Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from             to            

Commission File Number 0-10795

Boeing Capital Corporation

(Exact name of registrant as specified in its charter)

500 Naches Ave. SW, 3rd Floor • Renton, Washington 98055

(Address of principal executive offices)

(425) 965-4002

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

No common stock is held by non-affiliates of the registrant. Common stock shares outstanding at April 26, 2005: 50,000 shares

Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

1

Table of Contents

Table of Contents

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

4

Table of Contents

Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholder’s Equity and Comprehensive Income

(Unaudited)

We have authorized 100,000 shares of Series A preferred stock with no par value and a $5,000 stated value. No shares were issued and outstanding at March 31, 2005 and 2004.

See Notes to Condensed Consolidated Financial Statements.

5

Table of Contents

Boeing Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

6

Table of Contents

Boeing Capital Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2005

(Unaudited)

(Dollars in millions, except per share data)

Note 1 – Basis of Presentation

Boeing Capital Corporation (together with its subsidiaries, referred to as “us,” “we,” “our” or the “Company”) is an indirect wholly owned subsidiary of The Boeing Company (Boeing). Boeing Capital Services Corporation (BCSC) owns 100% of our stock and is an indirect wholly owned subsidiary of Boeing and a largely inactive holding company. We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary to present fairly the condensed consolidated balance sheets and the related condensed consolidated statements of operations, shareholder’s equity and comprehensive income and cash flows for the interim periods presented. Operating results for the three month period ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The condensed consolidated financial statements should be read in conjunction with the notes to consolidated financial statements included in our Form 10-K for the year ended December 31, 2004, which contains the latest available audited consolidated financial statements and notes.

Certain amounts in prior periods have been reclassified to conform to the current period’s presentation. In addition, unless specifically noted, amounts disclosed in the notes to the condensed consolidated financial statements are from continuing operations.

Note 2 – Standards Issued and Not Yet Implemented

In March 2005, the Financial Accounting Standard Board (FASB) issued Staff Position (FSP) No. FIN 46(R)-5, Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. This FSP clarifies that when applying the variable interest consolidation model, a reporting enterprise should consider whether it holds an implicit variable interest in a Variable Interest Entity (VIE) or potential VIE. FSP No. FIN 46(R)-5 is effective as of April 1, 2005. We are currently evaluating the impact of FSP No. FIN 46(R)-5 on our financial statements.

Note 3 – Discontinued Operations

On May 2, 2004, Boeing’s Board of Directors approved a plan to sell all of the assets and business operations of our Commercial Financial Services (CFS) business. This plan was approved by our Board of Directors on May 21, 2004. On May 24, 2004, we entered into a purchase and sale agreement with General Electric Capital Corporation (GECC) to sell substantially all of the assets related to our CFS business. The final asset sale closed December 27, 2004.

Our condensed consolidated financial statements and related note disclosures reflect the CFS business as discontinued operations. Income associated with the CFS business, net of applicable income tax, is shown as income from discontinued operations for all periods presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In addition, the assets of this business have been reclassified and

7

Table of Contents

presented as assets of discontinued operations. There are no liabilities related to the CFS business that were assumed by GECC or are expected to be assumed by other buyers, other than those specific liabilities associated with the portfolio assets sold, such as security deposits and maintenance reserves.

As part of the purchase and sale agreement with GECC, we agreed to a sharing arrangement for losses that may be incurred at the end of the initial financing terms of the transferred portfolio assets, or, in some instances, prior to the end of the financing term, such as certain events of default and repossession. The loss sharing arrangement provides that cumulative net losses (if any) are to be shared between us and GECC in accordance with the following formula: (i) with respect to the first $150 of cumulative net losses, we will be liable to GECC for 80% of the amount thereof (in such event GECC will bear 20% of such losses); (ii) with respect to cumulative net losses between $150 and $275, we will be liable to GECC for 100% of such additional cumulative net losses; and (iii) if cumulative losses exceed $275, GECC will bear 100% of the loss risk above $275. These provisions effectively “cap” our exposure to any losses as referred to herein at $245. In the event there are cumulative net gains on the portfolio, GECC is required to make an earn-out payment to us in an amount equal to 80% of such cumulative net gain. Gains and losses on the portfolio are to be measured on a cumulative basis over the remaining life of the portfolio assets. The amount of the gain or loss on any particular portfolio asset is the difference between the fair market value of the equipment asset securing the portfolio asset and the carrying value of the portfolio asset. We have the right in certain circumstances to participate in a refinancing or other redeployment of a portfolio asset for the purpose of minimizing any loss on such asset. We have provided an accrued liability of $90 for our estimated losses under this sharing arrangement.

