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1
United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 1995
MCDONNELL DOUGLAS FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2564584 0-10795
(State or other (I.R.S. Employer (Commission File No.)
jurisdiction of Identification No.)
Incorporation or
Organization)
4060 Lakewood Boulevard, 6th Floor - Long Beach, California 90808-1700
(Address of principal executive offices)
(310) 627-3000
(Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $100 per share
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. _X_
As of March 29, 1996, there were 50,000 shares of the Company's common
stock outstanding.
Registrant meets the conditions set forth in General Instruction J(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
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3
Table of Contents
Page
Part I
Item 1. Business . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . 19
Item 3. Legal Proceedings . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders *
Part II
Item 5. Market for Registrant s Common Equity and Related Stockholder
Matters . . . . . . . . . . . . 19
Item 6. Selected Financial Data . . . . 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . 22
Item 8. Financial Statements and Supplementary Data. . . . . . 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . 42
Part III
Item 10.Directors and Executive Officers of the Registrant *
Item 11.Executive Compensation *
Item 12.Security Ownership of Certain Beneficial Owners and Management *
Item 13.Certain Relationships and Related Transactions *
Part IV
Item 14.Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . 43
Signatures . . . . . . . . . . . 47
Exhibits . . . . . . . . . . . . 48
____________________
*Omitted pursuant to General Instruction J(2)(c)of Form 10-K.
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Part I
Item 1. Business
General
McDonnell Douglas Finance Corporation (together with its subsidiaries the
"Company") is a wholly-owned subsidiary of McDonnell Douglas Financial
Services Corporation ("MDFS"), a wholly-owned subsidiary of McDonnell
Douglas Corporation ("McDonnell Douglas"). The Company was incorporated
in Delaware in 1968 and originally financed only McDonnell Douglas
manufactured commercial jet transport aircraft. While this continues to
represent a significant portion of the Company s business, the Company
also provides a diversified range of financing including loans, finance
leases and operating leases, primarily involving equipment for commercial
and industrial customers. At December 31, 1995, the Company had 74
employees.
The Company now operates in principally two segments: commercial aircraft
financing and commercial equipment leasing ("CEL"). Prior to 1995, the
Company operated in three segments: commercial aircraft financing, CEL
and non-core businesses. Non-core businesses represents market segments
in which the Company is no longer active and continues to liquidate and
manage the remaining non-core businesses as market opportunities occur.
Based on trends to date, the Company does not expect to incur significant
losses related to the disposal of its non-core businesses. At
December 31, 1995 and 1994, the portfolio balances for non-core
businesses totaled $80.6 million and $113.9 million.
Information on the Company's continuing businesses is included in the
following tables.
New Business Volume
Years ended December 31,
(Dollars in millions) 1995 1994 1993 1992 1991
Commercial aircraft financing$ 349.7 $117.9 $411.4 $153.2 $ 100.9
Commercial equipment leasing 241.1 84.1 41.5 50.7 91.8
$ 590.8 $202.0 $452.9 $203.9 $ 192.7
Portfolio Balances
December 31,
(Dollars in millions) 1995 1994 1993 1992 1991
Commercial aircraft financing$ 1,405.7 $1,333.0 $1,237.5 $ 1,001.1 $ 907.8
Commercial equipment leasing 502.4 369.4 422.3 557.4 668.9
$ 1,908.1 $1,702.4 $1,659.8 $ 1,558.5 $1,576.7$
For financial information about the Company's segments, see Notes to
Consolidated Financial Statements included in Item 8.
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Commercial Aircraft Financing Segment
The Company's commercial aircraft financing group, located in Long Beach,
California, provides financing for customers purchasing aircraft. The
Company primarily purchases aircraft from McDonnell Douglas and provides
airline customers financing alternatives, including lease transactions
and secured and unsecured notes receivable financing. A substantial
majority of the commercial aircraft portfolio is comprised of aircraft
manufactured by McDonnell Douglas. Additionally, this group assists the
McDonnell Douglas aircraft financing group with respect to financing of
some of McDonnell Douglas aircraft by others.
Portfolio balances for the Company's commercial aircraft financing
segment are summarized as follows:
Commercial Aircraft Portfolio by Aircraft Type
December 31,
(Dollars in millions) 1995 1994 1993 1992 1991
McDonnell Douglas aircraft financing:
Finance leases $857.4 $748.2 $732.3 $506.2 $465.6
Operating leases 256.8 197.8 176.9 93.7 30.0
Notes receivable 110.9 194.8 125.9 169.4 107.4
1,225.1 1,140.8 1,035.1 769.3 603.0
Other commercial aircraft
financing:
Finance leases 126.1 125.2 123.0 149.9 214.6
Operating leases 49.6 43.1 55.9 57.6 62.3
Notes receivable 4.9 23.9 23.5 24.3 27.9
180.6 192.2 202.4 231.8 304.8
$1,405.7 $1,333.0 $1,237.5 $1,001.1 $ 907.8
Commercial Aircraft Portfolio by Product Type
December 31,
(Dollars in millions) 1995 1994 1993 1992 1991
Aircraft leases:
Finance leases
Domestic $ 776.2 $653.3 $ 638.9 $601.5 $ 609.2
Foreign 207.3 220.1 216.5 54.6 70.9
Operating leases
Domestic 183.5 161.9 149.7 111.4 81.5
Foreign 122.9 79.0 83.0 39.9 10.9
1,289.9 1,114.3 1,088.1 807.4 772.5
Aircraft related notes
receivable:
Domestic obligors 31.2 53.4 51.4 88.0 61.6
Foreign obligors 84.6 165.3 98.0 105.7 73.7
115.8 218.7 149.4 193.7 135.3
$1,405.7 $1,333.0 $1,237.5 $1,001.1 $ 907.8
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At December 31, 1995, the Company's commercial aircraft portfolio was
comprised of finance leases to 25 customers (22 domestic and three
foreign) with a carrying amount of $983.5 million (49.5% of total Company
portfolio), notes receivable from six customers (three domestic and three
foreign) with a carrying amount of $115.8 million (5.8% of total Company
portfolio) and operating leases to 12 customers (eight domestic and four
foreign) with a carrying amount of $306.4 million (15.4% of total Company
portfolio).
At December 31, 1995, 61.6% of the Company's total portfolio consisted of
financings related to McDonnell Douglas aircraft, compared with 62.8% and
56.5% in 1994 and 1993.
- Factors Affecting the Commercial Aircraft Financing Portfolio
A substantial portion of the Company's total portfolio is concentrated
among the Company's largest commercial aircraft financing customers. The
single largest commercial aircraft financing customer, Trans World
Airlines, Inc. ("TWA"), accounted for $279.9 million (14.1% of total
Company portfolio) and $287.9 million (15.9% of total Company portfolio)
at December 31, 1995 and 1994. The Company agreed to defer six months of
lease and other payments as part of a restructuring of certain
indebtedness of TWA with its creditors in March 1995. The agreement calls
for TWA to pay deferred amounts, aggregating $29.1 million, over a 28-
month period which commenced in April 1995. As a result of such payment
deferrals, McDonnell Douglas has agreed to increase the aggregate amount
of its guaranties of TWA s obligations to the Company. In addition,
McDonnell Douglas provides supplemental guaranties in favor of the
Company for up to an additional $25.0 million of the Company's financings
to TWA. These guaranties supplement individual guaranties provided by
McDonnell Douglas with respect to certain of the Company's financings to
TWA to the extent that the estimated fair market value of the financings
(after applying the individual guaranties) is less than the net asset
value of the financings on the Company's books. The supplemental
guaranties terminate on June 30, 1996, but may be extended under certain
limited circumstances. See "Aircraft Financing Guaranties." The Company's
agreement with TWA was assumed under a prepackaged plan of reorganization
under Chapter 11 of the U.S. bankruptcy laws which was confirmed by the
U.S. Bankruptcy Court in August 1995. Although TWA is current on its
payments under the agreement with the Company and the reorganization plan
is not expected to have a significant effect on the Company's earnings,
cash flow or financial position, no assurance can be given that TWA will
be able to continue to perform its obligations under the agreement.
The Company's second largest customer, Federal Express Corporation,
accounted for $220.4 million (11.1% of the total Company portfolio) and
$78.1 million (4.3% of total Company portfolio) at December 31, 1995 and
1994. The five largest commercial aircraft financing customers accounted
for $865.2 million (43.5% of total Company portfolio) and $748.6 million
(41.2% of Company total portfolio) at December 31, 1995 and 1994.
A commercial aircraft customer of the Company, located in Venezuela,
has filed for bankruptcy protection in a Venezuelan bankruptcy court.
Such customer is in default under a loan secured by an MD-83 aircraft.
7
The amount due to the Company under the loan is approximately $13.6
million, which approximately equals the estimated value of the aircraft
securing the loan, net of maintenance reserves held by the Company of
$2.4 million. The aircraft is currently in possession of the Venezuelan
bankruptcy trustee and the Company has retained outside counsel in
Venezuela in connection with a foreclosure and repossession of the
aircraft or a potential settlement. Although Venezuelan bankruptcy law
provides for compensation to privileged creditors, to date, the Company
has been unsuccessful in its attempts to repossess the aircraft. No
assurance can be given as to whether the Company will be successful in
its attempt to repossess the aircraft or the amount, if any, otherwise
recoverable by the Company in connection with such loan. The Company does
not expect any impact to have a material adverse effect on earnings, cash
flow or financial position.
- Current Commercial Aircraft Market Conditions
The Company's financial performance is dependent in part upon general
economic conditions which may affect the profitability of the commercial
airlines with which the Company does business. The economic downturn in
the commercial airline industry, which contributed to an oversupply of
aircraft through the early 1990 s is now considered within the industry
to be over. Currently, domestic load factors have improved, resulting in
increasing demand for new and used equipment and firming of narrowbody
aircraft values. Although airlines have experienced stronger than
expected earnings growth, industry-wide balance sheets remain weak
resulting in a continuing focus on cost control and cautious fleet
planning decisions. Difficulties in the commercial airline industry have
resulted in and may again result in airlines declining deliveries of
aircraft, requesting change in delivery schedules, defaulting on
contracts for firm orders, or not exercising options or reserves. While
new orders are expected to remain modest over the next year, the Company
believes that there will be a continued demand for older aircraft and
that the prices for this equipment should continue to increase. The
Company also believes that realizable values for its aircraft at lease
maturity will remain above the values actually booked. Although the
Company continues to have a substantial portion of its total portfolio
concentrated among a small number of customers, the Company anticipates
that a combination of the improved earnings results of the airline
industry and the increasing demand for equipment will have a positive
effect on portfolio performance. The Company continues to look for
opportunities to expand its commercial aircraft portfolio while taking
advantage of improving market conditions to reduce exposure levels to a
small number of its customers. If aircraft values decline and the Company
is required as a result of customer defaults to repossess a substantial
number of aircraft prior to the expiration of the related lease or
financing, the Company could incur substantial losses in remarketing the
aircraft, which could have a material adverse effect on the Company's
earnings, cash flow or financial position.
