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United States
Securities and Exchange Commission
Washington, DC 20549
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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, 1996
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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)
(562) 627-3000
(Registrant's telephone number, including area code)
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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 31, 1997, 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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Table of Contents
Page
Part I
Item 1. Business.......................................................3
Item 2. Properties....................................................17
Item 3. Legal Proceedings.............................................18
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.......................................................18
Item 6. Selected Financial Data.......................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................20
Item 8. Financial Statements and Supplementary Data...................22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................40
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..40
Signatures.......................................................44
Exhibits.........................................................45
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*Omitted pursuant to General Instruction J(2)(c)of Form 10-K.
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, 1996, the
Company had 70 employees.
On December 14, 1996, McDonnell Douglas and The Boeing Company ("Boeing")
entered into a definitive agreement whereby a wholly-owned subsidiary of Boeing
will merge into McDonnell Douglas in a stock-for-stock transaction with
McDonnell Douglas surviving as a wholly-owned subsidiary of Boeing. The
transaction is subject to approval by the shareholders of both companies and
certain regulatory agencies; it is expected to close as early as mid-1997. The
following discussions throughout this Form 10-K do not consider any effects the
merger may have on the Company or on its relationship with McDonnell Douglas.
See "Relationship with McDonnell Douglas."
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 represented market segments in which the Company
is no longer active, and the Company continues to manage and liquidate 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, 1996 and 1995, the
portfolio balances for non-core businesses totaled $44.9 million and $80.6
million.
Information on the Company's continuing businesses is included in the following
tables.
New Business Volume
Years ended December 31,
-----------------------------------------------------------------------------
(Dollars in millions) 1996 1995 1994 1993 1992
Commercial aircraft financing $ 475.3 $ 349.7 $ 117.9 $ 411.4 $ 153.2
Commercial equipment leasing 392.0 241.1 84.1 41.5 50.7
-----------------------------------------------------------------------------
$ 867.3 $ 590.8 $ 202.0 $ 452.9 $ 203.9
=============================================================================
Portfolio Balances
December 31,
-----------------------------------------------------------------------------
(Dollars in millions) 1996 1995 1994 1993 1992
Commercial aircraft financing $ 1,814.9 $ 1,405.7 $ 1,333.0 $ 1,237.5 $ 1,001.1
Commercial equipment leasing 769.8 502.4 369.4 422.3 557.4
-----------------------------------------------------------------------------
$ 2,584.7 $ 1,908.1 $ 1,702.4 $ 1,659.8 $ 1,558.5
=============================================================================
For financial information about the Company's segments, see Notes to
Consolidated Financial Statements included in Item 8.
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 some 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) 1996 1995 1994 1993 1992
McDonnell Douglas aircraft financing:
Finance leases $ 1,132.6 $ 857.4 $ 748.2 $ 732.3 $ 506.2
Operating leases 402.0 256.8 197.8 176.9 93.7
Notes receivable 82.9 110.9 194.8 125.9 169.4
-------------- -------------- --------------- -------------- --------------
1,617.5 1,225.1 1,140.8 1,035.1 769.3
-------------- -------------- --------------- -------------- --------------
Other commercial aircraft financing:
Finance leases 136.9 126.1 125.2 123.0 149.9
Operating leases 56.0 49.6 43.1 55.9 57.6
Notes receivable 4.5 4.9 23.9 23.5 24.3
-------------- -------------- --------------- -------------- --------------
197.4 180.6 192.2 202.4 231.8
-------------- -------------- --------------- -------------- --------------
$ 1,814.9 $ 1,405.7 $ 1,333.0 $ 1,237.5 $ 1,001.1
============== ============== =============== ============== ==============
Commercial Aircraft Portfolio by Product Type
December 31,
----------------------------------------------------------------------------
(Dollars in millions) 1996 1995 1994 1993 1992
Aircraft leases:
Finance leases
Domestic $ 950.0 $ 776.2 $ 653.3 $ 638.9 $ 601.5
Foreign 319.5 207.3 220.1 216.5 54.6
Operating leases
Domestic 357.2 183.5 161.9 149.7 111.4
Foreign 100.8 122.9 79.0 83.0 39.9
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1,727.5 1,289.9 1,114.3 1,088.1 807.4
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Aircraft related notes receivable:
Domestic obligors 22.6 31.2 53.4 51.4 88.0
Foreign obligors 64.8 84.6 165.3 98.0 105.7
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87.4 115.8 218.7 149.4 193.7
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$ 1,814.9 $ 1,405.7 $ 1,333.0 $ 1,237.5 $ 1,001.1
=============================================================================
At December 31, 1996, the Company's commercial aircraft portfolio was comprised
of finance leases to 27 customers (24 domestic and three foreign) with a
carrying amount of $1,269.5 million (48.3% of total Company portfolio), notes
receivable from six customers (three domestic and three foreign) with a carrying
amount of $87.4 million (3.3% of total Company portfolio) and operating leases
to 14 customers (ten domestic and four foreign) with a carrying amount of $458.0
million (17.4% of total Company portfolio).
At December 31, 1996, 61.5% of the Company's total portfolio consisted of
financings related to McDonnell Douglas aircraft, compared with 61.6% and 62.8%
in 1995 and 1994.
o 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 five
largest commercial aircraft financing customers accounted for $1,172.4
million (44.6% of total Company portfolio) and $865.2 million (43.5% of
Company total portfolio) at December 31, 1996 and 1995.
The Company's largest customer, Federal Express Corporation, accounted for
$316.1 million (12.0% of the total Company portfolio) and $220.4 million
(11.1% of total Company portfolio) at December 31, 1996 and 1995.
The Company's second largest customer, P. T. Garuda Indonesia ("Garuda"),
accounted for $279.4 million (10.6% of the total Company portfolio) and
$182.7 million (9.2% of the total Company portfolio) at December 31, 1996 and
1995. At December 31, 1996, $101.6 million of Garuda's outstandings were
represented by an aircraft which the Company has the right to sell to
McDonnell Douglas in June of 1997 at the Company's original purchase price.
Trans World Airlines, Inc. ("TWA") accounted for $249.5 million (9.5% of
total Company portfolio) and $279.9 million (14.1% of total Company
portfolio) at December 31, 1996 and 1995. In 1996, 1995 and 1994, TWA
accounted for 18.0%, 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.
TWA continues to operate under a reorganization plan, confirmed by the United
States Bankruptcy Court in 1995, that restructured its indebtedness and
leasehold obligations to its creditors. In addition, TWA continues to face
financial and operational challenges due in part to an airliner crash in July
1996 and turnover of key management, which occurred during 1996. McDonnell
Douglas provides to the Company guaranties of certain obligations under
various lease agreements between the Company and TWA. At December 31, 1996,
the maximum aggregate coverage under such guaranties was $45.6 million. In
addition, McDonnell Douglas provides supplemental guaranties in favor of the
Company for up to an additional $10.0 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 in March 1998,
but may be extended under certain limited circumstances. The reorganization
plan and TWA's current financial condition have not had and, assuming TWA's
financial condition does not further deteriorate, and taking into account the
McDonnell Douglas guaranties, are not expected to have a material adverse
effect on the Company's earnings, cash flow, or financial position. See
"Aircraft Financing Guaranties."
Great Lakes Aviation, Ltd. ("Great Lakes") is in arrears in the payment of
rent under the lease of two Embraer Brasilia commuter aircraft. Great Lakes
has stated that it will submit to the Company a proposal for repayment of the
delinquent sums. The net asset value of the aircraft leased to Great Lakes at
December 31, 1996, was $14.4 million. Taking into account the available
allowance for losses, the Company does not expect this transaction to have a
material adverse impact on its earnings, cash flow, or financial condition.