Operating results of the discontinued operations were as follows:

The major classes of assets related to discontinued operations, all of which were held for sale, were as follows:

Note 4 – Transactions with Boeing

We enter into certain transactions with Boeing in the form of intercompany guarantees and other subsidies.

8

Table of Contents

Intercompany guarantees primarily relate to residual value guarantees, first loss deficiency guarantees and rental loss guarantees. Residual value guarantees cover a specified asset value at the end of a lease agreement in the event of a decline in market value of the financed aircraft. First loss deficiency guarantees cover a specified portion of our losses on aircraft that we finance in the event of a loss upon disposition of the aircraft following a default by the lessee. Rental loss guarantees are whole or partial guarantees covering us against the lessee’s failure to pay rent under the lease agreement or our inability to re-lease these aircraft at or above a specified rent level. Due to intercompany guarantees from Boeing, our accounting classification of certain third party leases may differ from the accounting classification in the consolidated Boeing financial statements. As a result of these intercompany guarantees, the required balance for the allowance for losses on receivables and the required provision for losses we recognized have been mitigated. At March 31, 2005, we were the beneficiary under $2,852 of guarantees ($2,464 for domestic airlines and $388 for foreign airlines) from Boeing which mitigates our risk with respect to portfolio assets totaling $4,336. Payments under Boeing guarantees would be net of realization of underlying residual values, partial rent payments, re-lease rental payments or other mitigating value received.

Intercompany guarantee amounts by portfolio type are summarized as follows:

Intercompany guarantee amounts by aircraft type are summarized as follows:

We also have third party guarantees of $13 and $15 on carrying values of $15 and $18 at March 31, 2005 and December 31, 2004.

We recorded the following activity under the intercompany guarantee agreements:

9

Table of Contents

Boeing has also agreed to provide interest rate subsidies, non-guarantee concessions and rental payments on restructured third party leases. For the three months ended March 31, 2005 and 2004, we recognized income of $21 and $11 under these agreements.

Additionally, as provided for under the terms of the intercompany guarantee agreements, for the three months ended March 31, 2005 and 2004, Boeing recorded additional charges of $0 and $34 related to asset impairments, accrued expenses and allowance for losses on receivables in our portfolio.

For the three months ended March 31, 2005 and 2004, we recorded income from Boeing, exclusive of guarantees and subsidies, of $11 and $10.

For the three months ended March 31, 2005 and 2004, we recognized new business volume of $81 and $268 related to our purchase of aircraft and equipment from Boeing.

Note 5 – Portfolio Quality

The portfolio of receivables, equipment under operating leases, investments and assets held for sale or re-lease consisted of the following:

Non-Performing Assets

Non-performing assets (assets either not recognizing income on an accrual basis or equipment without current contractual lease revenue) consisted of the following:

At March 31, 2005 and December 31, 2004, ATA Holdings Corp. (ATA) represented $501 and $705 of our total portfolio ($494 and $0 represented equipment under operating leases, $0 and $699

10

Table of Contents

represented finance receivables and $7 and $6 represented a note receivable). Due to ATA’s continued financial difficulties, in 2004 we placed ATA’s portfolio on non-accrual status. On October 26, 2004, ATA filed for voluntary bankruptcy protection. During the first three months of 2005, due to the new lease terms with ATA we reclassified our leases for 757 aircraft with ATA from finance leases to operating leases, which were valued at their fair value. At March 31, 2005 and December 31, 2004, we had less than one half million and $0 receivables from ATA with installments more than 90 days delinquent.