8
- Aircraft Leasing
The Company normally purchases commercial aircraft for lease to
airlines only when such aircraft are subject to a signed lease contract.
At December 31, 1995, the Company owned or participated in the ownership
of 128 leased commercial aircraft, including 71 that were manufactured by
McDonnell Douglas.
- Factors Affecting Aircraft Financing Volume
As in the past, the Company anticipates continued fluctuations in the
volume of its aircraft financing transactions. Difficulties in the
commercial aircraft industry have resulted and may again result in
limiting many airlines' ability to access financing and present more
opportunities to the Company. At December 31, 1995, the Company had
unused credit lines available to a customer totaling $91.3 million. The
Company had no other commitments to provide aircraft related financing at
December 31, 1995 and had outstanding commitments of $10.8 million at
December 31, 1994. See "Competition and Economic Factors."
The following lists information on new business volume for the
Company's commercial aircraft financing segment:
Years ended December 31,
(Dollars in millions) 1995 1994 1993 1992 1991
McDonnell Douglas aircraft
financing volume:
Finance leases $220.6 $53.0 $357.3 $ 95.0 $19.2
Operating leases 81.9 15.7 33.8 53.5 30.0
Notes receivable 36.2 41.3 19.1 4.7 21.5
338.7 110.0 410.2 153.2 70.7
Other commercial aircraft
financing volume:
Finance leases 7.7 7.9 - - 23.9
Operating leases 3.3 - 0.7 - 6.3
Notes receivable - - 0.5 - -
11.0 7.9 1.2 - 30.2
$349.7 $117.9 $411.4 $153.2 $100.9
- Aircraft Financing Guaranties
At December 31, 1995, the Company had $332.7 million of guaranties in
its favor with respect to its commercial aircraft financing portfolio
relating to transactions with a carrying amount of $1,405.7 million
(23.7% of the commercial aircraft financing portfolio). The following
table summarizes such guaranties:
Domestic Foreign
(Dollars in millions) Airlines Airlines Total
Amounts guaranteed by:
McDonnell Douglas $139.5 $ 145.7 $ 285.2
Foreign governments - 8.3 8.3
Other 26.0 13.2 39.2
9
Total guaranties $165.5 $167.2 $332.7
The Company has no reason to believe that any such guaranteed amounts
will be ultimately unenforceable or uncollectible. See "Relationship
With McDonnell Douglas."
Commercial Equipment Leasing Segment
CEL provides single-investor, tax-oriented lease financing as its primary
product. CEL, which maintains its principal operations in Long Beach,
California and has marketing offices in Chicago, Illinois and Detroit,
Michigan, obtains its business primarily through direct solicitation by
its marketing personnel. CEL specializes in leasing equipment such as
machine tools, executive aircraft, highway vehicles, containers and
chassis, and printing equipment and other types of equipment which it
believes will maintain strong collateral and residual values. The lease
term is generally between three and ten years and transaction sizes
usually range between $2.0 million and $15.0 million. In addition to
financing transactions for the Company, CEL also arranges third party
financings of equipment.
Portfolio balances for the Company's CEL segment are summarized as
follows:
December 31,
(Dollars in millions) 1993 1992 1991
1995 1994
Finance leases $266.3 $216.8 235.2 $325.9 $425.9
Operating leases 169.1 133.4 157.5 179.9 198.7
Notes receivable 67.0 18.5 28.8 50.7 41.5
Preferred and preference
stock - 0.7 0.8 0.9 2.8
$502.4 $369.4 $422.3 $557.4 $668.9
- Factors Affecting CEL Volume
As the Company's borrowing costs have declined in recent years, CEL s
ability to compete more effectively has increased significantly. In 1995,
CEL booked $241.1 million of new business volume, almost tripling that of
1994. Additionally, at year end, CEL s backlog of business was $116.6
million, surpassing the 1994 backlog of $83.6 million.
The following lists information on new business volume for the
Company's CEL segment:
Years ended December 31,
(Dollars in millions) 1995 1994 1993 1992 1991
Finance leases $102.0 $53.9 $15.3 $24.9 $55.6
Operating leases 70.5 24.3 22.9 18.2 30.3
Notes receivable 68.6 5.9 3.3 7.6 5.9
$241.1 $84.1 $41.5 $50.7 $91.8
10
Cross-Border Outstandings
The extension of credit to borrowers located outside of the United States
is called "cross-border" credit. In addition to the credit risk
associated with any borrower, these particular credits are also subject
to "country risk" - economic and political risk factors specific to the
country of the borrower which may make the borrower unable or unwilling
to pay principal and interest or otherwise perform according to
contractual terms. Other risks associated with these credits include the
possibility of insufficient foreign exchange and restrictions on its
availability.
The Company has relatively small local currency outstandings to the
individual countries listed in the following table that are not hedged or
are not funded by local currency borrowings.
The countries in which the Company's cross border outstandings exceeded
1% of consolidated assets consist of the following at December 31, 1995,
1994 and 1993:
(Dollars in millions) December 31,
Finance Notes Operating
Country Leases Receivable Leases Total
1995
Indonesia $132.6 $ - $ - $ 132.6
Italy - - 48.8 48.8
$132.6 $ - $ 48.8 $ 181.4
1994
Indonesia $ 144.8 $ - $ - $ 144.8
Japan - 35.1 - 35.1
Mexico 21.4 - 23.9 45.3
$ 166.2 $ 35.1 $ 23.9 $ 225.2
1993
Indonesia $ 154.8 $ - $ - $154.8
Mexico 23.0 - 23.6 46.6
United Kingdom 14.3 23.0 - 37.3
$ 192.1 $ 23.0 $ 23.6 $238.7
At December 31, 1995, the Company had equipment in Mexico under both a
finance lease and an operating lease agreement with an aggregate net
carrying amount of $15.6 million and equipment in Belgium under an
operating lease agreement with a net carrying amount of $16.0 million.
At December 31, 1993, the Company had equipment in the Netherlands under
an operating lease agreement with a net carrying amount of $18.0 million,
representing outstandings between 0.75% and 1% of the Company's total
assets. At December 31, 1994, there were no countries whose outstandings
were between 0.75% and 1% of the Company's total assets.
11
Maturities and Sensitivity to Interest Rate Changes
The following table shows the maturity distribution and sensitivity to
changes in interest rates of the Company's domestic and foreign financing
receivables at December 31, 1995:
(Dollars in millions) Domestic Foreign Total
Maturity Distribution
1996 $ 265.7 $ 38.6 $ 304.3
1997 182.2 39.2 221.4
1998 164.1 26.1 190.2
1999 181.1 27.8 208.9
2000 133.5 28.1 161.6
2001 and thereafter 650.9 211.4 862.3
$1,577.5 $ 371.2 $1,948.7
Financing Receivables Due 1997 and Thereafter
Fixed interest rates $1,249.3 $ 83.9 $1,333.2
Variable interest rates 62.5 248.7 311.2
$1,311.8 $ 332.6 $1,644.4
Allowance for Losses on Financing Receivables and Credit Loss Experience
Analysis of Allowance for Losses on Financing Receivables
December 31,
(Dollars in millions) 1995 1994 1993 1992 1991
Allowance for losses on
financing receivables $40.7 $35.6 $37.4 $46.7 $61.6
at beginning of year
Provision for losses 12.2 9.9 8.6 19.1 47.2
Write-offs, net of (10.6) (4.9) (10.4) (27.4) (56.7)
recoveries
Other - 0.1 - (1.0) (5.4)
Allowance for losses on
financing receivables $42.3 $40.7 $35.6 $37.4 $46.7
at end of year
Allowance as percent of 2.1% 2.2% 1.9% 2.1% 2.2%
total portfolio
Net write-offs as percent of
average portfolio 0.6% 0.3% 0.6% 1.4% 2.0%
More than 90 days
delinquent:
12
Amount of delinquent $10.0 $ 2.8 $ 3.7 $ 4.6 $19.0
installments
Total receivables due from
delinquent obligors $12.1 $43.2 108.4$ $10.5 $42.8
Total receivables due from
delinquent obligors as a
percentage of total 0.6% 2.4% 5.9% 0.6% 2.0%
portfolio
The portfolio at December 31, 1995 includes five CEL obligors and three
airline obligors to which payment extensions have been granted. At
December 31, 1995, payments so extended amounted to $22.5 million ($17.7
million airline-related), and the aggregate carrying amount of the
related receivables was $406.4 million ($378.6 million airline-related).
Receivable Write-offs, Net of Recoveries by Business Unit
The following table summarizes the loss experience for the Company's
continuing businesses:
Years ended % of Respective
December 31, Average
Portfolio
(Dollars in millions) 1995 1994 1995 1994
Commercial aircraft financing $ 5.0 $ (1.9) 0.37% (0.14)%
Commercial equipment leasing 1.7 2.5 0.41 0.66
$ 6.7 $ 0.6
In its analysis of the allowance for losses on financing receivables, the
Company has taken into consideration the current economic and market
conditions and provided $12.2 million and $9.9 million in 1995 and 1994
for losses. The Company believes that the allowance for losses on
financing receivables is adequate at December 31, 1995 to cover potential
losses in the Company's total portfolio. If, however, certain major
customers defaulted and the Company were forced to take possession of and
dispose of significant amounts of aircraft or equipment, losses in excess
of the allowance could be incurred, which would be charged directly
against earnings.
The Company's receivable write-offs, net of recoveries, increased in 1995
as compared to 1994 primarily attributable to certain aircraft that were
repossessed during 1995.
Nonaccrual and Past Due Financing Receivables
Financing receivables accounted for on a nonaccrual basis consisted of
the following at December 31:
(Dollars in millions) 1995 1994
Domestic $ 13.6 $ 8.8
13
Foreign 17.0 21.4
$ 30.6 $30.2
Financing receivables being accrued which are contractually past due 90
days or more as to principal and interest payments consisted of domestic
financings of $0.6 million and $16.5 million at December 31, 1995 and
1994.
Borrowing Operations
The Company principally relies on funds from operations and borrowings to
operate its business. Borrowings include commercial paper, secured and
unsecured senior and subordinated long-term debt, and bank borrowings.
