates decline, borrowers have a greater incentive to prepay mortgage loans
through a refinancing; when mortgage interest rates rise, this incentive is
reduced or eliminated. Since MSRs represent the right to service mortgage loans,
a decline in interest rates and an actual (or probable) increase in mortgage
prepayments shortens the expected life of the MSR asset and reduces its economic
value. Correspondingly, an increase in interest rates and an actual (or
probable) decline in mortgage prepayments lengthen the expected life of the MSR
asset and enhance its economic value. The expected income from and, therefore,
economic value of MSRs is sensitive to movements in interest rates due to this
sensitivity to mortgage prepayments.
To mitigate the risk of declining long-term interest rates,
higher-than-expected mortgage prepayments, and the potential impairment of the
MSRs, the Company uses interest-rate swaps and floors. These instruments gain
value as interest rates decline, mitigating the impairment of MSRs. At December
31, 1998, the Company had approximately $275 million of interest-rate swaps and
$1.3 billion of interest-rate floors outstanding (notional amounts) to manage
risk to the MSRs' valuation.
It is the Company's policy to use financial instruments only to the extent
necessary to meet the above stated objectives, and not for speculative purposes.
PBCC uses a Value-at-Risk ("VaR") model to determine the maximum potential
one-day loss in the fair value of its interest rate and foreign exchange
sensitive financial instruments. The VaR model estimates were made assuming
normal market conditions and a 95% confidence level. The Company's computations
are based on the interrelationships between movements in various currencies and
interest rates. The model includes all of the Company's debt as well as interest
rate swaps. Anticipated transactions, firm commitments and accounts receivable
and payable denominated in foreign currencies, which certain of these
instruments are intended to hedge, were excluded from the model.
The VaR model is a risk analysis tool and does not purport to represent actual
losses in fair value that will be incurred by PBCC, nor does it consider the
potential effect of favorable changes in market factors. At December 31, 1998,
the Company's maximum potential one-day loss in fair value on the interest rate
swaps, using a variance/co-variance technique, was not material to the Company's
financial condition, results of operations or cash flows. (See Note 13 to
CONSOLIDATED FINANCIAL STATEMENTS.)
<PAGE>18
Exhibit (99.06)
PITNEY BOWES CREDIT CORPORATION
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 accompanying consolidated balance sheets and the related
consolidated statements of income, of retained earnings and of cash flows
present fairly, in all material respects, the financial position of Pitney Bowes
Credit Corporation and its subsidiaries (the "Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 21, 1999, except as to Note 2 which is as of July 20, 1999
<PAGE>19
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars)
<TABLE>
<S> <C> <C> <C>
Years Ended December 31 1998 1997 1996
---- ---- ----
Revenue:
Finance income...................................... $ 514,287 $ 524,913 $ 529,987
Equipment sales..................................... - - 26,666
------- ------- -------
Total revenue..................................... 514,287 524,913 556,653
------- ------- -------
Expenses:
Selling, general and administrative................. 99,067 98,542 92,737
Depreciation and amortization....................... 10,040 15,218 19,155
Cost of equipment sales............................. - - 22,821
Provision for credit losses......................... 36,080 34,076 35,617
Interest............................................ 124,411 154,634 163,860
------- ------- -------
Total expenses.................................... 269,598 302,470 334,190
------- ------- -------
Income from continuing operations
before income taxes................................. 244,689 222,443 222,463
Provision for income taxes............................ 69,946 61,285 70,114
------- ------- -------
Income from continuing operations..................... 174,743 161,158 152,349
Discontinued operations (net of taxes of $17,751 in 1998;
$20,998 in 1997 and $16,740 in 1996)................ 32,733 33,675 26,885
------- ------- -------
Net income [1]........................................ $ 207,476 $ 194,833 $ 179,234
======= ======= =======
</TABLE>
Consolidated StatementS of Retained Earnings
(in thousands of dollars)
<TABLE>
<S> <C> <C> <C>
Years Ended December 31 1998 1997 1996
---- ---- ----
Retained earnings at beginning of year................ $ 1,007,136 $ 890,303 $ 782,269
Net income for the year............................... 207,476 194,833 179,234
Dividends paid to Pitney Bowes Inc.................... (86,000) (78,000) (71,200)
-------- ------- -------
Retained earnings at end of year...................... $ 1,128,612 $ 1,007,136 $ 890,303
======== ======== =======
</TABLE>
[1] For the years ended December 31, 1998, 1997 and 1996, the Company
had no other comprehensive income items. Consequently, net income
represents the Company's total comprehensive income.
The accompanying notes are an integral part of the financial statements.
<PAGE>20
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
December 31,
<S> <C> <C>
1998 1997
---- ----
Assets:
Cash..................................................................... $ 19,154 $ 36,320
--------- ---------
Investments:
Finance assets......................................................... 2,721,805 3,475,538
Investment in leveraged leases......................................... 764,145 667,779
Investment in operating leases, net of accumulated depreciation........ 33,261 32,112
Allowance for credit losses............................................ (115,233) (116,588)
--------- ---------
Net investments...................................................... 3,403,978 4,058,841
--------- ---------
Mortgage servicing rights, net of accumulated amortization............. 364,071 220,912
Assets held for sale................................................... 337,757 305,228
Investment in partnership.............................................. 165,950 158,327
Loans and advances to affiliates....................................... 611,625 290,488
Other assets........................................................... 391,135 258,224
--------- ---------
Total assets........................................................ $ 5,293,670 $ 5,328,340
========= =========
Liabilities:
Senior notes payable within one year................................... $ 991,853 $ 1,970,110
Short-term notes payable to affiliates................................. 137,000 -
Accounts payable to affiliates......................................... 278,452 232,917
Accounts payable and accrued liabilities............................... 182,236 199,905
Deferred taxes......................................................... 486,906 510,060
Senior notes payable after one year.................................... 1,382,000 1,050,000
Long-term notes payable to affiliates.................................. 333,000 -
Subordinated notes payable............................................. 285,886 270,487
--------- ---------
Total liabilities.................................................. 4,077,333 4,233,479
--------- ---------
Stockholder's Equity:
Common stock........................................................... 46,000 46,000
Capital surplus........................................................ 41,725 41,725
Retained earnings...................................................... 1,128,612 1,007,136
--------- ---------
Total stockholder's equity.......................................... 1,216,337 1,094,861
--------- ---------
Total liabilities and stockholder's equity.......................... $ 5,293,670 $ 5,328,340
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>21
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<S> <C> <C> <C>
Years Ended December 31 1998 1997 1996
---- ---- ----
Operating Activities
Net income........................................................... $ 207,476 $ 194,833 $ 179,234
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses 65,404 78,320 66,529
Depreciation and amortization...................................... 75,163 42,648 40,447
Cost of equipment sales............................................ - - 22,821
Increase in deferred taxes.......................................... 22,387 31,436 37,300
Increase in other receivables....................................... (14,643) (37,782) (8,315)
Increase in foreclosure claims receivable........................... (23,414) (24,155) (3,673)
Increase in advances and deposits................................... (17,942) (23,351) (6,168)
Increase in loans held for sale..................................... (89,577) (12,336) (17,964)
Increase in accounts payable to affiliates.......................... 45,535 64,359 41,551
(Decrease) increase in accounts payable and accrued liabilities..... (7,518) 23,248 21,054
Other, net.......................................................... (10,155) 12,271 (784)
--------- --------- --------
Net cash provided by operating activities 267,752 349,491 372,032
--------- --------- --------
Investing Activities
Proceeds from sale of subsidiary................................... 789,936 - -
Investment in net finance assets................................... (1,399,498) (1,420,409) (1,494,606)
Investment in leveraged leases..................................... (77,441) (46,390) (22,446)
Investment in operating leases..................................... (6,366) (16,023) (20,348)
Investment in assets held for sale................................. (545,149) (650,951) (326,691)
Cash receipts collected under lease contracts, net of finance
income recognized............................................... 1,783,235 2,538,321 1,557,822
Investment in mortgage service rights.............................. (206,464) (110,014) (50,407)
Investment in affiliate notes...................................... (282,000) - -
Loans and advances to affiliated companies, net.................... (26,101) (281,777) (2,001)
Additions to equipment and leasehold improvements.................. (9,012) (14,327) (12,536)
--------- --------- --------
Net cash provided by (used in) investing activities.................. 21,140 (1,570) (371,213)
--------- --------- --------
Financing Activities
Net change in short-term debt..................................... (1,012,457) 89,029 (466,799)
Short-term loans from affiliates.................................. 137,000 (139,400) (10,309)
Proceeds from issuance of senior notes payable after one year..... 532,000 - 500,000
Proceeds from issuance of subordinated debt....................... 15,399 41,333 58,297
Settlement of long-term debt...................................... (225,000) (245,500) -
Loans from affiliates ............................................ 333,000 - -
Dividends paid to Pitney Bowes, Inc............................... (86,000) (78,000) (71,200)
--------- --------- --------
Net cash (used in) provided by financing activities.................. (306,058) (332,538) 9,989
--------- --------- --------
(Decrease) increase in cash.......................................... (17,166) 15,383 10,808
Cash at beginning of year............................................ 36,320 20,937 10,129
--------- --------- --------
Cash at end of year.................................................. $ 19,154 $ 36,320 $ 20,937
========= ========= ========
Interest paid........................................................ $ 162,270 $ 196,968 $ 197,256
========= ========= ========
Income taxes refunded, net........................................... $ (63,420) $ (21,773) $ (44,397)
========= ========= ========
Supplemental noncash activities:
During 1998, the Company acquired a lease portfolio consisting of direct
financing and operating leases. In connection with this acquisition, the Company
assumed certain non-recourse debt in the amount of $59.2 million.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>22
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 1. - Summary of Significant Accounting Policies
Consolidation The consolidated financial statements include the accounts of
Pitney Bowes Credit Corporation and all of its subsidiaries (the "Company" or
"PBCC"). All significant intercompany transactions and balances have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
Cash equivalents include short-term, highly liquid investments with a maturity
of three months or less from the date of acquisition.