For the portfolio assets that we deemed to be non-performing as of March 31, 2005 and December 31, 2004, we received cash and reported income of $7 during the three months ended March 31, 2005 and during the year ended December 31, 2004.

At March 31, 2005 and December 31, 2004, we had no receivables or equipment under operating leases with amounts past due greater than 90 days with income still accruing.

Impaired Receivables

The carrying amounts of impaired receivables consisted of the following:

As noted above, due to ATA’s continued financial difficulties, in 2004 we provided a specific impairment allowance to reserve for our collateral exposure related to our finance leases. As a result of the reclassification of our leases for the 757 aircraft with ATA from finance leases to operating leases, there is no longer a specific impairment allowance for these receivables. At March 31, 2005, $7 of our impaired receivables with no specific impairment allowance related to receivables from ATA. At December 31, 2004, $705 of our impaired receivables with specific impairment allowance related to receivables from ATA.

At December 31, 2004 we held $389 of specifically impaired receivables related to receivables from Hawaiian Airlines, Inc. (Hawaiian) that were fully reserved and secured by 717 and 767 aircraft. At March 31, 2005, the Hawaiian receivables were no longer considered impaired, based on our evaluation of Hawaiian’s current financial condition and current performance under the aircraft leases.

At March 31, 2005 and December 31, 2004, we determined that a specific impairment allowance on $1,042 and $1,053, of our impaired receivables from United Air Lines, Inc. (United), that are secured by 767 aircraft and 777 aircraft, was not necessary. Although United is performing under the terms of the restructuring at March 31, 2005, due to its continued operation under protection of the bankruptcy laws, we continue to deem our receivables from United as impaired.

Receivables More than 90 Days Delinquent

The following table presents information related to receivables that are more than 90 days delinquent:

11

Table of Contents

Impairments of equipment under operating leases and held for sale or re-lease

For the three months ended March 31, 2005 and 2004, we recorded pre-tax non-cash charges totaling $7 and $13 to record impairments of equipment under operating lease and held for sale or re-lease as a result of declines in market values and projected future rents for aircraft and equipment.

Note 6 – Allowance for Losses on Receivables

The following table reconciles the changes in the allowance for losses on receivables:

During the three months ended March 31, 2005, we reduced the allowance for losses on receivables $119 as a result of the reclassification of our leases for the 757 aircraft with ATA from finance leases to operating leases. We increased the provision for losses $4 to provide for the effects of declines in collateral values offset by the declines in the carrying values of our notes and finance lease receivables. During the three months ended March 31, 2004, we increased the provision for losses $5 to provide for the estimated change in the collateral exposure of our notes and finance leases receivables, with the collateral exposure being the difference between the carrying value and the collateral value associated with the notes and finance lease receivables.

The allocation of the allowance for losses on receivables between specific reserves and general purposes is as follows:

As noted above in Note 5, Portfolio Quality, there is no longer a specific impairment allowance for receivables from ATA and Hawaiian.

The following table reconciles, on a pro forma basis, the changes in the allowance for losses on receivables excluding the impact of intercompany guarantees from Boeing and any related accounting classification differences:

12

Table of Contents

In connection with the reclassification of the ATA finance leases for the 757 aircraft to operating leases, we wrote down the carrying value of our leases by $200 to the fair value of the underlying leased assets resulting in a $119 reduction to our allowance for losses on receivables and an $81 reduction to Boeing’s allowance for losses on receivables related to certain leases guaranteed by Boeing. Additionally, during the three months ended March 31, 2004, Boeing increased the provision for losses by an additional $34 due to deteriorated airline credit ratings and depressed aircraft values.

Note 7 – Investments

Available-for-sale securities consisted of the following:

Included in investments at March 31, 2005 and December 31, 2004 was $14 and $1 related to cost method investments, which are not classified as available-for-sale securities for financial statement purposes.