The Company also utilizes interest rate swap agreements to manage
interest costs and risk associated with changing interest rates. See Note
6 of Notes to Consolidated Financial Statements.
The Company has a joint revolving credit agreement under which the
Company may borrow up to $220 million, reduced by borrowings of up to $16
million that can be made by MDFS under this agreement. Commercial paper,
when outstanding, is fully supported by unused commitments under this
agreement. At December 31, 1995, there was no commercial paper
outstanding. The Company also has available approximately $120 million in
uncommitted, short-term bank credit facilities. At December 31, 1995,
there were no amounts outstanding under the revolving credit agreement
and $10 million under the short-term bank facilities.
The Company has an effective shelf registration statement relating to up
to $750 million aggregate principal amount of debt securities. The
Company established a $500 million medium-term note program under the
shelf registration and, as of December 31, 1995, has issued and sold $135
million in aggregate principal amount of securities under the program.
The following table sets forth the average debt of the Company by
borrowing classification:
(Dollars in millions)
Average Average Average
Years ended Short-Term Long-Term Total
December 31, Debt Debt Debt
1995 $ 71.4 $ 1,183.6 $ 1,255.0
1994 108.0 1,167.3 1,275.3
1993 113.0 1,153.7 1,266.7
1992 118.2 1,513.1 1,631.3
1991 341.1 1,750.4 2,091.5
The weighted average interest rates on all outstanding indebtedness
computed for the relevant period were as follows:
14
Weighted Weighted Weighted
Years ended Average Average Average
December 31, Short-Term Long-Term Total Debt
Interest Rate Interest Rate Interest Rate
1995 6.34% 8.19% 8.12%
1994 5.27 8.76 8.50
1993 5.97 9.53 9.19
1992 12.38 8.75 9.00
1991 10.28 9.73 9.82
The Company's access to capital at rates that allow for a reasonable
return on new business is affected by credit rating agencies' ratings of
the Company's debt. All three credit rating agencies, recognizing the
Company's improved financial performance, have upgraded the Company's
credit ratings:
- In March 1996, Standard & Poor's ("S&P") upgraded the Company's senior
debt to A- and upgraded the Company's subordinated debt to BBB+ and
S&P also affirmed its A-2 rating of the Company s commercial paper.
- In March 1996, Duff & Phelps Credit Rating Co. raised the rating of
the Company's senior debt to A-, subordinated debt to BBB+, and
commercial paper to D1-.
- In October 1995, Moody's Investors Service Inc. upgraded its rating of
the Company's senior debt to Baa2, subordinated debt to Baa3, and
short-term debt rating for commercial paper to Prime-2.
Although security ratings impact the rate at which the Company can borrow
funds, a security rating is not a recommendation to buy, sell or hold
securities. In addition, a security rating is subject to revision or
withdrawal at any time by the assigning rating organization and each
rating should be evaluated independently of any other rating.
Competition and Economic Factors
The Company is subject to competition from other financial institutions,
including commercial banks, finance companies and leasing companies, some
of which are larger than the Company and have greater financial
resources, greater leverage ability and lower effective borrowing costs.
These factors permit many competitors to provide financing at lower rates
than the Company. In its commercial equipment leasing and commercial
aircraft financing segments, the ability of the Company to compete in the
marketplace is principally based on rates which the Company charges its
customers, which rates are related to the Company's access to and cost of
funds and to the ability of the Company to utilize tax benefits attendant
to leasing. See "Borrowing Operations" and "Relationship With McDonnell
Douglas." Competitive factors also include, among other things, the
Company s ability to be relatively flexible in its financing arrangements
with new and existing customers.
The Company has in the past obtained a significant portion of its leasing
business and notes receivable in connection with the lease or sale of
McDonnell Douglas aircraft. The Company's relationship with McDonnell
15
Douglas has in many cases presented opportunities for such business and
has caused McDonnell Douglas to offer to the Company substantially all of
the notes receivable taken by McDonnell Douglas upon the sale of its
aircraft. See "Relationship With McDonnell Douglas." In past years many
customers have obtained their financing for McDonnell Douglas aircraft
through sources other than the Company or McDonnell Douglas, reflecting a
broader range of competitive financing alternatives available to
McDonnell Douglas customers. The consolidation in the United States
airline industry as a result of bankruptcies and mergers has resulted in
an increase in the concentration of the Company's McDonnell Douglas
aircraft financings in a smaller number of larger airlines at the same
time that the Company's decision to exit its non-core businesses has
resulted in a greater concentration of the Company's portfolio in
commercial aircraft financing. With a larger portion of the portfolio
concentrated in McDonnell Douglas aircraft financings, the risk to the
Company resulting from the declining creditworthiness of many airlines
has increased. See "Commercial Aircraft Financing Segment" and "Allowance
for Losses on Financing Receivables and Credit Loss Experience."
Aircraft owned or financed by the Company may become significantly less
valuable because of the introduction of new aircraft models, which may be
more economical to operate, the aging of particular aircraft,
technological obsolescence such as that caused by legislation for noise
abatement which will over time prohibit the use of older, noisier (Stage
2) aircraft in the United States by year end 2000, or an oversupply of
aircraft for sale. In any such event, carrying amounts on the Company's
books may be reduced if, in the judgment of management, such carrying
amounts are greater than market value, which would result in recognition
of a loss to the Company. At December 31, 1995, the Company's carrying
amount of Stage 2 aircraft totaled $72.9 million (5.1% of the Company's
total aircraft portfolio, including any aircraft held for sale or re-
lease), however, all of the Company's Stage 2 aircraft will have book
values approximating the aircraft s scrap value by the year 2000.
Although the Company is particularly subject to risks attendant to the
airline and aircraft manufacturing industries, the ability of the Company
to generate new business also is dependent upon, among other factors, the
capital equipment requirements of U.S. businesses and the availability of
capital.
Relationship With McDonnell Douglas
McDonnell Douglas is principally engaged in the design, development and
production of government and commercial aerospace products. For the year
ended December 31, 1995, McDonnell Douglas recorded revenues of $14.3
billion and net earnings of $707 million, excluding the effect of the
accounting charge of $1.1 billion related to the MD-11 trijet. At
December 31, 1995, McDonnell Douglas had assets of $10.5 billion and
shareholders equity of $3.0 billion.
The financial well-being of McDonnell Douglas is vital to the Company's
ability to enter into significant amounts of new business in the future.
Two of the principal industry segments in which McDonnell Douglas
16
operates, military aircraft and commercial aircraft, are especially
competitive and have a limited number of customers. As the Company
focuses on its core businesses, and primarily aircraft financing, its
future business prospects become more closely tied to the success of
McDonnell Douglas, and especially the ability of McDonnell Douglas's
commercial aircraft business to generate additional sales. The commercial
aircraft business is market sensitive, which causes disruptions in
production and procurement and attendant costs, and requires large
investments to develop new derivatives of existing aircraft or new
aircraft. McDonnell Douglas s market share of firm order backlog for new
commercial aircraft has declined significantly in the past several years.
At December 31, 1995, approximately 20.3% of the Company's total aircraft
portfolio are supported by guaranties from McDonnell Douglas. In the
event a substantial portion of the guaranties become payable and in the
unlikely event that McDonnell Douglas is unable to honor its obligations
under these guaranties, such event could have a material adverse effect
on the Company's earnings, cash flow or financial position. In addition,
McDonnell Douglas participates as an intermediary in financings to a
small number of the Company's commercial aircraft customers and largely
as a result thereof, at December 31, 1995, McDonnell Douglas is the fifth
largest commercial aircraft financing customer of the Company.
For a further description of these and other significant factors which
may affect McDonnell Douglas s financial condition, see McDonnell
Douglas s Form 10-K for the year ended December 31, 1995 (Securities and
Exchange Commission file number 1-3685).
- Operating Agreement
The relationship between the Company and McDonnell Douglas is governed
by an operating agreement (the "Operating Agreement"), which formalizes
certain aspects of the relationship between the companies, principally
those relating to the purchase and sale of McDonnell Douglas aircraft
receivables, the leasing of McDonnell Douglas aircraft, the resale of
McDonnell Douglas aircraft returned to, or repossessed by, the Company
under leases or secured notes, and the allocation of federal income
taxes between the companies.
Under the Operating Agreement, McDonnell Douglas is required to offer
to the Company all promissory notes, conditional sales contracts and
certain other receivables obtained by McDonnell Douglas in connection
with the sale of its commercial transport aircraft, except for any
receivable that McDonnell Douglas acquires in a transaction which, in
its opinion, involves unusual or exceptional circumstances or which it
acquires with the expressed intention of selling to a purchaser other
than the Company.
The Company is obligated under the Operating Agreement to purchase all
aircraft receivables offered by McDonnell Douglas, unless (a) it is
unable or deems it inappropriate to obtain or allocate funds for the
acquisition, (b) the receivables do not meet the Company's customary
standards as to terms and conditions or creditworthiness, or (c) the
amount of the receivable offered, when added to the amount of
17
receivables of the same obligor then held by the Company, would exceed
the amount that the Company deems prudent to hold.
The prices to be paid for notes receivable purchased from McDonnell
Douglas are intended to produce reasonable returns to the Company,
taking into account the rates of return realized by independent finance
companies, the Company's assessment of the credit risk and the
Company's projected borrowing costs and expenses. In cases where credit
risks associated with a note receivable are not acceptable to the
Company, the Company may refuse to accept the note receivable or may
condition its acceptance upon receipt of a guaranty from McDonnell
Douglas with a negotiated fee to be paid by the Company for the
guaranty. See "Commercial Aircraft Financing Segment - Aircraft
Financing Guaranties."
With respect to aircraft leasing activities, unlike the purchase of
other aircraft receivables which are acquired by McDonnell Douglas and
sold to the Company, the Company may make lease proposals directly to
the prospective customers. If a lease proposal is accepted, the Company
enters into a lease with the customer and purchases the aircraft from
McDonnell Douglas on the terms negotiated between McDonnell Douglas and
the customer. Under the Operating Agreement the Company may make a
lease proposal to any customer desiring to lease an aircraft for two
years or more, but the Company may decline to make a proposal or may
condition its proposal upon a full or partial guaranty from McDonnell
Douglas, with a negotiated fee, if any, to be paid by the Company for
the guaranty.