Basis of accounting for financing transactions
At the time a financing 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 over the cost of equipment or
contract acquired. Unearned income is recognized as finance income under the
interest method over the term of the transaction. Initial direct costs incurred
in consummating transactions, including fees paid to Pitney Bowes Inc. ("Pitney
Bowes" or "PBI"), are accounted for as part of the investment in a direct
financing lease and amortized to income using the interest method over the term
of the lease. The Company has, from time-to-time, sold selected finance assets.
Beginning January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", to account for the sale of these assets.
All assets obtained or liabilities incurred in consideration are recognized as
proceeds of the sale and any resulting gain or loss is recognized in income
currently. Prior to January 1, 1997, the Company followed Statement of Financial
Accounting Standards No. 77, "Reporting by Transferors for Transfers of
Receivables with Recourse", when accounting for its sale of finance assets.
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. Finance receivables are charged to the allowance for credit losses after
the account is deemed uncollectible. (See Note 6 to CONSOLIDATED FINANCIAL
STATEMENTS.) The Company's general policy is to discontinue income recognition
for finance receivables contractually past due for over 90 to 120 days depending
on the nature of the transaction. Resumption of income recognition occurs when
payments reduce the account to 60 days or less past due. Capital services
transactions are reviewed on an individual basis. Income recognition is
discontinued when it is apparent an obligor will not be making payment in
accordance with lease terms and is resumed when the Company has sufficient
experience on resumption of payments to be satisfied that such payments will
continue in accordance with contract terms.
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 with a maturity one day
after all senior debt is repaid. 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.
Investment in operating leases
Equipment under operating leases is depreciated over the initial term of the
lease to its estimated residual value. Rental revenue is recognized on a
straight-line basis over the related lease term.
Mortgage servicing rights ("MSRs")
The Company recognizes, as separate assets, rights to service mortgage loans,
whether those servicing rights are originated or purchased. MSRs originated by
others, purchased separately from loans, are recorded at cost. The Company
assesses impairment of MSRs based on the fair value of those rights. The Company
estimates the fair value of MSRs based on estimated future net servicing income,
using a valuation model which considers such factors as market discount rates,
consensus loan prepayment predictions, servicing costs and other economic
factors. For purposes of impairment valuation, the CompanyAEs policy stratifies
MSRs based on predominant risk characteristics of the underlying loans,
including loan type, amortization type (fixed or adjustable) and note rate. To
the extent that the carrying value of MSRs exceeds fair value by individual
stratum, a valuation reserve is established, which is adjusted as the value of
MSRs increases or decreases. The cost of MSRs is amortized in proportion to and
over the period of estimated net servicing income.
Reclassifications
Certain amounts from prior years have been reclassified in order to conform to
current year presentation.
<PAGE>23
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 2. - Discontinued Operations
As of June 30, 1999, the Company committed itself to a formal plan to dispose of
the operations and assets of its mortgage servicing business at Atlantic
Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary of the
Company. At June 30, 1999, the Company estimated a loss on the disposal of AMIC
of approximately $34.2 million (net of taxes of $22.8 million). The loss was
recorded by PBCC at June 30, 1999.
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 capital services
financing business to General Electric Capital Corporation ("GECC"). As part of
the sale, the Company retained certain non-performing accounts of CPLC. (See
Note 6 to CONSOLIDATED FINANCIAL STATEMENTS.) . 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), recorded in the second quarter of 1999. The transaction
is still subject to post-closing adjustments pursuant to the terms of the
purchase agreement with GECC executed on October 12, 1998. The Company does not
expect the effect of any adjustments to be significant.
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 not been separately classified in the
consolidated balance sheets as of December 31, 1998 and 1997. Cash flow impacts
of discontinued operations have not been segregated in the accompanying
consolidated statements of cash flows. Details of income from discontinued
operations, net of taxes, are as follows (in thousands of dollars):
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
AMIC (net of taxes of $12,514; $10,452 and $6,331) $ 24,280 $ 16,650 $ 10,081
CPLC (net of taxes of $5,237; $10,546 and $10,409) 8,453 17,025 16,804
------- ------- -------
Income from discontinued operations, net
of taxes $ 32,733 $ 33,675 $ 26,885
======== ========= ========
</TABLE>
Mortgage servicing revenue of AMIC was $132.1, $73.2 and $53.0 million for 1998,
1997 and 1996, respectively. Net interest expense (income) allocated to AMIC's
discontinued operations was $4.9, $0.1 and $(1.8) million for 1998, 1997, and
1996, respectively. 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 $128.8 million for the ten months ended October 31,
1998 and $180.5 million and $163.0 million for the years ended December 31, 1997
and 1996, respectively. Interest expense allocated to discontinued operations
was $33.9 million for the ten months ended October 31, 1998 and $46.2 million
and $40.7 million for the years ended December 31, 1997 and 1996, respectively.
Interest expense has been allocated based on the level of CPLC's intercompany
borrowing, charged at the Company's weighted average borrowing rate.
<PAGE>24
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 3. - Finance Assets
The composition of the Company's finance assets is as follows:
<TABLE>
<S> <C> <C>
December 31 1998 1997
---- ----
(in thousands of dollars)
Gross finance receivables.................................. $ 3,050,572 $ 3,923,767
Unguaranteed residual valuation............................ 412,569 461,051
Initial direct costs deferred.............................. 46,224 85,497
Unearned income............................................ (787,560) (994,777)
--------- ---------
Total finance assets..................................... $ 2,721,805 $ 3,475,538
========= =========
</TABLE>
Gross finance receivables represent earning assets held by the Company which are
generally due in monthly, quarterly or semi-annual installments over original
periods ranging from 36 to 180 months. In addition, gross finance receivables
for the Company's capital services programs include commercial jet aircraft
transactions with original lease terms of up to 23 years and other
non-commercial jet aircraft transactions with original lease terms ranging from
two to 12 years. The balance due at December 31, 1998, including estimated
residual value realizable at the end of the lease term, is payable as follows:
<TABLE>
<S> <C> <C> <C>
Gross Finance Assets
-----------------------------------------------------------
Internal Financing Capital Services Total
1999 $1,125,925 $ 134,753 $1,260,678
2000 662,580 121,363 783,943
2001 460,061 90,612 550,673
2002 241,231 98,914 340,145
2003 62,815 68,107 130,922
Thereafter 7,912 388,868 396,780
-------- -------- --------
Total $2,560,524 $ 902,617 $3,463,141
======== ======== ========
</TABLE>
Net equipment financed for Pitney Bowes products were $672.7 million, $611.2
million and $571.6 million in 1998, 1997, and 1996, respectively.
During 1997, PBCC and GATX Corporation ("GATX") formed PBG Capital Partners LLC
("PBG") for the purpose of financing and managing certain leasing related
assets. PBCC and GATX each contributed assets (primarily direct financing
leases) to PBG. The Company and GATX each maintain a 50 percent ownership
interest and jointly manage PBG. PBCC accounts for its investment in PBG under
the equity method and recorded income of approximately $8.0 million and $1.2
million in 1998 and 1997, respectively. During 1998, PBCC contributed $65.3
million of assets to PBG and received cash distributions totaling $89.6 million.
Total assets sold and contributed (including assets sold to GATX) by PBCC during
1997 were $958.8 million.
During 1998, 1997 and 1996, PBCC sold finance assets with limited recourse of
approximately $384 million, $264 million and $409 million, respectively. The
uncollected principal balance of receivables sold at December 31, 1998 and 1997
was $501.2 million and $391.0 million, respectively. The maximum risk of loss in
these transactions arises from the possible non-performance of lessees to meet
the terms of their contracts. The Company believes adequate provisions have been
made for sold receivables which may become uncollectible.
As of December 31, 1998, $326.8 million (12.0 percent) of the Company's finance
assets and $428.8 million (12.4 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 due to the credit worthiness of
the underlying lessees and the fact that all payments are being made 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.
<PAGE>25
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 4. - Net Investment in Leveraged Leases
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<S> <C> <C>
December 31 1998 1997
---- ----
(in thousands of dollars)
Net rents receivable....................................... $ 788,404 $ 627,655
Unguaranteed residual valuation............................ 599,741 599,741
Unearned income............................................ (624,000) (559,617)
--------- ---------
Investment in leveraged leases............................. 764,145 667,779
Deferred taxes arising from
leveraged leases (1) ..................................... (450,900) (308,746)
--------- ---------
Net investment in leveraged leases......................... $ 313,245 $ 359,033
========= =========
</TABLE>
(1) Includes amounts reclassified to subordinated debt.