At March 31, 2005, our available-for-sale investments included $257 of subordinated debt investments in several Equipment Trust Certificates (ETC), EETCs and a $5 investment in preferred stock. Approximately $125 of these amounts related to investments that were acquired in 2002. Due to the commercial aviation market downturn, with the exception of the Delta EETC investments, these securities have been in a continuous unrealized loss position for 12 months or longer. Despite the unrealized loss position of these securities, we have concluded that these EETC investments are not other-than-temporarily impaired. This assessment was based on the value of the underlying collateral to the securities, the term of the securities, and both internal and third party credit reviews and analyses of the counterparties, principally major domestic airlines. Accordingly, we have concluded that it is probable that we will be able to collect all amounts due according to the contractual terms of these debt securities and equity securities.

On March 4, 2005, we completed the previously disclosed exchange transaction with Delta in which we exchanged our investment in a D tranche EETC investment with a carrying value of $145 and a face value of $176 for two C tranche EETC investments with a face value of $176. During the three months ended March 31, 2005, the assets we received were recorded at their combined fair values of $143 and recorded an asset impairment charge of $2. As of March 31, 2005, the unrealized loss on the two C tranche EETC investments was $14. At December 31, 2004, there was no unrealized loss on the Delta investment.

As of March 31, 2005, the two C tranche EETC investments and the other available-for-sale investments were marked-to-market, resulting in a decrease of $16 in investments. At March 31, 2005 and December 31, 2004, none of our investment securities were considered investment grade securities.

13

Table of Contents

At March 31, 2005, maturities of debt securities were as follows:

Note 8 – Debt and Credit Agreements

Debt consisted of the following:

The most restrictive provisions of various debt agreements require us to (a) limit the payment of cash dividends to the extent that our consolidated assets would be less than 115% of our consolidated liabilities (excluding deferred taxes) after dividend payments and (b) restrict the amount of liens on our property to secure indebtedness to 15% or less of consolidated assets, other than liens specifically excluded. At March 31, 2005, as well as during the period, we were in compliance with these and all debt covenants.

Since November 21, 2003, $750 of Boeing’s five-year revolving credit line expiring in 2008 has been exclusively available to us. This is in addition to $1,250 of Boeing’s $2,000 364-day revolving credit line, which is exclusively available to us. At March 31, 2005, there were no amounts outstanding under these agreements.

Note 9 — Share-Based Plans Expense

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment. We have early adopted the provisions of SFAS No. 123R as of January 1, 2005 using the modified prospective method.

14

Table of Contents

Included in operating expenses are costs attributable to share-based plans expense. For the three months ended March 31, 2005 and 2004, we recorded $10 and $2 attributable to share-based plans expense. Share-based plans expense relates to Boeing Performance Shares issued to our executives. Performance Shares are stock units that are convertible to Boeing stock contingent upon the Boeing stock price performance.

During the three months ended March 31, 2005, the Boeing stock price, on two occasions, met the thresholds that resulted in Performance Shares converting to Boeing stock. Of the $10 recorded, for the three months ended March 31, 2005, $1 related to compensation expense reflecting the attainment of these thresholds.

For Performance Shares granted prior to 2005, share-based expense associated was determined based on the market value of Boeing’s stock at the time of the award applied to the maximum number of shares contingently issuable based on stock price, and was amortized over a five-year period.

For Performance Shares granted in 2005, the fair value of each award was estimated on the date of grant using a Monte Carlo simulation model instead of the grant date market price used for previous awards. We changed our valuation technique based on further clarification provided in SFAS No.123R and the fact that our Performance Shares contain a market condition, which should be reflected in the grant date fair value of an award.

Note 10 – Derivative Financial Instruments

We are exposed to a variety of market risks, including the effects of changes in interest rates and foreign currency exchange rates. We manage these exposures, in part, with the use of derivatives. In particular, we enter into interest rate swap and cross currency swap contracts with a number of major financial institutions. Since we believe it is unlikely that any of our counterparties will be unable to perform under the terms of derivative financial instruments, we generally do not require collateral or other security supporting derivative contracts with our counterparties. The following is a summary of our risk management strategies and the effects of these strategies on the condensed consolidated financial statements.