The Company has the option under the Operating Agreement to tender to
McDonnell Douglas any McDonnell Douglas aircraft returned to or
repossessed by the Company under a lease or security instrument at a
price equal to the fair market value of the aircraft less 10%. This
provision does not include McDonnell Douglas aircraft leased under a
partnership arrangement in which the Company is one of the partners, or
McDonnell Douglas aircraft subject to third party liens or other
security interests, unless the Company and McDonnell Douglas determine
that purchase by McDonnell Douglas is desirable. At December 31, 1995,
the carrying amount of McDonnell Douglas aircraft potentially excluded
by this provision amounted to approximately $65.2 million.
- Federal Income Taxes
The Company and McDonnell Douglas presently file consolidated federal
income tax returns, with the consolidated tax payments, if any, being
made by McDonnell Douglas. The Operating Agreement provides that so
long as consolidated federal tax returns are filed, payments shall be
made, directly or indirectly, by McDonnell Douglas to the Company or by
the Company to McDonnell Douglas, as appropriate, equal to the
difference between the consolidated tax liability and McDonnell
Douglas s tax liability computed without consolidation with the
Company. If, subsequent to any such payments by McDonnell Douglas, it
incurs tax losses which may be carried back to the year for which such
payments were made, the Company nevertheless will not be obligated to
repay to McDonnell Douglas any portion of such payments.
18
The Company and McDonnell Douglas have been operating since 1975 under
an informal arrangement, which has entitled the Company to rely upon
the realization of tax benefits for the portion of projected taxable
earnings of McDonnell Douglas allocated to the Company. This has been
important in planning the volume of and pricing for the Company's
leasing activities. Under the current arrangement, McDonnell Douglas
presently charges or credits the Company for the corresponding increase
or decrease in McDonnell Douglas's taxes (disregarding alternative
minimum taxes) resulting from the Company's inclusion in the
consolidated federal income tax return of McDonnell Douglas.
Intercompany payments are made when such taxes are due or tax benefits
are realized by McDonnell Douglas based on the assumption, pursuant to
an informal arrangement, that taxes are due or tax benefits are
realized up to 100% of the amounts forecasted by the Company with the
amounts in excess of such forecast due in the year realized by
McDonnell Douglas.
The Company's ability to price its business competitively and obtain
new business volume is significantly dependent on its ability to
realize the tax benefits generated by its leasing business. In some
cases, the yields on receivables, without regard to tax benefits, may
be less than the Company's related financing costs. To the extent that
McDonnell Douglas would be unable on a long-term basis to utilize such
tax benefits, or if the informal arrangement is not continued in its
present form, the Company would be required to restructure its
financing activities and to reprice its new financing transactions so
as to make them profitable without regard to McDonnell Douglas s
utilization of tax benefits since there can be no assurance that the
Company would be able to utilize such benefits currently. No assurances
can be given that the Company would be successful in restructuring its
financing activities. See "Competition and Economic Factors."
- Intercompany Services
McDonnell Douglas provides to the Company certain payroll, employee
benefit, facilities and other services, for which the Company generally
pays McDonnell Douglas the actual cost. See Note 8 of Notes to
Consolidated Financial Statements.
- Intercompany Credit Arrangements
The Company and McDonnell Douglas maintain separate borrowing
facilities and there are no arrangements for joint use of credit lines by
the companies. Bank credit and other borrowing facilities are negotiated
by the Company on its own behalf. There are no provisions in the
Company's debt instruments that provide that a default by McDonnell
Douglas on McDonnell Douglas debt constitutes a default on Company debt.
There are no guaranties, direct or indirect, by McDonnell Douglas of the
payment of any debt of the Company.
The Company has an arrangement with McDonnell Douglas, terminable at
the discretion of either of the parties, pursuant to which the Company
may borrow from McDonnell Douglas and McDonnell Douglas may borrow from
the Company, funds for 30-day periods at a market rate of interest.
19
Under this arrangement, there were no outstanding balances at
December 31, 1995 and 1994. During 1995, the Company did not borrow
under this agreement and the highest level loaned to McDonnell Douglas
was $50.0 million.
Under a similar arrangement, the Company may borrow from MDFS and MDFS
may borrow from the Company, funds for 30-day periods at the Company's
cost of funds for short-term borrowings. Under this arrangement,
borrowings of $3.7 million and $0.8 million were outstanding at
December 31, 1995 and 1994. During 1995, the Company's highest level of
borrowings from MDFS and highest level of loans to MDFS were $67.8
million and $22.0 million, respectively.
Under another arrangement, McDonnell Douglas Realty Company, a wholly-
owned subsidiary of McDonnell Douglas, owed the Company $14.6 million
and $23.4 million at December 31, 1995 and 1994.
Item 2. Properties
The Company leases all of its office space and other facilities. The
Company's principal office is subleased from McDonnell Douglas, at fair
market value. The Company believes that its properties, including the
equipment located therein, are suitable and adequate to meet the
requirements of its business.
Item 3. Legal Proceedings
In 1994, certain debtors of the Company commenced actions against the
Company seeking damages in excess of $14.0 million based on various
contractual and tort claims arising out of financing and loan agreements.
Concurrently, the Company brought actions against the debtors to collect
overdue amounts under the loans provided by the Company. No response to
discovery has taken place in any of these actions. At this early stage of
the legal proceedings it is not possible to predict with any certainty
the ultimate outcome of these related legal proceedings. The Company
intends to vigorously defend such claims. Based on information currently
available, the Company believes it has meritorious defenses to all of the
allegations of wrongdoing and that there will be no material adverse
effect on the Company's earnings, cash flow or financial position.
Part II
Item 5. Market for Registrant s Common Equity and Related Stockholder
Matters.
All of the Company's preferred and common stock is owned by MDFS. In 1995
and 1994, the Company declared dividends of $27.5 million and $27.0
million to MDFS on its common stock. The Company paid $3.5 million in
dividends on its preferred stock in 1995 and 1994. Preferred stock
20
dividends of $0.6 million payable to MDFS were accrued at December 31,
1995.
The provisions of various credit and debt agreements require the Company
to maintain a minimum net worth, restrict indebtedness, and limit cash
dividends and other distributions. Under the most restrictive provision,
$60.1 million of the Company's income retained for growth was available
for dividends at December 31, 1995.
Item 6. Selected Financial Data
The selected consolidated financial data should be read in conjunction
with the Company's consolidated financial statements at December 31, 1995
and for the year then ended and with "Item 7. Management s Discussion and
Analysis of Financial Condition and Results of Operations." The following
table sets forth selected consolidated financial data for the Company:
Years Ended December 31,
(Dollars in millions) 1995 1994 1993 1992 1991
Financing volume $590.8 $ 202.0 $453.0 $206.5 $231.3
Operating income:
Finance lease income $104.3 $ 100.7 $ 90.1 $113.0 $179.3
Interest on notes
receivable 27.2 29.4 38.9 47.9 61.5
Operating lease income,
net 41.1 38.5 35.9 33.3 34.1
Net gain on disposal or
re-lease of assets 8.7 11.1 23.7 37.1 45.8
Postretirement benefit
curtailment - - - 2.8 -
Other 10.2 7.9 9.9 20.6 21.6
191.5 187.6 198.5 254.7 342.3
Expenses:
Interest expense 101.9 108.3 116.4 145.9 198.5
Provision for losses 12.2 9.9 8.6 19.1 47.2
Operating expenses 11.3 15.2 20.3 27.4 35.6
Other 4.9 12.3 12.4 14.3 3.8
130.3 145.7 157.7 206.7 285.1
Income from continuing
operations before
income taxes and
cumulative effect
of accounting change 61.2 41.9 40.8 48.0 57.2
Provision for taxes on
income 21.9 13.6 24.0 15.9 19.1
Income from continuing
operations before
cumulative effect of
accounting change 39.3 28.3 16.8 32.1 38.1
21
Discontinued operations,
net - - - (2.5) (1.4)
Cumulative effect of
accounting change - - - (1.9) -
Net income $ 39.3 $ 28.3 $ 16.8 $ 27.7 $ 36.7
Dividends declared $ 31.0 $ 30.5 $ 3.6 $105.8 $ 59.0
Ratio of income to fixed 1.58 1.37 1.34 1.32 1.28
charges(1)
Balance sheet data:
Total assets $2,049.6 $1,929.6 $2,055.5 $1,999.0 $2,582.3
Total debt 1,339.7 1,215.1 1,361.2 1,330.4 1,730.7
Shareholder's equity 280.2 271.9 269.4 256.4 340.5
Dividends accrued on
preferred stock at $ 0.6 $ 0.6 $ 0.6 $ 0.5 $ 0.5
year end
_______________
(1) For the purpose of computing the ratio of income to fixed charges,
income consists of income from continuing operations before income
taxes, cumulative effect of accounting change and fixed charges; and
fixed charges consist of interest expense and preferred stock
dividends.
22
Item 7. Management s Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with the consolidated
financial statements included in Item 8.
Capital Resources and Liquidity
The Company has significant liquidity requirements. The Company has
traditionally attempted to match-fund its business such that scheduled
receipts from its portfolio will cover its expenses and debt payments as
they become due. The Company believes that, absent a severe or prolonged
economic downturn which results in defaults materially in excess of those
provided for, receipts from the portfolio will cover the payment of
expenses and debt payments when due. If cash provided by operations,
issuance of commercial paper, borrowings under bank credit lines and term
borrowings do not provide the necessary liquidity, the Company would be
required to restrict its new business volume unless it obtained access to
other sources of capital at rates that would allow for a reasonable
return on new business. The Company has a $220 million revolving credit
agreement which is reduced by borrowings of up to $16 million made by
MDFS. The Company's commercial paper program is fully supported by this
credit agreement. The Company also has been accessing the public debt
market since mid-1993 and anticipates using proceeds from the issuance of
additional public debt to fund future growth. In 1995, the Company issued
$135.0 million of public senior and subordinated unsecured notes. See
"Item 1. Business - Borrowing Operations."
1995 vs. 1994
Portfolio income (lease and interest income) increased $4.0 million
(2.4%), primarily attributable to increased financing volume.
Net gain on disposal or re-lease of assets decreased $2.4 million (21.6%)
during 1995 compared to 1994, primarily attributable to a $1.3 million
gain in 1994 from a sale of an executive jet within the CEL portfolio and
$1.2 million of losses in 1995 due to a prepayment of a commercial
aircraft financing note.
Other income increased $2.3 million (29.1%) during 1995 compared to 1994,
primarily attributable to a $1.0 million gain recognized in 1995 related
to a debt maturity, and $0.6 million recognized in 1995 related to
certain arrangements in connection with the Company's deferred agreement
with TWA.
Interest expense decreased $6.4 million (5.9%) during 1995 compared to
1994, primarily attributable to the Company's refinancing of a portion of
its high coupon debt with lower coupon debt.
Provision for losses increased $2.3 million (23.2%) during 1995 compared
to 1994, primarily attributable to the overall increase in the Company's
portfolio balances. The allowance for losses on financing receivables as
a percent of the portfolio at December 31, 1995 and December 31, 1994 was
23
2.1% and 2.2%, respectively.
Operating expenses decreased $3.9 million (25.7%) during 1995 compared to
1994, attributable primarily to the closing of certain of the Company's
former non-core businesses.
Other expenses decreased $7.4 million (60.2%) during 1995 compared to
1994, attributable primarily to a decrease of $3.2 million related to
real estate owned expenses and the 1994 realization of the Company's $3.5
million foreign translation loss.
1994 vs. 1993
Finance lease income increased $10.6 million (11.8%) in 1994 compared to
1993, due to the late 1993 purchase of two new MD-11 aircraft financed
under direct financing lease agreements.
Interest on notes receivable in 1994 was $9.5 million (24.4%) lower than
1993, reflecting a decrease in bridge financings within the aircraft
portfolio.
Net gain on disposal or re-lease of assets decreased $12.6 million
(53.2%) in 1994, primarily attributable to reduced dispositions within
the aircraft portfolio.
Other income decreased $2.0 million (20.2%) in 1994, primarily due to
lower short-term investment income.
The provision for losses increased $1.3 million (15.1%) during 1994
compared to 1993, attributable primarily to concerns with certain credits
within the aircraft portfolio.
Operating expenses decreased $5.1 million (25.1%) during 1994 compared to
1993, attributable primarily to the closings of certain business units
within the non-core businesses segment portfolio.
Item 8. Financial Statements and Supplementary Data
The following pages include the consolidated financial statements of the
Company as described in Item 14 (a) 1 and (a) 2 of Part IV herein.
24
Report of Independent Auditors
Shareholder and Board of Directors
McDonnell Douglas Finance Corporation
We have audited the accompanying consolidated balance sheet of McDonnell
Douglas Finance Corporation (a wholly-owned subsidiary of McDonnell
Douglas Financial Services Corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
income and income retained for growth, and cash flows for each of the
three years in the period ended December 31, 1995. Our audits also
included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of McDonnell Douglas Finance Corporation and subsidiaries at
December 31, 1995 and 1994, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information
set forth therein.
We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets as of December 31,
1993, 1992 and 1991, and the related consolidated statements of income
and income retained for growth, and cash flows for the years ended
December 31, 1992 and 1991 (none of which are presented separately
herein); and we expressed unqualified opinions on those consolidated
financial statements. In our opinion, the information set forth in the
selected financial data for each of the five years in the period ended
December 31, 1995, appearing on pages ? - ? is fairly stated in all
material respects in relation to the consolidated financial statements
from which it has been derived.
/s/ ERNST & YOUNG LLP
Orange County, California
25
January 17, 1996
26
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Balance Sheet
December 31,
(Dollars in millions, except stated value 1995 1994
and par value)
ASSETS
Financing receivables:
Investment in finance leases $ 1,249.7 $1,090.3
Notes receivable 263.5 351.7
1,513.2 1,442.0
Allowance for losses on financing (42.3) (40.7)
receivables
Financing receivables, net 1,470.9 1,401.3
Cash and cash equivalents 12.6 13.1
Equipment under operating leases, net 475.5 374.3
Equipment held for sale or re-lease 28.6 12.1
Accounts with McDonnell Douglas and MDFS 18.5 44.9
Other assets 43.5 83.9
$ 2,049.6 $1,929.6
LIABILITIES AND SHAREHOLDER S EQUITY
Short-term notes payable $ 13.7 $ 103.8
Accounts payable and accrued expenses 41.8 44.0
Other liabilities 82.5 92.5
Deferred income taxes 305.4 306.1
Long-term debt:
Senior 1,206.3 1,023.8
Subordinated 119.7 87.5
1,769.4 1,657.7
Commitments and contingencies Note 7
Shareholder's equity:
Preferred stock no par value;
authorized 100,000 shares:
Series A; $5,000 stated value;
authorized, issued and outstanding 50.0 50.0
10,000 shares
Common stock $100 par value; authorized
100,000 shares; issued and 5.0 5.0
outstanding 50,000 shares
Capital in excess of par value 89.5 89.5
Income retained for growth 135.7 127.4
280.2 271.9
$ 2,049.6 $ 1,929.6
See notes to consolidated financial statements.
27
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
Years Ended December 31,
(Dollars in millions) 1995 1994 1993
OPERATING INCOME
Finance lease income $ 104.3 $ 100.7 $90.1
Interest income on notes receivable 27.2 29.4 38.9
Operating lease income, net of
depreciation expense of $48.2,
$39.9 and $39.0 in 1995, 1994 41.1 38.5 35.9
and 1993, respectively
Net gain on disposal or re-lease of 8.7 11.1 23.7
assets
Other 10.2 7.9 9.9
191.5 187.6 198.5
EXPENSES
Interest expense 101.9 108.3 116.4
Provision for losses 12.2 9.9 8.6
Operating expenses 11.3 15.2 20.3
Other 4.9 12.3 12.4
130.3 145.7 157.7
Income before taxes on income 61.2 41.9 40.8
Provision for income taxes 21.9 13.6 24.0
Net income 39.3 28.3 16.8
Income retained for growth at beginning 127.4 129.6 116.4
of year
Dividends (31.0) (30.5) (3.6)
Income retained for growth at end of $ 135.7 $ 127.4 $129.6
year
See notes to consolidated financial statements.
28
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows
Years Ended December 31,
(Dollars in millions) 1995 1994 1993
OPERATING ACTIVITIES
Net income $ 39.3 $ 28.3 $ 16.8
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation expense - equipment under
operating leases 48.2 39.9 39.0
Net gain on disposal or re-lease of assets (8.7) (11.1) (23.7)
Provision for losses 12.2 9.9 8.6
Change in assets and liabilities:
Accounts with McDonnell Douglas and MDFS 26.4 25.5 (29.5)
Other assets 40.4 5.8 51.2
Accounts payable and accrued
liabilities 8.8 (18.5) 10.3
Other liabilities (10.0) 18.0 0.6
Deferred income taxes (0.7) 7.2 1.8
Other, net 0.4 9.2 3.3
156.3 114.2 78.4
INVESTING ACTIVITIES
Net change in short-term notes and
leases receivable 60.6 (58.6) 88.5
Purchase of equipment for operating
leases (155.7) (40.0) (57.4)
Proceeds from disposition of
equipment, notes and leases
receivable 109.6 109.0 139.5
Collection of notes and leases
receivable 181.6 170.5 164.1
Acquisition of notes and leases
receivable (435.6) (179.0) (385.7)
(239.5) 1.9 (51.0)
FINANCING ACTIVITIES
Net change in short-term borrowings (90.1) (98.8) 69.1
Debt having maturities more than 90 days:
Proceeds 572.8 229.9 183.0
Repayments (358.0) (280.1) (222.0)
Payment of cash dividends (42.0) (19.5) (3.6)
82.7 (168.5) 26.5
Increase (decrease) in cash and cash
equivalents (0.5) (52.4) 53.9
Cash and cash equivalents at beginning
of year 13.1 65.5 11.6
Cash and cash equivalents at end of year $ 12.6 $ 13.1 $ 65.5
See notes to consolidated financial statements.
29
McDonnell Douglas Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995
Note 1 Organization and Summary of Significant Accounting Policies
Organization McDonnell Douglas Finance Corporation (the "Company") is a
wholly-owned subsidiary of McDonnell Douglas Financial Services
Corporation ("MDFS"), a wholly-owned subsidiary of McDonnell Douglas
Corporation ("McDonnell Douglas"). The Company was incorporated in
Delaware in 1968 and provides equipment financing and leasing
arrangements to a diversified range of customers and industries. The
Company's primary operations include two financial reporting segments:
commercial aircraft financing and commercial equipment leasing. The
commercial aircraft financing segment provides customer financing
services to McDonnell Douglas components, primarily Douglas Aircraft
Company, and also provides financing for the acquisition of non-
McDonnell Douglas aircraft. The commercial equipment leasing segment is
principally involved in large financing and leasing transactions for a
diversified range of equipment.
Consolidation The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the 1995
presentation.
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 operating
income and expenses during the reporting period. Actual results could
differ from those estimates.
Finance Leases At lease commencement, the Company records the lease
receivable, estimated residual value of the leased equipment and unearned
lease income. Income from leases is recognized over the terms of the
leases so as to approximate a level rate of return on the net investment.
Residual values, which are reviewed periodically, represent the estimated
amount to be received at lease termination from the disposition of leased
equipment.
Initial Direct Costs Initial direct costs are deferred and amortized
over the related financing terms.
Cash Equivalents The Company considers all cash investments with
original maturities of three months or less to be cash equivalents. Cash
equivalents at December 31, 1995 and 1994 were $10.0 million and $11.7
million. At December 31, 1995 and 1994, the Company has classified as
other assets restricted cash deposited with banks in interest bearing
accounts of $37.2 million and $37.0 million for specific lease rents and
contractual purchase options related to certain aircraft leased by the
30
Company under capital lease obligations, and security against recourse
provisions related to certain note and lease receivable sales.
Allowance for Losses on Financing Receivables The allowance for losses
on financing receivables includes consideration of such factors as the
risk rating of individual credits, economic and political conditions,
guaranties, prior loss experience and results of periodic credit reviews.
Collateral that is repossessed in satisfaction of a receivable is
transferred to equipment held for sale or re-lease at its estimated fair
value. Subsequent to such transfer, these assets are carried at the lower
of the former loan amount or estimated net realizable value.
Payments from a few of the Company's commercial aircraft customers are
delinquent and, as a result, the Company may be required to repossess
aircraft from such customers. Losses from repossession of aircraft from
these delinquent customers in the currently depressed aircraft market
could have an adverse affect on future earnings. However, based on its
current assessment of probable credit losses, management believes its
loss reserves are adequate and does not believe that these matters would
have a material adverse affect on the Company's earnings, cash flow or
financial position.
Equipment Under Operating Leases Rental equipment subject to operating
leases is recorded at cost and depreciated over its useful life or lease
term to an estimated salvage value, primarily on a straight-line basis.
Income Taxes The operations of the Company and its subsidiaries are
included in the consolidated federal income tax return of McDonnell
Douglas. McDonnell Douglas presently charges or credits the Company for
the corresponding increase or decrease in McDonnell Douglas s taxes
resulting from such inclusion. Intercompany payments are made when such
taxes are due or tax benefits are realized by MDC based on the
assumption, pursuant to an informal arrangement, that taxes are due or
tax benefits are realized up to 100% of the amounts forecasted by the
Company with the amounts in excess of such forecast due in the year
realized by McDonnell Douglas.
Investment tax credits (which were repealed by the Tax Reform Act of
1986) related to property subject to financing transactions are deferred
and amortized over the terms of the financing transactions.
Taxes on income is computed at current tax rates and adjusted for items
that do not have tax consequences. Deferred income taxes reflect the
impact of temporary differences between the amount of assets and
liabilities recognized for financial reporting purposes and the carrying
amounts recognized for tax purposes.
Future Accounting and Reporting Requirements Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was
issued in March 1995. SFAS No. 121, which is effective beginning in 1996,
addressed accounting for the impairment of long-lived assets to be
disposed of or that will be held and used in operations. The impact of
31
the Company's adoption of this standard is not expected to be material.
Note 2 Investment in Finance Leases
The following lists the components of the investment in finance leases at
December 31:
(Dollars in millions) 1995 1994
Minimum lease payments receivable $1,687.0 1,466.9$
Estimated residual value of leased assets 309.4 261.1
Unearned income (749.6) (640.9)
Deferred initial direct costs 2.9 3.2
$1,249.7 1,090.3$
The following lists the components of the investment in finance leases at
December 31 that relate to aircraft leased by the Company under capital
leases that have been subleased to others under finance leases:
(Dollars in millions) 1995 1994
Minimum lease payments receivable $417.4 $ 74.3
Estimated residual value of leased assets 54.6 15.0
Unearned income (217.8) (36.6)
Deferred initial direct costs 0.6 0.2
$254.8 $ 52.9
At December 31, 1995, finance lease receivables of $71.4 million serve as
collateral to senior long-term debt.
At December 31, 1995, finance lease receivables are due in installments
as follows: 1996, $206.4 million; 1997, $181.9 million; 1998, $171.2
million; 1999, $189.9 million; 2000, $142.4 million; 2001 and thereafter,
$795.2 million.
Under a finance lease agreement, the Company leases a DC-10-30 aircraft
to McDonnell Douglas. The lease requires monthly rent payments of $0.4
million through April 14, 2004. At December 31, 1995 and 1994, the
carrying amount of this aircraft was $30.1 million and $31.6 million.
Note 3 Notes Receivable
The following lists the components of notes receivable at December 31:
(Dollars in millions) 1995 1994
Principal $261.7 $ 349.2
Accrued interest 2.1 2.3
Unamortized discount (0.9) (0.6)
Deferred initial direct costs 0.6 0.8
$263.5 $ 351.7
At December 31, 1995, notes receivables are due in installments as
follows: 1996, $97.8 million; 1997, $39.4 million; 1998, $19.1 million;
1999, $19.1 million; 2000, $19.2 million; 2001 and thereafter, $67.1
32
million.
During November 1995, the Company agreed to provide an aircraft financing
customer with a credit facility of $100.0 million for the purpose of
purchasing used McDonnell Douglas aircraft. This facility expires upon
delivery of the first scheduled new McDonnell Douglas aircraft, presently
expected to occur in 1999. Borrowings under this agreement must be repaid
within 180 days and the interest rate is based on the London Interbank
Offering Rate ("LIBOR"). At December 31, 1995, receivables outstanding
pursuant to this agreement totaled $8.7 million.
Note 4 Equipment Under Operating Leases
Equipment under operating leases consists of the following at December
31:
(Dollars in millions) 1995 1994
Commercial aircraft $364.1 $275.3
Executive aircraft 99.5 67.9
Highway vehicles 70.9 73.0
Printing equipment 34.1 28.6
Machine tools and production equipment 30.2 25.9
Medical equipment 8.5 14.0
Computers and related equipment 2.6 6.2
Other 7.1 3.8
617.0 494.7
Accumulated depreciation (132.7) (114.7)
Rentals receivable 7.3 6.1
Deferred lease income (17.3) (13.0)
Deferred initial direct costs 1.2 1.2
$475.5 $374.3
At December 31, 1995, future minimum rentals scheduled to be received
under the noncancelable portion of operating leases are as follows: 1996,
$93.7 million; 1997, $74.4 million; 1998, $66.0 million; 1999, $53.0
million; 2000, $31.9 million; 2001 and thereafter, $70.8 million.
At December 31, 1995, equipment under operating leases of $26.7 million
are assigned as collateral to senior long-term debt. Equipment under
operating leases of $13.4 million at December 31, 1995, relate to
commercial aircraft leased by the Company under capital lease
obligations.
Under an operating lease agreement, the Company leases four MD-82
aircraft to McDonnell Douglas. The leases require quarterly rent payments
of $2.1 million through May 31, 2002. At December 31, 1995 and 1994, the
carrying amount of these aircraft was $54.0 million and $57.2 million.
During January 1995, under a separate operating lease agreement, the
Company leased a corporate aircraft to McDonnell Douglas. The lease
requires monthly rent payments of $0.2 million through January 27, 2002.
At December 31, 1995, the carrying amount of this aircraft was $16.2
33
million.
Note 5 Income Taxes
The components of the provision (benefit) for taxes on income for the
year ended December 31 are as follows:
(Dollars in millions) 1995 1994 1993
Current:
Federal $19.4 $ 3.8 $ 19.8
State 3.2 2.6 2.4
22.6 6.4 22.2
Deferred:
Federal (0.7) 7.2 1.0
Foreign - - 0.8
(0.7) 7.2 1.8
$21.9 $ 13.6 $ 24.0
Temporary differences represent the cumulative taxable or deductible
amounts recorded in the financial statements in different years than
recognized in the tax returns. The components of the net deferred income
tax liability consist of the following at December 31:
(Dollars in millions) 1995 1994
Deferred tax assets:
Allowance for losses $14.8 $ 14.2
Deferred installment sales - 3.5
Other 5.2 16.6
20.0 34.3
Deferred tax liabilities:
Leased assets (322.8) (316.9)
Other (2.6) (23.5)
(325.4) (340.4)
Net deferred tax liability $(305.4) $ (306.1)
34
Income taxes computed at the United States federal income tax rate and
the provision (benefit) for taxes on income differ as follows for the
year ended December 31:
(Dollars in millions) 1995 1994 1993
Tax computed at federal statutory $21.4 $ 14.7 $14.3
rate
State income taxes, net of federal 2.1 1.7 1.5
tax benefit
Foreign sales corporation benefit (2.1) - -
Effect of foreign tax rates - 1.6 0.9
U.S. tax effect from the sale of MD - (3.2) -
Bank
Effect of investment tax credits (0.3) (0.3) (0.6)
Effect of tax rate change - - 8.4
Other 0.8 (0.9) (0.5)
$21.9 $ 13.6 $24.0
During December 1994, the Company disposed of its investment in McDonnell
Douglas Bank Limited, a former United Kingdom company and an indirect
wholly-owned subsidiary of the Company, for $23.8 million and recognized
a loss on disposition totaling $3.2 million. The cumulative foreign
currency translation adjustment was recognized and charged to other
expenses. In addition, tax benefits totaling $3.2 million were recognized
as a result of this sale.
During the third quarter of 1993, the Company's effective tax rate was
affected by an additional tax provision of $8.4 million associated with
the tax rate increase included in the Omnibus Budget Reconciliation Act
of 1993.
MDFS is currently under examination by the Internal Revenue Service
("IRS") for the tax years 1990 through 1992. The outcome of the IRS audit
is not expected to have a material effect on the Company's financial
condition or results of operations.
Income tax refunds received by the Company from McDonnell Douglas totaled
$2.9 million in 1995. Income taxes paid by the Company to McDonnell
Douglas totaled $15.2 million in 1994 and $54.0 million in 1993.
35
Note 6 Indebtedness
Short-term notes payable consist of the following at December 31:
Weighted
Average
Balance at End of Interest Rate
Year at End of
Year
(Dollars in millions) 1995 1994 1995 1994
Commercial paper $ - $103.0 - % 6.55 %
Uncommitted credit facilities 10.0 - 6.05 -
MDFS 3.7 0.8 6.38 6.64
$13.7 $103.8
At December 31, 1995, MDFS and the Company had a joint revolving credit
agreement under which the Company may borrow a maximum of $220.0 million,
reduced by MDFS borrowings under this same agreement. By the terms of
this agreement, which expires in August 1999, MDFS can borrow no more
than $16.0 million. The interest rate, at the option of MDFS or the
Company, is either a floating rate generally based on a defined prime
rate or fixed rate related to LIBOR. There were no amounts outstanding
under this agreement at December 31, 1995 and 1994. Commercial paper,
when outstanding, is fully supported by unused commitments under this
agreement.
The Company has available approximately $120.0 million in uncommitted,
short-term bank credit facilities whereby the Company may borrow, at
interest rates which are negotiated at the time of the borrowings, upon
such terms as the Company and the banks may mutually agree. At
December 31, 1995, borrowings on these credit facilities totaled $10.0
million.
The Company has an effective shelf registration statement relating to up
to $750.0 million aggregate principal amount of debt securities. The
Company established a $500.0 million medium-term note program under a
shelf registration and, as of December 31, 1995, has issued and sold
$135.0 million in aggregate principal amount of securities under the
program.
36
Senior long-term debt consists of the following at December 31:
(Dollars in millions) 1995 1994
8.46% Note due 1995 $ - $ 8.0
10.52% Note due 1995 - 58.8
7.0% Notes due through 1996 0.3 1.2
7.0% Notes due through 1998, net of discount based on
imputed interest rate of 10.88% 1.8 2.6
3.9% Notes due through 1999, net of discount based on
imputed interest rates of 9.15% - 10.6% 6.3 7.9
5.75% - 6.875% Notes due through 2000, net of discount
based on imputed interest rates of 9.75% - 11.4% 8.4 10.2
6.263% - 17.5% Notes due through 2001 84.8 80.3
5.0% - 8.375% Retail medium term notes due through 2011 84.5 88.9
5.48% - 13.55% Medium term notes due through 2005 773.8 684.1
Capital lease obligations due through 2003 246.4 81.8
1,206.3$ $1,023.8
Subordinated long-term debt consists of the following at December 31:
(Dollars in millions) 1995 1994
9.26% Note due 1996 $ 5.0 $ 5.0
10.25% Notes due through 1997 - 15.0
12.35% Note due 1996 10.0 20.0
5.97% - 9.85% Medium term notes due through 1999 104.7 47.5
$119.7 $ 87.5
The Company uses interest rate swap agreements to manage interest costs
and risks associated with changing interest rates. The differential to be
paid or received is accrued as interest rates change and is recognized in
interest expense over the life of the agreements. Counterparties to the
interest rate swap contracts are major financial institutions and credit
loss from counterparty non-performance is not anticipated. At
December 31, 1995, the Company had interest rate swap agreements
outstanding as follows:
(Dollars in millions)
Contract Notional
Maturity Principal Receive Rate Pay Rate
Capital lease 2007 $168.4 Floating(1) 6.65% - 6.885%
obligations
Medium term notes 1997 $20.0 Floating(1) 6.65%
Medium term notes 2000 $20.0 8.59% - 8.61% Floating(1)
_____________
(1) Floating rates are based on LIBOR or Federal Funds.