Following is a summary of the components of income from leveraged leases:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Pretax leveraged lease income............... $ 16,513 $ 4,467 $ 7,145
Income tax benefit.......................... 11,770 17,110 7,080
------- ------- -------
Net income from leveraged leases........... $ 28,283 $ 21,577 $ 14,225
======= ======= =======
</TABLE>
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 $301.6 million (39.5 percent) are related
to commercial real estate facilities, with original lease terms ranging up to 25
years. Also included are seven aircraft transactions with major commercial
airlines, with a total investment of $297.5 million (38.9 percent) and with
original lease terms ranging from 22 to 25 years; one transaction involving
locomotives with a total investment of $37.0 million (4.8 percent) with an
original lease term of 38 years and five transactions involving rail and bus
facilities with a total investment of $128.0 million (16.8 percent) and original
lease terms of 37 to 44 years.
Note 5. - Investment in Operating Leases, Net
The Company is the lessor of various types of equipment under operating leases
including data processing, transportation and production equipment.
Minimum future rental payments to be received in each of the next five years
under non-cancelable operating leases are $1.6 million in 1999, $0.7 million in
2000, $0.5 million in 2001, $0.3 million in 2002, $0.1 million in 2003 and $0.3
million thereafter.
<PAGE>26
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 6. - Allowance for Credit Losses
The following is a summary of the allowance for credit losses, substantially all
of which relates to lease financing:
<TABLE>
<S> <C> <C> <C>
December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Beginning balance.......................... $ 116,588 $ 98,721 $ 101,355
Additions charged to
discontinued operations.................. 29,324 44,244 30,912
Additions charged to continuing operations. 36,080 34,076 35,617
Amounts written-off:
Internal programs....................... (28,945) (27,182) (22,879)
Capital services........................ (490) 40 (101)
External small-ticket................... (37,324) (33,311) (46,183)
------- ------- -------
Total write-offs.................... (66,759) (60,453) (69,163)
------- ------- -------
Ending balance............................. $ 115,233 $ 116,588 $ 98,721
======= ======= =======
</TABLE>
The increase in the amount of additions charged to continuing operations in 1998
is the result of higher investment levels in the Company's new business
initiatives and the impact of finance asset sales. The decrease in 1997
additions was due to favorable adjustments to the internal financing programs
provisions reflecting management's evaluation of expected losses.
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 capital services financing transactions, the credit ratings assigned by
Moody's and Standard & Poor's. In evaluating the adequacy of reserves, estimates
of expected losses, again by nature of the asset, are utilized. While historical
experience is the principal factor in determining loss percentages, adjustments
will also be made for current economic conditions, deviations from historical
aging patterns, seasonal write-off patterns and levels of non-earning assets. If
the resulting evaluation of expected losses differs from the actual aggregate
reserve, adjustments are made to the reserve.
For transactions in the internal programs, the Company discontinues income
recognition for finance receivables past due over 120 days. The Company has
utilized this period because historically internal collection efforts have
continued for this time period. In capital services programs, income recognition
is discontinued as soon as it is apparent that the obligor will not be making
payments in accordance with lease terms, such as in the event of bankruptcy.
Otherwise, income recognition is discontinued when accounts are past due over 90
days.
Finance receivables are written-off to the allowance for credit losses after
collection efforts are exhausted and the account is deemed uncollectible. For
internal financing transactions, this usually occurs near the point in time when
the transaction is placed in a non-earning status. For capital services
financing 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 capital services
financing 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 the future expected recovery. All write-offs and
adjustments are recorded on a transaction by transaction basis.
Resumption of income recognition on internal program non-earning accounts occurs
when payments are reduced to 60 days or less past due. On capital services
financing transactions, resumption of income recognition occurs after the
Company has had sufficient experience on resumption of payments and is satisfied
that such payments will continue in accordance with the original or restructured
contract terms.
The carrying values of non-performing and troubled finance assets are outlined
below. There are no leveraged leases classified under these categories.
<PAGE>27
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 6. - Allowance for Credit Losses (continued)
<TABLE>
<S> <C> <C> <C>
December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Non-performing (non-accrual) transactions
Internal programs....................... $ 15,214 $ 11,394 $ 12,614
Capital services programs............... 2,134 2,543 2,643
External small-ticket................... 42,063 37,184 23,766
------- ------- -------
Total............................... $ 59,411 $ 51,121 $ 39,023
======= ======= =======
Troubled (potential problem) transactions
Capital services programs............... $ 12,906 $ 13,446 $ 13,810
======= ======= =======
</TABLE>
The increase in non-performing transactions in 1998 and 1997 in the external
small-ticket programs was due to an increase in bankruptcy levels among certain
lease customers. As part of the sale of CPLC in October 1998, the Company
retained certain non-performing accounts. These accounts have been placed with a
specialized late stage collection group in an effort to maximize the potential
for recovery. The Company believes it has sufficient reserves to provide for any
losses which may result from the final resolution of the above transactions.
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 capital services financing programs
and the limited number of transactions with material credit loss exposure in
other areas. As stated previously, the Company evaluates its aggregate reserve
position in comparison to estimates of aggregate expected losse.
However, for non-performing capital services financing transactions, the Company
has adjusted the face value of these receivables through the following
adjustments:
<TABLE>
<S> <C> <C> <C>
December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Face value of receivables.................. $ 2,500 $ 2,500 $ 2,500
Cash collections applied to principal...... (1,481) (1,352) (1,252)
------- ------- -------
Carrying value............................. $ 1,019 $ 1,148 $ 1,248
======= ======= =======
</TABLE>
Note 7. - Mortgage Servicing Rights
The cost of rights to service mortgage loans, whether those servicing rights are
originated or purchased, are capitalized and recorded as separate assets by the
Company. These costs are amortized in proportion to and over the period of
estimated net servicing income. The Company assesses impairment of MSRs based on
the fair value of those rights. The Company estimates the fair value of MSRs
based on estimated future net servicing income, using a valuation model which
considers such factors as market discount rates, consensus loan prepayment
predictions, servicing costs and other economic factors. For purposes of
impairment valuation, the Company's policy stratifies MSRs based on predominant
risk characteristics of the underlying loans, including loan type, amortization
type (fixed or adjustable) and note rate. To the extent that the carrying value
of MSRs exceeds fair value by individual stratum, a valuation reserve is
established, which is adjusted as the value of MSRs increases or decreases.
The Company purchased rights to service loans with aggregate unpaid principal
balances of approximately $12.4 billion in 1998, $8.1 billion in 1997, and $5.3
billion in 1996. The costs associated with acquiring these rights were
capitalized and recorded as MSRs.
<PAGE>28
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 7. - Mortgage Servicing Rights (continued)
The following summarizes the Company's capitalized MSR activity:
<TABLE>
<S> <C> <C> <C>
December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Balance at beginning of year................ $ 220,912 $ 138,146 $ 108,851
MSR acquisitions............................ 206,464 110,014 50,407
Deferred hedge loss......................... 1,709 - -
MSR amortization............................ (54,787) (27,248) (21,112)
Impairment reserve.......................... (10,227) - -
------- ------- -------
Balance at end of year..................... $ 364,071 $ 220,912 $ 138,146
======= ======= =======
</TABLE>
The fair value of MSRs was approximately $372.9 million at December 31, 1998 and
$247.5 million at December 31, 1997.
Note 8. - Assets Held for Sale
The Company funded transactions totaling $545.1 million in 1998, $650.9 million
in 1997, and $326.7 million in 1996, relating to assets held for sale.
Transactions totaling $380.3 million in 1998 and $445.5 million in 1997, were
sold for a net gain before taxes of $7.4 million in 1998 and $6.3 million in
1997, which is recorded as part of finance income. Thirty-eight transactions
relating to assets held for sale remain in inventory with a net carrying value
of $337.8 million at December 31, 1998 compared with twenty-one transactions
with a net carrying value of $305.2 million at December 31, 1997.
Note 9. - Other Assets
<TABLE>
<S> <C> <C>
December 31 1998 1997
---- ----
(in thousands of dollars)
Loans held for sale......................................... $ 131,504 $ 41,927
Other receivables........................................... 74,834 60,191
Foreclosure claims receivable, net.......................... 57,471 34,057
Equipment and leasehold improvements, net of accumulated
depreciation and amortization: 1998-$22,259; 1997-$21,975 15,393 30,612
Billed meter rental receivables ............................ 33,514 29,582
Mortgage escrow advances.................................... 33,019 25,634
Other advances and deposits................................. 29,698 19,141
MSR hedge................................................... 3,950 -
Deferred partnership fees................................... 3,330 5,290
Deferred debt placement fees................................ 3,594 3,308
Goodwill, net of accumulated amortization:
1998-$2,518; 1997-$2,132.................................. 2,131 2,518
Interest discount on commercial paper....................... 51 2,672
Prepaid expenses and other assets........................... 2,646 3,292
-------- --------
Total other assets......................................... $ 391,135 $ 258,224
======== ========
</TABLE>
Loans held for sale consist of purchased and originated mortgage loans secured
by first real estate mortgages and are stated at the lower of aggregated cost or
market. Market value is determined by outstanding committments from investors or
by current investor yield requirements. In general, the Company enters into
forward delivery contracts for the sale of loans. Write-downs of loans to the
lower of cost or market are included in net income of the period in which the
adjustment occurs. Any discount resulting from the purchase of mortgage loans is
not included in net income until the loans are sold. There were no write-downs
of loans held for sale for the years ended December 31, 1998 or 1997.