Fair Value Hedges

Interest rate swaps, under which we agree to pay variable rates of interest, are designated as fair value hedges of fixed rate debt. For our fair value hedges that qualify for hedge accounting treatment we use the short-cut method, and thus there are no gains or losses realized due to hedge ineffectiveness. Unrealized gains or losses from the value changes of fair value hedges are offset by changes in the fair value of the hedged underlying debt. In addition, the transition adjustment related to fair value hedges that did not qualify for hedge accounting treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, is being reclassified into interest income over the remaining maturity of the hedged debt.

During the three months ended March 31, 2005 and 2004, we recorded $3 and $4 of gains related to the basis adjustment of certain terminated swaps in interest expense.

Cash Flow Hedges

The cash flow hedges we use include certain interest rate swaps and cross currency swaps. Interest rate swap contracts under which we agree to pay a fixed rate of interest are designated as cash flow hedges of variable-rate debt obligations. In addition, cross currency swap contracts under which we agree to pay fixed functional currency rates of interest are designated as cash flow hedges of fixed non-functional currency debt obligations.

15

Table of Contents

For our cash flow hedges that qualify for hedge accounting treatment we use the short-cut method, and thus there are no gains or losses realized due to hedge ineffectiveness. We record unrealized gains or losses from the fair value changes of cash flow hedges in accumulated other comprehensive income. We also reclassified into interest income over the remaining maturity of the hedged variable rate debt the transition adjustment related to cash flow hedges that were recorded in accumulated other comprehensive income as they did not qualify for hedge accounting treatment under SFAS No. 133, as amended.

At March 31, 2005 and December 31, 2004, we recorded net unrealized gains of $1 and $0 net of tax in accumulated other comprehensive income/loss related to our cash flow hedging transactions.

Non-hedging Derivative Instruments

We hold certain interest exchange agreements, on which we have elected not to receive hedge accounting treatment, and related interest rate swaps and fair value hedges that do not qualify for hedge accounting treatment. For the three months ended March 31, 2005 and 2004, we recorded net losses of $1 on all non-hedging derivative instruments.

We hold certain warrants which we received prior to 2004 as part of financing transactions. As of March 31, 2005 and December 31, 2004, these warrants were reflected in other assets at a fair value of $5 and $6. For the three months ended March 31, 2005 and 2004, the warrants recorded in other assets had changes in fair value resulting in a reduction to other income of $1 and $0.

Note 11 – Commitments and Contingencies

Litigation

Various legal proceedings and claims are pending or have been asserted against us, many of which are covered by third parties, including insurance companies. We believe that the final outcome of these proceedings and claims will not have a material adverse effect on our earnings, cash flows and/or financial position.

Restructurings and Restructuring Requests

At March 31, 2005 and December 31, 2004, United accounted for $1,118 and $1,131 (11.9% and 11.7%) of our total portfolio. At March 31, 2005, our United portfolio was secured by security interests in two 767 aircraft and 13 777 aircraft and by an ownership and security interests in five 757 aircraft. At March 31, 2005, United was our second largest customer. United continues to operate under Chapter 11 bankruptcy protection. On June 28, 2004, United’s application to obtain federal loan guarantees was denied by the Airline Transportation Stabilization Board, which also withdrew United’s eligibility to reapply. In March 2005, United obtained approval from the bankruptcy court to extend its debtor-in-possession financing credit facilities through September 30, 2005. United is continuing to pursue alternative financing through private investors. At March 31, 2005, United was current on all of its obligations related to these 20 aircraft.

United retains certain rights by operating under Chapter 11 bankruptcy protection, including the right to reject the restructuring terms with its creditors and return aircraft, including our aircraft. The terms of our restructuring with United, which were approved by the federal bankruptcy court, set forth the terms under which all 20 aircraft financed by us are expected to remain in service upon United’s emergence from Chapter 11 protection. If United exercises its right to reject the agreed upon restructuring terms, the terms of all of the leases and loans with United would immediately revert to the original terms, which are generally less favorable to United. United would retain its rights under Chapter 11 to return our aircraft in the event of a reversion to the original lease and loan terms. During the fourth quarter of 2004, United requested that we restructure our financing terms further as part of its ongoing efforts to emerge from bankruptcy. We are currently evaluating the request from United.