The $100.0 million aircraft purchase bridge facility made available by the
Company to ValuJet Airlines, Inc. ("ValuJet") in 1995 was reduced to a
maximum of $50.0 million by mutual agreement during the third quarter of
1996. This facility expires upon delivery to ValuJet of the first scheduled
new McDonnell Douglas MD-95 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"). There
were no amounts outstanding under this agreement at December 31, 1996. At
December 31, 1995, receivables outstanding pursuant to this agreement totaled
$8.7 million.
o 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 Company continues to look
for opportunities to expand its commercial aircraft portfolio while taking
advantage of improving market conditions to reduce concentration and certain
exposure levels.
The Company believes that realizable values for its aircraft at lease
maturity are likely to remain above the values actually booked, but this is
subject to many uncertainties including those referred to in "Factors
Affecting Aircraft Financing Volume." 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.
o 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,
1996, the Company owned or participated in the ownership of 133 leased
commercial aircraft, including 71 that were manufactured by McDonnell
Douglas.
o Factors Affecting Aircraft Financing Volume
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. During 1996, McDonnell Douglas
received orders amounting to four percent of the total narrow-body and
wide-body orders received in the commercial aircraft industry. McDonnell
Douglas expected to receive a higher level of orders in 1996. As the year
progressed, it became apparent that McDonnell Douglas's share of commercial
aircraft orders would be minimal. Airline customer orders in which McDonnell
Douglas expected to participate were instead recorded by its competitors. In
addition, a few significant customers previously supportive of McDonnell
Douglas have either expressed reduced confidence in McDonnell Douglas's
existing product line or have made decisions to convert to aircraft of a
competitor. During this same period, McDonnell Douglas studied the
feasibility of developing a new high-capacity, long-range three-engine
jetliner, designated the MD-XX. In October 1996, subsequent to a
disappointing first nine months of new orders, McDonnell Douglas decided not
to proceed with this proposed aircraft. Several factors influenced the
decision. Key among those were a high level of risk, marketplace price
expectations, and the amount of product and internal infrastructure
investment (estimated at up to $15 billion) required to bring McDonnell
Douglas to the level of the other major players in the commercial aerospace
industry.
McDonnell Douglas's presence in the commercial aerospace industry will be
focused on its existing product line of MD-80 and MD-90 twin jets and MD-11
trijet commercial aircraft, its MD-95 twin jet in development, and its
commercial aircraft modification, support, spare parts and related services.
The impact of the decision not to proceed with the MD-XX on existing orders
and options and on future orders of its existing product line, and on the
Company, is uncertain. However, as mentioned above, reduced confidence
expressed by a few significant existing customers and customer movement is
likely to have negative ramifications. McDonnell Douglas has emphasized cost
reduction efforts during recent years and those efforts will continue.
Significant price competition also currently exists in the marketplace, and
McDonnell Douglas's competitors offer broader product lines.
The Company anticipates continued fluctuations in the volume of its aircraft
financing transactions. At December 31, 1996, the Company had unused credit
lines available to a customer totaling $50.0 million. The Company had no
other commitments to provide aircraft related financing at December 31, 1996.
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) 1996 1995 1994 1993 1992
McDonnell Douglas aircraft financing volume:
Finance leases $ 234.1 $ 220.6 $ 53.0 $ 357.3 $ 95.0
Operating leases 196.9 81.9 15.7 33.8 53.5
Notes receivable 24.2 36.2 41.3 19.1 4.7
-----------------------------------------------------------------------------
455.2 338.7 110.0 410.2 153.2
-----------------------------------------------------------------------------
Other commercial aircraft financing volume:
Finance leases 20.1 7.7 7.9 - -
Operating leases - 3.3 - 0.7 -
Notes receivable - - - 0.5 -
-----------------------------------------------------------------------------
20.1 11.0 7.9 1.2 -
-----------------------------------------------------------------------------
$ 475.3 $ 349.7 $ 117.9 $ 411.4 $ 153.2
=============================================================================
o Aircraft Financing Guaranties
At December 31, 1996, the Company had $521.3 million of guaranties in its
favor with respect to its commercial aircraft financing portfolio relating to
transactions with a carrying amount of $1,356.6 million (74.7% 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 $ 240.6 $ 229.6 $ 470.2
Other 38.2 12.9 51.1
----------------------------------------------
Total guaranties $ 278.8 $ 242.5 $ 521.3
==============================================
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. In addition, CEL participates in senior secured bank loans. 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 $20.0 million.
Portfolio balances for the Company's CEL segment are summarized as follows:
December 31,
-----------------------------------------------------------------------------
(Dollars in millions) 1996 1995 1994 1993 1992
Finance leases $ 361.7 $ 266.3 $ 216.8 $ 235.2 $ 325.9
Operating leases 231.5 169.1 133.4 157.5 179.9
Notes receivable 176.6 67.0 18.5 28.8 50.7
Preferred and preference stock - - 0.7 0.8 0.9
-----------------------------------------------------------------------------
$ 769.8 $ 502.4 $ 369.4 $ 422.3 $ 557.4
=============================================================================
o 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 1996, CEL booked
$392.0 million of new business volume, representing a $150.9 million increase
over 1995 bookings. At year end, CEL's backlog of business was $76.6 million,
compared to $116.6 million at December 31, 1995.
The Company is presently attempting to grow its CEL portfolio at a relatively
faster rate than its commercial aircraft portfolio in order to achieve a
better balance of its overall portfolio. Additionally, the Company is
considering increasing the amount of its financings to foreign borrowers and
lessees. For a discussion of additional risks associated with foreign
financings, see "Cross-Border Outstandings."
The following lists information on new business volume for the Company's CEL
segment:
Years ended December 31,
-----------------------------------------------------------------------------
(Dollars in millions) 1996 1995 1994 1993 1992
Finance leases $ 160.9 $ 102.0 $ 53.9 $ 15.3 $ 24.9
Operating leases 107.0 70.5 24.3 22.9 18.2
Notes receivable 124.1 68.6 5.9 3.3 7.6
-----------------------------------------------------------------------------
$ 392.0 $ 241.1 $ 84.1 $ 41.5 $ 50.7
=============================================================================
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 countries in which the Company's
cross-border outstandings exceeded 1% of consolidated assets, net of domestic
guaranties, consisted of the following at December 31, 1996, 1995 and 1994:
December 31,
--------------------------------------------------------------
Finance Notes Operating
(Dollars in millions) Leases Receivable Leases Total
Country
1996
Indonesia $ 120.8 $ - $ - $ 120.8
Mexico 27.0 9.5 13.2 49.7
Italy - - 44.4 44.4
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$ 147.8 $ 9.5 $ 57.6 $ 214.9
=============================================================
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
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$ 166.2 $ 35.1 $ 23.9 $ 225.2
=============================================================
At December 31, 1996 and 1994 there were no countries in which customer
outstandings were between 0.75% and 1% of the Company's total assets. 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, representing outstandings between 0.75%
and 1% of the Company's total assets.
