Item 1. Business
General
McDonnell Douglas Finance Corporation (together with its subsidiaries the "Company") is a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation ("MDFS"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("McDonnell Douglas"). The Company was incorporated in Delaware in 1968 and originally financed only McDonnell Douglas manufactured commercial jet transport aircraft. While this continues to represent a significant portion of the Company's business, the Company also provides a diversified range of financing including loans, finance leases and operating leases, primarily involving equipment for commercial and industrial customers. At December 31, 1996, the Company had 70 employees.
On December 14, 1996, McDonnell Douglas and The Boeing Company ("Boeing") entered into a definitive agreement whereby a wholly-owned subsidiary of Boeing will merge into McDonnell Douglas in a stock-for-stock transaction with McDonnell Douglas surviving as a wholly-owned subsidiary of Boeing. The transaction is subject to approval by the shareholders of both companies and certain regulatory agencies; it is expected to close as early as mid-1997. The following discussions throughout this Form 10-K do not consider any effects the merger may have on the Company or on its relationship with McDonnell Douglas. See "Relationship with McDonnell Douglas."
The Company now operates in principally two segments: commercial aircraft financing and commercial equipment leasing ("CEL"). Prior to 1995, the Company operated in three segments: commercial aircraft financing, CEL and non-core businesses. Non-core businesses represented market segments in which the Company is no longer active, and the Company continues to manage and liquidate the remaining non-core businesses as market opportunities occur. Based on trends to date, the Company does not expect to incur significant losses related to the disposal of its non-core businesses. At December 31, 1996 and 1995, the portfolio balances for non-core businesses totaled $44.9 million and $80.6 million.
Information on the Company's continuing businesses is included in the following tables.
For financial information about the Company's segments, see Notes to Consolidated Financial Statements included in Item 8.
Commercial Aircraft Financing Segment
The Company's commercial aircraft financing group, located in Long Beach, California, provides financing for customers purchasing aircraft. The Company primarily purchases aircraft from McDonnell Douglas and provides airline customers financing alternatives, including lease transactions and secured and unsecured notes receivable financing. A substantial majority of the commercial aircraft portfolio is comprised of aircraft manufactured by McDonnell Douglas. Additionally, this group assists the McDonnell Douglas aircraft financing group with respect to financing some McDonnell Douglas aircraft by others.
Portfolio balances for the Company's commercial aircraft financing segment are summarized as follows:
At December 31, 1996, the Company's commercial aircraft portfolio was comprised of finance leases to 27 customers (24 domestic and three foreign) with a carrying amount of $1,269.5 million (48.3% of total Company portfolio), notes receivable from six customers (three domestic and three foreign) with a carrying amount of $87.4 million (3.3% of total Company portfolio) and operating leases to 14 customers (ten domestic and four foreign) with a carrying amount of $458.0 million (17.4% of total Company portfolio).
At December 31, 1996, 61.5% of the Company's total portfolio consisted of financings related to McDonnell Douglas aircraft, compared with 61.6% and 62.8% in 1995 and 1994.
o Factors Affecting the Commercial Aircraft Financing Portfolio
A substantial portion of the Company's total portfolio is concentrated among the Company's largest commercial aircraft financing customers. The five largest commercial aircraft financing customers accounted for $1,172.4 million (44.6% of total Company portfolio) and $865.2 million (43.5% of Company total portfolio) at December 31, 1996 and 1995.
The Company's largest customer, Federal Express Corporation, accounted for $316.1 million (12.0% of the total Company portfolio) and $220.4 million (11.1% of total Company portfolio) at December 31, 1996 and 1995.
The Company's second largest customer, P. T. Garuda Indonesia ("Garuda"), accounted for $279.4 million (10.6% of the total Company portfolio) and $182.7 million (9.2% of the total Company portfolio) at December 31, 1996 and 1995. At December 31, 1996, $101.6 million of Garuda's outstandings were represented by an aircraft which the Company has the right to sell to McDonnell Douglas in June of 1997 at the Company's original purchase price.
Trans World Airlines, Inc. ("TWA") accounted for $249.5 million (9.5% of total Company portfolio) and $279.9 million (14.1% of total Company portfolio) at December 31, 1996 and 1995. In 1996, 1995 and 1994, TWA accounted for 18.0%, 21.6% and 19.8% of the Company's operating income; no other customer accounted for more than 10% of the Company's operating income. TWA continues to operate under a reorganization plan, confirmed by the United States Bankruptcy Court in 1995, that restructured its indebtedness and leasehold obligations to its creditors. In addition, TWA continues to face financial and operational challenges due in part to an airliner crash in July 1996 and turnover of key management, which occurred during 1996. McDonnell Douglas provides to the Company guaranties of certain obligations under various lease agreements between the Company and TWA. At December 31, 1996, the maximum aggregate coverage under such guaranties was $45.6 million. In addition, McDonnell Douglas provides supplemental guaranties in favor of the Company for up to an additional $10.0 million of the Company's financings to TWA. These guaranties supplement individual guaranties provided by McDonnell Douglas with respect to certain of the Company's financings to TWA to the extent that the estimated fair market value of the financings (after applying the individual guaranties) is less than the net asset value of the financings on the Company's books. The supplemental guaranties terminate in March 1998, but may be extended under certain limited circumstances. The reorganization plan and TWA's current financial condition have not had and, assuming TWA's financial condition does not further deteriorate, and taking into account the McDonnell Douglas guaranties, are not expected to have a material adverse effect on the Company's earnings, cash flow, or financial position. See "Aircraft Financing Guaranties."
Great Lakes Aviation, Ltd. ("Great Lakes") is in arrears in the payment of rent under the lease of two Embraer Brasilia commuter aircraft. Great Lakes has stated that it will submit to the Company a proposal for repayment of the delinquent sums. The net asset value of the aircraft leased to Great Lakes at December 31, 1996, was $14.4 million. Taking into account the available allowance for losses, the Company does not expect this transaction to have a material adverse impact on its earnings, cash flow, or financial condition.
The $100.0 million aircraft purchase bridge facility made available by the Company to ValuJet Airlines, Inc. ("ValuJet") in 1995 was reduced to a maximum of $50.0 million by mutual agreement during the third quarter of 1996. This facility expires upon delivery to ValuJet of the first scheduled new McDonnell Douglas MD-95 aircraft, presently expected to occur in 1999. Borrowings under this agreement must be repaid within 180 days and the interest rate is based on the London Interbank Offering Rate ("LIBOR"). There were no amounts outstanding under this agreement at December 31, 1996. At December 31, 1995, receivables outstanding pursuant to this agreement totaled $8.7 million.
o Current Commercial Aircraft Market Conditions
The Company's financial performance is dependent in part upon general economic conditions which may affect the profitability of the commercial airlines with which the Company does business. The Company continues to look for opportunities to expand its commercial aircraft portfolio while taking advantage of improving market conditions to reduce concentration and certain exposure levels.
The Company believes that realizable values for its aircraft at lease maturity are likely to remain above the values actually booked, but this is subject to many uncertainties including those referred to in "Factors Affecting Aircraft Financing Volume." If aircraft values decline and the Company is required as a result of customer defaults to repossess a substantial number of aircraft prior to the expiration of the related lease or financing, the Company could incur substantial losses in remarketing the aircraft, which could have a material adverse effect on the Company's earnings, cash flow or financial position.
o Aircraft Leasing
The Company normally purchases commercial aircraft for lease to airlines only when such aircraft are subject to a signed lease contract. At December 31, 1996, the Company owned or participated in the ownership of 133 leased commercial aircraft, including 71 that were manufactured by McDonnell Douglas.
o Factors Affecting Aircraft Financing Volume
The Company's financial performance is dependent in part upon general economic conditions which may affect the profitability of the commercial airlines with which the Company does business. During 1996, McDonnell Douglas received orders amounting to four percent of the total narrow-body and wide-body orders received in the commercial aircraft industry. McDonnell Douglas expected to receive a higher level of orders in 1996. As the year progressed, it became apparent that McDonnell Douglas's share of commercial aircraft orders would be minimal. Airline customer orders in which McDonnell Douglas expected to participate were instead recorded by its competitors. In addition, a few significant customers previously supportive of McDonnell Douglas have either expressed reduced confidence in McDonnell Douglas's existing product line or have made decisions to convert to aircraft of a competitor. During this same period, McDonnell Douglas studied the feasibility of developing a new high-capacity, long-range three-engine jetliner, designated the MD-XX. In October 1996, subsequent to a disappointing first nine months of new orders, McDonnell Douglas decided not to proceed with this proposed aircraft. Several factors influenced the decision. Key among those were a high level of risk, marketplace price expectations, and the amount of product and internal infrastructure investment (estimated at up to $15 billion) required to bring McDonnell Douglas to the level of the other major players in the commercial aerospace industry.
McDonnell Douglas's presence in the commercial aerospace industry will be focused on its existing product line of MD-80 and MD-90 twin jets and MD-11 trijet commercial aircraft, its MD-95 twin jet in development, and its commercial aircraft modification, support, spare parts and related services. The impact of the decision not to proceed with the MD-XX on existing orders and options and on future orders of its existing product line, and on the Company, is uncertain. However, as mentioned above, reduced confidence expressed by a few significant existing customers and customer movement is likely to have negative ramifications. McDonnell Douglas has emphasized cost reduction efforts during recent years and those efforts will continue. Significant price competition also currently exists in the marketplace, and McDonnell Douglas's competitors offer broader product lines.
The Company anticipates continued fluctuations in the volume of its aircraft financing transactions. At December 31, 1996, the Company had unused credit lines available to a customer totaling $50.0 million. The Company had no other commitments to provide aircraft related financing at December 31, 1996. See "Competition and Economic Factors."
The following lists information on new business volume for the Company's commercial aircraft financing segment:
o Aircraft Financing Guaranties
At December 31, 1996, the Company had $521.3 million of guaranties in its favor with respect to its commercial aircraft financing portfolio relating to transactions with a carrying amount of $1,356.6 million (74.7% of the commercial aircraft financing portfolio). The following table summarizes such guaranties:
The Company has no reason to believe that any such guaranteed amounts will be ultimately unenforceable or uncollectible. See "Relationship With McDonnell Douglas."
Commercial Equipment Leasing Segment
CEL provides single-investor, tax-oriented lease financing as its primary product. In addition, CEL participates in senior secured bank loans. CEL, which maintains its principal operations in Long Beach, California and has marketing offices in Chicago, Illinois and Detroit, Michigan, obtains its business primarily through direct solicitation by its marketing personnel. CEL specializes in leasing equipment such as machine tools, executive aircraft, highway vehicles, containers and chassis, and printing equipment and other types of equipment which it believes will maintain strong collateral and residual values. The lease term is generally between three and ten years and transaction sizes usually range between $2.0 million and $20.0 million.
Portfolio balances for the Company's CEL segment are summarized as follows:
o Factors Affecting CEL Volume
As the Company's borrowing costs have declined in recent years, CEL's ability to compete more effectively has increased significantly. In 1996, CEL booked $392.0 million of new business volume, representing a $150.9 million increase over 1995 bookings. At year end, CEL's backlog of business was $76.6 million, compared to $116.6 million at December 31, 1995.
The Company is presently attempting to grow its CEL portfolio at a relatively faster rate than its commercial aircraft portfolio in order to achieve a better balance of its overall portfolio. Additionally, the Company is considering increasing the amount of its financings to foreign borrowers and lessees. For a discussion of additional risks associated with foreign financings, see "Cross-Border Outstandings."
The following lists information on new business volume for the Company's CEL segment:
Cross-Border Outstandings
The extension of credit to borrowers located outside of the United States is called "cross-border" credit. In addition to the credit risk associated with any borrower, these particular credits are also subject to "country risk" -- economic and political risk factors specific to the country of the borrower which may make the borrower unable or unwilling to pay principal and interest or otherwise perform according to contractual terms. Other risks associated with these credits include the possibility of insufficient foreign exchange and restrictions on its availability. The countries in which the Company's cross-border outstandings exceeded 1% of consolidated assets, net of domestic guaranties, consisted of the following at December 31, 1996, 1995 and 1994:
At December 31, 1996 and 1994 there were no countries in which customer outstandings were between 0.75% and 1% of the Company's total assets. At December 31, 1995, the Company had equipment in Mexico under both a finance lease and an operating lease agreement with an aggregate net carrying amount of $15.6 million and equipment in Belgium under an operating lease agreement with a net carrying amount of $16.0 million, representing outstandings between 0.75% and 1% of the Company's total assets.
Maturities and Sensitivity to Interest Rate Changes
The following table shows the maturity distribution and sensitivity to changes in interest rates of the Company's domestic and foreign financing receivables at December 31, 1996:
Allowance for Losses on Financing Receivables and Credit Loss Experience
The portfolio at December 31, 1996 includes five CEL obligors and one airline obligor to which payment extensions have been granted. At December 31, 1996 payments so extended amounted to $7.7 million ($5.0 million airline-related), and the aggregate carrying amount of the related receivables was $282.6 million ($249.5 million airline-related).
Receivable Write-offs, Net of Recoveries by Segment
The following table summarizes the loss experience for the Company's continuing businesses:
In its analysis of the allowance for losses on financing receivables, the Company has taken into consideration the current economic and market conditions and provided $14.2 million and $12.2 million in 1996 and 1995 for losses. The Company believes that the allowance for losses on financing receivables is adequate at December 31, 1996 to cover potential losses in the Company's total portfolio. If, however, certain major customers defaulted and the Company were forced to take possession of and dispose of significant amounts of aircraft or equipment, losses in excess of the allowance could be incurred, which would be charged directly against earnings.
The Company's receivable write-offs, net of recoveries, decreased in 1996 as compared to 1995 primarily attributable to certain aircraft that were repossessed during 1995.