16

Table of Contents

At March 31, 2005 and December 31, 2004, ATA accounted for $501 and $705 (5.4% and 7.3%) of our total portfolio. At March 31, 2005, the ATA portfolio consisted of 12 operating leases for 757 aircraft and a note receivable.

On October 26, 2004, ATA filed for Chapter 11 bankruptcy protection. As a result, on December 29, 2004, we entered into an agreement in principle with ATA whereby ATA agreed to continue to lease the 12 757s under restructured terms and agreed to return eight of the 12 757s during the second half of 2005 and early 2006. The restructured lease terms with ATA, including ATA’s agreement to return the eight aircraft starting in July 2005 are subject to approval by the bankruptcy court. ATA is obligated to pay rent on all aircraft until returned. During the first three months of 2005, following completion of certain conditions, we reclassified the 12 757 finance leases to operating leases due to new lease terms negotiated with ATA. We reduced the carrying value of the leases by $200 to the fair value of the underlying leased assets, of which $119 was recorded as a reduction to the allowance for losses on receivables and $81 was recorded as an intercompany guarantee payable from Boeing, which was owed to us by Boeing at March 31, 2005. In addition, we negotiated a settlement of the guarantees with Boeing for certain 757 leases for $66, which was owed by Boeing at March 31, 2005, and recorded the settlement as unearned lease income. With regard to eight of the 12 aircraft, we have entered into an agreement with Continental Airlines, Inc. (Continental) to lease the aircraft for periods ranging from five to eight years. The timing of the aircraft returns should enable us to meet the delivery dates committed to Continental as part of the agreement.

At March 31, 2005 and December 31, 2004, Hawaiian accounted for $457 and $456 (4.9% and 4.7%) of our total portfolio. At March 31, 2005, the Hawaiian portfolio consisted of 11 717 aircraft and three 767 aircraft. Hawaiian filed for Chapter 11 bankruptcy protection on March 21, 2003. On March 10, 2005, the U.S. Bankruptcy Court approved a proposed reorganization plan subject to ratification of labor agreements with Hawaiian’s pilots. Hawaiian is planning to emerge from bankruptcy during the second quarter of 2005.

Hawaiian retains certain rights by operating under Chapter 11 bankruptcy protection, including the right to reject restructuring terms with its creditors and return aircraft, including our aircraft. The terms of our restructuring with Hawaiian, which were approved by the federal bankruptcy court, set forth the terms under which all 14 aircraft financed by us are expected to remain in service upon Hawaiian’s emergence from Chapter 11 protection.

At March 31, 2005 and December 31, 2004, Viacao Aerea Rio-Grandense (VARIG) accounted for $389 and $400 (4.2% and 4.1%) of our total portfolio. At March 31, 2005, the VARIG portfolio consisted of two 737 aircraft and nine MD-11 aircraft. In recent years, VARIG has repeatedly defaulted on its obligations under leases with us, which has resulted in deferrals and restructurings, some of which are ongoing. Boeing has provided us with first loss deficiency and partial rental guarantees covering $321 of the VARIG obligations. Taking into account these guarantees, we do not expect the VARIG transactions, including the impact of any restructurings, to have a material adverse effect on our earnings, cash flows and/or financial position. We expect to reduce our asset exposure with VARIG during the second quarter of 2005 by exercising an option to terminate two MD-11 leases and selling the aircraft to Boeing’s Commercial Airplanes segment which in turn intends to sell the aircraft to another customer.

We have reviewed our obligations due from our customers for collectibility and have established specific or general allowances as we deemed necessary. In addition to the customers discussed above, some other customers have requested a restructuring of their transactions with us. We have not reached agreement on any other restructuring requests that we believe would have a material adverse effect on our earnings, cash flows and/or financial position.