<PAGE>29
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 9. - Other Assets (continued)
Other receivables increased over the prior year mainly due to higher billed
receivables at the Company's Mortgage Servicing subsidiary and proceeds due on
syndication transactions.
Foreclosure claims receivable include loans and related advances in the process
of foreclosure. Such loans are insured or guaranteed by either the Federal
Housing Administration, the Veterans Administration or private mortgage
insurance and will be repaid when the foreclosure process is completed. The
Company has established reserves for possible losses in excess of insured or
guaranteed amounts of approximately $8.4 million at December 31, 1998 and $5.5
million at December 31, 1997.
Equipment and leasehold improvements are stated at cost. Equipment is
depreciated on a straight-line basis over the expected useful life generally
ranging from five to ten years. Leasehold improvements are amortized on a
straight-line basis over the remaining lease terms.
Billed meter rental receivables represent uncollected meter rental receivables
billed to customers who have opted to have their meter rental charged on their
lease invoice. PBCC remits these charges to PBI based on billings. There is no
reserve established at PBCC, since any unpaid meter rentals are netted against
future payments due PBI. The increase in billed meter rental receivables
resulted from a larger customer base and higher meter rates.
Mortgage escrow advances include advances made in connection with loan servicing
activities. These advances consist primarily of property taxes and insurance
premiums made before they are collected from mortgagors.
Other advances and deposits include advances made in connection with the
acquisition of new mortgage servicing portfolios.
The MSR hedge represents the net carrying value of the interest rate floor
contract the Company has entered into during 1998.
Deferred partnership fees relate to a transaction whereby the Company
contributed certain commercial aircraft, subject to direct financing leases, to
a majority-owned partnership. Partnership fees incurred in connection with this
transaction are amortized over the term of the transaction.
Deferred debt placement fees incurred in connection with placing senior and
subordinated notes are amortized over the related terms of the notes
Note 10. - Accounts Payable and Accrued Liabilities
<TABLE>
<S> <C> <C>
December 31 1998 1997
---- ----
(in thousands of dollars)
Advances and deposits from customers........................ $ 48,448 $ 51,616
Accounts payable............................................ 45,787 48,572
Accrued interest payable.................................... 27,393 23,081
Sales and use, property and sundry taxes.................... 15,282 14,663
Portfolio purchase price payable............................ 4,448 12,800
Accrued salary and benefits payable......................... 5,664 8,662
Minority interest in partnership............................ 8,751 8,130
Other liabilities........................................... 26,463 32,381
-------- --------
Total accounts payable and accrued liabilities............. $ 182,236 $ 199,905
======== ========
</TABLE>
<PAGE>30
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 11. - Notes Payable
Short-term notes payable totaled $1.0 billion at December 31, 1998 and $2.0
billion at December 31, 1997. These notes were issued as commercial paper, loans
against bank lines of credit, or to trust departments of banks and others at
rates below the prevailing prime rate.
The composition of the Company's notes payable is as follows:
<TABLE>
<S> <C> <C>
December 31 1998 1997
---- ----
(in thousands of dollars)
Senior Notes Payable:
Commercial paper at the weighted average
interest rate of 4.90% (5.66% in 1997).................... $ 173,700 $ 1,361,110
Notes payable against bank lines of credit and others at a
weighted average interest rate of 1.16% (1.68% in 1997)... 618,153 384,000
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............. 991,853 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................................. 2,373,853 3,020,110
--------- ---------
Notes Payable to Affiliates:
Due within one year at interest rates of 5.38% and 5.55%... 137,000 -
Due after one year at an interest rate of 5.38%............ 333,000 -
--------- ---------
Total notes payable to affiliates.......................... 470,000 -
--------- ---------
Subordinated Notes Payable:
Non-interest bearing notes due Pitney Bowes Inc............. 285,886 270,487
--------- ---------
Total notes payable........................................ $ 3,129,739 $ 3,290,597
========= =========
</TABLE>
At December 31, 1998, the Company had unused lines of credit and revolving
credit facilities totaling $1,200 million largely supporting commercial paper
borrowings. The Company recorded commitment fees of $0.7 million, $0.6 million
and $1.3 million in 1998, 1997 and 1996, respectively, to maintain its lines of
credit. The reduction in commitment fees from 1996 is a result of reductions in
commitment fee rates in January 1997.
Total notes payable at December 31, 1998 mature as follows: approximately $1,129
million in 1999, $87 million in 2000, $519 million in 2001, $137 million in
2002, $437 million in 2003 and $821 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 earnings
available for fixed charges or make approved debt/commercial paper principal,
interest or premium payments in the event that PBCC is unable to. To date, no
such payments have been required to maintain earnings available for fixed charge
coverage or to maintain the Company's contractual liquidity obligations.
In January 1998, the Company issued $250 million of medium-term notes due in
January 2003.
<PAGE>31
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 11. - Notes Payable (continued)
On September 30, 1998, the Company issued a total of $282 million of Series A
and Series B Secured Floating Rate Senior Notes (the "Notes"), through certain
affiliates. The Notes are due in 2001 and bear interest at a floating rate of
LIBOR plus .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. (the "PBI Obligations"). The PBI Obligations have a principal amount
of $282 million and bear interest at a floating rate of LIBOR plus one percent,
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 million. 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. At December 31, 1998, the entire $750 million was
available under the shelf registration.
In 1998 and 1997, the Company issued $15.4 million and $41.3 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 1997 and 1996 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.
<PAGE>32
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 12. - Business Segment Information
The Internal Financing Division of PBCC provides marketing support to PBI.
Equipment leased or financed for Internal Division programs include mailing,
paper handling and shipping equipment, scales, copiers, and facsimile units.
PBCC's Capital Services Division operates in the commercial and industrial
market by offering financial services to its customers for products not
manufactured or sold by PBI or its subsidiaries. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. (See Note 1 to CONSOLIDATED FINANCIAL STATEMENTS.)
Operating profit of each segment is determined by deducting from revenue the
costs and expenses directly related to the segment as well as an allocation of
certain corporate expenses. Operating profit excludes income taxes and net
interest attributable to corporate debt. Identifiable assets are those used by
the segment directly in operations and exclude cash and cash equivalents,
short-term investments and general corporate assets. Long-lived assets exclude
finance receivables, investment in leveraged leases and MSRs.
Segmental revenue and income before taxes for the years ended 1998, 1997 and
1996 are presented below. All revenue is produced in the United States.
<TABLE>
Revenue
---------------------------------------
<S> <C> <C> <C>
Years Ended December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Internal financing............................... $ 358,273 $ 331,824 $ 308,084
Capital services................................. 156,014 193,089 248,569
------- ------- -------
Total revenue............................... $ 514,287 $ 524,913 $ 556,653
======= ======= =======
Income from Continuing
Operations Before Income Taxes
---------------------------------------
Years Ended December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Internal financing............................... $ 212,030 $ 194,171 $ 174,176
Capital services................................. 77,313 66,638 73,294
------- ------- -------
Total for reportable segments.................... 289,343 260,809 247,470
Unallocated amounts:
Corporate interest expense, net................ (28,040) (20,796) (15,201)
Corporate expenses............................. (16,614) (17,570) (9,806)
------- ------- -------
Income from continuing operations
before income taxes............................. $ 244,689 $ 222,443 $ 222,463
======= ======= =======
Additional segment information is as follows:
Depreciation and Amortization
----------------------------------------
Years Ended December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Internal financing............................... $ 16 $ - $ -
Capital services................................. 10,024 15,218 19,155
------- ------- -------
Total....................................... $ 10,040 $ 15,218 $ 19,155
======= ======= =======
</TABLE>
<PAGE>33
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 12. - Business Segment Information (continued)
<TABLE>
Net Interest Expense
---------------------------------------
<S> <C> <C> <C>
Years Ended December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Internal financing............................... $ 52,174 $ 47,844 $ 43,213
Capital services................................. 44,197 85,994 105,446
------- ------- -------
Total for reportable segments.................... 96,371 133,838 148,659
Corporate interest expense, net.................. 28,040 20,796 15,201
------- ------- -------
Consolidated interest expense, net............... $ 124,411 $ 154,634 $ 163,860
======= ======= =======
</TABLE>
<TABLE>
December 31,
------------------------------
<S> <C> <C>
Net additions to long-lived assets: 1998 1997
---- ----
(in thousands of dollars)
Internal financing............................... $ 245,665 $ 57,492
Capital services................................. 372,725 183,031
Mortgage servicing............................... 20,736 4,086
------- -------
Total for reportable segments................... 639,126 244,609
General corporate assets......................... 106,746 284,251
------- -------
Consolidated additions to
long-lived assets............................... $ 745,872 $ 528,860
======= =======
December 31,
--------------------------------
Identifiable assets: 1998 1997
---- ----
(in thousands of dollars)
Internal financing............................... $ 2,087,845 $ 1,797,783
Capital services................................. 2,437,177 3,015,278
Mortgage servicing............................... 598,771 345,317
-------- --------
Total for reportable segments.................... 5,123,793 5,158,378
Cash............................................. 19,154 36,320
General corporate assets......................... 150,723 133,642
-------- --------
Consolidated assets.............................. $ 5,293,670 $ 5,328,340
======== ========
</TABLE>
<PAGE>34
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 13. - Derivative Instruments
PBCC's principal objective in holding derivatives is the management of
interest-rate risk. The Company uses various financial instruments, particularly
interest rate swaps to manage these risks. The Company is exclusively an end
user of these instruments and does not engage in any derivatives trading,
market-making or other speculative activities in the derivative markets.