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, 1996:
(Dollars in millions) Domestic Foreign Total
Maturity Distribution
1997 $ 519.4 $ 55.1 $ 574.5
1998 197.6 41.9 239.5
1999 222.6 43.5 266.1
2000 172.8 43.7 216.5
2001 162.4 47.8 210.2
2002 and thereafter 731.4 320.2 1,051.6
-------------------------------------------------
$ 2,006.2 $ 552.2 $ 2,558.4
=================================================
Financing Receivables Due 1998 and Thereafter
Fixed interest rates $ 1,383.0 $ 237.6 $ 1,620.6
Variable interest rates 103.8 259.5 363.3
-------------------------------------------------
$ 1,486.8 $ 497.1 $ 1,983.9
=================================================
Allowance for Losses on Financing Receivables and Credit Loss Experience
Analysis of Allowance for Losses on Financing Receivables
December 31,
-----------------------------------------------------------------------------
(Dollars in millions) 1996 1995 1994 1993 1992
Allowance for losses on financing
receivables at beginning of year $ 42.3 $ 40.7 $ 35.6 $ 37.4 $ 46.7
Provision for losses 14.2 12.2 9.9 8.6 19.1
Write-offs, net of recoveries (6.0) (10.6) (4.9) (10.4) (27.4)
Other (1.9) - 0.1 - (1.0)
-----------------------------------------------------------------------------
Allowance for losses on financing
receivables at end of year $ 48.6 $ 42.3 $ 40.7 $ 35.6 $ 37.4
=============================================================================
Allowance as percent of total portfolio 1.8% 2.1% 2.2% 1.9% 2.1%
Net write-offs as percent of average
portfolio 0.3% 0.6% 0.3% 0.6% 1.4%
More than 90 days delinquent:
Amount of delinquent installments $ 2.1 $ 10.0 $ 2.8 $ 3.7 $ 4.6
Total receivables due from delinquent
obligors $ 23.4 $ 12.1 $ 43.2 $ 108.4 $ 10.5
Total receivables due from delinquent
obligors as a percentage of total
portfolio 0.9% 0.6% 2.4% 5.9% 0.6%
The portfolio at December 31, 1996 includes five CEL obligors and one airline
obligor to which payment extensions have been granted. At December 31, 1996
payments so extended amounted to $7.7 million ($5.0 million airline-related),
and the aggregate carrying amount of the related receivables was $282.6 million
($249.5 million airline-related).
Receivable Write-offs, Net of Recoveries by Segment
The following table summarizes the loss experience for the Company's continuing
businesses:
Years ended % of Respective
December 31, Average Portfolio
------------------------------------------------------------------
(Dollars in millions) 1996 1995 1996 1995
Commercial aircraft financing $ - $ 5.0 - % 0.37%
Commercial equipment leasing 3.0 1.7 0.51 0.41
---------------------------------
$ 3.0 $ 6.7
=================================
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 $14.2 million and $12.2 million in 1996 and 1995 for losses. The
Company believes that the allowance for losses on financing receivables is
adequate at December 31, 1996 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, decreased in 1996
as compared to 1995 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) 1996 1995
Domestic $ 1.6 $ 17.0
Foreign 13.8 13.6
---------------------------------
$ 15.4 $ 30.6
=================================
Interest on receivables which are contractually past due 90 days or more as to
principal and interest payments is being accrued for domestic financings of $0.9
million and $0.6 million at December 31, 1996 and 1995.
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 7 of Notes to Consolidated
Financial Statements included as Item 8.
The Company has a joint revolving credit agreement under which the Company may
borrow up to $240 million, reduced by borrowings of up to $16 million that can
be made by MDFS under this agreement. At December 31, 1996 and 1995, borrowings
under commercial paper and uncommitted short-term bank facilities totaling
$141.0 million and $10.0 million, respectively, were supported by available
unused commitments under the revolving credit agreement. The Company also has
available approximately $95 million in uncommitted, short-term bank credit
facilities. At December 31, 1996 and 1995, there were no amounts outstanding
under the revolving credit agreement.
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, 1996, has issued and sold $490 million in aggregate principal
amount of securities under the program. On January 15, 1997, the Company
authorized the sale and issuance of the remaining $250 million aggregate
principal amount of such securities under the shelf registration.
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
1996 $ 49.5 $ 1,501.0 $ 1,550.5
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
The weighted average interest rates on all outstanding indebtedness computed for
the relevant period were as follows:
Weighted Average Weighted Average Weighted Average
Years ended Short-Term Long-Term Total Debt
December 31, Interest Rate Interest Rate Interest Rate
1996 5.66% 7.60% 7.56%
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
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. Currently, the Company's senior debt is rated A- and subordinated debt is
rated BBB+ by both Standard and Poor's ("S&P") and Duff & Phelps Credit Rating
Company ("DCR"). Moody's Investors Service ("Moody's") rates the Company's
senior and subordinate debt Baa2 and Baa3, respectively. Commercial paper is
rated A2, D1- and P2 by S&P, DCR and Moody's, respectively. On December 16,
1996, all three rating agencies placed the Company on review with positive
implications.
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 Douglas has in many
cases presented opportunities for such business and has caused McDonnell Douglas
to offer to the Company substantially all of the financing receivables 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. 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 and there has been
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 any future
declining creditworthiness of 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 discontinuation of existing aircraft models or 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 (including estimated lease values), which
would result in recognition of a loss to the Company. At December 31, 1996, the
Company's carrying amount of Stage 2 aircraft totaled $63.3 million (3.5% 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 United States and foreign 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, 1996, McDonnell Douglas recorded revenues of $13.8 billion and net
earnings of $788 million. At December 31, 1996, McDonnell Douglas had assets of
$11.6 billion and shareholders' equity of $3.0 billion.
If the financial well-being of McDonnell Douglas (or any other future ultimate
shareholder of the Company) were to decline significantly below current levels,
the Company's ability to enter into significant amounts of new business in the
future could be materially constrained. Two of the principal industry segments
in which McDonnell Douglas operates, military aircraft and commercial aircraft,
are especially competitive and have a limited number of customers. 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 announced in October 1996 that it decided not to build the MD-XX, a
proposed new trijet, due to projected costs and other factors. McDonnell
Douglas's market share of firm order backlog for new commercial aircraft has
declined significantly in the past several years. McDonnell Douglas's commercial
backlog decreased during 1996, while backlog for its two major competitors
increased substantially. McDonnell Douglas's ability to generate additional
orders is subject to its ability to operate successfully as a niche player. See
"Commercial Aircraft Financing Segment," for further discussion of this risk.
Approximately 39 percent of McDonnell Douglas's firm backlog for commercial
aircraft is scheduled for delivery during 1997 and an additional 20 percent is
scheduled during 1998. If difficulties recur in the commercial airline industry,
airlines may decline deliveries of aircraft, request changes in delivery
schedules, or default on contracts for firm orders. At December 31, 1996,
McDonnell Douglas has provided $470.2 million of guaranties on the Company's
aircraft portfolio, including first loss guaranties. 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 is the obligor in a
small number of the Company's commercial aircraft transactions and largely as a
result thereof, at December 31, 1996, McDonnell Douglas was the lessee for $83.9
million of the Company's commercial aircraft portfolio.
For a further description of significant factors which may affect McDonnell
Douglas, see McDonnell Douglas's Form 10-K for the year ended December 31, 1996
(Securities and Exchange Commission file number 1-3685). Until the
Boeing-McDonnell Douglas merger is completed, its impact, if any, on the
Company's relationship with McDonnell Douglas cannot be determined. Consummation
of the Boeing-McDonnell Douglas merger would result in the Company having a new
ultimate shareholder and this could result in significant changes in the
Company's relationship with McDonnell Douglas and the Operating Agreement and
tax arrangement discussed below.
o 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 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, 1996, the carrying amount of McDonnell Douglas aircraft
potentially excluded by this provision amounted to approximately $48.2
million.
o Federal Income Taxes
The Company and McDonnell Douglas presently file a consolidated federal
income tax return, 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.
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."
o 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 9 of Notes to Consolidated Financial
Statements included as Item 8.
o 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 periods up to 30 days at a market rate of interest. Under these
arrangements, there were no outstanding balances at December 31, 1996 and
1995. During 1996, the Company did not borrow under this agreement and did
not lend to McDonnell Douglas.