17

Table of Contents

At March 31, 2005, Boeing and its indirect wholly owned subsidiary, BCSC, had unfunded commercial aircraft financing commitments of $8,716. Based on historical experience, it is not anticipated that all of these commitments will be exercised by the customer. However, if there were to be a requirement to fund all of these commitments, the timing in which these commitments expire is as follows:

We expect to ultimately provide funding for those commitments which are exercised.

In addition to the unfunded commercial aircraft financing commitments by Boeing and its indirect wholly owned subsidiary, BCSC, we had commitments to provide leasing and other financing totaling $628 at March 31, 2005. Based on historical experience, we do not anticipate that we will fund all of these commitments. However, if we were required to fund all unfunded commitments:

We expect to ultimately fund a portion of these unfunded commitments.

Note 12 – Off-Balance Sheet Arrangements

We are a party to off-balance sheet arrangements, including guarantor obligations and variable interests in unconsolidated entities.

Guarantor Obligations

The following table provides data regarding our third party guarantees. The maximum potential payment amounts represent a “worst-case scenario,” and do not necessarily reflect results that we expect. Estimated proceeds from collateral and recourse represent the anticipated values of assets we could liquidate or receive from other parties to offset our payments under guarantees. The carrying value of liabilities recorded on the condensed consolidated balance sheets reflects fees received for extending these guarantees.

18

Table of Contents

Current outstanding deficiency guarantees expire within the next eight years.

Material Variable Interests in Unconsolidated Entities

As of March 31, 2005, we believe that our maximum exposure to economic loss from ETC and EETCs is $257, which represents our investment balance. Accounting losses, if any, from period to period could differ. At March 31, 2005, the ETC and EETC transactions we participated in had total assets of $2,675 and total debt (which is non-recourse to us) of $2,418. During the first quarter of 2005, we recorded revenue of $10 and cash flows of $23 related to these investments.

We believe that our maximum exposure to economic loss from non-consolidated Special Purpose Entities (SPE) arrangements that are VIEs is $40, which represents our investment balance. Accounting losses, if any, from period to period could differ. At March 31, 2005, these SPE arrangements had total assets of $441 and total debt (which is non-recourse to us) of $401. During first quarter of 2005, we recorded revenue of $1 and cash flows of $4 related to these SPEs.

Capital lease obligations

We have off-balance sheet arrangements that relate to capital lease obligations for four cross-border financing transactions each involving an MD-11 aircraft leased by us and subleased to our commercial aircraft customers. At March 31, 2005 these transactions included restricted cash deposits denominated in yen for the equivalent of $110 and an equal amount of liabilities reflecting our obligations to purchase underlying aircraft with these deposits by 2008. These liabilities and corresponding deposits are considered defeased based upon their structure.

Note 13 – Concentrations

Generally, each asset in our portfolio is backed both by the value of the equipment that we have financed and by a particular customer’s credit. Our risk is that both a customer defaults and the current market value of the related equipment does not equal or exceed the amount of our investment. That risk is sometimes mitigated by cross-collateralization or other transactional features. Our risk is also frequently mitigated by transactional support provided by Boeing; that support itself is concentrated on the 717 financing in our portfolio. Because of our mission, our portfolio is concentrated in Boeing equipment financed for Boeing customers. However, because our risk of loss is determined by many factors, the single-factor analyses of our portfolio shown below should not be interpreted as defining our concentrations of risk.

Portfolio carrying values for our five largest customers were as follows:

At March 31, 2005 and December 31, 2004, the AirTran Holdings, Inc. (AirTran) portfolio consisted of 71 and 69 717 aircraft and an EETC investment with a carrying value of $25. For the three months ended March 31, 2005 and 2004, AirTran accounted for more than 10% of our revenue.

19

Table of Contents

At March 31, 2005 and December 31, 2004, the American Airlines, Inc. (American) portfolio consisted of leases on 39 MD-83 aircraft and four MD-82 aircraft, subordinated debt in one 777 aircraft, and final delivery payment loans on nine 767 aircraft and two 777 aircraft.

Portfolio carrying values were represented in the following regions:

Portfolio carrying values were represented by the following product types: