SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-13497
PITNEY BOWES CREDIT CORPORATION
Incorporated pursuant to the Laws of the State of Delaware
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Internal Revenue Service -- Employer Identification No. 06-0946476
27 Waterview Drive, Shelton, CT 06484-4361
(203) 922-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of October 31, 2000, 460 shares of common stock, no par value, with a stated
value of $100,000 per share, were outstanding, all of which were owned by Pitney
Bowes Inc., the parent of the Registrant.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
PITNEY BOWES CREDIT CORPORATION
Part I -- FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1.-- FINANCIAL STATEMENTS
Consolidated Statements of Income:
Three and Nine Months Ended September 30, 2000 and 1999............................. 3
Consolidated Balance Sheets:
At September 30, 2000 and December 31, 1999......................................... 4
Consolidated Statements of Cash Flow:
Nine Months Ended September 30, 2000 and 1999....................................... 5
Notes to Consolidated Financial Statements............................................ 6
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................... 10
Part II -- OTHER INFORMATION
ITEM 1.-- LEGAL PROCEEDINGS............................................................... 14
ITEM 6.-- EXHIBITS AND REPORTS ON FORM 8-K................................................ 14
SignatureS................................................................................ 15
Exhibit (i)-- Computation of Ratio of Earnings from Continuing
Operations to Fixed Charges........................................................... 16
Exhibit (ii)-- Financial Data Schedule.................................................... 17
</TABLE>
<PAGE>
Part I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands of dollars)
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
<S> <C> <C> <C> <C>
Finance income............................................... $ 142,437 $ 140,119 $ 434,707 $ 417,197
------- ------- ------- -------
Expenses:
Selling, general and administrative.......................... 26,874 29,833 84,919 89,214
Interest, net................................................ 28,303 26,606 88,768 91,167
Provision for credit losses.................................. 9,208 8,030 41,513 28,043
Depreciation and amortization................................ 3,451 7,427 12,049 22,309
------- ------- ------- -------
Total expenses............................................. 67,836 71,896 227,249 230,733
------- ------- ------- -------
------
Income from continuing operations before income taxes.......... 74,601 68,223 207,458 186,464
Provision for income taxes..................................... 19,947 14,783 55,993 49,475
------- ------- ------- -------
-------
Income from continuing operations.............................. 54,654 53,440 151,465 136,989
Discontinued operations:
Income from discontinued operations, net of taxes of $177.... - - - 971
Loss on disposal of discontinued operations, net of tax
benefits of $17,062........................................ - - - (24,938)
------- ------- ------- -------
-------
Net income..................................................... $ 54,654 $ 53,440 $ 151,465 $ 113,022
======= ======= ======== ========
Ratio of earnings from continuing
operations to fixed charges................................. 3.63X 3.55X 3.33X 3.04X
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands of dollars)
<TABLE>
September 30, December 31,
2000 1999
--------- ---------
ASSETS
<S> <C> <C>
Cash and cash equivalents............................................ $ 166,938 $ 132,914
Investments:
Finance assets..................................................... 2,781,408 2,984,246
Investment in leveraged leases..................................... 958,559 850,000
Investment in operating leases, net of accumulated depreciation.... 39,996 45,607
Allowance for credit losses........................................ (71,530) (80,655)
--------- ---------
Net investments.................................................. 3,708,433 3,799,198
--------- ---------
Assets held for sale................................................. 302,600 342,934
Investment in partnership............................................ 166,477 167,071
Loans and advances to affiliates..................................... 968,450 362,012
Net assets of discontinued operations................................ - 491,763
Other assets......................................................... 112,547 87,084
--------- ---------
Total assets.................................................. $ 5,425,445 $ 5,382,976
========= =========
LIABILITIES
Senior notes payable due within one year............................. $ 831,010 $ 1,044,573
Short-term notes payable to affiliates............................... 76,680 37,000
Accounts payable to affiliates....................................... 208,802 227,503
Accounts payable and accrued liabilities............................. 320,587 283,361
Deferred taxes....................................................... 602,896 526,838
Senior notes payable due after one year.............................. 1,407,254 1,332,000