Under a similar arrangement, the Company may borrow from MDFS, and MDFS may
borrow from the Company, funds for periods up to 30 days at the Company's
cost of funds for short-term borrowings. Under this arrangement, borrowings
of $20.3 million and $3.7 million were outstanding at December 31, 1996 and
1995. During 1996, the Company's highest level of borrowings from MDFS and
highest level of loans to MDFS were $40.5 million and $67.8 million,
respectively.
Under another arrangement, McDonnell Douglas Realty Company, a wholly-owned
subsidiary of McDonnell Douglas, owed the Company $1.7 million and $14.6
million at December 31, 1996 and 1995. The note is payable on demand and
accrues interest at a rate equal to a market rate of interest.
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
On November 1, 1996, The Allen Austin Harris Group, Inc. ("Plaintiff") filed a
complaint in the Superior Court of the State of California, County of Alameda,
against the Company, McDonnell Douglas, McDonnell Douglas Aerospace - Middle
East Limited and the Selah Group, Inc. (the "Defendants"). The Plaintiff, which
had hoped to establish a manufacturing plant abroad with various assistance from
the Defendants, seeks more than $57.0 million in alleged damages (primarily
consisting of lost profits) based on various theories. The Company believes it
has meritorious defenses to all of the allegations and that the litigation will
have no material adverse effect on the Company's earnings, cash flow or
financial condition.
A number of legal proceedings and claims are pending or have been asserted
against the Company. A substantial number of such legal proceedings and claims
are covered by third parties, including insurance companies. The Company
believes that the final outcome of such proceedings and claims will not have a
material adverse effect on its 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 1996, the
Company did not declare or pay any dividends to MDFS on its common stock
compared to dividends of $27.5 million declared and paid in 1995. The Company
paid $3.5 million in dividends on its preferred stock in 1996 and 1995.
Preferred stock dividends of $0.6 million payable to MDFS were accrued at
December 31, 1996.
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, $68.4 million of
the Company's income retained for growth was available for dividends at December
31, 1996.
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, 1996 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) 1996 1995 1994 1993 1992
Financing volume $ 867.3 $ 590.8 $ 202.0 $ 453.0 $ 206.5
==============================================================================
Operating income:
Finance lease income $ 118.6 $ 104.3 $ 100.7 $ 90.1 $ 113.0
Interest on notes receivable 24.4 27.2 29.4 38.9 47.9
Operating lease income, net 55.1 41.1 38.5 35.9 33.3
Net gain on disposal or re-lease of assets 19.6 8.7 11.1 23.7 37.1
Postretirement benefit curtailment - - - - 2.8
Other 3.8 9.3 7.1 8.3 17.4
------------------------------------------------------------------------------
221.5 190.6 186.8 196.9 251.5
------------------------------------------------------------------------------
Expenses:
Interest expense 117.3 101.9 108.3 116.4 145.9
Provision for losses 14.2 12.2 9.9 8.6 19.1
Operating expenses 11.7 11.3 15.2 20.3 27.4
Other 3.4 4.9 12.3 12.4 14.3
------------------------------------------------------------------------------
146.6 130.3 145.7 157.7 206.7
------------------------------------------------------------------------------
Income from continuing operations before
provision for income taxes and
cumulative effect of accounting change 74.9 60.3 41.1 39.2 44.8
Provision for income taxes 26.1 21.0 12.8 22.4 12.7
------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of accounting change 48.8 39.3 28.3 16.8 32.1
Discontinued operations, net - - - - (2.5)
Cumulative effect of accounting change - - - - (1.9)
------------------------------------------------------------------------------
Net income $ 48.8 $ 39.3 $ 28.3 $ 16.8 $ 27.7
==============================================================================
Dividends declared $ 3.5 $ 31.0 $ 30.5 $ 3.6 $ 105.8
Ratio of income to fixed charges(1) 1.62 1.57 1.37 1.33 1.30
Balance sheet data:
Total assets $ 2,666.6 $ 2,049.6 $ 1,929.6 $ 2,055.5 $ 1,999.0
Total debt 1,850.2 1,339.7 1,215.1 1,361.2 1,330.4
Shareholder's equity 325.5 280.2 271.9 269.4 256.4
Dividends accrued on preferred stock at
year end $ 0.6 $ 0.6 $ 0.6 $ 0.6 $ 0.5
- ---------------
(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.
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.
From time to time, the Company may make certain statements that contain
projections or "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risk and uncertainty.
Certain statements in this Form 10-K, and particularly in Items 1, 3 and 7, may
contain forward-looking information. The subject matter of such statements may
include, but are not limited to, the consummation of the Boeing-McDonnell
Douglas merger and its possible effects, future earnings, costs, expenditures,
losses, residual values, and various business environment trends. In addition to
those contained herein, forward-looking statements and properties may be made by
management orally or in writing including, but not limited to, various sections
of the Company's filings with the Securities and Exchange Commission under the
Securities Act of 1933 and the Securities Exchange Act of 1934.
Actual results and trends in the future may differ materially from projections
depending on a variety of factors including, but not limited to, the timing and
consummation of the Boeing-McDonnell Douglas merger and the Company's
relationship with McDonnell Douglas as well as its new ultimate shareholder, the
capital equipment requirements of United States and foreign businesses, capital
availability and cost, changes in laws and tax benefits, competition from other
financial institutions, the Company's successful execution of internal operating
plans, defaults by customers, regulatory uncertainties, and legal proceedings.
Capital Resources and Liquidity
The Company has significant liquidity requirements. The Company attempts to 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 $240 million revolving credit agreement which is reduced by borrowings of up
to $16 million made by MDFS. At December 31, 1996 and 1995, borrowings under
commercial paper and uncommitted short-term bank facilities totaling $141.0
million and $10.0 million, respectively, were supported by available unused
commitments under the revolving credit agreement. The Company also accesses the
public debt market and anticipates using proceeds from the issuance of
additional public debt to fund future growth. In 1996, the Company issued $355.0
million of public senior and subordinated unsecured notes. See "Item 1. Business
- - Borrowing Operations."
1996 vs. 1995
Finance lease income increased $14.3 million (13.7%) in 1996 compared to 1995,
primarily attributable to increased volume for 1996 and the 1995 fourth quarter
financings of two MD-11aircraft.
Interest on notes receivable in 1996 was $2.8 million (10.3%) lower than 1995,
primarily attributable to aircraft repossessed under defaulted loans and leased
in 1995 and notes that matured in 1995.
Operating lease income, net of depreciation expense, increased $14.0 million
(34.1%) in 1996 compared to 1995, primarily attributable to the March 1996
financing of two MD-11s and the March 1995 financing of two MD-82 aircraft
under operating lease agreements.
Net gain on disposal or re-lease of assets increased $10.9 million (greater than
125%) in 1996 compared to 1995, attributable primarily to equipment sales within
the commercial equipment leasing portfolio and sales within the commercial
aircraft financing portfolio.
Interest expense increased $15.4 million (15.1%) in 1996 compared to 1995,
primarily attributable to a higher level of debt borrowings in 1996, resulting
from increased financing activity.
Provision for losses increased $2.0 million (16.4%) during 1996 compared
to 1995, primarily attributable to increased financing activity.
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 $2.2 million (31.0%) 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 deferral 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 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.
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.
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, 1996 and 1995, 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, 1996.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, 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, 1994, 1993 and
1992, and the related consolidated statements of income and income retained for
growth, and cash flows for the years ended December 31, 1993 and 1992 (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, 1996, appearing on pages 19 - 20 is fairly stated in all
material respects in relation to the consolidated financial statements from
which it has been derived.
