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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, 1998
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BOEING CAPITAL 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, 1999, there were 50,000 shares of the Company's common stock
outstanding.
Registrant meets the conditions set forth in General Instruction I(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
Item 1. Business.....................................................3
Item 2. Properties..................................................17
Item 3. Legal Proceedings...........................................17
Item 4. Submission of Matters to a Vote of Security Holders *
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.....................................................19
Item 6. Selected Financial Data.....................................20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................21
Item 8. Financial Statements and Supplementary Data.................25
Item 9. Changes in and Disagreements with Accountants on Accounting
1and Financial Disclosure...................................44
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.
.............................................................45
Signatures...................................................49
Exhibits.....................................................50
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*Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Part I
Item 1. Business
General
Boeing Capital Corporation (formerly McDonnell Douglas Finance Corporation)
(together with its subsidiaries the "Company") is a wholly-owned subsidiary of
Boeing Capital Services Corporation ("BCSC"), a wholly-owned subsidiary of
McDonnell Douglas Corporation ("McDonnell Douglas"), which in turn is
wholly-owned by The Boeing Company ("Boeing"). 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 and financing. The Company's strategy is to
generate and participate in finance transactions in which the Company's
structuring and analysis can provide high returns on its invested equity.
Currently, the commercial aircraft financing group is active in providing lease
and debt financing to domestic and international airlines, and the Company is
active in providing lease and debt financing to a broad range of commercial and
industrial customers. At December 31, 1998, the Company had 69 employees.
On August 1, 1997, the Boeing-McDonnell Douglas merger was consummated pursuant
to an Agreement and Plan of Merger dated as of December 14, 1996, among Boeing,
West Acquisition Corp., a wholly-owned subsidiary of Boeing ("Sub"), and
McDonnell Douglas (the "Merger Agreement"). Under the terms of the Merger
Agreement, Sub was merged into McDonnell Douglas, with McDonnell Douglas
surviving as a wholly-owned subsidiary of Boeing.
The many possible ramifications of strategic decisions to be made by Boeing with
respect to the Company are currently unknown and, therefore, cannot be
quantified at this time. Boeing is actively conducting a review of the
operations and the strategic value of the Company, which review could lead to a
decision to divest all or part of the Company's assets or to sell the Company's
stock, presently held indirectly by Boeing.
Boeing has announced that it will not produce MD-80 and MD-90 aircraft after
early 2000. Boeing has also stated that it plans to phase out production of the
MD-11 aircraft, with final deliveries now scheduled for 2001. The Company's
commercial aircraft portfolio as of December 31, 1998 included 32 MD-80s, three
MD-90s and five MD-11s, representing an aggregate of $963.8 million in net
asset value (34.4% of total Company portfolio). The Company's commercial
aircraft portfolio as of December 31, 1997 included 33 MD-80s, three MD-90s and
seven MD-11s, representing an aggregate of $1,176.1 million in net asset
value (43.6% of total Company portfolio). The Company periodically reviews the
carrying and residual values of all aircraft in its portfolio. Such reviews
include the effects, if any, of the foregoing announcements as they become
known or can be reasonably estimated. While management believes that current
booked residual values are conservative, significant declines in market value
could impact the gain or loss on disposition of these aircraft.
The Company now operates in principally two segments: commercial aircraft
financing and commercial equipment leasing and financing ("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. At December 31, 1998 and 1997, the portfolio
balances for non-core businesses totaled $1.4 million and $12.2 million,
respectively.
Information on the Company's principal segments is included in the following
tables.
New Business Volume
Years ended December 31,
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(Dollars in millions) 1998 1997 1996 1995 1994
Commercial aircraft financing $ 201.6 $ 176.3 $ 475.3 $ 349.7 $ 117.9
Commercial equipment leasing 491.0 414.8 392.0 241.1 84.1
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$ 692.6 $ 591.1 $ 867.3 $ 590.8 $ 202.0
============================================================================
Portfolio Balances
December 31,
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(Dollars in millions) 1998 1997 1996 1995 1994
Commercial aircraft financing $ 1,573.5 $ 1,711.5 $ 1,814.9 $ 1,405.7 $ 1,333.0
Commercial equipment leasing 1,225.0 976.6 769.8 502.4 369.4
----------------------------------------------------------------------------
$ 2,798.5 $ 2,688.1 $ 2,584.7 $ 1,908.1 $ 1,702.4
============================================================================
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. A substantial
majority of the value of the commercial aircraft portfolio is derived from
aircraft manufactured by McDonnell Douglas. The Company's strategy is to
generate and participate in finance transactions in which the Company's
structuring and analysis can provide high returns on its invested equity.
Currently, the commercial aircraft financing group is active in providing lease
and debt financing to domestic and international airlines.
The Company has not been involved in the financing of any new Boeing/McDonnell
Douglas aircraft subsequent to the Boeing-McDonnell Douglas merger (except for
one unusual instance where the Company provided financing for one Boeing 737
aircraft in response to a third party's request). Under Boeing's strategy (which
is currently under review), the Company does not expect Boeing to provide a
material amount of new aircraft financing opportunities. In addition to the new
Boeing 737 discussed above, the Company has financed seven used Boeing 737
aircraft, two used Boeing 767 aircraft and one used Boeing 757 aircraft
subsequent to the Boeing-McDonnell Douglas merger. It is the present intent of
the Company's management to achieve more balance in the commercial aircraft
portfolio between Boeing and McDonnell Douglas aircraft.
Portfolio balances for the Company's commercial aircraft financing segment are
summarized as follows:
Commercial Aircraft Portfolio by Aircraft Type
December 31,
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(Dollars in millions) 1998 1997 1996 1995 1994
Boeing/McDonnell Douglas aircraft
financing:
Finance leases $ 803.3 $ 964.9 $ 1,132.6 $ 857.4 $ 748.2
Operating leases 513.3 495.2 402.0 256.8 197.8
Notes receivable 82.9 61.9 82.9 110.9 194.8
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1,399.5 1,522.0 1,617.5 1,225.1 1,140.8
-------------------------------------------------------------------------
Other commercial aircraft financing:
Finance leases 131.6 133.3 136.9 126.1 125.2
Operating leases 30.4 51.9 56.0 49.6 43.1
Notes receivable 12.0 4.3 4.5 4.9 23.9
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174.0 189.5 197.4 180.6 192.2
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$ 1,573.5 $ 1,711.5 $ 1,814.9 $ 1,405.7 $ 1,333.0
=========================================================================
Commercial Aircraft Portfolio by Product Type
December 31,
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(Dollars in millions) 1998 1997 1996 1995 1994
Aircraft leases:
Finance leases
Domestic $ 786.9 $ 863.1 $ 950.0 $ 776.2 $ 653.3
Foreign 148.0 235.1 319.5 207.3 220.1
Operating leases
Domestic 357.9 319.2 357.2 183.5 161.9
Foreign 185.8 227.9 100.8 122.9 79.0
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1,478.6 1,645.3 1,727.5 1,289.9 1,114.3
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Aircraft related notes receivable:
Domestic obligors 33.5 2.2 22.6 31.2 53.4
Foreign obligors 61.4 64.0 64.8 84.6 165.3
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94.9 66.2 87.4 115.8 218.7
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$ 1,573.5 $ 1,711.5 $ 1,814.9 $ 1,405.7 $ 1,333.0
=========================================================================
At December 31, 1998, the Company's commercial aircraft portfolio was comprised
of finance leases to 27 customers (23 domestic and four foreign) with a carrying
amount of $934.9 million (33.4% of total Company portfolio), notes receivable
from five customers (two domestic and three foreign) with a carrying amount of
$94.9 million (3.4% of total Company portfolio) and operating leases to 16
customers (12 domestic and four foreign) with a carrying amount of $543.7
million (19.4% of total Company portfolio).
At December 31, 1998, 50.0% of the Company's total portfolio consisted of
financings related to Boeing/McDonnell Douglas aircraft, compared with 56.4% and
61.5% in 1997 and 1996, respectively.
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 $895.4 million
(32.0% of total Company portfolio) and $994.4 million (36.8% of total Company
portfolio) at December 31, 1998 and 1997, respectively.
The Company's largest customer, Federal Express Corporation ("FedEx"),
accounted for $303.0 million (10.8% of total Company portfolio) and $309.7
million (11.5% of total Company portfolio) at December 31, 1998 and 1997,
respectively. On June 26, 1998, FedEx gave notice to the Company of its
intention to terminate early (in late 1999) two lease agreements covering
MD-11 freighter aircraft which FedEx leases from the Company. Even if the
leases are in fact terminated early, the Company does not anticipate any
material adverse effect on its earnings, cash flow or financial position
taking into account current demand for the aircraft, a guaranty from
McDonnell Douglas and certain other contractual rights including payments due
to the Company upon early termination, as well as a commitment from another
airline to lease the aircraft for a pre-determined rental amount.
The Company's second largest customer, World Airways, Inc. ("World"),
accounted for $176.4 million (6.3% of total Company portfolio) and $183.5
million (6.8% of total Company portfolio) at December 31, 1998 and 1997,
respectively. World experienced losses in 1998 and its cash balances have
fallen to relatively low levels. Also, Worldcorp Inc., the majority owner of
World, has recently made a "prepackaged" filing under Chapter 11 of the U.S.
bankruptcy code. With respect to the existing lease agreements between World
and the Company, World has requested that the Company consider a reduction
in rentals, elimination of maintenance reserve payments and conversion of
the subject two MD-11 aircraft to a freighter configuration. The Company is
studying these requests and has concluded that any resulting restructuring
of these lease transactions, taking into account a guaranty from McDonnell
Douglas, is not expected to have a material adverse effect on the Company's
earnings, cash flow or financial position.
Trans World Airlines, Inc. ("TWA"), the Company's third largest customer,
accounted for $163.3 million (5.8% of total Company portfolio) and $196.6
million (7.3% of total Company portfolio) at December 31, 1998 and 1997,
respectively. In 1998, 1997 and 1996, TWA accounted for 13.6%, 16.8% and
18.0%, respectively, of the Company's operating income; no other customer
accounted for more than 10% of the Company's operating income. TWA faces
significant financial and operational challenges and, until recently,
operated under a reorganization plan confirmed by the United States
Bankruptcy Court in 1995. McDonnell Douglas provides guaranties to the
Company for certain obligations of TWA under the various lease agreements
between the Company and TWA. At December 31, 1998, the maximum aggregate
coverage under such guaranties was $32.9 million. As of the date hereof, TWA
is current on its obligations to the Company. If, however, TWA were to
default on its obligations to the Company, this could have a material adverse
effect on the Company's earnings, cash flow or financial position.