Long-term notes payable to affiliates................................ 296,000 333,000
Subordinated notes payable........................................... 299,892 299,892
--------- ---------
Total liabilities............................................... 4,043,121 4,084,167
--------- ---------
STOCKHOLDER'S EQUITY
Common stock......................................................... 46,000 46,000
Capital surplus...................................................... 341,725 41,725
Retained earnings.................................................... 994,599 1,211,084
--------- ---------
Total stockholder's equity...................................... 1,382,324 1,298,809
--------- ---------
Total liabilities and stockholder's equity.................... $ 5,425,445 $ 5,382,976
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
(in thousands of dollars)
<TABLE>
Nine Months Ended September 30,
------------------------------
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Income from continuing operations, net of taxes............................ $ 151,465 $ 136,989
Income from discontinued operations, net of taxes.......................... - 971
Loss on disposal of discontinued operations, net of tax benefits........... - (24,938)
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for credit losses.............................................. 41,513 28,043
Depreciation and amortization............................................ 12,049 65,345
Increase in other assets................................................. (2,374) (14,439)
Decrease in discontinued other assets.................................... - 80,885
Decrease in accounts payable to affiliates............................... (18,701) (78,330)
Increase in accounts payable and accrued liabilities..................... 37,226 95,623
Other, net................................................................. (15,520) (4,398)
--------- ---------
Net cash provided by operating activities.................................. 281,716 350,143
--------- ---------
INVESTING ACTIVITIES
Proceeds and cash receipts from sale of discontinued operations............ 512,780 -
Net proceeds from sale of credit card operations........................... 321,746 -
Investment in net finance assets........................................... (549,081) (550,751)
Investment in leveraged leases............................................. (81,686) (63,576)
Investment in operating leases............................................. (324) (552)
Investment in assets held for sale......................................... (390,213) (290,915)
Cash receipts collected under lease contracts, net of finance
income recognized........................................................ 750,418 613,938
Investment in mortgage service rights...................................... - (21,800)
Loans and advances to affiliates, net...................................... (606,438) 244,953
Additions to equipment and leasehold improvements.......................... (1,315) (4,228)
--------- ---------
Net cash used in investing activities...................................... (44,113) (72,931)
--------- ---------
FINANCING ACTIVITIES
Change in commercial paper borrowings, net................................. 325,525 20,825
Change in other short-term debt, net....................................... (516,102) (52,999)
Proceeds from senior notes................................................. 177,268 125,000
Proceeds from short-term loan to affiliate................................. 39,680 -
Repayment of senior notes.................................................. (125,000) (200,000)
Repayment of loan from affiliates.......................................... (37,000) (100,000)
Capital contribution from Pitney Bowes Inc................................. 300,000 -
Dividends paid to Pitney Bowes Inc......................................... (367,950) (63,750)
--------- ---------
Net cash used in financing activities...................................... (203,579) (270,924)
--------- ---------
Increase in cash and cash equivalents...................................... 34,024 6,288
Cash and cash equivalents at beginning of period........................... 132,914 19,154
--------- ---------
Cash and cash equivalents at end of period................................. $ 166,938 $ 25,442
========= =========
Interest paid.............................................................. $ 137,528 $ 124,692
========= =========
Income taxes refunded, net................................................. $ (50,869) $ (47,486)
========= =========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
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 adjustments) necessary to present fairly the financial position
of the Company at September 30, 2000 and December 31, 1999, and the results of
operations for the three and nine months ended September 30, 2000 and 1999, and
the cash flows for the nine months ended September 30, 2000 and 1999 have been
included. Certain amounts from prior periods have been reclassified to conform
to current period presentation. Operating results for the nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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, 1999.
Note 2 -- Discontinued Operations
On January 14, 2000, the Company sold its mortgage servicing business, Atlantic
Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary of the
Company to ABN AMRO North America. The Company received approximately $484
million in cash at closing. The transaction is subject to post-closing
adjustments.
Revenue of AMIC was $26.3 million and $88.8 million for the three and nine
months ended September 30, 1999. Net interest expense allocated to AMIC's
discontinued operations was $0.8 million and $4.5 million for the three and nine
months ended September 30, 1999. Interest has been allocated based on AMIC's net
intercompany borrowing levels charged at the Company's weighted average
borrowing rate, offset by the interest savings the Company realized due to
borrowings against AMIC's escrow deposits as opposed to regular commercial paper
borrowings. On June 30, 1999, the Company recorded an expected loss of
approximately $34.2 million (net of taxes of $22.8 million) on the disposal of
AMIC.
In the second quarter of 1999, the Company recorded a gain of approximately $9.3
million (net of taxes of $5.7 million) representing the excess proceeds received
over the book value of the net assets of Colonial Pacific Leasing Corporation
sold to General Electric Capital Corporation, net of related transaction costs.
<TABLE>
Nine Months Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Income on AMIC discontinued operations.............. $ - $ 971
Loss on disposal of AMIC............................ - (34,200)
Gain on sale of CPLC................................ - 9,262
-------- -------
Loss from discontinued operations $ - $ (23,967)
======== ========
</TABLE>
Operating results have been segregated and reported as discontinued operations
in the Consolidated Statements of Income for the nine months ended September 30,
1999. Net assets of discontinued operations have been separately classified in
the Consolidated Balance Sheets at December 31, 1999. Cash flow impacts of
discontinued operations have not been segregated in the Consolidated Statements
of Cash Flow for the nine months ended September 30, 1999.
<PAGE>
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3 -- Finance Assets
The composition of the Company's finance assets is as follows:
<TABLE>
September 30, December 31,
(in thousands of dollars) 2000 1999
--------- ---------
<S> <C> <C>
Lease finance receivables...................................... $2,851,047 $2,713,358
Other finance receivables ..................................... 267,835 539,499
--------- ---------
Total gross finance receivables.............................. 3,118,882 3,252,857
Unguaranteed residual valuation................................ 364,727 415,079
--------- ---------
Total gross finance assets .................................. 3,483,609 3,667,936
Initial direct costs deferred.................................. 42,651 43,916
Unearned income................................................ (744,852) (727,606)
--------- ---------
Total finance assets......................................... $2,781,408 $2,984,246
========= =========
</TABLE>
Note 4 -- Notes Payable
The composition of the Company's notes payable is as follows:
<TABLE>
September 30, December 31,
(in thousands of dollars) 2000 1999
--------- ---------
Senior Notes Payable:
Commercial paper at the weighted average
<S> <C> <C>
interest rate of 6.52% (5.55% in 1999).......................... $ 729,525 $ 404,000
Notes payable against bank lines of credit and others at a
weighted average interest rate of 1.36% in 1999................. - 457,255
Other notes payable at a weighted average interest rate
of 7.51% (7.50% in 1999)........................................ 1,485 8,318
Current installment of long-term debt due within one year at
an interest rate of 6.78% (5.95% to 6.11% in 1999)............. 100,000 175,000
--------- ---------
Total senior notes payable due within one year................... 831,010 1,044,573
Senior notes payable due after one year at interest rates of
5.65% to 9.25% in both 2000 and 1999........................... 1,407,254 1,332,000
--------- ---------
Total senior notes payable....................................... 2,238,264 2,376,573
--------- ---------
Notes Payable to Affiliates:
Due within one year at an interest rate of 5.38% in 2000 and 1999 76,680 37,000
Due after one year at an interest rate of 5.38% in 2000 and 1999. 296,000 333,000
--------- ---------
Total notes payable to affiliates................................ 372,680 370,000
--------- ---------
Subordinated Notes Payable:
Non-interest bearing notes due Pitney Bowes Inc. ("PBI")......... 299,892 299,892
--------- ---------
Total notes payable................................................. $2,910,836 $3,046,465
========= =========
</TABLE>
Interest expense, net on the income statement is shown net of interest income
earned on loans made to the Company's parent, Pitney Bowes Inc, and to other
affiliates. Interest income was $18.8 million and $41.5 for the three and
nine months ended September 30, 2000, respectively, and $11.6 million and
$29.8 million for the three and nine months ended September 30, 1999,
respectively.
<PAGE>
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 4 -- Notes Payable (continued)
On April 19, 2000, certain partnerships controlled by affiliates of the
Company issued a total of $134 million of Series A and Series B Secured Fixed
Rate Senior Notes (the "Notes"). The Notes are due in 2003 and bear interest
at 7.44 percent. The proceeds from the Notes were used to purchase
subordinated debt obligations from PBI ("PBI Obligations"). The PBI
Obligations have a principal amount of $134 million and are due in 2010. The
PBI Obligations bear an interest rate of 8.07 percent for the first three
years and reset in May 2003 and each third anniversary of the first reset
date.
On March 31, 2000, PBCC issued $43.3 million of 7.52 percent senior notes to
various holders maturing on January 10, 2012. The proceeds from these notes
were used to pay down commercial paper.
In July 1998, the Company filed a shelf registration statement on Form S-3
with the Securities and Exchange Commission ("SEC") to offer, in one or more
series, its unsecured debt securities at an aggregate initial offering price
not to exceed $750 million. As part of this shelf registration statement in
August 1999, PBCC established a medium-term note program for the issuance
from time to time of up to $500 million aggregate principal amount of
Medium-Term Notes, Series D. At September 30, 2000, $625 million was
available under the shelf registration including $375 million that was
available under the related medium-term note program.
Note 5 -- Business Segment Information
The composition of the Company's segment revenue and operating profit is as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands of dollars)
Revenue:
Internal Financing Division............................. $ 105,618 $ 103,318 $ 331,204 $ 308,060
Capital Services Division............................... 36,819 36,801 103,503 109,137
------- ------- ------- -------
Total revenue...................................... $ 142,437 $ 140,119 $ 434,707 $ 417,197
======== ======== ======== ========
(in thousands of dollars)
Income from continuing operations
before income taxes:
Internal Financing Division............................ $ 62,569 $ 63,417 $ 181,288 $ 170,802
Capital Services Division.............................. 12,032 4,806 26,170 15,662
------ ------- ------- -------
Total income from continuing operations
before income taxes................................ $ 74,601 $ 68,223 $ 207,458 $ 186,464
======== ======== ======== =========
The Company fully allocates corporate expenses to its individual divisions.
</TABLE>
<PAGE>
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6 -- Accounting Pronouncements
In September 2000, Statement of Financial Accounting Standards ("SFAS") No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued, replacing SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral, as well as requiring certain additional disclosures. However, it
carries over most of SFAS No. 125's provisions. SFAS No. 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001. However, it is effective for the recognition
and reclassification of collateral and for disclosures relating to those
transactions for the year ending December 31, 2000. The Company is currently
evaluating the impact, if any, of adopting the statement.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", amended in June 2000 by SFAS No. 138, was issued. SFAS
No. 133 requires that an entity recognize all derivative instruments as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. Changes in the fair value of those
instruments will be reflected as gains or losses. The accounting for the
gains or losses depends on the intended use of the derivative and the
resulting designation. The Company is currently evaluating the impact of this
statement. SFAS No. 133, as amended, is effective January 1, 2001 for the
Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," summarizing guidance in applying generally accepted accounting
principles to revenue recognition in financial statements. Although the
Company believes it is in compliance with this guidance in all material
respects, the Company is currently evaluating its current revenue recognition
policies to determine the impact, if any, of SAB No. 101. SAB No. 101 is
effective for the fourth quarter of 2000.
Note 7 -- Other Matters
As part of a strategic alliance with U.S. Bank, a division of U.S. Bancorp,
on June 30, 2000 PBCC sold its PitneyWorksSM Business RewardsSM Visa(R) and
Business Visa(R) card operations, including credit card receivables of
approximately $322 million. The Company expects to earn fees in connection
with the strategic alliance with U.S. Bank. However, the Company will no
longer originate credit card receivables and as a result will not earn
finance income on those balances. The transaction is subject to post-closing
adjustments.
<PAGE>
PITNEY BOWES CREDIT CORPORATION
ITEM 2.-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Income from continuing operations for the nine months ending September 30, 2000
increased $14.5 million (10.6%) to $151.5 million compared with $137.0 million
for the same period of 1999. The improvement was largely attributable to growth
in the Company's internal financing segment and higher fee- and service-based
income.
As part of a strategic alliance with U.S. Bank, a division of U.S. Bancorp, on
June 30, 2000 PBCC sold its PitneyWorksSM Business RewardsSM Visa(R) and
Business Visa(R) card operations, including credit card receivables of
approximately $322 million. The Company expects to earn fees in connection with
the strategic alliance with U.S. Bank. However, the Company is no longer
originating credit card receivables and as a result will not be earning finance
income on those balances. The transaction is subject to post-closing
adjustments.
Results from Continuing Operations
Finance income from all sources increased $17.5 million (4.2%) to $434.7 million
for the first nine months of 2000 compared with $417.2 million for the first
nine months of 1999. The net increase primarily reflects a combination of
portfolio growth in the internal financing segment coupled with higher fee- and
service-based revenue from the Company's Small Business Solutions programs.
Selling, general and administrative ("SG&A") expenses decreased $4.3 million
(4.8%) to $84.9 million for the first nine months of 2000 compared with $89.2
million for the first nine months of 1999. The decrease reflects the completion
of the Company's regional consolidation project early in 2000.
Interest expense, net decreased $2.4 million (2.6%) to $88.8 million for the
first nine months of 2000 compared with $91.2 million for the first nine months
of 1999. The decrease reflects lower average borrowings in 2000, partially
offset by higher interest rates. The effective interest rate on average
borrowings was 6.73 percent for the first nine months of 2000 compared to 5.61
percent for the first nine months of 1999. The Company does not match fund its
financing investments.
The provision for credit losses increased $13.5 million (48.0%) to $41.5 million
for the first nine months of 2000 compared with $28.0 million for the first nine
months of 1999. The increase is mainly due to the high growth experienced in the
Company's Small Business Solutions programs.
Depreciation of equipment under operating leases was $3.4 million and $3.7
million for the nine months ended September 30, 2000 and 1999, respectively.
This reflects a lower operating lease investment balance at September 30, 2000
compared with September 30, 1999.
Provisions for income taxes on continuing operations were $56.0 million (an
effective tax rate of 27.0%) for the first nine months of 2000 compared to $49.5
million (an effective tax rate of 26.5%) for the first nine months of 1999.
Operating Segments
Revenue and operating profit for the Company, by operating segment, for the
three and nine months ended September 30, 2000 and 1999 are summarized below.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands of dollars)
Revenue:
Internal Financing Division................................. $ 105,618 $ 103,318 $ 331,204 $ 308,060
Capital Services Division................................... 36,819 36,801 103,503 109,137
------- ------- ------- -------
Total revenue.......................................... $ 142,437 $ 140,119 $ 434,707 $ 417,197
======== ======== ======== ========
(in thousands of dollars)
Income from continuing operations
before income taxes:
Internal Financing Division................................. $ 62,569 $ 63,417 $ 181,288 $ 170,802
Capital Services Division................................... 12,032 4,806 26,170 15,662
------ ------- ------- -------
Total income from continuing operations
before income taxes.................................... $ 74,601 $ 68,223 $ 207,458 $ 186,464
======== ========= ========= =========
</TABLE>
<PAGE>
PITNEY BOWES CREDIT CORPORATION
ITEM 2.-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Segments (continued)
Internal financing revenue increased 7.5 percent and income from continuing
operations before income taxes increased 6.1 percent for the first nine months
of 2000 compared to the first nine months of 1999. The increase in revenue was
mainly due to higher earning asset levels and higher fee-based income
attributable to Small Business Solutions programs. Operating profit growth was
slower than revenue growth due to higher credit loss provisions to support the
growth in Small Business Solutions programs.
Capital services financing revenue decreased 5.2 percent while operating profit
increased 67.1 percent for the first nine months of 2000 compared to the first
nine months of 1999. The decrease in revenue reflects the Company's ongoing
effort to reduce reliance on investment levels in the capital services
portfolio. This was offset by reduced interest and depreciation and amortization
costs reflected in the net increase in income from continuing operations before
income taxes. The Company continues to pursue a strategy of selective asset
sales and limited new investments.
Discontinued Operations
On January 14, 2000, the Company sold its mortgage servicing business, Atlantic
Mortgage & Investment Corporation ("AMIC"), a wholly owned subsidiary of the
Company to ABN AMRO North America. The Company received approximately $484
million in cash at closing. The transaction is subject to post-closing
adjustments. See Note 2 to the Consolidated Financial Statements.
Portfolio Quality
Finance assets represent the Company's largest asset and its primary source of
revenue. The Company's finance assets at September 30, 2000 decreased
approximately $0.2 billion to approximately $2.8 billion from approximately $3.0
billion at the end of 1999. This was primarily due to the sale of its
PitneyWorksSM Business RewardsSM Visa(R) and Business Visa(R) card operations.
Lease finance receivables represent the Company's expected future rental
payments on its finance leases and at September 30, 2000 amounted to $2.9
billion compared to $2.7 billion at December 31, 1999. The increase is mainly
attributable to growth experienced in the Company's internal leasing portfolios.
Other finance receivables represent the amount invested in the Company's Small
Business Solutions programs, including its PitneyWorksSM Business RewardsSM
Visa(R) and Business Visa(R) card operations that were sold during June 2000.
The balance of other finance receivables at September 30, 2000 was $267.8
million compared to $539.5 million at December 31, 1999. The decrease reflects
the sale of the Company's credit card operations referred to above.
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 1.65 percent at September
30, 2000 and 1.83 percent at December 31, 1999. PBCC charged $50.6 million and
$56.7 million against the allowance for credit losses in the first nine months
of 2000 and 1999, respectively.
Financial Position
Total assets of the Company remained relatively fixed at $5.4 billion at both
September 30, 2000 and December 31, 1999. However, the balance at September 30,
2000 reflects the disposal of $491.8 million of net assets of discontinued
operations and the sale of the Company's credit card operations, which were
offset by loans made to the Company's parent and other affiliates.
<PAGE>
PITNEY BOWES CREDIT CORPORATION
ITEM 2.-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash Flows
It is the Company's policy not to restate prior year balance sheets when
segregating assets of discontinued operations in a given year. Accordingly, the
Company's Statement of Cash Flows in that year includes the effect of changes in
assets and liabilities of discontinued operations, as a component of the
appropriate category of cash flow.
PBCC's cash and cash equivalents increased by $34.0 million to $166.9 million at
September 30, 2000 compared to $132.9 million at December 31, 1999. The increase
reflects the growth experienced in the Company's Reserve AccountSM program.