/s/ ERNST & YOUNG LLP
January 22, 1997
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Balance Sheet
December 31,
(Dollars in millions, except stated value and par value) 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Financing receivables:
Investment in finance leases $ 1,631.2 $ 1,249.7
Notes receivable 308.9 263.5
------------------------------------------
1,940.1 1,513.2
Allowance for losses on financing receivables (48.6) (42.3)
------------------------------------------
1,891.5 1,470.9
Cash and cash equivalents 16.9 12.6
Equipment under operating leases, net 689.5 475.5
Equipment held for sale or re-lease 14.0 28.6
Accounts with McDonnell Douglas and MDFS - 18.5
Other assets 54.7 43.5
------------------------------------------
$ 2,666.6 $ 2,049.6
==========================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 161.3 $ 13.7
Accounts payable and accrued expenses 47.7 41.8
Other liabilities 103.0 82.5
Deferred income taxes 340.2 305.4
Long-term debt:
Senior 1,594.1 1,206.3
Subordinated 94.8 119.7
------------------------------------------
2,341.1 1,769.4
------------------------------------------
Commitments and contingencies -- Note 8
Shareholder's equity:
Preferred stock -- no par value; authorized 100,000 shares:
Series A; $5,000 stated value; authorized, issued and outstanding
10,000 shares 50.0 50.0
Common stock $100 par value; authorized 100,000 shares; issued and
outstanding 50,000 shares 5.0 5.0
Capital in excess of par value 89.5 89.5
Income retained for growth 181.0 135.7
------------------------------------------
325.5 280.2
------------------------------------------
$ 2,666.6 $ 2,049.6
==========================================
See notes to consolidated financial statements.
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
Years Ended December 31,
(Dollars in millions) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Finance lease income $ 118.6 $ 104.3 $ 100.7
Interest income on notes receivable 24.4 27.2 29.4
Operating lease income, net of depreciation expense of $57.6,
$48.2 and $39.9 in 1996, 1995 and 1994, respectively 55.1 41.1 38.5
Net gain on disposal or re-lease of assets 19.6 8.7 11.1
Other 3.8 9.3 7.1
--------------- ---------------- ---------------
221.5 190.6 186.8
--------------- ---------------- ---------------
EXPENSES
Interest expense 117.3 101.9 108.3
Provision for losses 14.2 12.2 9.9
Operating expenses 11.7 11.3 15.2
Other 3.4 4.9 12.3
--------------- ---------------- ---------------
146.6 130.3 145.7
--------------- ---------------- ---------------
Income before provision for income taxes 74.9 60.3 41.1
Provision for income taxes 26.1 21.0 12.8
--------------- ---------------- ---------------
Net income 48.8 39.3 28.3
Income retained for growth at beginning of year 135.7 127.4 129.6
Dividends (3.5) (31.0) (30.5)
--------------- ---------------- ---------------
Income retained for growth at end of year $ 181.0 $ 135.7 $ 127.4
=============== ================ ===============
See notes to consolidated financial statements.
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows
Years Ended December 31,
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 48.8 $ 39.3 $ 28.3
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation expense - equipment under operating leases 57.6 48.2 39.9
Net gain on disposal or re-lease of assets (19.6) (8.7) (11.1)
Provision for losses 14.2 12.2 9.9
Change in assets and liabilities:
Accounts with McDonnell Douglas and MDFS 18.5 26.4 25.5
Other assets (11.2) 40.4 5.8
Accounts payable and accrued expenses 5.9 8.8 (18.5)
Other liabilities 20.5 (10.0) 18.0
Deferred income taxes 34.8 (0.7) 7.2
Other, net (1.7) 0.4 9.2
-------------------------------------------------
167.8 156.3 114.2
-------------------------------------------------
INVESTING ACTIVITIES
Net change in short-term notes and leases receivable (91.2) 60.6 (58.6)
Purchase of equipment for operating leases (303.9) (155.7) (40.0)
Proceeds from disposition of equipment, notes and leases 109.8 109.6 109.0
receivable
Collection of notes and leases receivable 172.2 181.6 170.5
Acquisition of notes and leases receivable (557.2) (435.6) (179.0)
-------------------------------------------------
(670.3) (239.5) 1.9
-------------------------------------------------
FINANCING ACTIVITIES
Net change in short-term borrowings 147.6 (90.1) (98.8)
Debt having maturities more than 90 days:
Proceeds 608.7 572.8 229.9
Repayments (246.0) (358.0) (280.1)
Payment of cash dividends (3.5) (42.0) (19.5)
-------------------------------------------------
506.8 82.7 (168.5)
-------------------------------------------------
Increase (decrease) in cash and cash equivalents 4.3 (0.5) (52.4)
Cash and cash equivalents at beginning of year 12.6 13.1 65.5
=================================================
Cash and cash equivalents at end of year $ 16.9 $ 12.6 $ 13.1
=================================================
See notes to consolidated financial statements.
McDonnell Douglas Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
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 1996 presentation.
Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts in the
financial statements and accompanying notes. 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, 1996 and 1995 were $15.3 million and $10.0 million. At December 31,
1996 and 1995, the Company has classified as other assets restricted cash
deposited with banks in interest bearing accounts of $42.5 million and $37.2
million for specific lease rents and contractual purchase options related to
certain aircraft leased by the 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 the lower of the former receivable amount
or estimated net realizable value.
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.
During 1996, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The adoption thereof had no material effect on the
Company's financial position or operating results.
Income Taxes The operations of the Company 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 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.
Taxes on income are computed at current tax rates after adjusting income 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 amounts recognized for tax
purposes.
Note 2 -- Proposed Merger with The Boeing Company
On December 14, 1996, McDonnell Douglas and The Boeing Company ("Boeing")
entered into a definitive agreement whereby a wholly owned subsidiary of Boeing
will merge into McDonnell Douglas in a stock-for-stock transaction, as a result
of which McDonnell Douglas will become a wholly owned subsidiary of Boeing.
Under the terms of the transaction, McDonnell Douglas shareholders will receive
0.65 share (1.3 shares if the previously announced Boeing 2-for-1 stock split is
approved by Boeing shareholders prior to consummation of the merger) of Boeing
common stock for each share of McDonnell Douglas common stock. The transaction
is subject to approval by the shareholders of both companies and certain
regulatory agencies; it is expected to close as early as mid-1997.
Note 3 -- Investment in Finance Leases
The following lists the components of the investment in finance leases at
December 31:
(Dollars in millions) 1996 1995
Minimum lease payments receivable $ 2,252.1 $ 1,687.0
Estimated residual value of leased assets 423.6 309.4
Unearned income (1,047.7) (749.6)
Deferred initial direct costs 3.2 2.9
----------------------------------
$ 1,631.2 $ 1,249.7
==================================
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) 1996 1995
Minimum lease payments receivable $ 568.1 $ 417.4
Estimated residual value of leased assets 83.3 54.6
Unearned income (300.8) (217.8)
Deferred initial direct costs 0.7 0.6
----------------------------------
$ 351.3 $ 254.8
==================================
At December 31, 1996, finance lease receivables of $63.3 million serve as
collateral to senior long-term debt.
At December 31, 1996, finance lease receivables are due in installments as
follows: 1997, $504.7 million; 1998, $216.1 million; 1999, $237.9 million; 2000,
$190.7 million; 2001, $173.0 million; 2002 and thereafter, $929.7 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, 1996 and 1995, the carrying amount of
this aircraft was $28.5 million and $30.1 million.
Note 4 -- Notes Receivable
The following lists the components of notes receivable at December 31:
(Dollars in millions) 1996 1995
Principal $ 306.3 $ 261.7
Accrued interest 2.8 2.1
Unamortized discount (0.8) (0.9)
Deferred initial direct costs 0.6 0.6
---------------------------------
$ 308.9 $ 263.5
=================================
At December 31, 1996, notes receivables are due in installments as follows:
1997, $69.7 million; 1998, $23.5 million; 1999, $28.1 million; 2000, $25.8
million; 2001, $37.3 million; 2002 and thereafter, $121.9 million.
The $100.0 million aircraft purchase bridge facility made available by the
Company to ValuJet Airlines, Inc. ("ValuJet") in 1995 was reduced in maximum
scope to $50.0 million by mutual agreement during the third quarter of 1996.
This facility expires upon delivery to ValuJet of the first scheduled new
McDonnell Douglas MD-95 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"). There were no
amounts outstanding under this agreement at December 31, 1996. At December 31,
1995, receivables outstanding pursuant to this agreement totaled $8.7 million.
Note 5 -- Equipment Under Operating Leases
Equipment under operating leases consisted of the following at December 31:
(Dollars in millions) 1996 1995
Commercial aircraft $ 543.7 $ 364.1
Executive aircraft 153.9 99.5
Highway vehicles 61.7 70.9
Printing equipment 50.7 34.1
Machine tools and production equipment 34.1 30.2
Other 16.4 18.2
---------------------------------
860.5 617.0
Accumulated depreciation (158.9) (132.7)
Rentals receivable 11.6 7.3
Deferred lease income (25.0) (17.3)
Deferred initial direct costs 1.3 1.2
---------------------------------
$ 689.5 $ 475.5
=================================
At December 31, 1996, future minimum rentals scheduled to be received under the
noncancelable portion of operating leases are as follows: 1997, $112.8 million;
1998, $95.7 million; 1999, $81.4 million; 2000, $60.4 million; 2001, $52.8
million; 2002 and thereafter, $392.7 million.
At December 31, 1996, equipment under operating leases of $8.7 million are
assigned as collateral to senior long-term debt. Equipment under operating
leases of $203.1 million at December 31, 1996, relate to commercial aircraft
leased by the Company under capital lease obligations.
Under an operating lease agreement, the Company leases two MD-82 aircraft to
McDonnell Douglas. The leases require quarterly rent payments of $1.0 million
through May 31, 2002. At December 31, 1996, the carrying amount of these
aircraft was $26.5 million. Prior to 1996, the Company leased four MD-82
aircraft to McDonnell Douglas. At December 31, 1995, the carrying amount of
these aircraft was $54.0 million.
During 1996, the Company entered into an operating lease agreement, to lease a
DC-10-30 aircraft to McDonnell Douglas. The lease requires monthly rent payment
of $0.4 million through 2004. At December 31, 1996, the carrying amount of this
aircraft was $28.9 million.
Under a separate operating lease agreement, the Company leases an executive
aircraft to McDonnell Douglas. The lease requires monthly rent payments of $0.2
million through January 2002. At December 31, 1996 and 1995, the carrying amount
of this aircraft was $15.6 million and $16.2 million.
Note 6 -- Income Taxes
The components of the provision (benefit) for taxes on income for the years
ended December 31 were as follows:
(Dollars in millions) 1996 1995 1994
Current:
Federal $ (12.8) $ 18.5 $ 3.0
State 4.1 3.2 2.6
-------------------------------------------------
(8.7) 21.7 5.6
-------------------------------------------------
Deferred:
Federal 34.8 (0.7) 7.2
-------------------------------------------------
$ 26.1 $ 21.0 $ 12.8
=================================================
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 consisted
of the following at December 31:
(Dollars in millions) 1996 1995
Deferred tax assets:
Allowance for losses $ 17.0 $ 14.8
Other 6.0 5.2
----------------------------------
23.0 20.0
----------------------------------
Deferred tax liabilities:
Leased assets (358.5) (322.8)
Other (4.7) (2.6)
----------------------------------
(363.2) (325.4)
----------------------------------
Net deferred tax liability $ (340.2) $ (305.4)
==================================
Income taxes computed at the United States federal income tax rate and the
provision (benefit) for taxes on income differ as follows for the years ended
December 31:
(Dollars in millions) 1996 1995 1994
Tax computed at federal statutory rate $ 26.2 $ 21.1 $ 14.4
State income taxes, net of federal tax benefit 2.6 2.1 1.7
Foreign sales corporation benefit (1.5) (2.1) -
Effect of foreign tax rates - - 1.6
United States tax effect from the sale of MD Bank - - (3.2)
Effect of investment tax credits (0.7) (0.9) (0.8)
Other (0.5) 0.8 (0.9)
=================================================
$ 26.1 $ 21.0 $ 12.8
=================================================
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.
MDFS is currently under examination by the Internal Revenue Service ("IRS") for
the tax years 1986 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.
The Company received income tax refunds from MDC of $15.4 million and $2.1
million in 1996 and 1995. The Company made income tax payments to MDC of $15.2
million in 1994.
Note 7 -- Indebtedness
Short-term notes payable consisted of the following at December 31:
Weighted Average Interest
Rate at End of Year
Balance at End of Year
-------------------------------------------------------------
(Dollars in millions) 1996 1995 1996 1995
Commercial paper $ 96.0 $ - 6.43% - %
Uncommitted credit facilities 45.0 10.0 6.02 6.05
MDFS 20.3 3.7 5.75 6.38
------------------------------
$ 161.3 $ 13.7
==============================
During 1996, MDFS and the Company amended their joint revolving credit agreement
to provide, among other things, for increased borrowing capacity and to extend
the maturity date to August 2001. Under the amended agreement, the Company may
borrow a maximum of $240.0 million, reduced by MDFS borrowings under this same
agreement, which are limited to $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, 1996. At December 31, 1996 and 1995,
borrowings under commercial paper and uncommitted short-term bank facilities
totaling $141.0 million and $10.0 million, respectively, were supported by
available unused commitments under the revolving credit agreement.
The Company has available approximately $95.0 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, 1996 and 1995, borrowings on these
credit facilities totaled $45.0 million and $10.0 million.
Senior long-term debt consisted of the following at December 31:
(Dollars in millions) 1996 1995
7.0% Notes due through 1996 $ - $ 0.3
7.0% Notes due through 1998, net of discount based on imputed
interest rate of 10.88% 1.0 1.8
Variable rate note due 1998 15.0 15.0
3.9% Notes due through 1999, net of discount based on imputed
interest rates of 9.15% - 10.6% 4.7 6.3
5.75% - 6.875% Notes due through 2000, net of discount based on
imputed interest rates of 9.75% - 11.4% 6.7 8.4
6.9% - 9.4% Notes due through 2001 54.1 69.8
5.0% - 8.375% Retail medium term notes due through 2011 76.5 84.5
5.48% - 13.55% Medium term notes due through 2017 960.2 773.8
Capital lease obligations due through 2008 475.9 246.4
---------------------------------
$ 1,594.1 $ 1,206.3
=================================
Subordinated long-term debt consisted of the following at December 31:
(Dollars in millions) 1996 1995
9.26% Note due 1996 $ - $ 5.0
12.35% Note due 1996 - 10.0
5.48% - 8.31% Medium term notes due through 2004 94.8 104.7
---------------------------------
$ 94.8 $ 119.7
=================================
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. The Company believes it has no market
rate risk as the interest rate swaps are matched with specific debt.
Counterparties to the interest rate swap contracts are major financial
institutions and credit loss from counterparty non-performance is not
anticipated. At December 31, 1996, the Company had interest rate swap agreements
outstanding as follows:
Contract Notional
(Dollars in millions) Maturity Principal Receive Rate Pay Rate
Capital lease obligations 2006 - 2008 $ 399.9 Floating(1) 6.65% - 7.599%
Medium term notes 1997 20.0 Floating(1) 6.65%
Medium term notes 2000 - 2001 50.0 6.83% - 8.61% Floating(1)
- -------------
(1) Floating rates are based on LIBOR or Federal Funds.
As of December 31, 1996, $55.1 million of senior long-term debt was
collateralized by equipment. This debt is composed of the 7.0% Notes due through
1998 and the 6.9% - 9.4% Notes due through 2001.
Payments required on long-term debt and capital lease obligations during the
years ending December 31 are as follows:
Long-Term Capital
(Dollars in millions) Debt Leases
1997 $ 176.8 $ 72.1
1998 228.3 72.1
1999 204.8 69.3
2000 137.8 87.8
2001 142.8 67.5
2002 and thereafter 327.6 347.3
-------------------------------------
1,218.1 716.1
Deferred debt expenses (5.1) (0.5)
Imputed interest - (239.7)
-------------------------------------
$ 1,213.0 $ 475.9
=====================================
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, $68.4 million of
the Company's income retained for growth was available for dividends at December
31, 1996.
Interest payments totaled $113.9 million in 1996, $99.2 million in 1995 and
$110.8 million in 1994.
Note 8 -- Commitments and Contingencies
On November 1, 1996, The Allen Austin Harris Group, Inc. ("Plaintiff") filed a
complaint in the Superior Court of the State of California, County of Alameda,
against the Company, McDonnell Douglas, McDonnell Douglas Aerospace - Middle
East Limited and the Selah Group, Inc. (the "Defendants"). The Plaintiff, which
had hoped to establish a manufacturing plant abroad with various assistance from
the Defendants, seeks more than $57.0 million in alleged damages (primarily
consisting of lost profits) based on various theories. The Company believes it
has meritorious defenses to all of the allegations and that the litigation will
have no material adverse effect on the Company's earnings, cash flow or
financial condition.
A number of legal proceedings and claims are pending or have been asserted
against the Company. A substantial number of such legal proceedings and claims
are covered by third parties, including insurance companies. The Company
believes that the final outcome of such proceedings and claims will not have a
material adverse effect on its earnings, cash flow, or financial position.
Trans World Airlines, Inc. "(TWA") accounted for $249.5 million (9.5% of total
Company portfolio) and $279.9 million (14.1% of total Company portfolio) at
December 31, 1996 and 1995. TWA continues to operate under a reorganization
plan, confirmed by the United States Bankruptcy Court in 1995, that restructured
its indebtedness and leasehold obligations to its creditors. In addition, TWA
continues to face financial and operational challenges due in part to an
airliner crash in July 1996 and turnover of key management, which occurred
during 1996. McDonnell Douglas provides guaranties to the Company under the
various lease agreements between the Company and TWA. At December 31, 1996, the
maximum aggregate coverage under such guaranties was $45.6 million. In addition,
McDonnell Douglas provides supplemental guaranties in favor of the Company for
up to an additional $10.0 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 in March 1998, but may be extended
under certain limited circumstances. The reorganization plan and TWA's current
financial condition have not had and, assuming TWA's financial condition does
not further deteriorate, are not expected to have a material adverse effect on
the Company's earnings, cash flow, or financial position.
A United States based operator of commuter aircraft is in arrears in the payment
of rent under the lease of two Embraer Brasilia commuter aircraft. The airline
has stated that it will submit to the Company a proposal for repayment of the
delinquent sums. The net asset value of the aircraft leased to this airline at
December 31, 1996, totaled $14.4 million. The Company does not expect to suffer
a material adverse impact on its earnings, cash flow, or financial condition on
the account of this transaction.
At December 31, 1996 and 1995, the Company had commitments to provide leasing
and other financing totaling $76.6 million and $116.6 million.
In conjunction with prior asset dispositions, at December 31, 1996, the Company
is subject to a maximum recourse of $28.5 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, 1996, the Company had guaranteed the repayment of $7.0
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 for all office leases
under operating lease agreements in 1996, 1995 and 1994 totaled $0.3 million,
$0.9 million and $1.1 million. At December 31, 1996, the minimum future rental
commitments under these noncancelable leases payable over the remaining lives of
the leases aggregate $1.8 million.
Note 9 -- Transactions with McDonnell Douglas and MDFS
Accounts with McDonnell Douglas and MDFS consisted of the following at December
31:
(Dollars in millions) 1996 1995
Note receivable $ 1.7 $ 14.6
Federal income tax receivable 6.7 0.7
State income tax payable (3.5) (0.7)
Other receivables (payables) (4.9) 3.9
------------------------------------
$ - $ 18.5
====================================
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 periods up to 30 days at a market rate of interest. Under these
arrangements, there were no outstanding balances at December 31, 1996 and 1995.
Under a similar arrangement, the Company may borrow from MDFS and MDFS and its
subsidiaries may borrow from the Company, funds for periods up to 30 days at the
Company's cost of funds for short-term borrowings. Under these arrangements,
borrowings of $20.3 million and $3.7 million were outstanding at December 31,
1996 and 1995.
At December 31, 1996 and 1995, the Company had a note receivable from McDonnell
Douglas Realty Company, a wholly owned subsidiary of McDonnell Douglas, of $1.7
million and $14.6 million. The note is payable on demand and accrues interest at
a rate equal to a market rate of interest.
During 1995, the Company sold, at net book value, McDonnell Douglas aircraft
subject to direct finance leases to MDFS totaling $60.1 million.
During 1996, 1995 and 1994, the Company purchased aircraft subject to leases
from McDonnell Douglas in the amount of $501.9 million, $276.8 million and
$227.1 million, respectively. During 1996, 1995 and 1994, the Company recorded
operating income from McDonnell Douglas relating to financings aggregating $14.9
million, $16.2 million and $14.8 million, respectively.
At December 31, 1996 and 1995, $470.2 million and $285.2 million of the
commercial aircraft financing portfolio was guaranteed by McDonnell Douglas.
Fees related to these guaranties that were paid to McDonnell Douglas totaled
$1.6 million, $1.9 million and $0.9 million in 1996, 1995 and 1994,
respectively. During 1996, 1995 and 1994, the Company collected $2.1 million,
$0.5 million and $1.7 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, 1996 and 1995.
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 attributable to the
Company's employees which are included with other McDonnell Douglas charges for
support services and reflected in operating expenses. McDonnell Douglas charges
for services provided during 1996, 1995 and 1994 totaled $1.3 million, $1.1
million and $0.9 million, respectively. Additionally, the Company was
compensated by certain affiliates for a number of support services, which are
netted against operating expenses, amounting to $0.9 million, $1.2 million and
$0.2 million in 1996, 1995 and 1994, respectively.
Note 10 -- 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 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 The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
Notes Receivable Fair values for variable rate notes that reprice frequently and
with no significant change in credit risk are based on carrying values. The fair
values of fixed rate notes are estimated in discounted cash flow analyses, with
the use of interest rates currently offered on loans with similar terms to
borrowers of similar credit quality.
Short and Long-Term Debt Carrying amounts of borrowings under the short-term
revolving credit agreements approximate their fair value. The fair values of
long-term debt, excluding capital lease obligations, are estimated according to
public quotations or discounted cash flow analyses, which are based on current
incremental borrowing rates for similar types of borrowing arrangements.
Interest Rate Hedges The fair values of the Company's interest rate swaps are
based on quoted market prices of comparable instruments.
Financing Commitments Risks associated with changes in interest rates are
minimized during the commitment term because the rates are set at the
date of funding based on current market conditions, the fair value of the
underlying collateral and the credit worthiness of the customers. As a
result, the fair value of these financings is expected to equal the amounts
funded.
The notional amounts, carrying amounts and estimated fair values of the
Company's financial instruments at December 31 were as follows:
1996 1995
------------------------------------------------------------------------
Assets (Liabilities) Assets (Liabilities)
------------------------- ------------------------
Notional Carrying Fair Notional Carrying Fair
(Dollars in millions) Amount Amount Value Amount Amount Value
ASSETS
Cash and cash equivalents $ - $ 16.9 $ 16.9 $ - $ 12.6 $ 12.6
Notes receivable - 308.9 317.0 - 263.5 270.0
- -
LIABILITIES
Short-term notes payable to banks - (161.2) (161.2) - (13.7) (13.7)
Long-term debt:
Senior, excluding capital lease
obligations - (1,136.5) (1,154.3) - (976.8) (1,025.7)
Subordinated - (97.8) (99.2) - (123.5) (127.8)
OFF BALANCE SHEET INSTRUMENTS
Commitments to extend credit (76.6) - (76.6) (116.6) - (116.6)
Interest rate swaps 469.9 - (3.1) 208.4 - (11.8)
Note 11 -- Segment Information and Concentration of Credit Risk
The Company's financing and leasing portfolio consisted of the following at
December 31:
(Dollars in millions) 1996 1995
Commercial aircraft financing:
MDC aircraft financing $ 1,617.5 61.5% $ 1,225.1 61.6%
Other commercial aircraft financing 197.4 7.5 180.6 9.1
--------------------------------------------------------------
1,814.9 69.0 1,405.7 70.7
--------------------------------------------------------------
Commercial equipment leasing:
Transportation equipment 109.1 4.2 58.3 2.9
Printing and publishing 57.7 2.2 35.7 1.8
Transportation services 57.2 2.2 69.3 3.5
Other 545.8 20.7 339.1 17.0
--------------------------------------------------------------
769.8 29.3 502.4 25.2
--------------------------------------------------------------
Other 44.9 1.7 80.6 4.1
--------------------------------------------------------------
Total portfolio $ 2,629.6 100.0% $ 1,988.7 100.0%
==============================================================
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 $316.1
million (12.0% of total Company portfolio) and $220.4 million (11.1% of total
Company portfolio) at December 31, 1996 and 1995. The second largest commercial
aircraft financing customer accounted for $279.4 million (10.6% of total Company
portfolio) and $182.7 million (9.2% of total Company portfolio) at December 31,
1996 and 1995. The five largest commercial aircraft financing customers
accounted for $1,172.4 million (44.6% of total Company portfolio) and $865.2
million (43.5% of total Company portfolio) at December 31, 1996 and 1995. At
December 31, 1996 and 1995, there were no significant concentrations by customer
within the commercial equipment leasing portfolio.
In 1996, 1995 and 1994, a single aircraft financing customer accounted for
18.0%, 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 ending December 31 is as follows:
(Dollars in millions) 1996 1995 1994
Operating income:
Commercial aircraft financing $ 145.2 $ 123.5 $ 120.9
Commercial equipment leasing 68.1 52.7 49.6
Other 7.5 12.4 15.6
Corporate 0.7 2.0 0.7
-------------------------------------------------
$ 221.5 $ 190.6 $ 186.8
=================================================
Income (loss) before taxes on income:
Commercial aircraft financing $ 55.2 $ 36.2 $ 26.6
Commercial equipment leasing 25.4 27.2 27.7
Other 0.7 1.4 (5.3)
Corporate (6.4) (4.5) (7.9)
-------------------------------------------------
$ 74.9 $ 60.3 $ 41.1
=================================================
Identifiable assets at December 31:
Commercial aircraft financing $ 1,844.6 $ 1,443.6 $ 1,364.1
Commercial equipment leasing 767.0 507.3 382.7
Other 53.2 97.3 160.2
Corporate 1.8 1.4 22.6
-------------------------------------------------
$ 2,666.6 $ 2,049.6 $ 1,929.6
=================================================
Depreciation expense - equipment under operating leases:
Commercial aircraft financing $ 35.1 $ 26.2 $ 17.2
Commercial equipment leasing 22.5 22.0 22.2
Other - - 0.5
-------------------------------------------------
$ 57.6 $ 48.2 $ 39.9
=================================================
Equipment acquired for operating leases, at cost:
Commercial aircraft financing $ 196.9 $ 85.2 $ 15.7
Commercial equipment leasing 107.0 70.5 24.3
-------------------------------------------------
303.9 $ 155.7 $ 40.0
=================================================
Operating income from financing of assets located outside the United States
totaled $45.5 million, $45.7 million and $41.7 million in 1996, 1995 and 1994,
respectively.
McDonnell Douglas Finance Corporation and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
(Dollars in millions)
Balance Charged
Allowance for at to Balance
Losses on Beginning Costs at End
Financing of and of
Receivables Year Expenses Other Deductions(1) Year
1996 $ 42.3 $ 14.2 $ (1.9) $ (6.0) $ 48.6
1995 $ 40.7 $ 12.2 $ - $ (10.6) $ 42.3
1994 $ 35.6 $ 9.9 $ 0.1 $ (4.9) $ 40.7
- -----------------------------
(1) Write-offs net of recoveries
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
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..................................23
Consolidated Balance Sheet at December 31, 1996 and 1995........24
Consolidated Statement of Income and Income Retained for
Growth for the Years Ended December 31, 1996,
1995and 1994..................................................25
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994..............................26
Notes to Consolidated Financial Statements......................27
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts..................40
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 (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, incorporated by reference to
Exhibit 4(c) to the Form 8-K of the Company dated as of August 22,
1983.
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, incorporated by reference to
Exhibit 4 to the Form S-3 Registration Statement of the Company,
as filed with the SEC on April 24, 1987.
4.10 Form of Series VII Medium Term Note, incorporated by reference to
Exhibit 4 to the Form S-3 Registration
Statement of the Company, as filed with the SEC on April 24, 1987.
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, 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, incorporated herein by reference
to Exhibit 10.3 to the Company's Form 10-K for the year ended
December 31, 1989.
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 Amendment No. 1 to Supplemental Guaranty Agreement, dated as
of March 28, 1996.
10.6 Guaranty Amendment Agreement, dated as of June 28, 1996, by and
between the Company and McDonnell Douglas.
10.7 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.
10.8 Amendment No. 1 to Supplemental Guaranty Agreement, dated as of
March 28, 1996, between the Company and McDonnell Douglas.
10.9 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.
10.10 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.
10.11 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
reference to Exhibit 10 to the Company's Form 10-Q for the
quarterly period ended September 30, 1995.
10.12 Amendment No. 2, dated as of August 16, 1996, to Credit
Agreement, dated as of September 29, 1994, among the Company,
MDFS and the banks listed therein, incorporated by reference to
Exhibit 10 to the Company's Form 10-Q for the quarterly period
ended September 30, 1996.
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
None.
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 31, 1997 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 March 31, 1997
- ---------------------------------- --------------
James F. Palmer Chairman and Director
/s/ THOMAS J. MOTHERWAY
- ----------------------------------
Thomas J. Motherway President and Director March 31, 1997
--------------
(Principal Executive Officer)
/s/ STEVEN W. VOGEDING
- ----------------------------------
Steven W. Vogeding Vice President and March 31, 1997
Chief Financial Officer --------------
(Principal Financial Officer)
/s/ F. MARK KUHLMANN March 31, 1997
- ---------------------------------- --------------
F. Mark Kuhlmann Director
- ---------------------------------- --------------
Michael M. Sears Director
/s/ MAURA R. MIZUGUCHI March 31, 1997
- ---------------------------------- --------------
Maura R. Mizuguchi Controller
(Principal Accounting Officer)
/s/ DANIEL O. ANDERSON March 31, 1997
- ---------------------------------- --------------
Daniel O. Anderson Vice President -
Operations and Director