The major source of the Company's interest-rate risk is its exposure to changes
in interest rates as they relate to its notes payable. To manage this exposure,
the Company periodically enters into interest rate swaps. The interest rate
differential to be paid or received is recognized over the life of the
agreements as an adjustment to interest expense.
The aggregate amount of interest rate swaps categorized by type, and the related
weighted average interest rate paid and received assuming current market
conditions is reflected below:
<TABLE>
<S> <C> <C> <C> <C>
Total
Major Type Notional
of Interest Amount Weighted Average Interest Rates
Rate Swap Hedged Liability (000's) Fixed Variable(1)
Pay fixed Commercial paper $325,000 7.70% 4.73%
(1) The variable rate is indexed from the 30 day Fed AA composite commercial
paper rate. The Fed AA composite rate at December 31, 1998 was used to
calculate the weighted average interest rate.
</TABLE>
The aggregate notional amount of interest rate swaps categorized by annual
maturity is reflected below:
<TABLE>
<S> <C> <C>
Pay
(in thousands of dollars) Fixed
1999....................................... $ -
2000....................................... -
2001....................................... -
2002....................................... 100,000
2003....................................... -
Thereafter................................. 225,000
-------
Notional Amount............................ $ 325,000
=======
</TABLE>
<PAGE>35
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 13. - Derivative Instruments (continued)
The following is a reconciliation of interest rate swap activity by major type
of swap:
<TABLE>
<S> <C> <C> <C>
Annual Maturity
---------------------------------------
Pay
------------------------
(in thousands of dollars) Fixed Variable Total
Balance December 31, 1996................... $ 300,000 $ 26,048 $ 326,048
Expired contracts.......................... (100,000) (2,524) (102,524)
-------- -------- --------
Balance December 31, 1997.................. 200,000 23,524 223,524
New contracts.............................. 125,000 - 125,000
Expired contracts.......................... - (23,524) ( 23,524)
-------- -------- --------
Balance December 31, 1998................... $ 325,000 $ - $ 325,000
======== ======== ========
</TABLE>
Interest rate swaps are used in the majority of circumstances to convert
variable rate commercial paper interest payments to fixed rate interest
payments. The impact of interest rate swaps on interest expense and the weighted
average borrowing rate is as follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Impact of interest rate swaps on interest expense (000's).............. $ 4,500 $ 6,268 $ 7,346
Weighted average borrowing rate excluding interest rate swaps.......... 5.53% 5.89% 5.81%
Weighted average borrowing rate including interest rate swaps.......... 5.69% 6.09% 6.03%
</TABLE>
A second source of the Company's interest-rate risk is the sensitivity of its
MSRs to prepayments. The mortgage borrower has the option to repay the mortgage
loan at any time. When mortgage interest rates decline, borrowers have a greater
incentive to prepay mortgage loans through a refinancing; when mortgage interest
rates rise, this incentive is reduced or eliminated. To mitigate the risk of
declining long-term interest rates, higher-than-expected mortgage prepayments,
and the potential impairment of the MSRs, the Company uses interest-rate swaps
and interest rate floors tied to yields on 10-year "constant maturity" swap
rates. Decreases in the value of such contracts aggregating $2.1 million, of
which, $1.7 million has been recorded as adjustments to the carrying value of
MSRs at December 31, 1998.
The aggregate amount of the MSRs hedge categorized by contract type, and the
related interest rate to be paid and received assuming current market conditions
is reflected below:
<TABLE>
<S> <C> <C> <C>
Total
Notional
Amount Interest Rates
Contract Type (000's) Fixed/Floor Variable
Interest rate swap: 3-Month
Company as variable rate payor $ 275,000 5.400% LIBOR
10-Year
Interest rate floor $ 1,275,000 5.186% CMS
</TABLE>
Interest rate swap agreements involve the exchange of fixed rate and variable
rate interest payments based on a notional principal amount and maturity date.
In a purchased interest-rate floor agreement, cash interest payments are
received only if current interest rates fall below a predetermined interest
rate.
<PAGE>36
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 13. - Derivative Instruments (continued)
The Company is exposed to credit loss in the event of non-performance by the
counterparties to the interest-rate swap and interest-rate floor agreements to
the extent of the differential between fixed- and variable-rates; such exposure
is considered minimal.
The Company periodically enters into foreign currency contracts for the purpose
of minimizing its risk of loss from fluctuations in exchange rates in connection
with certain intercompany loans and certain sales of receivables with recourse
of foreign currency denominated lease receivables. The Company had no foreign
currency contracts outstanding as of December 31, 1998.
Since the Company normally enters into derivative transactions only with members
of its banking group, the credit risk of these transactions is monitored as part
of the normal credit review of the banking group. The Company monitors the
market risk of derivative instruments through periodic review of the fair market
values.
There were no deferred gains or losses relating to terminated interest rate
swaps or foreign currency contracts at December 31, 1998 and 1997. The fair
value of interest rate swaps and foreign currency contracts is presented in Note
14 to CONSOLIDATED FINANCIAL STATEMENTS.
Note 14. - Stockholder's Equity
The following is a reconciliation of stockholder's equity:
<TABLE>
<S> <C> <C> <C> <C>
Total
Common Capital Retained Stockholder's
(in thousands of dollars) Stock Surplus Earnings Equity
Balance December 31, 1995...... $ 46,000 $ 41,725 $ 782,269 $ 869,994
Net income - 1996.............. - - 179,234 179,234
Dividends paid to PBI.......... - - (71,200) (71,200)
-------- -------- -------- --------
Balance December 31, 1996...... 46,000 41,725 890,303 978,028
Net income - 1997.............. - - 194,833 194,833
Dividends paid to PBI.......... - - (78,000) (78,000)
-------- -------- -------- --------
Balance December 31, 1997...... 46,000 41,725 1,007,136 1,094,861
Net income - 1998.............. - - 207,476 207,476
Dividends paid to PBI.......... - - (86,000) (86,000)
-------- -------- -------- --------
Balance December 31, 1998...... $ 46,000 $ 41,725 $ 1,128,612 $ 1,216,337
======== ======== ======== ========
</TABLE>
At December 31, 1998, 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, 1998 and 1997. All of the
Company's stock is owned by Pitney Bowes.
When the Company entered into real estate lease financing, PBI made capital
contributions to provide a portion of the financing for such transactions. A
total of $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.
No capital contributions have been received since 1993.
<PAGE>37
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 15. - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash, assets held for sale, accounts payable and senior notes payable within one
year. Due to the short maturity of these instruments, the carrying amounts
approximate fair value.
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 after one year. The fair value of long-term debt is
estimated based on quoted dealer prices for the same or similar issues.
Interest rate swaps. The fair values of interest rate swaps 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 and the creditworthiness of the counterparties.
MSR hedge. The fair values of the MSR hedge are obtained from dealer quotes. The
interest rate swap portion represents the estimated amount the Company would
receive or pay to terminate the agreements taking into consideration current
interest rates and the creditworthiness of the counterparties. The interest rate
floor portion represents the difference between the market value and amounts
paid to enter into the contracts.
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 recourse obligations in
connection with certain finance asset sales to third-parties. Aggregate exposure
at December 31, 1998 and 1997 was $151 million and $213 million respectively.
The fair value of the guarantees under these obligations represents the estimate
of expected future losses.
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.
The estimated fair value of the Company's financial instruments is as follows:
<TABLE>
<S> <C> <C> <C> <C>
December 31 1998 1997
--------------------------- ---------------------------
(in thousands of dollars) Carrying Fair Carrying Fair
Value (1) Value Value (1) Value
Investment securities $ 683 $ 683 $ 15,822 $ 15,715
Loans receivable (2) 453,558 469,159 357,227 358,941
Senior notes payable after one year (1,325,454) (1,414,697) (1,068,662) (1,143,402)
Interest rate swaps (2,051) (29,730) (935) (24,524)
MSR hedge 2,864 2,864 - -
Transfers of receivables
with recourse (42,805) (42,805) (7,765) (7,765)
Financial guarantee contracts (1,532) (3,411) (1,656) (3,265)
Residual and conditional
commitment guarantee contracts (545) (48) (4,750) (4,253)
</TABLE>
(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.