In July 1998, the Company terminated early a lease agreement covering one
used DC-10-30 aircraft. The Company has repossessed such aircraft and has
been remarketing it in a currently weak market for this type of aircraft.
Taking into account a guaranty from McDonnell Douglas, this transaction is
not expected to have a material adverse effect on the Company's earnings,
cash flow or financial position.
The Company had leased six Embraer EMB-120 aircraft to Westair. As a result
of Westair's cessation of operations at the end of May 1998, the lease
agreements for such aircraft have been terminated and the aircraft have been
returned to the Company. The Company has been remarketing these aircraft
(along with two other used EMB-120s returned from another airline). Although
the market for EMB-120s is currently weak, the Company does not expect this
transaction to have a material adverse effect on the Company's earnings,
cash flow or financial position.
The $100.0 million used aircraft purchase bridge facility made available by
the Company to AirTran Airlines ("AirTran"), formerly ValuJet Airlines, Inc.,
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 AirTran of
the first scheduled new Boeing 717-200 (formerly 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, 1998 or 1997.
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 Commercial 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.
Boeing has announced that it will not produce MD-80 and MD-90 aircraft after
early 2000. Boeing has also stated that it plans to phase out production of
the MD-11 aircraft with final deliveries now scheduled for 2001. The
Company's commercial aircraft portfolio as of December 31, 1998 included 32
MD-80s, three MD-90s and five MD-11s, representing an aggregate of $963.8
million in net asset value (34.4% of total Company portfolio). The Company's
commercial aircraft portfolio as of December 31, 1997 included 33 MD-80s,
three MD-90s and seven MD-11s, representing an aggregate of $1,176.1
million in net asset value (43.6% of total Company portfolio). The Company
periodically reviews the carrying and residual values of all aircraft in its
portfolio. Such reviews include the effects, if any, of the foregoing
announcements as they become known or can be reasonably estimated. While
management believes that current booked residual values are conservative,
significant declines in market value could impact the gain or loss on
disposition of these aircraft.
Results in 1998 for Asia-Pacific airlines were mixed. Recessions are now
under way throughout Asia, impacting the economies of Japan, Malaysia, the
Philippines, Hong Kong, Singapore, Indonesia, Thailand and South Korea. Air
travel declined in a number of regional markets. Passenger load factors
declined and some airlines reported net losses. With growth in the region
lower than past forecasts, airlines, including those in China, are
reassessing the number and timing of aircraft contracted to deliver during
the next several years. Except for the lease of the two Boeing 737 aircraft
leased to Jet Airways (India) Pvt. Ltd. discussed in "Relationship With
Boeing and McDonnell Douglas," the Company has no commercial aircraft leased
to airlines in the Asia-Pacific region.
For further discussion on the commercial jet aircraft market and the
airline industry, see "Competition and Economic
Factors."
o Commercial 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,
1998, the Company owned or participated in the ownership of 132 leased
commercial aircraft, a majority of which were manufactured by McDonnell
Douglas.
o Factors Affecting Commercial Aircraft Financing Volume
The Company's commercial aircraft group has historically derived the majority
of its new business volume by financing new McDonnell Douglas aircraft.
Following the Boeing-McDonnell Douglas merger, this source of new business
has not been available to the Company and, accordingly, the Company has not
financed any new Boeing/McDonnell Douglas aircraft (except for one unusual
instance where the Company provided financing for one Boeing 737 aircraft in
response to a third party's request). Under Boeing's strategy (which is
currently under review), the Company does not expect Boeing to provide a
material amount of new aircraft financing opportunities. See "Relationship
with Boeing and McDonnell Douglas."
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 anticipates continued fluctuations in the volume of its aircraft
financing transactions. At December 31, 1998, 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, 1998.
See "Competition and Economic Factors."
The following table lists information on new business volume for the
Company's commercial aircraft financing segment:
Years ending December 31,
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(Dollars in millions) 1998 1997 1996 1995 1994
Boeing/McDonnell Douglas aircraft
financing volume:
Finance leases $ 78.3 $ 7.1 $ 234.1 $ 220.6 $ 53.0
Operating leases 75.3 146.5 196.9 81.9 15.7
Notes receivable 25.5 18.2 24.2 36.2 41.3
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179.1 171.8 455.2 338.7 110.0
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Other commercial aircraft
financing volume:
Finance leases 22.5 4.5 20.1 7.7 7.9
Operating leases - - - 3.3 -
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22.5 4.5 20.1 11.0 7.9
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$ 201.6 $ 176.3 $ 475.3 $ 349.7 $ 117.9
===========================================================================
In 1998, $143.1 million of the $179.1 million in Boeing/McDonnell Douglas
aircraft financing volume related to Boeing aircraft. There are no Boeing
commercial aircraft in the Company's portfolio from transactions prior to
1997. There are no Airbus aircraft in the Company's portfolio.
o Commercial Aircraft Financing Guaranties
At December 31, 1998, the Company had $319.7 of guaranties in its favor with
respect to its commercial aircraft financing portfolio relating to
transactions with a carrying amount of $881.6 million (56.0% 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 $ 206.9 $ 77.6 $ 284.5
Other 23.2 12.0 35.2
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$ 230.1 $ 89.6 $ 319.7
===========================================================
The Company has no reason to believe that the amounts guaranteed by McDonnell
Douglas will be ultimately uncollectible. See "Relationship with Boeing and
McDonnell Douglas."
Commercial Equipment Leasing and Financing Segment
The CEL group provides single-investor, tax-oriented lease financing, as well as
loans secured by equipment. In addition, the CEL group participates in senior
secured bank loans. CEL obtains its business primarily through direct
solicitation by its marketing personnel and maintains its principal operations
in Long Beach, California with marketing offices in Atlanta, Georgia; Chicago,
Illinois; and Detroit, Michigan. CEL specializes in leasing and financing of
commercial equipment such as executive aircraft, production equipment,
transportation equipment, printing equipment and other types of equipment which
it believes will maintain strong collateral and residual values. The term is
generally between three and ten years and transaction sizes usually range
between $2.0 million and $30.0 million.
Portfolio balances for the Company's CEL segment are summarized as follows:
December 31,
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(Dollars in millions) 1998 1997 1996 1995 1994
Finance leases $ 430.1 $ 410.9 $ 361.7 $ 266.3 $ 216.8
Operating leases 345.5 375.1 231.5 169.1 133.4
Notes receivable 449.4 190.6 176.6 67.0 18.5
Preferred and preference stock - - - - 0.7
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$ 1,225.0 $ 976.6 $ 769.8 $ 502.4 $ 369.4
=========================================================================
o Factors Affecting CEL Volume
The particular portion of the commercial equipment leasing and financing
market in which the Company operates is highly competitive. However, in 1998,
CEL booked $491.0 million of new business volume, representing a $76.2
million increase (18.4%) over 1997 bookings. As shown in the table below, a
significant portion of the new CEL business volume in recent years has
consisted of secured loans rather than lease financings. Of the $491.0
million in new business volume for CEL in 1998, $36.7 million (7.5%)
represented business with foreign lessees or borrowers. In 1997, of the
$414.8 million in new business volume for CEL, $58.8 million (14.2%)
represented business with foreign lessees or borrowers. For a discussion of
additional risks associated with foreign financing, see "Cross-Border
Outstandings." At December 31, 1998, CEL's backlog of business was $163.3
million, compared to $79.7 million at December 31, 1997. The Company's
ability to compete in the commercial equipment leasing and financing market
is dependent to a significant extent upon its comparative borrowing costs
relative to competitors. The Company's borrowing costs increased in the
second half of 1998. See "Borrowing Operations."
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
The following lists information on new business volume for the Company's CEL
segment:
Years ended December 31,
----------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996 1995 1994
Finance leases $ 91.8 $ 109.5 $ 160.9 $ 102.0 $ 53.9
Operating leases 81.9 199.7 107.0 70.5 24.3
Notes receivable 317.3 105.6 124.1 68.6 5.9
----------------------------------------------------------------------------------
$ 491.0 $ 414.8 $ 392.0 $ 241.1 $ 84.1
==================================================================================
o Factors Affecting the CEL Portfolio
The Company's CEL portfolio is diversified among executive aircraft,
production equipment, transportation equipment, printing equipment, and other
equipment types. Executive aircraft represent the highest concentration,
accounting for $326.2 million (11.7% of total Company portfolio) and $342.3
million (12.7% of total Company portfolio) at December 31, 1998 and 1997,
respectively. At December 31, 1998 and 1997, no single CEL customer
represented a significant portion of the Company's total portfolio. Executive
aircraft financing, as well as the rest of the CEL portfolio, is dependent in
part upon general economic conditions which may affect the profitability of
the Company's customers and residual value of the equipment financed by the
CEL group. The Company believes that realizable values at lease maturity for
its commercial equipment are generally likely to remain above the values
actually booked, but this is subject to many uncertainties including economic
conditions.
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.