As of December 31, 1995, $87.0 million of senior long-term debt was
collateralized by equipment. This debt is composed of the 7.0% Notes due
through 1996, 7.0% Notes due through 1998, and the 6.263% - 17.5% Notes
due through 2001.
Payments required on long-term debt and capital lease obligations during
the years ending December 31 are as follows:
37
Long-Term Capital
(Dollars in millions) Debt Leases
1996 $172.7 $ 33.4
1997 160.0 37.3
1998 176.3 37.3
1999 145.3 34.5
2000 138.6 53.0
2001 and thereafter 291.8 181.5
1,084.7 377.0
Deferred debt expenses (5.1) (0.6)
Imputed interest - (130.0)
1,079.6$ $246.4
The provisions of various credit and debt agreements require the Company
to maintain a minimum net worth, restrict indebtedness, and limit cash
dividends and other distributions. Under the most restrictive provision,
$60.1 million of the Company's income retained for growth was available
for dividends at December 31, 1995.
Interest payments totaled $99.2 million in 1995, $110.8 million in 1994
and $116.3 million in 1993.
Note 7 Commitments and Contingencies
In 1994, certain debtors of the Company commenced actions against the
Company seeking damages in excess of $14.0 million based on various
contractual and tort claims arising out of financing and loan agreements.
Concurrently, the Company brought actions against the debtors to collect
overdue amounts under the loans provided by the Company. No response to
discovery has taken place in any of these actions. At this early stage of
the legal proceedings it is not possible to predict with any certainty
the ultimate outcome of these related legal proceedings. The Company
intends to vigorously defend such claims. Based on information currently
available, the Company believes it has meritorious defenses to all of the
allegations of wrongdoing and that there will be no material adverse
effect on the Company's earnings, cash flow or financial position.
A certain commercial aircraft customer of the Company, located in
Venezuela, has filed for bankruptcy protection in a Venezuelan bankruptcy
court. Such customer is in default under a loan secured by an MD-83
aircraft. The amount due to the Company under the loan is approximately
$13.6 million, which approximately equals the estimated value of the
aircraft securing the loan, net of maintenance reserves held by the
Company of $2.4 million. The aircraft is currently in possession of the
Venezuelan bankruptcy trustee and the Company has retained outside
counsel in Venezuela in connection with a foreclosure and repossession of
the aircraft or a potential settlement. Although Venezuelan bankruptcy
law provides for compensation to privileged creditors, to date, the
Company has been unsuccessful in its attempts to repossess the aircraft.
The Company does not expect any impact to have a material adverse effect
on earnings, cash flows or financial position.
38
Trans World Airlines, Inc. ("TWA"), the Company's largest customer,
completed a restructuring of its indebtedness and leasehold obligations
to its creditors via a prepackaged reorganization plan confirmed by the
U.S. Bankruptcy Court in August 1995. As part of the reorganization plan,
McDonnell Douglas and the Company agreed to defer six months of lease and
other payments. The plan calls for TWA to pay deferred amounts over a 28-
month period which commenced in April 1995. The reorganization plan is
not expected to have a significant adverse effect on the Company's
earnings, cash flow or financial position.
At December 31, 1995 and 1994, the Company had commitments to provide
leasing and other financing totaling $116.6 million and $94.4 million.
In conjunction with prior asset dispositions, at December 31, 1995, the
Company is subject to a maximum recourse of $37.8 million. Based on
trends to date, the Company's exposure to such loss is not expected to be
significant.
The Company leases aircraft under capital leases which have been
subleased to others. At December 31, 1995, the Company had guaranteed the
repayment of $7.9 million in capital lease obligations associated with a
50% partner.
The Company's principal office is leased from McDonnell Douglas under an
operating lease agreement, expiring in 1999. Rent expense in 1995, 1994
and 1993 totaled $0.9 million, $1.1 million, and $1.3 million. At
December 31, 1995, the minimum future rental commitments under
noncancelable leases payable over the remaining lives of the leases
aggregate $3.4 million.
Note 8 Transactions with McDonnell Douglas and MDFS
Accounts with McDonnell Douglas and MDFS consist of the following at
December 31:
(Dollars in millions) 1995 1994
Notes receivable $ 14.6 $ 23.4
Federal income tax receivable 0.7 35.7
State income tax receivable (payable) (0.7) 1.3
Other payables 3.9 (15.5)
$ 18.5 $ 44.9
The Company has arrangements with McDonnell Douglas, terminable at the
discretion of either of the parties, pursuant to which the Company may
borrow from McDonnell Douglas and McDonnell Douglas may borrow from the
Company, funds for 30-day periods at a market rate of interest. Under
these arrangements, there were no outstanding balances at December 31,
1995 and 1994.
Under a similar arrangement, the Company may borrow from MDFS and MDFS
and its subsidiaries may borrow from the Company, funds for 30-day
periods at the Company's cost of funds for short-term borrowings. Under
39
these arrangements, borrowings of $3.7 million and $0.8 million were
outstanding at December 31, 1995 and 1994.
On September 28, 1993, the Company sold, at estimated fair value, real
estate owned properties to McDonnell Douglas Realty Company, a wholly-
owned subsidiary of McDonnell Douglas, and financed the sale by taking a
$28.9 million note. The Company recorded a pretax loss of $5.7 million on
the transfer, which is included in other expenses in the consolidated
statement of income. The note is payable on demand and accrues interest
at a rate equal to a market rate of interest. At December 31, 1995 and
1994, $14.6 million and $23.4 million was outstanding under this note.
During 1995, 1994 and 1993, the Company purchased aircraft and aircraft
related notes from McDonnell Douglas in the amount of $276.8 million,
$227.1 million and $400.2 million, respectively. During 1995, 1994 and
1993, the Company recorded operating income from McDonnell Douglas
relating to financings aggregating $16.2 million, $14.8 million and $13.1
million, respectively.
At December 31, 1995 and 1994, $285.2 million and $281.8 million of the
commercial aircraft financing portfolio was guaranteed by McDonnell
Douglas. This represents 20.3% and 21.1% of the Company's total
commercial aircraft financing portfolio at December 31, 1995 and 1994.
Fees related to these guaranties that were paid to McDonnell Douglas
totaled $1.9 million, $0.9 million, and $0.4 million in 1995, 1994 and
1993, respectively. During 1995, 1994 and 1993, the Company collected
$0.5 million, $1.7 million and $0.2 million, respectively, under these
guaranties.
The Series A Preferred Stock is redeemable at the Company's option at
$5,000 per share, has no voting privileges and is entitled to cumulative
semi-annual dividends of $175 per share. Such dividends have priority
over cash dividends on the Company's common stock. Accrued dividends on
preferred stock amounted to $0.6 million at December 31, 1995 and 1994.
Substantially all employees of McDonnell Douglas and its subsidiaries are
members of defined benefit pension plans and insurance plans. McDonnell
Douglas also provides eligible employees the opportunity to participate
in savings plans that permit both pretax and after-tax contributions.
McDonnell Douglas generally charges the Company with the actual cost of
these plans which are included with other McDonnell Douglas charges for
support services and reflected in operating expenses. McDonnell Douglas
charges for services provided during 1995, 1994 and 1993 totaled $1.1
million, $0.9 million and $1.1 million, respectively. Additionally, the
Company was compensated by certain affiliates for a number of support
services, which are netted against operating expenses, amounting to $1.2
million, $0.2 million and $1.8 million in 1995, 1994 and 1993,
respectively.
Note 9 Fair Value of Financial Instruments
The estimated fair value amounts of the Company's financial instruments
have been determined by the Company, using appropriate market information
40
and valuation methodologies. The following methods and assumptions were
used to estimate the fair value of each class of financial instruments:
Cash and Cash Equivalents Because of the short maturity of these
instruments, the carrying amount approximates fair value.
Notes Receivable For variable rate notes that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values of fixed rate notes are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Short and Long-Term Debt The carrying amount of the Company's short-
term borrowings approximates its fair value. The fair value of the
Company's long-term debt is estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
Off-Balance Sheet Instruments Fair values for the Company's off-balance
sheet instruments (swaps and financing commitments) are based on quoted
market prices of comparable instruments (interest rate swaps); and the
counterparties' credit standing, taking into account the remaining terms
of the agreements (financing commitments).
The estimated fair values of the Company's financial instruments consist
of the following at December 31:
(Dollars in millions) 1995 1994
Carrying Fair Carrying Fair
Asset (Liability) Amount Value Amount Value
ASSETS
Cash and cash equivalents $ 12.6 $ 12.6 $ 13.1 $ 13.1
Notes receivable 263.5 270.0 351.7 347.5
LIABILITIES
Short-term notes payable to (13.7) (13.7) (103.8) (103.8)
Long-term debt:
Senior, excluding capital (976.8) (1,025.7) (959.4) (965.6)
Subordinated (123.5) (127.8) (90.8) (92.3)
OFF BALANCE SHEET INSTRUMENTS
Commitments to extend credit (116.6) (116.6) (97.5) (97.5)
Interest rate swaps (1.5) (11.8) - -
Note 10 Segment Information
The Company's financing and leasing portfolio consists of the following
at December 31:
(Dollars in millions) 1995 1994
Commercial aircraft financing:
41
MDC aircraft financing $1,225.1 61.6% $1,140.8 62.8%
Other commercial aircraft 180.6 9.1 192.2 10.6
financing
1,405.7 70.7 1,333.0 73.4
Commercial equipment leasing:
Transportation services 69.3 3.5 56.3 3.1
Transportation equipment 58.3 2.9 38.2 2.1
Printing and publishing 35.7 1.8 16.0 0.9
Other 339.1 17.0 258.9 14.1
502.4 25.2 369.4 20.2
Other 80.6 4.1 113.9 6.4
Total portfolio $1,988.7 100.0% $1,816.3 100.0%
A substantial portion of the Company's total portfolio is concentrated
among a small number of the Company's largest commercial aircraft
financing customers. The single largest commercial aircraft financing
customer accounted for $279.9 million (14.1% of total Company portfolio)
and $287.9 million (15.9% of total Company portfolio) at December 31,
1995 and 1994. The five largest commercial aircraft financing customers
accounted for $865.2 million (43.5% of total Company portfolio) and
$748.6 million (41.2% of total Company portfolio) at December 31, 1995
and 1994. There were no significant concentrations by customer within the
commercial equipment leasing portfolio.