<PAGE>38
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 16. - Taxes on Income from Continuing Operations
Income from continuing operations before income taxes and the provision for
income taxes were as follows:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Income from continuing operations
before income taxes...................... $ 244,689 $ 222,443 $ 222,463
======== ======== ========
Provision for income taxes:
Federal:
Current................................. $ (7,509) $ (32,440) $ (10,402)
Deferred................................ 67,561 95,976 66,061
------- ------- -------
Total federal....................... 60,052 63,536 55,659
------- ------- -------
State and local:
Current................................. 2,495 10,276 (7,164)
Deferred................................ 7,399 (12,527) 21,619
------- ------- -------
Total state and local............... 9,894 (2,251) 14,455
------- ------- -------
Total...................................... $ 69,946 $ 61,285 $ 70,114
======= ======= =======
Including discontinued operations, the provision for income taxes consists of
the following:
Years Ended December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Federal.................................... $ 76,773 $ 81,668 $ 70,136
State and local............................ 10,924 615 16,719
------- ------- -------
Total............................... $ 87,697 $ 82,283 $ 86,855
======= ======= =======
Deferred tax liabilities and (assets):
December 31 1998 1997 1996
---- ---- ----
(in thousands of dollars)
Deferred tax liabilities:
Lease revenue and related depreciation.... $ 511,172 $ 531,195 $ 553,206
Deferred tax assets:
Alternative minimum tax
credit carryforwards................... (24,266) (21,135) (74,582)
-------- -------- --------
Total...................................... $ 486,906 $ 510,060 $ 478,624
======= ======= =======
</TABLE>
<PAGE>39
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 16. - Taxes on Income from Continuing Operations (continued)
The reconciliation of the U.S. Federal statutory rate to the Company's effective
income tax rate for continuing operations is as follows:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31 1998 1997 1996
---- ---- ----
(Percent of pretax income)
U.S. Federal statutory rate................. 35.0% 35.0% 35.0%
State and local income taxes .............. 2.6 (0.8) 4.2
Partnership tax benefits................... (0.8) (1.0) (1.1)
Tax-exempt foreign trade income............ (1.9) (2.4) (2.6)
Tax-exempt finance income ................. (1.3) (0.7) (0.6)
Residual portfolio and
equipment acquisition.................... (0.6) (0.6) (0.7)
Other, net ................................ (4.4) (2.0) (2.7)
-------- -------- --------
Effective income tax rate ................. 28.6% 27.5% 31.5%
======== ======== ========
</TABLE>
The difference between the statutory tax rate and the effective tax rate for
discontinued operations is primarily due to state and local income taxes.
Note 17. - Retirement Plan
The Company participates in the Pitney Bowes retirement plan which covers the
majority of PBCC employees. The assets of this plan fully fund vested benefits.
Pitney Bowes' plan assumptions for 1998 were 7.00 percent for the discount rate,
4.25 percent for the expected rate of increase in future compensation levels and
9.30 percent for the expected long-term rate of return on plan assets. Plan
assumptions for 1997 were 7.25 percent for the discount rate, 4.25 percent for
the expected rate of increase in future compensation levels and 9.50 percent for
the expected long-term rate of return on plan assets. The Company's pension
expense was $0.5 million in 1998, $0.4 million in 1997 and $1.6 million in 1996.
The Company participates in the Pitney Bowes nonpension postretirement benefit
plan, which provides certain health care and life insurance benefits to eligible
retirees and their dependents.
Note 18. - Commitments, Contingencies and Regulatory Matters
The Company is the lessee under noncancelable operating leases for office space
and automobiles. Future minimum lease payments under these leases are as
follows: $3.2 million in 1999, $2.3 million in 2000, $2.1 million in 2001, $2.0
million in 2002, $1.9 million in 2003 and $16.1 million thereafter. Rental
expense under operating leases was $2.8 million, $4.3 million and $4.1 million
in 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had no unfunded commitments to extend credit
to customers. The Company evaluates each customer's creditworthiness on a
case-by-case basis. Upon extension of credit, the amount and type of collateral
obtained, if deemed necessary by the Company, is based on management's credit
assessment of the customer. Fees received under the agreements are recognized
over the commitment period. The maximum risk of loss arises from the possible
non-performance of the customer to meet the terms of the credit agreement. As
part of the Company's review of its exposure to risk, adequate provisions are
made for finance assets which may be uncollectible. 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 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 condition, results
of operations or cash flows.
<PAGE>40
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 18. - Commitments, Contingencies and Regulatory Matters (continued)
Pitney Bowes is subject to Federal, state and local laws and regulations related
to the environment, and is currently named as a member of various groups of
potentially responsible parties in administrative or court proceedings. Based on
facts presently known, PBI believes that the outcome of any current proceeding
will not have a material adverse effect on its financial condition, results of
operations or cash flows.
In June 1995, the United States Postal Service ("USPS") finalized and issued
regulations governing the manufacture, distribution and use of postage meters.
These regulations cover four general categories: meter security, administrative
controls, Computerized Meter Resetting Systems and other issues. Pitney Bowes
continues to comply with these regulations in its ongoing postage meter
operations.
In May 1996, the USPS issued a proposed schedule for the phaseout of mechanical
meters in the United States. Between May 1996 and March 1997, PBI worked with
the USPS to negotiate a revised mechanical meter migration schedule which better
reflected the needs of existing mechanical meter users and minimized any
potential negative financial impact. The final schedule agreed to with the USPS
is as follows:
o as of June 1, 1996, new placements of mechanical meters would no longer be
permitted; replacements of mechanical meters previously licensed to customers
would be permitted prior to the applicable suspension date for that category of
mechanical meter
o as of March 1, 1997, use of mechanical meters by persons or firms who process
mail for a fee would be suspended and would have to be removed from service o as
of December 31, 1997, use of mechanical meters that interface with mail machines
or processors ("systems meters") would be suspended and would have to be removed
from service
o as of March 1, 1999, use of all other mechanical meters ("stand-alone meters")
would be suspended and have to be removed from service
Based on the foregoing schedule, PBI believes that the phaseout of mechanical
meters will not have a material adverse financial impact.
As a result of the PBI's aggressive efforts to meet the USPS mechanical meter
migration schedule combined with its ongoing and continuing investment in
advanced postage evidencing technologies, mechanical meters represent less than
10% of PBI's installed U.S. meter base as of December 31, 1998, compared with
25% as of December 31, 1997.
In May 1995, the USPS publicly announced its concept of its Information Based
Indicia Program ("IBIP") for future postage evidencing devices. As initially
stated by the USPS, the purpose of the program was to develop a new standard for
future digital postage evidencing devices which significantly enhanced postal
revenue security and supported expanded USPS value-added services to mailers.
The program would consist of the development of four separate specifications:
o the Indicium specification- the technical specifications for the Indicium to
be printed
o a Postal Security Device specification- the technical specification for the
device that would contain the accounting and security features of the system
o a Host specification
o a Vendor Infrastructure specification
In July 1996, the USPS published for public comment draft specifications for the
Indicium, Postal Security Device and Host specifications. Pitney Bowes submitted
extensive comments to these specifications. In March 1997, the USPS published
for public comment the Vendor Infrastructure specification.
On August 26, 1998, the USPS published for public comment a consolidated and
revised set of IBIP specifications entitled "Performance Criteria for
Information Based Indicia and Security Architecture for IBI Postage Metering
Systems" (the IBI Performance Criteria). The IBI Performance Criteria
consolidated the aforementioned IBIP specifications and Incorporated many of the
comments previously submitted by the Company. PBI submitted comments to the IBI
Performance Criteria on November 30, 1998.
As of December 31, 1998, PBI is in the process of finalizing the development of
a PC project, which satisfies the proposed IBI Performance Criteria. This
product is currently undergoing beta testing and is expected to be ready for
market upon final approval from the USPS.
<PAGE>41
PITNEY BOWES CREDIT CORPORATION
Notes to Consolidated Financial Statements
Note 19. - Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for 1998 and 1997 follows (in thousands of
dollars):
<TABLE>
Three Months Ended
-------------------------------------------------------
<S> <C> <C> <C> <C>
1998 March 31 June 30 Sept. 30 Dec. 31
---- -------- ------- -------- -------
Total revenue $ 119,529 $ 126,728 $ 127,644 $ 140,386
-------- -------- -------- --------
Expenses:
Selling, general and administrative 22,831 23,824 23,977 28,435
Depreciation and amortization 3,125 3,041 3,795 79
Provision for credit losses 8,849 8,933 8,307 9,991
Interest 30,311 31,968 31,099 31,033
Provision for income taxes 14,916 16,118 17,108 21,804
-------- -------- -------- --------
Total expenses 80,032 83,884 84,286 91,342
-------- -------- -------- --------
Income from continuing operations 39,497 42,844 43,358 49,044
Discontinued operations (net of taxes
of $4,591, $5,785, $6,384 and $991) 7,352 9,248 10,201 5,932
-------- -------- -------- --------
Net income $ 46,849 $ 52,092 $ 53,559 $ 54,976
======== ======== ======== ========
1997
Total revenue $ 133,456 $ 129,290 $ 131,820 $ 130,347
-------- -------- -------- --------
Expenses:
Selling, general and administrative 21,432 22,671 28,285 26,154
Depreciation and amortization 5,001 3,684 4,102 2,431
Provision for credit losses 10,155 9,753 7,068 7,100
Interest 39,858 40,427 40,491 33,858
Provision for income taxes 17,518 15,002 12,731 16,034
-------- -------- -------- --------
Total expenses 93,964 91,537 92,677 85,577
-------- -------- -------- --------
Income from continuing operations 39,492 37,753 39,143 44,770
Discontinued operations (net of taxes
of $3,583, $4,390, $5,209 and $7,816) 5,746 7,034 8,345 12,550
-------- -------- -------- --------
Net income $ 45,238 $ 44,787 $ 47,488 $ 57,320
======== ======== ======== ========
</TABLE>
<PAGE>42
Exhibit (99.07)
PITNEY BOWES CREDIT CORPORATION
Computation of Ratio of Earnings from Continuing Operations to Fixed Charges
(in thousands of dollars)
<TABLE>
Years Ended December 31,
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Income from continuing operations
before income taxes............... $ 244,689 $ 222,443 $ 222,463 $ 199,965 $ 193,838
------- ------- -------- -------- -------
Fixed charges:
Interest on debt.................. 124,411 154,634 163,860 173,745 129,016
One-third of rent expense......... 520 1,107 1,149 1,246 1,190
------- ------- -------- -------- -------
Total fixed charges................. 124,931 155,741 165,009 174,991 130,206
------- ------- -------- -------- -------
Earnings from continuing
operations before fixed charges... $ 369,620 $ 378,184 $ 387,472 $ 374,956 $ 324,044
======= ======= ======== ======== =======
Ratio of earnings from continuing
operations to fixed charges (1)... 2.96X 2.43X 2.35X 2.14X 2.49X
======= ======= ======== ======== =======
</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>43
Exhibit (99.08)
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 March 31,
---------------------------------
<S> <C> <C>
1999 1998
---- ----
REVENUE
Finance income....................................... $ 135,124 $ 119,529
EXPENSES
Selling, general and administrative.................. 25,871 22,831
Interest............................................. 31,780 30,311
Depreciation and amortization........................ 7,717 3,125
Provision for credit losses.......................... 12,299 8,849
------- -------
Total expenses...................................... 77,667 65,116
------- -------
Income from continuing operations before
income taxes......................................... 57,457 54,413
Provision for income taxes............................. 16,710 14,916
------- -------
Income from continuing operations...................... 40,747 39,497
Discontinued operations
(net of taxes $2,140 in 1999 and $4,591 in 1998)..... 3,700 7,352
------- -------
Net income............................................. $ 44,447 $ 46,849
======= =======
Ratio of earnings from continuing
operations to fixed charges.......................... 2.80X 2.79X
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>44
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<S> <C> <C>
(Unaudited)
March 31, December 31,
1999 1998
--------- -----------
ASSETS
Cash................................................................. $ 19,665 $ 19,154
--------- ---------
Investments:
Finance assets..................................................... 2,742,343 2,721,805
Investment in leveraged leases..................................... 774,483 764,145
Investment in operating leases, net of accumulated depreciation.... 30,752 33,261
Allowance for credit losses........................................ (116,675) (115,233)
--------- ---------
Net investments.................................................. 3,430,903 3,403,978
--------- ---------
Mortgage servicing rights, net of accumulated amortization........... 362,957 364,071
Assets held for sale................................................. 413,217 337,757
Investment in partnership............................................ 168,525 165,950
Loans and advances to affiliates..................................... 360,760 611,625
Other assets......................................................... 404,328 391,135
--------- ---------
Total assets.................................................... $ 5,160,355 $ 5,293,670
========= =========
LIABILITIES
Senior notes payable within one year................................. $ 1,012,443 $ 991,853
Short-term notes payable to affiliates............................... 40,100 137,000
Accounts payable to affiliates....................................... 185,071 278,452
Accounts payable and accrued liabilities............................. 176,129 182,236
Deferred taxes....................................................... 506,192 486,906
Senior notes payable after one year.................................. 1,382,000 1,382,000
Long-term notes payable to affiliates................................ 333,000 333,000
Subordinated notes payable........................................... 285,886 285,886
--------- ---------
Total liabilities............................................... 3,920,821 4,077,333
--------- ---------
STOCKHOLDER'S EQUITY
Common stock......................................................... 46,000 46,000
Capital surplus...................................................... 41,725 41,725
Retained earnings.................................................... 1,151,809 1,128,612
--------- ---------
Total stockholder's equity...................................... 1,239,534 1,216,337
--------- ---------
Total liabilities and stockholder's equity.................... $ 5,160,355 $ 5,293,670
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>45
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of dollars)
<TABLE>
<S> <C> <C>
Three Months Ended March 31,
1999 1998
---- ----
OPERATING ACTIVITIES
Net income................................................................. $ 44,447 $ 46,849
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for credit losses.............................................. 12,299 14,778
Depreciation and amortization............................................ 24,812 12,262
Cash effects of changes in:
Deferred taxes........................................................ 19,286 28,815
Other receivables..................................................... 7,973 4,666
Foreclosure claims receivable......................................... (5,932) 6,949
Advances and deposits................................................. 5,517 (46,856)
Loans held for sale................................................... (20,289) (124,609)
Accounts payable to affiliates........................................ (93,381) (35,670)
Accounts payable and accrued liabilities.............................. (1,865) 5,109
Other, net............................................................... (3,552) (4,372)
--------- ---------
Net cash used in operating activities...................................... (10,685) (92,079)
--------- ---------
INVESTING ACTIVITIES
Investment in net finance assets......................................... (211,957) (367,773)
Investment in leveraged leases........................................... (3,445) (21,792)
Investment in assets held for sale....................................... (128,497) (118,444)
Cash receipts collected under lease contracts, net of finance
income recognized..................................................... 223,113 407,942
Investment in mortgage service rights.................................... (7,380) ( 86,611)
Loans and advances to affiliates, net.................................... 239,007 252,000
Additions to equipment and leasehold improvements........................ (2,085) (2,414)
--------- ---------
Net cash provided by investing activities.................................. 108,756 62,908
--------- ---------
FINANCING ACTIVITIES
Change in short-term debt, net........................................... 20,590 (257,060)
Proceeds from senior notes............................................... - 250,000
Short-term loans from affiliates......................................... (96,900) 61,979
Dividends paid to Pitney Bowes Inc....................................... (21,250) (21,500)
--------- --------
Net cash (used in) provided by financing activities........................ (97,560) 33,419
--------- --------
Increase in cash........................................................... 511 4,248
Cash at beginning of period................................................ 19,154 36,320
--------- --------
Cash at end of period...................................................... $ 19,665 $ 40,568
========= =========
Interest paid.............................................................. $ 35,367 $ 33,505
========= =========
Income taxes refunded, net................................................. $ (34,193) $ (2,006)
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>46
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 March 31, 1999 and the results of operations and cash flows for the
three months ended March 31, 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 months ended March 31, 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
As of June 30, 1999, the Company committed itself to a formal plan to dispose
of the operations and assets of its mortgage servicing business at Atlantic
Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary of the
Company. At June 30, 1999, the Company estimated a loss on the disposal of AMIC
of approximately $34.2 million (net of taxes of $22.8 million). The loss was
recorded by PBCC at June 30, 1999.
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 ("GECC"). As part of
the sale, the Company retained certain non-performing accounts of CPLC. 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), recorded in the second quarter of
1999. The transaction is still subject to post-closing adjustments pursuant to
the terms of the purchase agreement with GECC executed on October 12, 1998. The
Company does not expect the effect of any adjustments to be significant.
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 not been separately classified in the
consolidated balance sheets as of March 31, 1999. Cash flow impacts of
discontinued operations have not been segregated in the accompanying
consolidated statements of cash flows. Details of income from discontinued
operations, net of taxes, are as follows (in thousands of dollars):
<TABLE>
<S> <C> <C>
Three Months Ended March 31,
1999 1998
---- ----
AMIC (net of taxes of $2,140 and $2,886)....... $ 3,700 $ 4,599
CPLC (net of taxes of $1,705).................. - 2,753
------- -------
Income from discontinued operations, net
of taxes $ 3,700 $ 7,352
======== =======
</TABLE>
Mortgage servicing revenue of AMIC was $32.5 and $23.3 million for the three
months ended March 31, 1999 and 1998, respectively. Net interest expense
allocated to AMIC's discontinued operations was $1.8 and $1.6 million for the
three months ended March 31, 1999 and 1998, respectively. 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.
<PAGE>47
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 -- Discontinued Operations (continued)
Finance income of CPLC was $34.5 million for the three months ended March 31,
1998. Interest expense allocated to CPLC's discontinued operations was $10.5
million for the three months ended March 31, 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.