Approximately 17.9% of the total Company portfolio consisted of amounts due from
customers outside the United States. Substantially all of these amounts are
payable in U.S. dollars, and, in management's opinion, related risks are
adequately covered by guaranties and allowance for losses. Overall, the Company
has not experienced materially adverse financial consequences as a result of
sales and financing activities outside the United States. 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, 1998, 1997
and 1996:
December 31,
-----------------------------------------------------------------
Finance Leases Notes Operating
(Dollars in millions) Receivable Leases Total
Country
1998
Mexico $ 132.8 $ 48.0 $ - $ 180.8
India - - 48.6 48.6
Italy - 2.6 34.9 37.5
Sweden - - 50.1 50.1
Spain - - 36.4 36.4
-----------------------------------------------------------------
$ 132.8 $ 50.6 $ 170.0 $ 353.4
-----------------------------------------------------------------
1997
Indonesia $ 110.5 $ - $ - $ 110.5
Mexico 50.1 54.1 - 104.2
Sweden - - 55.1 55.1
India - - 50.4 50.4
Italy - 3.5 39.8 43.3
Spain - - 39.4 39.4
United Kingdom 10.9 - 28.2 39.1
-----------------------------------------------------------------
$ 171.5 $ 57.6 $ 212.9 $ 442.0
=================================================================
1996
Indonesia $ 120.8 $ - $ - $ 120.8
Mexico 27.0 31.2 13.2 71.4
Italy - - 44.4 44.4
-----------------------------------------------------------------
$ 147.8 $ 31.2 $ 57.6 $ 236.6
=================================================================
At December 31, 1998, the Company had customer outstandings between 0.75% and 1%
of the Company's total assets in Canada and the United Kingdom, with net
carrying value amounts of $25.6 million and $25.1 million, respectively. At
December 31, 1997 and 1996, there were no countries in which customer
outstandings were 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, 1998:
(Dollars in millions) Domestic Foreign Total
-------------------------------------------------
Maturity Distribution
1999 $ 301.6 $ 29.8 $ 331.4
2000 201.3 30.0 231.3
2001 197.6 33.5 231.1
2002 185.3 28.1 213.4
2003 176.0 37.3 213.3
2004 and thereafter 920.9 162.0 1,082.9
-------------------------------------------------
$ 1,982.7 $ 320.7 $ 2,303.4
=================================================
Financing Receivables due 2000 and Thereafter
Fixed interest rates $ 1,494.6 $ 208.0 $ 1,702.6
Variable interest rates 186.5 82.9 269.4
-------------------------------------------------
$ 1,681.1 $ 290.9 $ 1,972.0
=================================================
Allowance for Losses on Financing Receivables and Credit Loss Experience
Analysis of Allowance for Losses on Financing Receivables
December 31,
---------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996 1995 1994
Allowance for losses on financing
receivables at beginning of year $ 55.9 $ 48.6 $ 42.3 $ 40.7 $ 35.6
Provision for losses 7.4 11.5 14.2 12.2 9.9
Write-offs, net of recoveries (2.5) (2.5) (6.0) (10.6) (4.9)
Other 1.3 (1.7) (1.9) - 0.1
===========================================================================
Allowance for losses on financing
receivables at end of year $ 62.1 $ 55.9 $ 48.6 $ 42.3 $ 40.7
===========================================================================
Allowance as percent of total receivables % % % % %
3.3 3.1 2.5 2.8 2.8
Net write-offs as percent of average receivables 0.1 % 0.1 % 0.3 % % 0.3 %
0.7
More than 90 days delinquent:
Amount of delinquent installments $ 0.5 $ 1.8 $ 2.1 $ 10.0 $ 2.8
Total receivables due from delinquent
obligors $ 6.7 $ 15.5 $ 23.4 $ 12.1 $ 43.2
Total receivables due from delinquent
obligors as a percentage of total
receivables 0.4 % 0.9 % 1.2 % 0.8 % 3.0 %
The portfolio at December 31, 1998 includes one CEL obligor and two airline
obligors to which payment extensions have been granted. At December 31, 1998,
payments so extended amounted to $1.2 million ($1.1 million airline-related),
and the aggregate carrying amount of the related receivables was $18.8 million
($15.5 million airline-related).
Receivable Write-offs, Net of Recoveries by Segment
CEL had $2.3 million in net write-offs (0.3% of CEL average receivables), while
commercial aircraft financing had no net write-offs of receivables for the year
ended December 31, 1998. The Company's primary operations had no net write-offs
of receivables for the year ended December 31, 1997.
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 $7.4 million and $11.5 million in 1998 and 1997, respectively, for
losses. The Company believes that the allowance for losses on financing
receivables is adequate at December 31, 1998 to cover potential losses in the
Company's total receivables. If, however, certain major customers defaulted and
the Company were forced to take possession of and dispose of significant amounts
of aircraft or equipment, losses in excess of the allowance could be incurred,
which would be charged directly against earnings.
The Company's receivable write-offs, net of recoveries, increased in 1998, as
compared to 1997, primarily attributable to certain CEL repossessions which
occurred in 1998.
Nonaccrual and Past Due Financing Receivables
Financing receivables accounted for on a nonaccrual basis consisted of domestic
financings of $13.0 million and $1.4 million at December 31, 1998 and 1997,
respectively. There were no foreign financing receivables on nonaccrual at
December 31, 1998 or December 31, 1997.
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 $0.2
million and $4.6 million at December 31, 1998 and 1997, respectively.
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 $240.0 million, reduced by borrowings of up to $16.0 million that
can be made by BCSC under this agreement. At December 31, 1998 and 1997, there
were no amounts outstanding under the revolving credit agreement. At December
31, 1998 and 1997, borrowings under commercial paper totaling $122.0 million and
$80.0 million, respectively, were supported by available unused commitments
under the revolving credit agreement. The Company also has available
approximately $85.0 million in uncommitted, short-term bank credit facilities.
On October 10, 1997, the Company filed with the Securities and Exchange
Commission ("Commission") a Form S-3 Registration Statement for a public shelf
registration of $1.2 billion of its debt securities (SEC File No. 333-37635). On
October 31, 1997, the Commission declared such Registration Statement to be
effective. Since October 1997, the Company has authorized the sale and issuance
from time to time at the Company's discretion of up to $900.0 million of such
debt securities in the form of the Company's Series X medium-term notes. As of
December 31, 1998, the Company had issued and sold $571.4 million in aggregate
principal amount of such notes, with $406.4 million of the notes being issued
during 1998 at interest rates ranging from 5.35% to 6.54% and with maturities
ranging from 10 months to 10 years.
During the second half of 1998, the Company's borrowing rates were increased by
virtue of a significant increase in the spreads required to be paid by the
Company over rates for comparable U.S. Treasury Notes. Such higher rates can
reasonably be expected to have a negative impact on the Company's
competitiveness as a financier on transactions where the Company is unable to
pass through to customers such increased rates. These increased borrowing
spreads and consequent higher interest rates were caused by a variety of
factors, including without limitation the Company's credit rating downgrade and
outlook change discussed below and the uncertainty of the Company's strategic
fit at Boeing, as well as general financial market conditions.
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
1998 $ 134.6 $ 1,646.2 $ 1,780.8
1997 114.0 1,606.2 1,720.2
1996 49.5 1,501.0 1,550.5
1995 71.4 1,183.6 1,225.0
1994 108.0 1,167.3 1,275.3
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
1998 5.83% 7.21% 7.12%
1997 5.72 7.34 7.25
1996 5.66 7.60 7.56
1995 6.34 8.19 8.12
1994 5.27 8.76 8.50
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.
On March 16, 1998, Moody's Investors Service ("Moody's") said that it upgraded
the ratings of the Company. The Company's senior unsecured debt rating was
raised to A3 from Baa2 and its subordinated debt rating was raised to Baa1 from
Baa3. The Company's commercial paper rating was raised to Prime-1 from Prime-2.
Moody's said these ratings increases consider, among other things, "the improved
and steady performance of Boeing Capital's business over the last several
years." Moody's stated that "Further rating considerations include uncertainty
regarding Boeing's long-term commitment to this business unit." Moody's noted
that "the strategic fit of Boeing Capital is unclear in Boeing's overall
strategy." The rating agency went on to say that "Boeing has not maintained a
finance subsidiary of its own in the past, but has preferred to keep its
customer financing exposure on its own balance sheet."
On September 15, 1998, Moody's placed Boeing and the Company's debt ratings on
review for possible downgrade. The current Moody's ratings for the Company's
senior unsecured debt, subordinated debt and commercial paper are A3, Baa1 and
Prime-1, respectively, and were confirmed on December 21, 1998.
On June 8, 1998, Standard & Poor's Corporation ("Standard & Poor's") announced
that it lowered its credit ratings on Boeing and the Company. The ratings of the
Company's senior unsecured debt and subordinated debt were lowered from AA to
AA- and AA- to A+, respectively. On December 3, 1998, Standard & Poor's
announced that it lowered its credit ratings again on Boeing and the Company.
The ratings of the Company's senior unsecured debt and subordinated debt were
lowered from AA- to A+ and A+ to A, respectively. The outlook for the Company
was deemed to be "developing." Standard & Poor's stated that ratings "could be
raised if [the Company] is retained as a continuing operation of Boeing Co.
Ratings could be lowered if [the Company] is divested to a weaker entity."
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 "Commercial Equipment Leasing
Segment - Factors Affecting CEL Volume," "Relationship With Boeing and McDonnell
Douglas" and "Borrowing Operations." Competitive factors also include, among
other things, the Company's ability to be relatively flexible in its financing
arrangements with new and existing customers. 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 is
also dependent upon, among other factors, the capital equipment requirements of
United States and foreign businesses and the availability of capital.
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. This relationship has been
materially changed as a result of the Boeing-McDonnell Douglas merger and under
Boeing's strategy (which is currently under review), the Company does not expect
Boeing to provide a material amount of new aircraft financing opportunities. See
"Relationship With Boeing and 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. See
"Commercial Aircraft Financing Segment."
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 and regulations 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. Additionally, legislation and
regulations may in the future prohibit use in certain parts of the world (e.g.,
Europe) of certain types of aircraft which have been upgraded by hushkits to
meet the more stringent Stage 3 requirements. 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, 1998, the Company's carrying amount of Stage 2 aircraft totaled $22.1
million (1.4% 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. For
a discussion of the effects of the upcoming discontinuance of MD-80, MD-90 and
MD-11 aircraft, see "Commercial Aircraft Financing Segment - Factors Affecting
Current Commercial Aircraft Market Conditions."
For the five-year period 1994-1998, the average annual growth rate for worldwide
passenger traffic was approximately 6.0%. Boeing's 20-year forecast of the
average long-term growth rate in passenger traffic is approximately 4.7%
annually, based on projected average worldwide annual economic real growth of
2.9% over the 20-year period.
Based on global economic growth projections over the long term, and taking into
consideration increasing utilization levels of the worldwide aircraft fleet and
requirements to replace older aircraft, Boeing projects the total commercial jet
aircraft market over the next 20 years at more than $1,000 billion in 1998
dollars.
Relationship With Boeing and McDonnell Douglas
Boeing, together with its subsidiary McDonnell Douglas, is principally engaged
in the design, development and production of government and commercial aerospace
products. For the year ended December 31, 1998, Boeing recorded revenues of
$56.2 billion and net earnings of $1.1 billion. At December 31, 1998, Boeing had
assets of $36.7 billion and shareholders' equity of $12.3 billion. Boeing is
actively conducting a review of the operations and the strategic value of the
Company, which review could lead to a decision to divest all or part of the
Company's assets or to sell the Company's stock, presently held indirectly by
Boeing.
If the financial well-being of Boeing were to decline significantly, 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 Boeing operates, military aircraft and commercial aircraft, are
especially competitive and have a limited number of customers. At December 31,
1998, McDonnell Douglas has provided $284.5 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 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, 1998, McDonnell Douglas was the lessee for $48.4
million of the Company's commercial aircraft portfolio.
In August 1998, the Company's lease agreements with P.T. Garuda Indonesia
("Garuda") relating to two MD-11 aircraft were terminated and the aircraft,
which were returned by Garuda in July 1998, were sold to Boeing for an aggregate
sales price of $162.8 million, which resulted in a gain to the Company of $3.3
million.
For a further description of significant factors which may affect Boeing, see
Boeing's Form 10-K for the year ended December 31, 1998 (Securities and Exchange
Commission file number 001-00442).
o Operating Agreement
The relationship between the Company and McDonnell Douglas is governed by an
operating agreement (the "Operating Agreement"), which was intended to
formalize 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. Now that McDonnell Douglas is a subsidiary of Boeing,
Boeing has entered into a substantially similar agreement with the Company
with respect to the allocation of federal income taxes, but not with respect
to the purchase, sale and financing of any commercial aircraft. Although it
remains in full force and effect, the Operating Agreement, as it relates to
future commercial aircraft financings, now has little if any practical
significance, as Boeing is not a party to it. This is illustrated by the fact
that since the Boeing-McDonnell Douglas merger, the Company has not been
involved in the financing of any new commercial aircraft (except for one
unusual instance where the Company provided financing for one Boeing 737
aircraft in response to a third party's request). Further, it does not appear
that any future financings would be covered by the Operating Agreement. It is
also uncertain whether the Operating Agreement will be amended or whether
Boeing will become a party to it in its current or amended form.
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, 1998, the carrying amount of McDonnell Douglas aircraft
potentially excluded by this provision amounted to approximately $589.3
million.
o Federal Income Taxes
The Company and McDonnell Douglas presently file a consolidated federal
income tax return with Boeing, with the consolidated tax payments, if any,
being made by Boeing. 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.
In addition, Boeing, BCSC and the Company have entered into agreements (the
"Boeing Operating Agreements") with provisions substantially similar to the
Operating Agreement among the Company, BCSC and McDonnell Douglas which
remains in effect. Amounts payable under the Boeing Operating Agreements take
into account payments made under the Operating Agreement, provided that in no
event will the Company receive an amount which is materially less, or be
obligated to pay an amount which is materially greater, than it would have
received, or been obligated to pay, under the Operating Agreement.
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, Boeing presently charges or credits the
Company for the corresponding increase or decrease in Boeing's taxes
(disregarding alternative minimum taxes) resulting from the Company's
inclusion in the consolidated federal income tax return of Boeing.
Intercompany payments are made when such taxes are due or tax benefits are
realized by Boeing 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 Boeing.
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 Boeing 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 Boeing'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."
There can likewise be no assurance that these (and other) intercompany
arrangements will not change as time permits the Company's Board members and
shareholder to study and become more familiar with these working
arrangements. While it is difficult to predict the applicability of the
alternative minimum tax to Boeing and the effect thereof under such informal
arrangement, if Boeing were subject to alternative minimum tax liability for
an extended period, it could have a material adverse impact on the
competitiveness of the Company's pricing of new business and on the earnings
of the Company.
o Intercompany Services
Boeing provides to the Company certain payroll, employee benefit, facilities
and other services, for which the Company generally pays the actual cost. See
Note 9 of "Notes to Consolidated Financial Statements" included in Item 8.
o Intercompany Credit Arrangements
The Company maintains separate borrowing facilities and there are no
arrangements for joint use of such credit lines by Boeing or McDonnell
Douglas. 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 Boeing or McDonnell Douglas on
their respective debt constitutes a default on Company debt. There are no
guaranties, direct or indirect, by Boeing or McDonnell Douglas of the payment
of any debt of the Company.
The Company may borrow from BCSC, and BCSC 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 this arrangement, borrowings of $64.7
million and $51.0 million were outstanding at December 31, 1998 and 1997,
respectively. During 1998, the Company's highest level of borrowings from
BCSC was $64.7 million. The Company had no loans to BCSC during 1998 or 1997.
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 a rate that was
considered fair market value at the inception of the lease. 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. (the "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, but is unable to determine
at this stage of discovery if the litigation will have any future material
adverse effect on its earnings, cash flow or financial position.
The Company is a party to litigation in the United States District Court,
Southern District of Florida, entitled McDonnell Douglas Finance Corporation
adv. Aviaco International Leasing, Inc., Aviaco Traders International, Inc. and
Craig L. Dobbin with Related Counter-Claims (collectively referred to as
"Aviaco"). The foregoing litigation arose out of an action brought by the
Company in July 1991 seeking remedies on account of defaults by the other
parties to the litigation under loan and related documents involving a $17.9
million loan made by the Company. In January 1994, in response to the Company's
foreclosure of two aircraft and a related aircraft lease agreement which had
been collateral for the loan, Aviaco filed a counter-claim against the Company,
asserting nine claims for alleged damages based on various tort and contractual
theories relating to the Company's foreclosure.
The case proceeded to jury trial on the three of nine claims which survived the
Company's Motion for Summary Judgment. The case was submitted to the jury on
October 16, 1997. On October 17, 1997, the jury returned a verdict in favor of
Aviaco awarding aggregate damages of approximately $12.2 million, including
damages of approximately $10.0 million for the failure to exercise reasonable
care with regard to the related lease agreement.
In December of 1997, the Company filed a Motion for Judgment as a Matter of Law,
arguing, inter alia, to set aside the $10.0 million award as not being supported
by the record evidence or by applicable law. On February 13, 1998, the Judge
ruled in favor of the Company and set aside the $10.0 million award.
On March 2, 1998, the Judge entered a Final Judgment against the Company in the
aggregate amount, including prejudgment interest, of approximately $2.8 million
with post judgment interest thereon at the rate of 5.42% per annum. Aviaco has
appealed the Final Judgment to the United States Court of Appeals for the
Eleventh Circuit. Taking into account amounts reserved for this litigation, the
Company does not expect such litigation to have any future material adverse
effect on its earnings, cash flow or financial position.
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 BCSC. In 1998 and
1997, the Company declared and paid dividends of $40.0 million and $25.0
million, respectively, on its common stock to BCSC. The Company paid $3.9
million and $3.5 million in dividends on its preferred stock in 1998 and 1997,
respectively. Preferred stock dividends of $0.6 million payable to BCSC were
accrued at December 31, 1998.
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, $56.9 million of
the Company's income retained for growth was available for dividends at December
31, 1998.
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, 1998 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) 1998 1997 1996 1995 1994
Financing volume $ 692.6 $ 591.1 $ 867.3 $ 590.8 $ 202.0
============================================================================
Operating income:
Finance lease income $ 119.5 $ 136.9 $ 118.6 $ 104.3 $ 100.7
Interest on notes receivable 36.6 26.3 24.4 27.2 29.4
Operating lease income, net 67.7 56.7 55.1 41.1 38.5
Net gain on disposal or re-lease
of assets 33.4 21.0 19.6 8.7 11.1
Other 2.9 5.5 3.8 9.3 7.1
----------------------------------------------------------------------------
260.1 246.4 221.5 190.6 186.8
----------------------------------------------------------------------------
Expenses:
Interest expense 126.7 124.7 117.3 101.9 108.3
Provision for losses 7.4 11.5 14.2 12.2 9.9
Operating expenses 12.6 13.1 11.7 11.3 15.2
Other 8.8 9.3 3.4 4.9 12.3
----------------------------------------------------------------------------
155.5 158.6 146.6 130.3 145.7
----------------------------------------------------------------------------
Income before provision for income
taxes 104.6 87.8 74.9 60.3 41.1
Provision for income taxes 33.1 31.7 26.1 21.0 12.8
----------------------------------------------------------------------------
Net income $ 71.5 $ 56.1 $ 48.8 $ 39.3 $ 28.3
============================================================================
Dividends declared $ 43.9 $ 28.5 $ 3.5 $ 31.0 $ 30.5
Ratio of income to fixed charges (1) 1.80 1.68 1.62 1.57 1.37
Balance sheet data:
Total assets $ 2,861.4 $ 2,722.8 $ 2,653.6 $ 2,049.6 $ 1,929.6
Total debt 1,970.3 1,797.9 1,850.2 1,339.7 1,215.1
Shareholder's equity 380.7 353.1 325.5 280.2 271.9
Dividends accrued on preferred
stock at year end $ 0.6 $ 0.6 $ 0.6 $ 0.6 $ 0.6
(1) For the purpose of computing the ratio of income to fixed charges, income
consists of income before provision for income taxes 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 not be limited to, the effects on the Company of the
Boeing-McDonnell Douglas merger and the Year 2000 date conversion, as well as
future earnings, costs, expenditures, losses, residual values and various
business environment trends. In addition to those contained herein,
forward-looking statements and projections may be made by management of the
Company 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 effects on
the Company of the Boeing-McDonnell Douglas merger and the Company's
relationship with Boeing, as well as strategic decisions relating to the Company
to be made by Boeing, the capital equipment requirements of United States and
foreign businesses, capital availability and cost, changes in laws and tax
benefits, the tax position of Boeing (including the applicability of the
alternative minimum tax), competition from other financial institutions, the
Company's successful execution of internal operating plans and Year 2000 date
conversion plans, the impact of Year 2000 issues on the Company's customers,
vendors and service providers, 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 $240.0 million revolving credit agreement which is reduced by borrowings
of up to $16.0 million made by BCSC. At December 31, 1998 and 1997, borrowings
under commercial paper totaling $122.0 million and $80.0 million, respectively,
were supported by available unused commitments under the revolving credit
agreement. The Company has available approximately $85.0 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, 1998 and 1997,
borrowings under these credit facilities totaled $50.0 million and $18.0
million, respectively.
The Company also accesses the public debt market and anticipates using proceeds
from the issuance of additional public debt to fund future growth. On October
10, 1997, the Company filed with the Securities and Exchange Commission
("Commission") a Form S-3 Registration Statement for a public shelf registration
of $1.2 billion of its debt securities (SEC File No. 333-37635). On October 31,
1997, the Commission declared such Registration Statement to be effective. Since
October 1997, the Company has authorized the sale and issuance from time to time
at the Company's discretion of up to $900.0 million of such debt securities in
the form of the Company's Series X medium-term notes. As of December 31, 1998,
the Company had issued and sold $571.4 million in aggregate principal amount of
such notes, with $406.4 million of the notes being issued during 1998 at
interest rates ranging from 5.35% to 6.54% and with maturities ranging from 10
months to 10 years.
During the second half of 1998, the Company's borrowing rates were increased by
virtue of a significant increase in the spreads required to be paid by the
Company over rates for comparable U.S. Treasury Notes. Such higher rates can
reasonably be expected to have a negative impact on the Company's
competitiveness as a financier on transactions where the Company is unable to
pass through to customers such increased rates. These increased borrowing
spreads and consequent higher interest rates were caused by a variety of
factors, including without limitation the Company's credit rating downgrade and
outlook change and the uncertainty of the Company's strategic fit at Boeing, as
well as general financial market conditions. See "Item 1. Business - Borrowing
Operations."
The Company, as of December 31, 1998, has $113.7 million in aggregate deposits
in Japanese banks for the purpose of defeasing certain obligations of the
Company under Japanese leveraged leases of aircraft. Currently, these deposits
cannot be moved to other financial institutions without significant cost.
However, as of the date hereof, all such banks holding such deposits held an
investment grade rating from either Standard & Poor's or Moody's.
1998 vs. 1997
Finance lease income decreased $17.4 million (12.7%) in 1998 compared to 1997,
primarily attributable to a decrease in finance leases as a result of aircraft
sales.
Interest on notes receivable increased $10.3 million (39.2%) from 1997,
primarily attributable to new volume of CEL notes receivable of $317.3 million
during 1998.
Operating lease income increased $11.0 million (19.4%) in 1998 compared to 1997,
primarily attributable to the operating lease financing of four used Boeing
aircraft during the last four months of 1997.
Gain on disposal or re-lease of assets increased $12.4 million (59.0%) from
1997, primarily attributable to sales within the commercial aircraft and
commercial equipment leasing portfolios.
Other income decreased $2.6 million (47.3%) from 1997, primarily attributable to
prepayment fees of $2.0 million received in 1997.
Provision for losses on receivables decreased $4.1 million (35.7%) in 1998
compared to 1997, primarily attributable to the Company's determination that
additional provisions for losses were not necessary or appropriate during the
current year, as the Company's core business segments did not experience net
write-offs during the year ended December 31, 1997.
1997 vs. 1996
Finance lease income increased $18.3 million (15.4%) in 1997 compared to 1996,
primarily attributable to the financings of two MD-11 aircraft funded in late
1996 under finance lease agreements.
Interest expense increased $7.4 million (6.3%) in 1997 compared to 1996,
attributable to a higher level of borrowings in 1997, resulting from increased
financing activity in late 1996.
Provision for losses decreased $2.7 million (19.0%) in 1997 compared to 1996,
primarily attributable to the Company's determination that additional provisions
for losses relating to the commercial aircraft portfolio in excess of those
previously provided were not necessary or appropriate during the current period
and to a decrease in new aircraft lease volume, which aggregated $176.3 million
in 1997, compared to aircraft lease volume of $475.3 million in 1996.
Other expenses increased $5.9 million (173.5%) in 1997 compared to 1996,
primarily attributable to maintenance expenses of approximately $5.3 million on
an airplane that was repossessed in March 1997.
Year 2000 Date Conversion
The Year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause systems to
process financial and operational information incorrectly.
The Company has assessed (and continues to re-assess) the impact of the Year
2000 issue on its information technology ("IT") systems. In 1996, the Company
initiated a conversion from its existing lease administration system to programs
that the Company has been advised are Year 2000 compliant. This conversion
project has not yet been completed although the majority of the tasks involved
in such project have been accomplished and it is expected that the project will
be completed during the second quarter of 1999. If the conversion project is not
completed before the end of 1999, the Company's operations could be adversely
and materially affected. The Company has begun to develop a contingency plan for
the possible unavailability of its new lease administration system. This plan
essentially involves the remediation, if necessary, of the existing lease
administration system. With respect to the other IT systems, the Company intends
to develop contingency plans during 1999 relating to possible Year 2000 problems
to the extent it deems necessary and appropriate, taking into account the advice
of its outside consultants, who are expected to complete their analysis in the
second quarter of 1999.
Although the Company does not consider it likely that Year 2000 problems
inherent within its IT systems will result in significant operational problems,
the possibility of such problems cannot be discounted at this time. The Company
is retaining outside consultants to assist in its ongoing assessment of its
computer system's vulnerability to Year 2000 problems. Also, the Company's
preliminary estimate that it will complete its overall Year 2000 project by the
end of the third quarter of 1999 is subject to the findings of the Company's
ongoing assessment.
With respect to non-IT systems, the Company has assessed and continues to assess
the impact of Year 2000 issues on these systems. The Company is retaining
outside consultants to assist in its ongoing assessment of possible Year 2000
problems relating to non-IT systems.
The total cost of the Year 2000 project to date has been funded through
operating cash flows and has not had a material adverse effect on the Company's
earnings, cash flow or financial position. Based on information available to
date, the cost of the Year 2000 project, including any remediation of the
Company's IT and non-IT systems, is not expected to have a material adverse
effect on the Company's earnings, cash flow or financial position.
No assurance can be given, however, that Year 2000 problems of third parties
(such as vendors, customers and other financial institutions with which the
Company does business) will not materially impact operations or operating
results. The Company is assessing the Year 2000 readiness of such third parties
whose lack of Year 2000 readiness could result in a material adverse impact on
the Company. The Company has identified and sent to certain significant
customers and other significant third parties inquiries regarding their Year
2000 readiness. The Company has not received a response from many of such third
parties and therefore is not yet in a position to assess this risk. The Company
presently expects to have completed preliminary assessment (subject to
cooperation where necessary from such third parties) by the end of the second
quarter of 1999. The Company expects this assessment will need to be updated in
some respects throughout 1999.
This entire discussion of Year 2000 issues contains forward-looking information
which is subject to uncertainty and risk. See "Forward-Looking Information is
Subject to Risk and Uncertainty" at the outset of this Item 7.
Market Risk Exposure
The Company has financial instruments that are subject to interest rate risk,
principally short-term investments, fixed-rate notes receivable attributable to
customer financing, and debt obligations issued at a fixed rate. Historically,
the Company has not experienced material gains or losses due to interest rate
changes when selling fixed-rate notes receivable. Additionally, the Company uses
interest rate swaps to manage exposure to interest rate changes. Based on the
current holdings of short-term investments, fixed-rate notes, as well as
underlying swaps, the exposure to interest rate risk is not considered to be
material. Fixed-rate debt obligations currently issued by the Company are
generally not callable until maturity.
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.
Independent Auditors' Report
Shareholder and Board of Directors
Boeing Capital Corporation
We have audited the accompanying consolidated balance sheets of Boeing Capital
Corporation (a wholly-owned subsidiary of Boeing Capital Services Corporation)
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income and income retained for growth, and cash flows for the
years then ended. Our audits also included the financial statement schedule
listed in Part IV Item 14 (a). These financial statements and financial
statement schedule are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements 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 financial position of Boeing Capital
Corporation and subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
January 26, 1999
Independent Auditors' Report
Shareholder and Board of Directors
McDonnell Douglas Finance Corporation
We have audited the consolidated balance sheet (not presented herein) of
McDonnell Douglas Finance Corporation (a wholly-owned subsidiary of McDonnell
Douglas Financial Services Corporation) and subsidiaries as of December 31,
1996, and the related consolidated statements of income and income retained for
the year then ended. Our audit 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 audit.
We conducted our audit 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 audit provides 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
the consolidated results of their operations and their cash flows for the year
then ended, 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, presents 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, 1995 and 1994, and
the related consolidated statements of income and income retained for growth,
and cash flows for the year ended December 31, 1994 (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 three years in the period ended December 31,
1996, appearing on page 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
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
(Dollars in millions, except stated value and par value) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Financing receivables:
Investment in finance leases $ 1,365.0 $ 1,509.1
Notes receivable 545.7 269.0
--------------------------------------
1,910.7 1,778.1
Allowance for losses on financing receivables (62.1) (55.9)
--------------------------------------
1,848.6 1,722.2
Cash and cash equivalents 20.3 39.1
Equipment under operating leases, net 889.2 922.2
Equipment held for sale or re-lease 62.3 0.7
Other assets 41.0 38.6
--------------------------------------
$ 2,861.4 $ 2,722.8
======================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 236.7 $ 149.0
Accounts payable and accrued expenses 35.6 49.1
Accounts with Boeing, McDonnell Douglas and BCSC 6.7 37.2
Other liabilities 84.8 97.2
Deferred income taxes 383.3 388.3
Long-term debt:
Senior 1,678.7 1,579.0
Subordinated 54.9 69.9
--------------------------------------
2,480.7 2,369.7
--------------------------------------
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 236.2 208.6
--------------------------------------
380.7 353.1
--------------------------------------
$ 2,861.4 $ 2,722.8
======================================
See notes to consolidated financial statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Income and Income Retained for Growth
Years ended December 31,
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Finance lease income $ 119.5 $ 136.9 $ 118.6
Interest income on notes receivable 36.6 26.3 24.4
Operating lease income, net of depreciation expense of
$70.6, $61.1 and $57.6 in 1998, 1997 and 1996,
respectively 67.7 56.7 55.1
Net gain on disposal or re-lease of assets 33.4 21.0 19.6
Other 2.9 5.5 3.8
-----------------------------------------------------
260.1 246.4 221.5
-----------------------------------------------------
EXPENSES
Interest expense 126.7 124.7 117.3
Provision for losses 7.4 11.5 14.2
Operating expenses 12.6 13.1 11.7
Other 8.8 9.3 3.4
-----------------------------------------------------
155.5 158.6 146.6
-----------------------------------------------------
Income before provision for income taxes 104.6 87.8 74.9
Provision for income taxes 33.1 31.7 26.1
-----------------------------------------------------
Net income 71.5 56.1 48.8
Income retained for growth at beginning of year 208.6 181.0 135.7
Dividends (43.9) (28.5) (3.5)
-----------------------------------------------------
Income retained for growth at end of year $ 236.2 $ 208.6 $ 181.0
=====================================================
See notes to consolidated financial statements.
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31,
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 71.5 $ 56.1 $ 48.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense - equipment under operating
leases 70.6 61.1 57.6
Net gain on disposal or re-lease of assets (33.4) (21.0) (19.6)
Provision for losses 7.4 11.5 14.2
Change in assets and liabilities:
Accounts with Boeing, McDonnell Douglas and
BCSC (30.5) 37.2 18.5
Other assets (2.4) 3.1 1.8
Accounts payable and accrued expenses (13.5) 1.4 5.9
Other liabilities (12.4) 7.2 7.5
Deferred income taxes (5.0) 48.1 34.8
Other, net (1.0) (0.7) (1.7)
---------------------------------------------------
51.3 204.0 167.8
---------------------------------------------------
INVESTING ACTIVITIES
Net change in short-term notes and leases receivable (51.9) 101.7 (91.2)
Purchase of equipment for operating leases (157.2) (346.2) (303.9)
Proceeds from disposition of equipment, notes and leases
receivable 323.7 177.4 115.0
Collection of notes and leases receivable 235.9 209.6 167.0
Acquisition of notes and leases receivable (548.9) (243.0) (557.2)
---------------------------------------------------
(198.4) (100.5) (670.3)
---------------------------------------------------
FINANCING ACTIVITIES
Net change in short-term borrowings 87.7 (12.3) 147.6
Debt having maturities more than 90 days:
Proceeds 436.8 226.8 608.7
Repayments (352.3) (267.3) (246.0)
Payment of cash dividends (43.9) (28.5) (3.5)
---------------------------------------------------
128.3 (81.3) 506.8
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents (18.8) 22.2 4.3
Cash and cash equivalents at beginning of year 39.1 16.9 12.6
---------------------------------------------------
Cash and cash equivalents at end of year $ 20.3 $ 39.1 $ 16.9
===================================================
See notes to consolidated financial statements.
