SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 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>
<TABLE>
<S> <C>
PITNEY BOWES CREDIT CORPORATION
Part I -- FINANCIAL INFORMATION
ITEM 1.-- FINANCIAL STATEMENTS
Consolidated Statements of Income:
Three and Six Months Ended June 30, 2000 and 1999................................... 3
Consolidated Balance Sheets:
At June 30, 2000 and December 31, 1999.............................................. 4
Consolidated Statements of Cash Flow:
Six Months Ended June 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
Finance income............................................... $ 150,164 $ 141,955 $ 292,270 $ 277,079
------- ------- ------- -------
Expenses:
Selling, general and administrative.......................... 26,873 33,511 58,045 59,382
Interest..................................................... 31,716 32,781 60,465 64,561
Provision for credit losses.................................. 15,387 7,714 32,305 20,013
Depreciation and amortization................................ 4,994 7,165 8,598 14,882
------- ------- ------- -------
Total expenses............................................. 78,970 81,171 159,413 158,838
------- ------- ------- -------
Income from continuing operations before income taxes.......... 71,194 60,784 132,857 118,241
Provision for income taxes..................................... 19,822 17,982 36,046 34,692
------- ------- ------- -------
Income from continuing operations.............................. 51,372 42,802 96,811 83,549
Discontinued operations:
(Loss) income from discontinued operations (net of (tax benefits)
taxes of ($1,963) and $177 for the three and six months ended
June 30, 1999, respectively)................................... - (2,729) - 971
Loss on disposal of discontinued operations (net of tax benefits
of ($17,062) for the three and six months ended June 30, 1999) - (24,938) - (24,938)
------- ------- ------- -------
-------
Net income..................................................... $ 51,372 $ 15,135 $ 96,811 $ 59,582
======= ======= ======= =======
Ratio of earnings from continuing
operations to fixed charges.................................. 3.24X 2.85X 3.19X 2.82X
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
PITNEY BOWES CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands of dollars)
<TABLE>
June 30, December 31,
2000 1999
--------- ---------
ASSETS
<S> <C> <C>
Cash and cash equivalents............................................ $ 168,248 $ 132,914
Investments:
Finance assets..................................................... 2,755,982 2,984,246
Investment in leveraged leases..................................... 919,573 850,000
Investment in operating leases, net of accumulated depreciation.... 39,989 45,607
Allowance for credit losses........................................ (76,713) (80,655)
--------- ---------
Net investments.................................................. 3,638,831 3,799,198
--------- ---------
Assets held for sale................................................. 321,359 342,934
Investment in partnership............................................ 166,656 167,071
Loans and advances to affiliates..................................... 963,830 362,012
Net assets of discontinued operations................................ - 491,763
Other assets......................................................... 151,774 87,084
--------- ---------
Total assets.................................................. $ 5,410,698 $ 5,382,976
========= =========
LIABILITIES
Senior notes payable due within one year............................. $ 786,325 $ 1,044,573
Short-term notes payable to affiliates............................... 83,280 37,000
Accounts payable to affiliates....................................... 202,551 227,503
Accounts payable and accrued liabilities............................. 302,746 283,361
Deferred taxes....................................................... 581,903 526,838
Senior notes payable due after one year.............................. 1,507,681 1,332,000
Long-term notes payable to affiliates................................ 296,000 333,000
Subordinated notes payable........................................... 299,892 299,892
--------- ---------
Total liabilities............................................... 4,060,378 4,084,167
--------- ---------
STOCKHOLDER'S EQUITY
Common stock......................................................... 46,000 46,000
Capital surplus...................................................... 341,725 41,725
Retained earnings.................................................... 962,595 1,211,084
--------- ---------
Total stockholder's equity...................................... 1,350,320 1,298,809
--------- ---------
Total liabilities and stockholder's equity.................... $ 5,410,698 $ 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>
Six Months Ended June 30,
----------------------------
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Income from continuing operations, net of taxes............................ $ 96,811 $ 83,549
Income from discontinued operations, net of taxes.......................... - 971
Loss on disposal of discontinued operations, net of tax benefit............ - (24,938)
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for credit losses.............................................. 32,305 20,013
Depreciation and amortization............................................ 8,598 56,965
Increase in deferred taxes................................................. 55,065 48,669
(Increase) in other assets................................................. (39,797) (497)
Decrease in discontinued other assets...................................... - 71,425
(Decrease) in accounts payable to affiliates............................... (24,952) (82,066)
Increase in accounts payable and accrued liabilities....................... 19,385 29,591
Other, net................................................................. (2,171) (1,791)
--------- ---------
Net cash provided by operating activities.................................. 145,244 201,891
--------- ---------
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........................................... (1,500,729) (430,288)
Investment in leveraged leases............................................. (50,341) (63,353)
Investment in operating leases............................................. - (510)
Investment in assets held for sale......................................... (334,308) (242,456)
Cash receipts collected under lease contracts, net of finance
income recognized........................................................ 1,662,513 529,687