In 1995 and 1994, a single aircraft financing customer accounted for
21.6% and 19.8% of the Company's operating income; no other customer
accounted for more than 10% of the Company's operating income.
The Company generally holds title to all leased equipment and generally
has a perfected security interest in the assets financed through note and
loan arrangements.
Information about the Company's operations in its different financial
reporting segments for the past three years is as follows:
(Dollars in millions) 1995 1994 1993
Operating income:
Commercial aircraft financing $124.3 $121.4 $107.4
Commercial equipment leasing 52.8 49.8 64.0
Other 12.4 15.7 24.4
Corporate 2.0 0.7 2.7
$191.5 $187.6 $198.5
Income (loss) before taxes on
income:
Commercial aircraft financing $37.0 $27.2 $ 26.3
Commercial equipment leasing 27.3 27.9 30.8
Other 1.4 (5.3) (10.7)
Corporate (4.5) (7.9) (5.6)
$61.2 $41.9 $ 40.8
Identifiable assets at December 31:
Commercial aircraft financing $ 1,443.6 $1,364.1 $1,361.4
42
Commercial equipment leasing 507.3 382.7 420.2
Other 97.3 160.2 247.6
Corporate 1.4 22.6 26.3
$ 2,049.6 $1,929.6 $2,055.5
Depreciation expense - equipment
under operating
leases:
Commercial aircraft financing $ 26.2 $17.2 $ 10.1
Commercial equipment leasing 22.0 22.2 28.2
Other - 0.5 0.7
$ 48.2 $39.9 $ 39.0
Equipment acquired for operating
leases, at cost:
Commercial aircraft financing $ 85.2 $ 15.7 $ 34.5
Commercial equipment leasing 70.5 24.3 22.9
$155.7 $ 40.0 $ 57.4
Operating income from financing of assets located outside the United
States totaled $45.7 million, $41.7 million and $20.9 million in 1995,
1994 and 1993, respectively.
McDonnell Douglas Finance Corporation and Subsidiaries
Schedule II Valuation and Qualifying Accounts
(Dollars in millions)
Allowance Balance Charged
For Losses at to Balance
on Beginning Costs at End
Financing of and (1) of
Receivables Year Expenses Other Deductions Year
1995 $ 40.7 $ 12.2 $ - $ (10.6) $ 42.3
1994 $ 35.6 $ 9.9 $ 0.1 $ (4.9) $ 40.7
1993 $ 37.4 $ 8.6 $ - $ (10.4) $ 35.6
_____________
(1) Write-offs net of recoveries
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
43
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K
Page
Number
in Form
10-K
(a) 1. Financial Statements:
Report of Independent Auditors ?
Consolidated Balance Sheet at December 31, 1995 and 1994 ?
Consolidated Statement of Income and Income Retained for
Growth for the Years Ended December 31, 1995,
1994 and 1993 ?
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 ?
Notes to Consolidated Financial Statements ?
2. Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts ?
Schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission (the "SEC"),
except Schedule II, which is included herein, have been omitted
because they are not required, or the information is set forth in
the financial statements or notes thereto.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company dated June
29, 1989, incorporated herein by reference to Exhibit 3.1 to the
Company's Form 10-K for the year ended December 31, 1993.
3.2 By-Laws of the Company, as amended to date, incorporated herein
by reference to Exhibit 3.2 to the Company's Form 10-K for the
year ended December 31, 1993.
4.1 Indenture, dated as of April 1, 1983, between the Company and
Bankers Trust Company, incorporated herein by reference to
Exhibit 4(a) to the Company's Form S-3 Registration
Statement(File No. 2-83007).
4.2 First Supplemental Indenture, dated as of June 12, 1995, between
the Company and Bankers Trust Company, incorporated herein by
reference to Exhibit 4(b) to the Company's Form S-3 Registration
Statement (File No. 33-58989).
4.3 Subordinated Indenture, dated as of June 15, 1988, by and between
the Company and Bankers Trust Company of California, N.A., as
Subordinated Indenture Trustee, incorporated by reference to
Exhibit 4(b) to the Company's Form S-3 Registration Statement
44
(File No. 33-26674).
4.4 First Supplemental Subordinated Indenture, dated as of June 12,
1995, between the Company and Bankers Trust Company, as successor
Trustee to Bankers Trust Company of California, N.A.,
incorporated herein by reference to Exhibit 4(d) to the Company's
Form S-3 Registration Statement (File No. 33-58989).
4.5 Indenture, dated as of April 15, 1987, incorporated herein by
reference to Exhibit 4 to the Company's Form S-3 Registration
Statement (File No. 33-26674).
4.6 Form of Series II Medium Term Note.
4.7 Form of Series III Medium Term Note, incorporated herein by
reference to Exhibit 4(b) to the Company's Form S-3 Registration
Statement (File No. 2-98001).
4.8 Form of Series V Medium Term Note, incorporated herein by
reference to Exhibit 4(b) to the Company's Form S-3 Registration
(File No. 33-13735).
4.9 Form of Series VI Medium Term Note.
4.10 Form of Series VII Medium Term Note.
4.11 Form of Series VIII Senior Medium Term Note, incorporated herein
by reference to Exhibit 4(c) to the Company's Form S-3
Registration Statement (File No. 33-26674).
4.12 Form of Series VIII Subordinated Medium Term Note, incorporated
herein by reference to Exhibit 4(d) to the Company's Form S-3
Registration Statement (File No. 33-26674).
4.13 Form of Series IX Senior Medium Term Note, incorporated herein by
reference to Exhibit 4(c) to the Company's Form S-3 Registration
Statement(File No. 33-31419).
4.14 Form of Series IX Senior Federal Funds Medium Term Note,
incorporated herein by reference to Exhibit 4(d) of the Company's
Form 8-K dated May 16, 1995.
4.15 Form of Series IX Subordinated Medium Term Note, incorporated
herein by reference to Exhibit 4(d) to the Company's Form S-3
Registration (File No. 33-31419).
4.16 Form of General Term Note(R), incorporated herein by reference to
Exhibit 4(c) to the Company's Form 8-K dated May 26, 1993.
4.17 Form of Series X Senior Fixed Rate Medium Term Note, incorporated
herein by reference to Exhibit 4(e) to the Company's Form S-3
Registration Statement (File No. 33-58989).
4.18 Form of Series X Senior Floating Rate Medium Term Note,
45
incorporated herein by reference to Exhibit 4(h) to the Company's
Form S-3 Registration Statement (File No. 33-58989.)
4.19 Form of series X Subordinated Fixed Rate Medium Term Note,
incorporated herein by reference to Exhibit 4(f) to the Company's
Form S-3 Registration Statement (File No. 33-58989).
4.20 Form of Series X Subordinated Floating Rate Medium Term Note,
incorporated herein by reference to Exhibit 4(g) to the Company's
Form S-3 Registration Statement (File No. 33-58989).
Pursuant to Item 601 (b)(4)(iii) of Regulation S-K, the Company is not
filing certain instruments with respect to its long-term debt because the
total amount of securities currently provided for under each of such
instruments does not exceed 10 percent of the total assets of the Company
and its subsidiaries on a consolidated basis. The Company hereby agrees
to furnish a copy of any such instrument to the SEC upon request.
10.1 Amended and Restated Operating Agreement, dated as of April 12,
1993, among McDonnell Douglas, the Company and MDFS, incorporated
herein by reference to Exhibit 10.1 to the Company's Form 10-K
for the year ended December 31, 1993.
10.2 Operating Agreement, effective as of February 8, 1989, by and
between the Company and MDFS.
10.3 By-Laws of McDonnell Douglas, as amended March 6, 1996,
incorporated by reference from McDonnell Douglas s Exhibit 3.2 to
its Form 10-K Report for the year ended December 31, 1995 (file
No. 1-3685).
10.4 Supplemental Guaranty Agreement, dated as of December 30, 1993,
by and between the Company and McDonnell Douglas, incorporated
herein by reference to Exhibit 10.4 to the Company's Form 10-K
for the year ended December 31, 1993.
10.5 Supplemental Guaranty Agreement, dated as of December 30,1993,
by and between the Company and McDonnell Douglas, incorporated
herein by reference to Exhibit 10.5 to the Company's Form 10-K
for the year ended December 31, 1994.
10.6 Agreement, dated as of December 30, 1994, by and between the
Company and McDonnell Douglas incorporated herein by reference to
Exhibit 10.6 to the Company's Form 10-K for the year ended
December 31, 1994.
10.7 Credit Agreement, dated as of September 29, 1994, among the
Company, MDFS and the banks listed therein incorporated herein by
reference to Exhibit 10.7 to the Company's Form 10-K for the year
ended December 31, 1994.
10.8 Amendment No. 1, dated as of August 31, 1995, to Credit
Agreement, dated as of September 29, 1994, among the Company,
MDFS and the banks listed therein, incorporated herein by
46
reference to Exhibit 10 to the Company's Form 10-Q for the
quarterly period ended September 30, 1995.
12 Statement regarding computation of ratio of earnings to fixed
charges.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On February 27, 1996, the Company filed a Current Report on Form
8-K, which included the Company's Consolidated Balance Sheet at
December 31, 1995 and 1994 and Consolidated Statement of Income
and Income Retained for Growth for each of the years ended
December 31, 1995, 1994 and 1993.
47
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
McDonnell Douglas Finance Corporation
By /s/ STEVEN W. VOGEDING
Steven W. Vogeding
March 29, 1996 Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ JAMES F. PALMER Chairman and Director March 29, 1996
James F. Palmer
/s/ THOMAS J.
MOTHERWAY
Thomas J. Motherway President and Director March 29, 1996
(Principal Executive
Officer)
/s/ STEVEN W. VOGEDING
Steven W. Vogeding Vice President and Chief
Financial Officer March 29, 1996
(Principal Financial
Officer)
Director
F. Mark Kuhlmann
Director
Robert H. Hood
/s/ MAURA R. MIZUGUCHI Controller March 29, 1996
Maura R. Mizuguchi
(Principal Accounting
Officer)
/s/ DANIEL O. ANDERSON Vice President - Operations
and Director March 29, 1996
Daniel O. Anderson