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
Note 1 -- Organization and Summary of Significant Accounting Policies
Organization Boeing Capital Corporation (formerly McDonnell Douglas Finance
Corporation) (the "Company") is a wholly-owned subsidiary of Boeing Capital
Services Corporation ("BCSC"), a wholly-owned subsidiary of McDonnell Douglas
Corporation ("McDonnell Douglas"), which in turn is wholly-owned by The Boeing
Company ("Boeing"). 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 and financing. The Company's strategy is to generate and participate in
finance transactions in which the Company's structuring and analysis can provide
high returns on its invested equity. Currently, the commercial aircraft
financing group is active in providing lease and debt financing to domestic and
international airlines, and the Company as a whole is active in providing lease
and debt financing to a broad range of commercial and industrial customers.
Principles of 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 1996 and
1997 amounts have been reclassified to conform to the 1998 presentation.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make assumptions
and estimates that directly affect the amounts reported in the consolidated
financial statements. Significant estimates for which changes in the near term
are considered reasonably possible and that may have a material impact on the
financial statements are addressed in these notes to the consolidated financial
statements.
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, 1998 and 1997 were $19.7 million and $37.9 million, respectively.
At December 31, 1998 and 1997, the Company has classified as other assets
restricted cash deposited with banks in interest bearing accounts of $34.1
million and $27.6 million, respectively, for specific lease rents and
contractual purchase options related to certain aircraft leased by the Company
under capital lease obligations.
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, collateral value of the underlying equipment and results of periodic
credit reviews.
Equipment Held for Sale or Re-lease 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.
Income Taxes The operations of the Company are included in the consolidated
federal income tax return of Boeing. McDonnell Douglas or Boeing presently
charges or credits the Company for the corresponding increase or decrease in
taxes resulting from such inclusion. Intercompany payments are made when such
taxes are due or tax benefits are realized by Boeing 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 Boeing.
Federal, state and foreign income taxes are computed at current tax rates, less
tax credits. Taxes are adjusted both for items that do not have tax consequences
and for the cumulative effect of any changes in tax rates from those previously
used to determine deferred tax assets or liabilities. Tax provisions include
amounts that are currently payable, plus changes in deferred tax assets and
liabilities that arise because of temporary differences between the time when
items of income and expense are recognized for financial reporting and income
tax purposes. Under an informal arrangement, the current provision for state
income taxes based on an agreed upon rate is paid to Boeing and the state income
tax deferred asset or liability is carried on Boeing's books.
Segment Information The Company has adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The adoption thereof had no material effect on the Company's
financial position or operating results. For segment information, see Note 11.
Software Costs Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed and Obtained for Internal Use," issued in March 1998
requires capitalization of certain costs of computer software developed or
obtained for internal use. The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998. Management of the Company does
not believe that SOP 98-1 will have a material impact on the Company's earnings,
cash flows or financial position when adopted.
Note 2 -- The Effects of the Boeing-McDonnell Douglas Merger
On August 1, 1997, the Boeing-McDonnell Douglas merger was consummated pursuant
to an Agreement and Plan of Merger dated as of December 14, 1996, among Boeing,
West Acquisition Corp., a wholly-owned subsidiary of Boeing ("Sub"), and
McDonnell Douglas (the "Merger Agreement"). Under the terms of the Merger
Agreement, Sub was merged into McDonnell Douglas, with McDonnell Douglas
surviving as a wholly-owned subsidiary of Boeing.
The many possible ramifications of strategic decisions to be made by Boeing with
respect to the Company are currently unknown and, therefore, cannot be
quantified at this time. Boeing is actively conducting a review of the
operations and the strategic value of the Company, which review could lead to a
decision to divest all or part of the Company's assets or to sell the Company's
stock, presently held indirectly by Boeing.
The Company and McDonnell Douglas presently file a consolidated federal income
tax return with Boeing, with the consolidated tax payments, if any, being made
by Boeing. The operating agreement between the Company, BCSC and 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.
In addition, Boeing, BCSC and the Company have entered into agreements (the
"Boeing Operating Agreements") with provisions substantially similar to the
Operating Agreement among the Company, BCSC and McDonnell Douglas which remains
in effect. Amounts payable under the Boeing Operating Agreements take into
account payments made under the Operating Agreement, provided that in no event
will the Company receive an amount which is materially less, or be obligated to
pay an amount which is materially greater, than it would have received, or been
obligated to pay, under the Operating Agreement.
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, Boeing presently charges or credits the Company for the
corresponding increase or decrease in Boeing's taxes (disregarding alternative
minimum taxes) resulting from the Company's inclusion in the consolidated
federal income tax return of Boeing. Intercompany payments are made when such
taxes are due or tax benefits are realized by Boeing 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 Boeing.
There can be no assurance, however, that these (and other) intercompany
arrangements will not change as time permits the Company's Board members and
shareholder to study and become more familiar with these working arrangements.
While it is difficult to predict the applicability of the alternative minimum
tax to Boeing and the effect thereof under such informal arrangement, if Boeing
were subject to alternative minimum tax liability for an extended period, it
could have a material adverse impact on the competitiveness of the Company's
pricing of new business and on the earnings of the Company.
Boeing has announced that it will not produce MD-80 and MD-90 aircraft after
early 2000. Boeing has also stated that it plans to phase out production of the
MD-11, with final deliveries now scheduled for 2001. The Company's commercial
aircraft portfolio as of December 31, 1998 included 32 MD-80s, three MD-90s and
five MD-11s, representing an aggregate of $963.8 million in net asset value
(34.4% of total Company portfolio). The Company's commercial aircraft
portfolio as of December 31, 1997 included 33 MD-80s, three MD-90s and
seven MD-11s, representing an aggregate of $1,176.1 million in net asset value
(43.6% of total Company portfolio). The Company periodically reviews the
carrying and residual values of all aircraft in its portfolio. Such reviews
include the effects, if any, of the foregoing announcements as they become
known or can be reasonably estimated. While management believes that current
booked residual values are conservative, significant declines in market
value could impact the gain or loss on disposition of these aircraft.
Note 3 -- Investment in Finance Leases
The following lists the components of the investment in finance leases at
December 31:
(Dollars in millions) 1998 1997
Minimum lease payments receivable $ 1,760.7 $ 1,985.8
Estimated residual value of leased assets 378.9 405.6
Unearned income (778.6) (885.9)
Deferred initial direct costs 4.0 3.6
------------------------------------
$ 1,365.0 $ 1,509.1
====================================
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) 1998 1997
Minimum lease payments receivable $ 501.1 $ 534.3
Estimated residual value of leased assets 83.3 83.3
Unearned income (252.4) (276.2)
Deferred initial direct costs 1.0 0.8
-----------------------------------
$ 333.0 $ 342.2
===================================
At December 31, 1998, finance lease receivables of $38.2 million serve as
collateral to senior long-term debt.
At December 31, 1998, finance lease receivables are due in installments as
follows: 1999, $268.7 million; 2000, $196.5 million; 2001, $187.3 million; 2002,
$160.1 million; 2003, $149.0 million; 2004 and thereafter, $799.1 million.
Under a finance lease agreement, the Company leases a DC-10-30 aircraft to
McDonnell Douglas. This lease requires monthly rent payments of $0.4 million
through April 14, 2004. At December 31, 1998 and 1997, the carrying amount of
this aircraft was $24.7 million and $26.7 million, respectively.
Note 4 -- Notes Receivable
The following lists the components of notes receivable at December 31:
(Dollars in millions) 1998 1997
Principal $ 542.7 $ 265.9
Accrued interest 3.6 2.8
Unamortized discount (1.6) (0.5)
Deferred initial direct costs 1.0 0.8
------------------------------------
$ 545.7 $ 269.0
====================================
At December 31, 1998, notes receivables are due in installments as follows:
1999, $62.7 million; 2000, $34.8 million; 2001, $43.9 million; 2002, $53.3
million; 2003, $64.2 million; 2004 and thereafter, $283.8 million.
Note 5 -- Equipment Under Operating Leases
Equipment under operating leases consisted of the following at December 31:
(Dollars in millions) 1998 1997
Commercial aircraft $ 668.0 $ 651.1
Executive aircraft 289.3 313.1
Machine tools and production equipment 56.2 52.6
Highway vehicles 33.7 51.4
Printing equipment 27.2 32.2
Other 25.3 15.3
-----------------------------------
1,099.7 1,115.7
Accumulated depreciation (208.5) (185.3)
Rentals receivable 15.3 15.1
Deferred lease income (19.5) (24.0)
Deferred initial direct costs 2.2 1.7
Allowance for uncollectible rents - (1.0)
-----------------------------------
$ 889.2 $ 922.2
===================================
At December 31, 1998, future minimum rentals scheduled to be received under the
noncancelable portion of operating leases are as follows: 1999, $161.9 million;
2000, $89.9 million; 2001, $76.2 million; 2002, $65.7 million; 2003, $62.4
million; 2004 and thereafter, $338.7 million.
At December 31, 1998, equipment under operating leases of $77.6 million are
assigned as collateral to senior long-term debt. Equipment under operating
leases of $187.4 million at December 31, 1998, relate to commercial aircraft
leased by the Company under capital lease obligations.
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. In March 1998, MDC entered into a sublease with
Caledonian Airways Limited ("Caledonian"), whereby Caledonian pays $0.2 million
of the $0.4 million in monthly rent payments. At December 31, 1998 and 1997, the
carrying amount of this aircraft was $23.7 million and $26.9 million,
respectively.
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) 1998 1997 1996
Current:
Federal $ 32.1 $ (21.3) $ (12.8)
State 6.0 4.9 4.1
--------------------------------------------------------
38.1 (16.4) (8.7)
Deferred:
Federal (5.0) 48.1 34.8
--------------------------------------------------------
$ 33.1 $ 31.7 $ 26.1
========================================================
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) 1998 1997
Deferred tax assets:
Allowance for losses $ 21.7 $ 19.6
Other 8.0 5.7
-------------------------------------
29.7 25.3
-------------------------------------
Deferred tax liabilities:
Leased assets (412.9) (410.9)
Other (0.1) (2.7)
-------------------------------------
(413.0) (413.6)
-------------------------------------
Net deferred tax liability $ (383.3) $ (388.3)
=====================================
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) 1998 1997 1996
Tax computed at federal statutory rate $ 36.6 $ 30.7 $ 26.2
State income taxes, net of federal tax benefit 3.9 3.2 2.6
Foreign sales corporation benefit (6.9) (1.2) (1.5)
Effect of investment tax credits (0.5) (0.9) (0.7)
Other - (0.1) (0.5)
------------------------------------------------------
$ 33.1 $ 31.7 $ 26.1
======================================================
The Company is currently under examination by the Internal Revenue Service
("IRS") for the tax years 1986 through 1995. 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 paid income tax payments to Boeing/McDonnell Douglas of $46.6
million in 1998. The Company received income tax payments from Boeing/McDonnell
Douglas of $32.4 million and $16.2 million in 1997 and 1996, respectively. The
Company paid income tax payments to other federal and state tax agencies of $1.4
million, $1.7 million and $0.8 million in 1998, 1997 and 1996, respectively.
Note 7 -- Indebtedness
Short-term notes payable consisted of the following at December 31:
December 31,
---------------------------------------------------------------
Weighted Average Interest
(Dollars in millions) Balance at End of Year Rate at End of Year
---------------------------------------------------------------
1998 1997 1998 1997
Commercial paper $ 122.0 $ 80.0 5.46 % 7.00 %
Uncommitted credit facilities 50.0 18.0 5.47 5.93
BCSC 64.7 51.0 5.20 5.96
------------------------------
$ 236.7 $ 149.0
==============================
During 1996, BCSC 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 BCSC borrowings under this same
agreement, which are limited to $16.0 million. The interest rate, at the option
of BCSC 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, 1998 and 1997. At December 31, 1998 and
1997, borrowings under commercial paper totaling $122.0 million and $80.0
million, respectively, were supported by available unused commitments under the
revolving credit agreement.
The Company has available approximately $85.0 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, 1998 and 1997, borrowings under
these credit facilities totaled $50.0 million and $18.0 million, respectively.
On October 10, 1997, the Company filed with the Securities and Exchange
Commission ("Commission") a Form S-3 Registration Statement for a public shelf
registration of $1.2 billion of its debt securities (SEC File No. 333-37635). On
October 31, 1997, the Commission declared such Registration Statement to be
effective. Since October 1997, the Company has authorized the sale and issuance
from time to time at the Company's discretion of up to $900.0 million of such
debt securities in the form of the Company's Series X medium-term notes. As of
December 31, 1998, the Company had issued and sold $571.4 million in aggregate
principal amount of such notes, with $406.4 million of the notes being issued
during 1998 at interest rates ranging from 5.35% to 6.54% and with maturities
ranging from 10 months to 10 years.
Senior long-term debt consisted of the following at December 31:
(Dollars in millions)
1998 1997
7.0% Notes due through 1998, net of discount based on imputed
interest rate of 10.88% $ - $ 0.2
Variable rate note due 1998 - 15.0
3.9% Notes due through 1999, net of discount based on imputed
interest rates of 9.15% - 10.6% 1.1 2.9
5.75% - 6.875% Notes due through 2000, net of discount based on
imputed interest rates of 9.75% - 11.4% 3.2 5.0
6.9% - 9.43% Notes due through 2001 33.5 44.2
13.84% - 14.28% Notes due through 2003, net of discount based on
inputed interest rate of 6.10% 30.0 -
6.0% - 8.25% Retail medium-term notes due through 2011 11.3 76.6
5.35% - 13.55% Medium-term notes due through 2017 1,191.3 990.5
Capital lease obligations due through 2008 408.3 444.6
------------------------------------------
$ 1,678.7 $ 1,579.0
==========================================
At December 31, 1998 and 1997, subordinated long-term debt consisted of $54.9
million and $69.9 million, respectively, in medium-term notes due through 2004
with interest rates ranging from 5.48% to 8.31%.
The derivative financial instruments held by the Company at December 31, 1998,
consisted of specifically tailored interest rate swaps. The Company does not
trade in derivatives for speculative purposes.
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, 1998, 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 $ 350.4 Floating(1) 6.65% - 7.60%
Medium-term notes 2000 - 2001 50.0 6.83% - 8.61% Floating(1)
Medium-term notes 2003 30.0 Floating(1) 5.99%
- -------------
(1) Floating rates are based on LIBOR.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be adopted in fiscal years
beginning after June 15, 1999. Because of the Company's limited use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a material adverse effect on the Company's earnings, cash
flows or financial position.
As of December 31, 1998, $63.5 million of senior long-term debt was
collateralized by equipment. This debt is comprised of the 13.84% - 14.28% notes
due through 2003 and the 6.9% - 9.43% 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
1999 $ 275.1 $ 66.3
2000 133.5 83.6
2001 217.1 63.8
2002 163.8 54.9
2003 158.3 60.0
2004 and thereafter 382.2 220.7
------------------------------------------
1,330.0 549.3
Deferred debt expenses (4.7) (0.2)
Imputed interest - (140.8)
------------------------------------------
$ 1,325.3 $ 408.3
==========================================
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, $56.9 million of
the Company's income retained for growth was available for dividends at December
31, 1998.
Interest payments totaled $123.0 million in 1998, $124.4 million in 1997 and
$113.9 million in 1996.
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, but is unable to determine
at this stage of discovery if the litigation will have any future material
adverse effect on its earnings, cash flow or financial position.
The Company is a party to litigation in the United States District Court,
Southern District of Florida, entitled McDonnell Douglas Finance Corporation
adv. Aviaco International Leasing, Inc., Aviaco Traders International, Inc. and
Craig L. Dobbin with Related Counter-Claims (collectively referred to as
"Aviaco"). The foregoing litigation arose out of an action brought by the
Company in July 1991 seeking remedies on account of defaults by the other
parties to the litigation under loan and related documents involving a $17.9
million loan made by the Company. In January 1994, in response to the Company's
foreclosure of two aircraft and a related aircraft lease agreement which had
been collateral for the loan, Aviaco filed a counter-claim against the Company,
asserting nine claims for alleged damages based on various tort and contractual
theories relating to the Company's foreclosure.
The case proceeded to jury trial on the three of nine claims which survived the
Company's Motion for Summary Judgment. The case was submitted to the jury on
October 16, 1997. On October 17, 1997, the jury returned a verdict in favor of
Aviaco awarding aggregate damages of approximately $12.2 million, including
damages of approximately $10.0 million for the failure to exercise reasonable
care with regard to the related lease agreement.
In December of 1997, the Company filed a Motion for Judgment as a Matter of Law,
arguing, inter alia, to set aside the $10.0 million award as not being supported
by the record evidence or by applicable law. On February 13, 1998, the Judge
ruled in favor of the Company and set aside the $10.0 million award.
On March 2, 1998, the Judge entered a Final Judgment against the Company in the
aggregate amount, including prejudgment interest of approximately $2.8 million
with post judgment interest thereon at the rate of 5.42% per annum. Aviaco has
appealed the Final Judgment to the United States Court of Appeals for the
Eleventh Circuit. Taking into account amounts reserved for this litigation, the
Company does not expect such litigation to have any future material adverse
effect on its earnings, cash flow or financial position.
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 $163.3 million (5.8% of total
Company portfolio) and $196.6 million (7.3% of total Company portfolio) at
December 31, 1998 and 1997, respectively. TWA faces significant financial and
operational challenges and, until recently, operated under a reorganization plan
confirmed by the United States Bankruptcy Court in 1995. McDonnell Douglas
provides guaranties to the Company for certain obligations of TWA under the
various lease agreements between the Company and TWA. At December 31, 1998, the
maximum aggregate coverage under such guaranties was $32.9 million. As of the
date hereof, TWA is current on its obligations to the Company. If, however, TWA
were to default on its obligations to the Company, this could have a material
adverse effect on the Company's earnings, cash flow or financial position.
World Airways, Inc. ("World") accounted for $176.4 million (6.3% of total
Company portfolio) and $183.5 million (6.8% of total Company portfolio) at
December 31, 1998 and 1997, respectively. World experienced losses in 1998 and
its cash balances have fallen to relatively low levels. Also, Worldcorp Inc.,
the majority owner of World, has recently made a "prepackaged" filing under
Chapter 11 of the U.S. bankruptcy code. With respect to the existing lease
agreements between World and the Company, World has requested that the Company
consider a reduction in rentals, elimination of maintenance reserve payments and
conversion of the subject two MD-11 aircraft to a freighter configuration. The
Company is studying these requests and has concluded that any resulting
restructuring of these lease transactions, taking into account a guaranty from
McDonnell Douglas, is not expected to have a material adverse effect on the
Company's earnings, cash flow or financial position.
On June 26, 1998, Federal Express Corporation ("FedEx") gave notice to the
Company of its intention to terminate early (in late 1999) two lease agreements
covering MD-11 freighter aircraft which FedEx leases from the Company. Even if
the leases are in fact terminated early, the Company does not anticipate any
material adverse effect on its earnings, cash flow or financial position taking
into account current demand for the aircraft, a guaranty from McDonnell Douglas
and certain other contractual rights including payments due to the Company upon
early termination, as well as a commitment from another airline to lease the
aircraft for a pre-determined rental amount.
In July 1998, the Company terminated early a lease agreement covering one used
DC-10-30 aircraft. The Company has repossessed such aircraft and has been
remarketing it in a currently weak market for this type of aircraft. Taking into
account a guaranty from McDonnell Douglas, this transaction is not expected to
have a material adverse effect on the Company's earnings, cash flow or financial
position.
The $100.0 million used aircraft purchase bridge facility made available by the
Company to AirTran Airlines ("AirTran"), formerly ValuJet Airlines, Inc., 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 AirTran of the
first scheduled new Boeing 717-200 (formerly 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, 1998 or
1997.
At December 31, 1998 and 1997, the Company had commitments to provide leasing
and other financing totaling $163.3 million and $102.2 million, respectively.
In conjunction with prior asset dispositions, at December 31, 1998, the Company
is subject to a maximum recourse of $52.4 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, 1998, the Company had guaranteed the repayment of $4.8
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 1998, 1997 and 1996 totaled $0.8 million,
$0.8 million and $0.4 million, respectively. At December 31, 1998, the minimum
future rental commitments under these noncancelable leases payable over the
remaining lives of the leases aggregated $0.2 million.