Investment in mortgage service rights...................................... - (9,719)
Loans and advances to affiliates, net...................................... (601,818) 239,497
Additions to equipment and leasehold improvements.......................... (1,166) (5,213)
--------- ---------
Net cash provided by investing activities.................................. 8,677 17,645
--------- ---------
FINANCING ACTIVITIES
Change in commercial paper borrowings, net................................. 256,000 10,800
Repayment of other short-term debt......................................... (515,835) (74,485)
Proceeds from senior notes................................................. 177,268 -
Change in loans from affiliates, net....................................... 9,280 (100,000)
Capital contribution from Pitney Bowes Inc................................. 300,000 -
Dividends paid to Pitney Bowes Inc......................................... (345,300) (42,500)
--------- ---------
Net cash used in financing activities...................................... (118,587) (206,185)
--------- ---------
Increase in cash and cash equivalents...................................... 35,334 13,351
Cash and cash equivalents at beginning of period........................... 132,914 19,154
--------- ---------
Cash and cash equivalents at end of period................................. $ 168,248 $ 32,505
========= =========
Interest paid.............................................................. $ 86,823 $ 82,576
========= =========
Income taxes (refunded) paid, net.......................................... $ (21,499) $ 49,374
========= =========
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 June 30, 2000 and December 31, 1999, and the results of
operations for the three and six months ended June 30, 2000 and 1999, and the
cash flows for the six months ended June 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 six months ended June 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 $30.0 and $62.5 million for the three and six months ended
June 30, 1999, respectively. Net interest expense allocated to AMIC's
discontinued operations was $1.8 and $3.7 million for the three and six months
ended June 30, 1999, respectively. 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 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 Colonial Pacific Leasing Corporation ("CPLC")
assets sold to General Electric Capital Corporation or otherwise disposed of,
net of related transaction costs.
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Loss) income on AMIC discontinued operations.... $ - $ (2,729) $ - $ 971
(Loss) on disposal of AMIC....................... - (34,200) - (34,200)
Gain on sale of CPLC............................. - 9,262 - 9,262
------- ------- ------- -------
Loss from discontinued operations $ - $ (27,667) $ - $ (23,967)
======= ======= ======= =======
</TABLE>
Operating results have been segregated and reported as discontinued operations
in the Consolidated Statements of Income for the three and six months ended June
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 six months ended June 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>
June 30, December 31,
(in thousands of dollars) 2000 1999
--------- ---------
<S> <C> <C>
Lease finance receivables...................................... $2,825,963 $2,713,358
Other finance receivables ..................................... 263,168 539,499
--------- ---------
Total gross finance receivables.............................. 3,089,131 3,252,857
Unguaranteed residual valuation................................ 362,930 415,079
--------- ---------
Total gross finance assets .................................. 3,452,061 3,667,936
Initial direct costs deferred.................................. 42,764 43,916
Unearned income................................................ (738,843) (727,606)
--------- ---------
Total finance assets......................................... $2,755,982 $2,984,246
========= =========
</TABLE>
Note 4 -- Notes Payable
The composition of the Company's notes payable is as follows:
<TABLE>
<S> <C> <C>
June 30, December 31,
(in thousands of dollars) 2000 1999
--------- ---------
Senior Notes Payable:
Commercial paper at the weighted average
interest rate of 6.55% (5.55% in 1999).......................... $ 660,000 $ 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)........................................ 1,325 8,318
Current installment of long-term debt due within one year at
an interest rate of 5.95% (5.95% to 6.11% in 1999)............. 125,000 175,000
--------- ---------
Total senior notes payable due within one year................... 786,325 1,044,573
Senior notes payable due after one year at interest rates of
5.65% to 9.25% in both 2000 and 1999........................... 1,507,681 1,332,000
--------- ---------
Total senior notes payable....................................... 2,294,006 2,376,573
--------- ---------
Notes Payable to Affiliates:
Due within one year at an interest rate of 5.38% in 2000 and 1999 83,280 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................................ 379,280 370,000
--------- ---------
Subordinated Notes Payable:
Non-interest bearing notes due Pitney Bowes Inc. ("PBI")......... 299,892 299,892
--------- ---------
Total notes payable................................................. $2,973,178 $3,046,465
========= =========
</TABLE>
<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 7.443 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 8.073 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 7.515 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 June 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>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands of dollars)
Revenue:
<S> <C> <C> <C> <C>
Internal Financing Division............................. $ 115,662 $ 104,261 $ 225,586 $ 204,743
Capital Services Division............................... 34,502 37,694 66,684 72,336
------- ------- ------- -------
Total revenue for reportable segments.............. $ 150,164 $ 141,955 $ 292,270 $ 277,079
======== ======== ======== ========
(in thousands of dollars)
Operating Profit:
Internal Financing Division............................. $ 62,827 $ 53,482 $ 118,719 $ 107,385
Capital Services Division............................... 8,367 7,302 14,138 10,856
------ ------- ------- ------
Total operating profit for reportable segments..... $ 71,194 $ 60,784 $ 132,857 $ 118,241
======== ========= ========= =======
The Company fully allocates corporate charges to its individual divisions.