Note 3 -- Finance Assets
The composition of the Company's finance assets is as follows:
<TABLE>
<S> <C> <C>
March 31, December 31,
(in thousands of dollars) 1999 1998
--------- ---------
Gross finance receivables...................................... $ 3,059,132 $ 3,050,572
Unguaranteed residual valuation................................ 379,060 412,569
Initial direct costs deferred.................................. 45,854 46,224
Unearned income................................................ (741,703) (787,560)
--------- ---------
Total finance assets......................................... $ 2,742,343 $ 2,721,805
========= =========
Note 4 -- Notes Payable
The composition of the Company's notes payable is as follows:
March 31, December 31,
(in thousands of dollars) 1999 1998
--------- ---------
Senior Notes Payable:
Commercial paper at the weighted average
interest rate of 4.82% (4.90% in 1998).......................... $ 276,750 $ 173,700
Notes payable against bank lines of credit and others at a
weighted average interest rate of 1.16% in 1999 and 1998........ 535,693 618,153
Current installment of long-term debt due within one year at an
interest rate of 6.54% in1999 and 1998......................... 200,000 200,000
--------- ---------
Total senior notes payable due within one year................... 1,012,443 991,853
Senior notes payable due after one year at interest rates of
5.65% to 9.25% in 1999 and 1998................................ 1,382,000 1,382,000
--------- ---------
Total senior notes payable....................................... 2,394,443 2,373,853
--------- ---------
Notes Payable to Affiliates:
Due within one year at an interest rate of 5.38% in 1999 and 1998 40,100 137,000
Due after one year at an interest rate of 5.38% in 1999 and 1998. 333,000 333,000
--------- ---------
Total notes payable to affiliates................................ 373,100 470,000
--------- ---------
Subordinated Notes Payable:
Non-interest bearing notes due Pitney Bowes Inc.................. 285,886 285,886
--------- ---------
Total notes payable................................................. $ 3,053,429 $ 3,129,739
========= =========
</TABLE>
<PAGE>48
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 -- Business Segment Information
Segment revenue and operating profit are as follows:
<TABLE>
<S> <C> <C>
(in thousands of dollars) Revenue
---------------------------
Quarter Ended March 31 1999 1998
---- ----
Internal financing..................................................... $ 100,482 $ 86,379
Capital services....................................................... 34,642 33,150
------- -------
Total revenue for reportable segments............................. $ 135,124 $ 119,529
======= =======
Income from Continuing
(in thousands of dollars) Operations Before Income Taxes
------------------------------
Quarter Ended March 31 1999 1998
---- ----
Internal financing..................................................... $ 55,052 $ 47,720
Capital services....................................................... 4,594 8,909
------- -------
Total for reportable segments........................... 59,646 56,629
Unallocated amounts:
Corporate interest expense, net...................................... (2,092) (2,119)
Corporate expenses................................................... (97) (97)
------- -------
Income from continuing operations before income taxes.................. $ 57,457 $ 54,413
======= =======
</TABLE>
<PAGE>49
Exhibit (99.10)
PITNEY BOWES CREDIT CORPORATION
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONs
AND FINANCIAL CONDITION
Results of Operations
First Quarter of 1999 Compared to First Quarter of 1998
As of June 30, 1999, the Company committed itself to a formal plan to
dispose of the operations and assets of its mortgage servicing business at
Atlantic Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary
of the Company. 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 $32.5 and $23.3 million for the three
months ended March 31, 1999 and 1998, respectively. (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 ("GECC"). Operating
results of CPLC have been segregated and reported as discontinued operations in
the consolidated statements of income. Finance income of CPLC was $34.5 million
for the three months ended March 31, 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 first quarter of 1999 increased 13.0 percent to
$135.1 million compared to $119.5 million in 1998. Finance income for internal
financing programs increased 16.3 percent to $100.5 million from $86.4 million
primarily due to higher income from fee- and service-based programs and higher
investment levels for the mail and copier financing programs. Finance income for
capital services financing programs increased 4.5 percent to $34.6 million from
$33.2 million primarily due to higher revenue from income and fee-based programs
offset by lower capital services investment levels in accordance with the
Company's strategy to shift the foundation of the capital services financing
business from asset-based to fee- and service- based revenues.
Selling, general and administrative ("SG&A") expenses increased 13.3
percent to $25.9 million in the first quarter of 1999 compared to $22.8 million
in 1998. SG&A for internal financing programs increased to $19.0 million from
$16.5 million in 1998 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 $6.7 million in 1999 from $6.2 million in 1998 mainly due to higher
personnel related expenses.
Depreciation on operating leases was $1.3 million in the first quarter of
1999 compared to $1.5 million in 1998 reflecting a lower operating lease
investment balance at March 31, 1999 compared to March 31, 1998.
The provision for credit losses was $12.3 million for the first quarter of
1999 compared with $8.8 million in 1998. The provision for internal financing
programs increased to $10.5 million from $8.0 million primarily due to increased
provisions for new business initiatives. The provision for capital services
financing programs increased to $1.8 million in the first quarter of 1999 from
$0.8 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) was 2.89 percent at March 31,
1999 and 2.87 at December 31, 1998. PBCC charged $10.9 million and $16.5 million
against the allowance for credit losses through the first quarters of 1999 and
1998, respectively. The decrease was mainly due to the sale of CPLC in the
fourth quarter of 1998.
Interest expense was $31.8 million in the first quarter of 1999 and $30.3
million in the first quarter of 1998. The increase was mainly due to higher
borrowing levels being offeset by lower effective interest rates. The effective
interest rate on average borrowings was 5.55 percent for the first quarter of
1999 compared to 5.98 percent for the same period of 1998. The Company does not
match fund its financing investments and does not apply different interest rates
to its various financing portfolios.
<PAGE>50
PITNEY BOWES CREDIT CORPORATION
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONs
AND FINANCIAL CONDITION (CONTINUED)
The effective tax rate for the first quarter of 1999 was 29.1 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 from continuing operations to fixed charges
was 2.80 times for the first quarter of 1999 compared with 2.79 times for the
same period of 1998. The increase reflects higher pretax income from operations
while fixed charges remained substantially the same.
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 March 31, 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 25 percent variable-rate and 75
percent fixed-rate at March 31, 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
March 31, 1999, largely supporting its commercial paper borrowings.
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 first quarter of 1999 decreased 0.7
percent from December 31, 1998. The decrease is principally due to the shift in
emphasis from asset-based investments in the capital services 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 capital services
asset sales, thereby allowing the Company 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 1.63 times at March 31, 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 leasing transactions and controlled investment in capital
services 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 debt will continue to be strong, additional liquidity
is available under revolving credit facilities and credit lines.
<PAGE>51
PITNEY BOWES CREDIT CORPORATION
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONs
AND FINANCIAL CONDITION (CONTINUED)
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 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.
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 has completed its worldwide inventory and assessment of all business
systems and supporting infrastructure. Required modifications are still in
progress but were substantially completed by March 31, 1999. 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 and telecommunications) on which all
corporations rely. However, the Company is unable to predict whether such third
parties will be able to address their Year 2000 problems on a timely basis.
PBCC estimates the total cost of the program from inception in 1997 through
the Year 2000 to be approximately $2 million, of which approximately $1.5
million was incurred through March 31, 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 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.
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>52
PITNEY BOWES CREDIT CORPORATION
ITEM 2. -- MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONs
AND FINANCIAL CONDITION (CONTINUED)
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.
<PAGE>53
Exhibit (99.10)
Computation of Ratio of Earnings from Continuing Operations to Fixed Charges
(in thousands of dollars)
<TABLE>
<S> <C> <C>
Three Months Ended
March 31,
-------------------------
1999 1998
---- ----
Income from continuing operations before income taxes............. $ 57,457 $ 54,413
------- -------
Fixed charges:
Interest on debt................................................. 31,780 30,311
One-third of rent expense........................................ 151 132
------- -------
Total fixed charges................................................ 31,931 30,443
------- -------
Earnings from continuing operations before fixed charges........... $ 89,388 $ 84,856
======= =======
Ratio of earnings from continuing operations to fixed charges (1).. 2.80X 2.79X
======= =======
</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>
PAGE 54
Exhibit (99.11)
Restated Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 12/31/98
RESTATED 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,154
<SECURITIES> 0
<RECEIVABLES> 3,519,211
<ALLOWANCES> (115,233)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,293,670
<CURRENT-LIABILITIES> 1,589,541
<BONDS> 0
<COMMON> 46,000
0
0
<OTHER-SE> 1,170,337
<TOTAL-LIABILITY-AND-EQUITY> 5,293,670
<SALES> 0
<TOTAL-REVENUES> 514,287
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 109,107
<LOSS-PROVISION> 36,080
<INTEREST-EXPENSE> 124,411
<INCOME-PRETAX> 244,689
<INCOME-TAX> 69,946
<INCOME-CONTINUING> 174,743
<DISCONTINUED> 32,733
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207,476
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
PAGE 55
Exhibit (99.12)
Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 3/31/99
RESTATED 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 19,665
<SECURITIES> 0
<RECEIVABLES> 3,547,578
<ALLOWANCES> (116,675)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,160,355
<CURRENT-LIABILITIES> 1,413,743
<BONDS> 0
<COMMON> 46,000
0
0
<OTHER-SE> 1,193,534
<TOTAL-LIABILITY-AND-EQUITY> 5,160,355
<SALES> 0
<TOTAL-REVENUES> 135,124
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 33,588
<LOSS-PROVISION> 12,299
<INTEREST-EXPENSE> 31,780
<INCOME-PRETAX> 57,457
<INCOME-TAX> 16,710
<INCOME-CONTINUING> 40,747
<DISCONTINUED> 3,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,447
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