Note 9 -- Transactions with Boeing, McDonnell Douglas and BCSC
Accounts with Boeing, McDonnell Douglas and BCSC consisted of the following at
December 31:
(Dollars in millions) 1998 1997
Federal income tax payable $ 0.7 $ 11.6
State income tax payable 5.8 4.1
Other payables 0.2 21.5
-------------------------------------
$ 6.7 $ 37.2
=====================================
The Company may borrow from BCSC, and BCSC 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 this arrangement, borrowings of $64.7 million and
$51.0 million were outstanding at December 31, 1998 and 1997, respectively.
In August 1998, the Company's lease agreements with P.T. Garuda ("Garuda")
relating to two MD-11 aircraft were terminated and the aircraft, which were
returned by Garuda in July 1998, were sold, at estimated fair value, to Boeing
for an aggregate sales price of $162.8 million. The Company recorded a pretax
gain of $3.3 million, which is included in net gain on disposal or re-lease of
assets.
In December 1997, the Company acquired from Boeing all of the outstanding shares
of a corporation which had been formed for the exclusive purpose of owning and
leasing two used Boeing 737-400 aircraft for a purchase price of $51.2 million.
The aircraft continue to be owned by the corporation and are presently leased to
Jet Airways (India) Pvt. Ltd. under leases expiring in 1999.
During 1997 and 1996, the Company purchased aircraft subject to leases from
Boeing and McDonnell Douglas in the amount of $51.9 million and $501.9 million,
respectively. There were no such aircraft purchases from Boeing or McDonnell
Douglas in 1998. During 1998, 1997 and 1996, the Company recorded operating
income from Boeing and McDonnell Douglas relating to financings aggregating $7.1
million, $12.1 million and $14.9 million, respectively.
In November 1997, the Company sold, at estimated fair value, an executive
aircraft formerly leased to McDonnell Douglas to Boeing for $16.8 million. The
Company recorded a pretax gain of $1.8 million in 1997, which was included in
net gain on disposal or re-lease of assets.
At December 31, 1998 and 1997, $284.5 million and $334.9 million, respectively,
was guaranteed by McDonnell Douglas for commercial aircraft financing. Fees
related to these guaranties that were paid to McDonnell Douglas totaled $1.0
million, $1.1 million and $1.6 million in 1998, 1997 and 1996, respectively.
During 1998, 1997 and 1996, the Company collected $12.3 million, $6.9 million
and $2.1 million, respectively, under these guaranties.
The Company's Series A Preferred Stock, owned entirely by BCSC, 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, 1998 and
1997.
Substantially all employees of Boeing and its subsidiaries are members of
defined benefit pension plans and insurance plans. Boeing also provides eligible
employees the opportunity to participate in savings plans that permit both
pretax and after-tax contributions. Boeing generally charges the Company with
the actual cost of these plans attributable to the Company's employees which are
included with other Boeing charges for support services and reflected in
operating expenses. Boeing charges for services provided during 1998, 1997 and
1996 totaled $1.6 million, $1.3 million and $1.3 million, respectively.
Additionally, the Company was compensated by certain affiliates for a number of
support services, which are netted against operating expenses, amounting to $0.6
million, $1.1 million and $0.9 million in 1998, 1997 and 1996, 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-Term and Long-Term Debt Carrying amounts of borrowings exclude netting of
deferred debt costs. 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:
1998 1997
-------------------------------------------------------------------------------
Assets (Liabilities) Assets (Liabilities)
-------------------------- ----------------------------
Notional Carrying Fair Notional Carrying Fair
(Dollars in millions) Amount Amount Value Amount Amount Value
ASSETS
Cash and cash equivalents $ - $ 20.3 $ 20.3 $ - $ 39.1 $ 39.1
Notes receivable - 545.7 567.3 - 269.0 298.8
LIABILITIES
Short-term notes payable to banks - (236.7) (236.7) - (149.0) (149.0)
Long-term debt:
Senior, excluding capital lease
obligations - (1,275.0) (1,308.7) - (1,139.0) (1,191.0)
Subordinated - (55.0) (58.7) - (70.0) (74.8)
OFF-BALANCE SHEET INSTRUMENTS
Commitments to extend credit (163.3) - (163.3) (102.2) - (102.2)
Interest rate swaps 430.4 - (16.1) 426.1 - (4.7)
Note 11 -- Segment Information and Concentration of Credit Risk
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 $303.0
million (10.8% of total Company portfolio) and $309.7 million (11.5% of total
Company portfolio) at December 31, 1998 and 1997, respectively. The second
largest commercial aircraft financing customer accounted for $176.4 million
(6.3% of total Company portfolio) and $183.5 million (10.7% of total portfolio),
at December 31, 1998 and 1997, respectively. The five largest commercial
aircraft financing customers accounted for $895.4 million (32.0% of total
Company portfolio) and $994.4 million (36.8% of total Company portfolio) at
December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, there
were no significant concentrations by customer within the commercial equipment
leasing portfolio.
In 1998, 1997 and 1996, a single aircraft financing customer accounted for
13.6%, 16.8% and 18.0%, respectively, 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) 1998 1997 1996
Operating income:
Commercial aircraft financing $ 145.8 $ 155.5 $ 145.2
Commercial equipment leasing 113.5 88.0 68.1
Other 0.3 2.6 7.5
Corporate 0.5 0.3 0.7
=====================================================
$ 260.1 $ 246.4 $ 221.5
=====================================================
Income (loss) before provision for income taxes:
Commercial aircraft financing $ 58.9 $ 58.7 $ 55.2
Commercial equipment leasing 51.5 37.7 25.4
Other 2.2 (0.2) 0.7
Corporate (8.0) (8.4) (6.4)
=====================================================
$ 104.6 $ 87.8 $ 74.9
=====================================================
Identifiable assets at December 31:
Commercial aircraft financing $ 1,632.5 $ 1,728.8 $ 1,831.6
Commercial equipment leasing 1,223.1 973.3 767.0
Other 1.1 17.9 53.2
Corporate 4.7 2.8 1.8
=====================================================
$ 2,861.4 $ 2,722.8 $ 2,653.6
=====================================================
Portfolio at December 31:
Commercial aircraft financing $ 1,573.5 $ 1,711.5 $ 1,814.9
Commercial equipment leasing 1,225.0 976.6 769.8
Other 1.4 12.2 44.9
=====================================================
$ 2,799.9 $ 2,700.3 $ 2,629.6
=====================================================
Depreciation expense - equipment under operating leases:
Commercial aircraft financing $ 40.2 $ 26.9 $ 35.1
Commercial equipment leasing 30.4 34.2 22.5
=====================================================
$ 70.6 $ 61.1 $ 57.6
=====================================================
Equipment acquired for operating leases, at cost:
Commercial aircraft financing $ 75.3 $ 146.5 $ 196.9
Commercial equipment leasing 81.9 199.7 107.0
=====================================================
$ 157.2 $ 346.2 $ 303.9
=====================================================
Operating income from financing of assets located outside the United States
totaled $55.4 million, $36.0 million and $28.5 million in 1998, 1997 and 1996,
respectively.
Boeing Capital Corporation and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
(Dollars in millions)
Allowance for
Losses on Balance at Charged to
Financing Beginning Costs and Balance at End
Receivables of Year Expenses Other Deductions (1) of Year
1998 $ 55.9 $ 7.4 $ 1.3 $ (2.5) $ 62.1
1997 $ 48.6 $ 11.5 $ (1.7) $ (2.5) $ 55.9
1996 $ 42.3 $ 14.2 $ (1.9) $ (6.0) $ 48.6
- ---------------------------------------
(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:
Independent Auditors' Reports..............................................................26
Consolidated Balance Sheets at December 31, 1998 and 1997..................................28
Consolidated Statements of Income and Income Retained for
Growth for the Years Ended December 31, 1998,
1997 and 1996...........................................................................29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996........................................................30
Notes to Consolidated Financial Statements.................................................31
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts............................................44
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 Amendment to Certificate of Incorporation of the Company dated
August 11, 1997, incorporated herein by reference to Exhibit 3(i)
to the Company's Form 10-Q, for the period ended June 30, 1997.
3.3 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).
4.21 Form of Series X Senior Fixed Rate Medium-Term Note, incorporated
by reference to Exhibit 4(e) to the Company's Form S-3
Registration Statement (File No. 333-37635).
4.22 Form of Series X Subordinated Fixed Rate Medium-Term Note,
incorporated by reference to Exhibit 4(f) to the Company's Form
S-3 Registration Statement (File No. 333-37635).
4.23 Form of Series X Senior Floating Rate Medium-Term Note,
incorporated by reference to Exhibit 4(g) to the Company's Form
S-3 Registration Statement (File No. 333-37635).
4.24 Form of Series X Subordinated Floating Rate Medium-Term Note,
incorporated by reference to Exhibit 4(h) to the Company's Form
S-3 Registration Statement (File No. 333-37635).
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 Amended and Restated Operating Agreement, dated as of August 1,
1997, incorporated herein by reference to Exhibit 10 to the
Company's Form 10-Q for the quarter ended September 30, 1997.
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 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.
10.5 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.
10.6 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.
10.7 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. Computation of Ratio of Earnings to Fixed Charges.
23.1 Independent Auditors' Consent.
23.2 Consent of Independent Auditors.
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.
Boeing Capital Corporation
By /s/ STEVEN W. VOGEDING
----------------------------------
Steven W. Vogeding
Vice President and Chief Financial
Officer
March 31, 1999
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/ DEBORAH C. HOPKINS
- ------------------------------------------
Deborah C. Hopkins Chairman and Director March 31, 1999
----------------------
/s/ THOMAS J. MOTHERWAY
- ------------------------------------------
Thomas J. Motherway President and Director March 31, 1999
----------------------
(Principal Executive Officer)
/s/ DANIEL O. ANDERSON
- ------------------------------------------
Daniel O. Anderson Vice President - Operations and Director March 31, 1999
----------------------
/s/ THEODORE J. COLLINS
- ------------------------------------------
Theodore J. Collins Director March 31, 1999
----------------------
/s/ STEVEN W. VOGEDING
- ------------------------------------------
Steven W. Vogeding Vice President and Chief Financial Officer March 31, 1999
----------------------
(Principal Financial Officer)
/s/ MAURA R. MIZUGUCHI
- ------------------------------------------
Maura R. Mizuguchi Controller March 31, 1999
----------------------
(Principal Accounting Officer)