Under this program, customers prepay for postage and earn interest on their
deposits in the form of free postage. Net cash provided from operating
activities amounted to $281.7 million during the first nine months of 2000,
compared to $350.1 million during the same period of 1999. The decrease in cash
from operating activities compared with last year is largely attributable to the
inclusion of operations from the Company's mortgage service subsidiary, AMIC, in
cash flow for the first nine months of 1999. The Company sold AMIC on January
14, 2000. Net cash used in investing activities amounted to $44.1 million during
the first nine months of 2000, compared to $72.9 million during the same period
of 1999. The decrease is mainly due to the receipt of proceeds from the sales of
AMIC and the credit card portfolio during 2000, partly offset by the lending of
a portion of the proceeds to PBI and other affiliates. Net cash used in
financing activities amounted to $203.6 million during the first nine months of
2000, compared to $270.9 million during the same period of 1999.
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 both September 30, 2000 and December 31, 1999. PBCC's
swap-adjusted variable-rate versus fixed-rate debt mix was 45 percent
variable-rate and 55 percent fixed-rate at September 30, 2000, and 39 percent
variable-rate and 61 percent fixed-rate at December 31, 1999. The Company may
borrow through the sale of commercial paper, under its confirmed bank lines of
credit, and by private and public offerings of intermediate- or long-term debt
securities. The Company had unused lines of credit and revolving credit
facilities totaling $1.2 billion at September 30, 2000, 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 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 transactions. The Company is exposed to
credit loss in the event of non-performance by the counterparties to the foreign
currency contracts to the extent of the difference between the spot rate at the
date of the contract delivery and the contracted rate; such exposure is also
considered minimal. At September 30, 2000 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 will continue to use cash to invest in finance assets with emphasis
on internal leasing transactions and select investment in capital services
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 dependent upon
the level of equipment purchases from Pitney Bowes Inc., 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 and
intermediate- or long-term debt securities and intercompany funds, when
available. 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>
PITNEY BOWES CREDIT CORPORATION
ITEM 2.-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Regulatory Matters
In 2000, the U.S. Postal Services ("U.S.P.S.") issued a proposed schedule for
the phaseout of manually reset electronic meters in the U.S. as follows:
o As of February 1, 2000, new placements of manually reset electronic meters are
no longer permitted.
o Current users of manually reset electronic meters can continue to use these
meters for the term of their current rental and lease agreements. Leases or
rentals due to expire in the year 2000 can be extended to December 31,
2001.
In August of 2000, the U.S.P.S. also issued a proposal to cease placements of
non-digital, or letterpress, meters as follows:
o New placements of non-digital meters with a "timeout" feature that enables
the meters to be automatically disabled, if not reset within a specified
time period are no longer permitted after December 2003.
o New placements of non-digital meters without the "timeout" feature are no
longer permitted after June 2001.
PBI has submitted comments to the U.S.P.S. proposed schedules described above.
Based on the proposed schedules PBI believes that the phaseout of manually reset
electronic meters or non-digital meters will not cause material adverse
financial impact on PBI.
In May 1995, the U.S.P.S. publicly announced its concept of its Information
Based Indicia Program ("IBIP") for future postage evidencing devices. As
initially stated by the U.S.P.S., the purpose of the program was to develop a
new standard for future digital postage evidencing devices which would
significantly enhanced postal revenue security and supported expanded U.S.P.S.
value-added services to mailers.
During the period from May 1995 through May 2000, PBI has submitted extensive
comments to a series of proposed IBIP specifications issued by the U.S.P.S. In
March 2000, the U.S.P.S. issued the latest set of proposed specifications,
entitled "Performance Criteria for Information Based Indicia and Security
Architecture for Open IBI Postage Evidencing Systems" (the "IBI Performance
Criteria"). PBI has submitted comments to the IBI Performance Criteria. In
September and October 2000, the U.S.P.S. issued further proposed regulations
regarding postage evidencing systems using Information Based Indicia, titled
"Refunds and Exchanges" and "Production, Distribution and Use of Postal Security
Devices and Information-Based Indicia." The Company will be submitting comments
regarding those proposed regulations.