</TABLE>
<PAGE>
PITNEY BOWES CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6 -- Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued and
amended in June 2000 by SFAS No. 138. 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 SEC 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 must be adopted in the fourth quarter of 2000.
Note 7 -- Other Items
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 direct
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
Results of Continuing Operations
Second Quarter of 2000 Compared to Second Quarter of 1999
--------------------------------------------------------------------------------
Finance income in the second quarter of 2000 increased 5.8 percent to $150.2
million compared to $142.0 million in 1999. Finance income for internal
financing programs increased 10.9 percent to $115.7 million from $104.3 million
primarily due to higher fee- and service-based income. Finance income for
Capital Services financing programs decreased to $34.5 million from $37.7
million primarily due to lower investment levels.
Selling, general and administrative ("SG&A") expenses decreased 19.8 percent
to $26.9 million in the second quarter of 2000 compared to $33.5 million in
1999. The decrease was attributable to higher expense reimbursements pursuant to
a revenue and expense sharing arrangement with a subsidiary of Pitney Bowes Inc.
The decrease was also affected by the completion of the Company's regional
consolidation project early in 2000. Expenses in 1999 included higher
professional fees and outsourcing expenses related to consulting services in
support of that project.
Depreciation on operating leases was $1.0 million in the second quarter of
2000 compared to $1.1 million in 1999 reflecting a lower operating lease
investment balance at June 30, 2000 compared to June 30, 1999.
The provision for credit losses was $15.4 million for the second quarter of
2000 compared with $7.7 million in 1999. The increase is mainly due to the
growth experienced in the Company's Small Business Solutions programs and not
due to qualitative reasons.
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 1.83 percent at both June
30, 2000 and December 31, 1999. PBCC charged $36.3 million and $23.7 million
against the allowance for credit losses in the first half of 2000 and 1999,
respectively. The increase was due to higher write-offs recorded in connection
with the growth of the Small Business Solutions programs referred to above. The
write-offs were due to the increased volume of transactions and not to a change
in portfolio quality.
Interest expense was $31.7 million in the second quarter of 2000 compared with
$32.8 million in 1999. The decrease reflects lower average borrowings in 2000,
partially offset by higher interest rates. The effective interest rate on
average borrowings was 6.51 percent for the second quarter of 2000 compared to
5.64 percent for the same period in 1999. The Company does not match fund its
financing investments.
The effective tax rate for the second quarter of 2000 was 27.8 percent
compared with 29.6 percent for the same period of 1999. The decrease is
primarily due to the impact of certain partnership leasing transactions.
The Company's ratio of earnings from continuing operations to fixed charges
was 3.24 times for the second quarter of 2000 compared with 2.85 times for the
same period of 1999. The increase was mainly due to lower interest expense and
the effect of higher earnings.
Results of Continuing Operation
Six Months of 2000 Compared to Six Months of 1999
--------------------------------------------------------------------------------
For the six months of 2000 compared to the same period of 1999, finance
revenue increased 5.5 percent to $292.3 million, SG&A expenses decreased 2.3
percent to $58.0 million, depreciation and amortization decreased 42.2 percent
to $8.6 million, the provision for credit losses increased 61.4 percent to $32.3
million, interest expense decreased 6.3 percent to $60.5 million and the
provision for income taxes increased 3.9 percent to $36.0 million, generating an
increase in income from continuing operations of 15.9 percent to $96.8 million.