In March 2000, PBI received approval from the U.S.P.S. for the commercial launch
of the Internet version of a product which satisfies the proposed IBI
Performance Criteria, ClickStamp(TM) Online.
Forward - Looking Statements
The Company cautions 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-Q or made by the Company management involve risks and
uncertainties which may change based on various important factors. Words such as
"estimate", "project", "plan", "believe", "expect" and similar expressions may
identify such forward-looking statements. 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, but are not limited to:
o changes in postal regulations
o timely development and acceptance of new products
o success in gaining product approval in new markets where regulatory
approval is required o successful entry into new markets
o mailers' utilization of alternative means of communication or competitors'
products
o the Company's success at managing customer credit risk
o changes in interest rates
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
In the course of normal business, the Company and PBI, its parent, are
occasionally party to lawsuits. These may involve litigation by or against the
Company relating to, among other things:
o contractual rights under vendor, insurance or other contracts
o intellectual property or patent rights
o equipment, service or payment disputes with customers
o disputes with employees
The Company is currently a plaintiff or defendant in a number of lawsuits,
none of which should have, in the opinion of management and legal counsel, a
material adverse effect on the Company's financial position or results of
operations.
In June 1999, PBI was served with a Civil Investigative Demand ("CID") from
the U.S. Justice Department's Antitrust Division. A CID is a tool used by the
Antitrust Division for gathering information and documents. PBI believes that
the Justice Department may be reviewing its efforts to protect its intellectual
property rights. PBI believes it has complied fully with the antitrust laws and
is cooperating fully with the department's investigation.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a. Financial Statements - see index on page 2
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<S> <C>
Reg S-K Incorporation
Exhibits Description by Reference
--------- ---------------------------------------- ---------------
(12) Computation of Ratio of Earnings from Continuing See Exhibit (i)
Operations to Fixed Charges on page 16
(27) Financial Data Schedule See Exhibit (ii)
on page 17
There are no unregistered debt instruments in which the total
amount of securities authorized thereunder exceeds 10 percent of
the total assets of the Company. Copies of all instruments
defining the rights of securities holders are available on
request.
b. No reports on Form 8-K were filed during the quarter ended September 30, 2000.
</TABLE>
<PAGE>
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/ DAVID KLEINMAN
----------------------
David Kleinman
Vice President, Finance and
Chief Administrative Officer
(Principal Financial Officer)
Dated: November 14, 2000
By /s/ MICHAEL C. COSTELLO
----------------------
Michael C. Costello
Controller
(Principal Accounting Officer)
Dated: November 14, 2000
<PAGE>
Exhibit (i)
Computation of Ratio of Earnings from Continuing Operations to Fixed Charges
(in thousands of dollars)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999(2)
---- ---- ---- -------
Income from continuing operations
before income taxes................ $ 74,601 $ 68,223 $ 207,458 $ 186,464
------- ------- -------- --------
Fixed charges:
Interest on debt................... 28,303 26,606 88,768 91,167
One third rent expense............. 93 148 307 456
------- ------- -------- --------
Total fixed charges.................. 28,396 26,754 89,075 91,623
------- ------- -------- --------
Earnings from continuing operations
before fixed charges............... $ 102,997 $ 94,977 $ 296,533 $ 278,087
======= ======= ======== ========
Ratio of earnings from continuing
operations to fixed charges (1).... 3.63X 3.55X 3.33X 3.04X
======= ======= ======== ========
</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.
(2) Amounts reclassified to reflect AMIC as discontinued operations. Interest
expense and the portion of rent representative of the interest factor of
this discontinued operation have been excluded from fixed charges in the
computation. Including these amounts in fixed charges, but excluding
subsidiary disposition gain and loss, the ratio of earnings to fixed
charges would have been 2.58 times for the nine months ended September 30,
1999.
<PAGE>