The factors that affected the change in each of the above income or expense
items were essentially the same as those affecting the second quarter of 2000
versus 1999.
<PAGE>
PITNEY BOWES CREDIT CORPORATION
ITEM 2.-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued and
amended in June 2000 by SFAS No. 138. 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 SEC 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 must be adopted in the fourth quarter of 2000.
Liquidity and Capital Resources
The Company's principal sources of funds are from operations and borrowings.
PBCC uses 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 43 percent short-term and 57 percent long-term
at June 30, 2000, and 45 percent short-term and 55 percent long-term at December
31, 1999. PBCC's swap-adjusted variable-rate versus fixed-rate debt mix was 41
percent variable-rate and 59 percent fixed-rate at June 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 June 30, 2000, largely supporting its
commercial paper borrowings.
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 direct finance
income on those balances. The transaction is subject to post-closing
adjustments.
On April 19, 2000, certain partnerships controlled by affiliates of PBCC 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 7.443 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 8.073
percent for the first three years and reset in May 2003 and each third
anniversary of the first reset date. The proceeds from the PBI Obligations were
used for general corporate purposes, including the repayment of commercial
paper.
On March 31, 2000, PBCC issued $43.3 million of 7.515 percent Senior Notes to
various holders maturing on January 10, 2012. The proceeds from these notes were
used to pay down commercial paper.
<PAGE>
PITNEY BOWES CREDIT CORPORATION
ITEM 2.-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
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. Under this program in September 1999, the Company issued $125 million
of 5.95 percent unsecured notes. The proceeds of these unsecured notes were used
for general corporate purposes including the repayment of short-term debt. At
June 30, 2000, $625 million was available under the shelf registration including
$375 million that was available under the related medium-term note program.
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 June 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.
Gross finance assets at the end of the second quarter of 2000 decreased 5.9
percent or $215.9 million from December 31, 1999. The decrease is principally
due to the sale of the credit card receivables of approximately $322 million in
June 2000, principally offset by higher asset-based investments in the mailing
and copier programs. Overall levels of gross finance assets are in line with
management's expectations.
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 1.85 times at June 30, 2000 and
1.80 times at December 31, 1999. The slight increase in the liquidity ratio is
due to lower short-term debt levels and lower short-term receivables resulting
from the sale of the credit card portfolio in June 2000.
The Company will continue to use cash to invest in finance assets with
emphasis on internal leasing transactions and select investment in Capital
Services Division 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 Division 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
THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Regulatory Matters
In January 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.
Based on the proposed schedule, the Company believes that the phaseout of
manually reset electronic meters will not cause adverse financial impact of the
Company.
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 significantly
enhanced postal revenue security and supported expanded U.S.P.S. value-added
services to mailers.
During the period from May 1995 through March 31, 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 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. The personal computer version of
this product is currently in the final phase of beta testing and is expected to
be ready for market upon final approval from the U.S.P.S.
Forward - Looking Statements
The Company wants 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-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 our success at managing 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 and/or 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)
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 June 30, 2000.
<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: August 14, 2000
By /s/ R. JEFFREY MACARTNEY
----------------------
R. Jeffrey Macartney
Controller
(Principal Accounting Officer)
Dated: August 14, 2000
<PAGE>
Exhibit (i)
Computation of Ratio of Earnings from Continuing Operations to Fixed Charges
(in thousands of dollars)
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
2000 1999(2) 2000 1999(2)
---- ------- ---- -------
<S> <C> <C> <C> <C>
Income from continuing operations
before income taxes................ $ 71,194 $ 60,784 $ 132,857 $ 118,241
------- ------- -------- --------
Fixed charges:
Interest on debt................... 31,716 32,781 60,465 64,561
One third rent expense............. 114 157 214 308
------- ------- -------- --------
Total fixed charges.................. 31,830 32,938 60,679 64,869
------- ------- -------- --------
Earnings from continuing operations
before fixed charges............... $ 103,024 $ 93,722 $ 193,536 $ 183,110
======= ======= ======== ========
Ratio of earnings from continuing
operations to fixed charges (1).... 3.24X 2.85X 3.19X 2.82X
======= ======= ======== =======
</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 2.77 times and 2.93 times for the three and six
months ended June 30, 1999, respectively.
<PAGE>