Nonaccrual and Past Due Financing Receivables
Financing receivables accounted for on a nonaccrual basis consisted of the following at December 31:
Interest on receivables which are contractually past due 90 days or more as to principal and interest payments is being accrued for domestic financings of $0.9 million and $0.6 million at December 31, 1996 and 1995.
Borrowing Operations
The Company principally relies on funds from operations and borrowings to operate its business. Borrowings include commercial paper, secured and unsecured senior and subordinated long-term debt, and bank borrowings. The Company also utilizes interest rate swap agreements to manage interest costs and risk associated with changing interest rates. See Note 7 of Notes to Consolidated Financial Statements included as Item 8.
The Company has a joint revolving credit agreement under which the Company may borrow up to $240 million, reduced by borrowings of up to $16 million that can be made by MDFS under this agreement. At December 31, 1996 and 1995, borrowings under commercial paper and uncommitted short-term bank facilities totaling $141.0 million and $10.0 million, respectively, were supported by available unused commitments under the revolving credit agreement. The Company also has available approximately $95 million in uncommitted, short-term bank credit facilities. At December 31, 1996 and 1995, there were no amounts outstanding under the revolving credit agreement.
The Company has an effective shelf registration statement relating to up to $750 million aggregate principal amount of debt securities. The Company established a $500 million medium-term note program under the shelf registration and, as of December 31, 1996, has issued and sold $490 million in aggregate principal amount of securities under the program. On January 15, 1997, the Company authorized the sale and issuance of the remaining $250 million aggregate principal amount of such securities under the shelf registration.
The following table sets forth the average debt of the Company by borrowing classification:
The weighted average interest rates on all outstanding indebtedness computed for the relevant period were as follows:
The Company's access to capital at rates that allow for a reasonable return on new business is affected by credit rating agencies' ratings of the Company's debt. Currently, the Company's senior debt is rated A- and subordinated debt is rated BBB+ by both Standard and Poor's ("S&P") and Duff & Phelps Credit Rating Company ("DCR"). Moody's Investors Service ("Moody's") rates the Company's senior and subordinate debt Baa2 and Baa3, respectively. Commercial paper is rated A2, D1- and P2 by S&P, DCR and Moody's, respectively. On December 16, 1996, all three rating agencies placed the Company on review with positive implications.
Although security ratings impact the rate at which the Company can borrow funds, a security rating is not a recommendation to buy, sell or hold securities. In addition, a security rating is subject to revision or withdrawal at any time by the assigning rating organization and each rating should be evaluated independently of any other rating.
Competition and Economic Factors
The Company is subject to competition from other financial institutions, including commercial banks, finance companies and leasing companies, some of which are larger than the Company and have greater financial resources, greater leverage ability and lower effective borrowing costs. These factors permit many competitors to provide financing at lower rates than the Company. In its commercial equipment leasing and commercial aircraft financing segments, the ability of the Company to compete in the marketplace is principally based on rates which the Company charges its customers, which rates are related to the Company's access to and cost of funds and to the ability of the Company to utilize tax benefits attendant to leasing. See "Borrowing Operations" and "Relationship With McDonnell Douglas." Competitive factors also include, among other things, the Company's ability to be relatively flexible in its financing arrangements with new and existing customers.
The Company has in the past obtained a significant portion of its leasing business and notes receivable in connection with the lease or sale of McDonnell Douglas aircraft. The Company's relationship with McDonnell Douglas has in many cases presented opportunities for such business and has caused McDonnell Douglas to offer to the Company substantially all of the financing receivables taken by McDonnell Douglas upon the sale of its aircraft. See "Relationship With McDonnell Douglas." In past years many customers have obtained their financing for McDonnell Douglas aircraft through sources other than the Company or McDonnell Douglas, reflecting a broader range of competitive financing alternatives available to McDonnell Douglas customers. Consolidation in the United States airline industry as a result of bankruptcies and mergers has resulted in an increase in the concentration of the Company's McDonnell Douglas aircraft financings in a smaller number of larger airlines and there has been greater concentration of the Company's portfolio in commercial aircraft financing. With a larger portion of the portfolio concentrated in McDonnell Douglas aircraft financings, the risk to the Company resulting from any future declining creditworthiness of airlines has increased. See "Commercial Aircraft Financing Segment" and "Allowance for Losses on Financing Receivables and Credit Loss Experience."
Aircraft owned or financed by the Company may become significantly less valuable because of the discontinuation of existing aircraft models or the introduction of new aircraft models which may be more economical to operate, the aging of particular aircraft, technological obsolescence such as that caused by legislation for noise abatement which will over time prohibit the use of older, noisier (Stage 2) aircraft in the United States by year end 2000, or an oversupply of aircraft for sale. In any such event, carrying amounts on the Company's books may be reduced if, in the judgment of management, such carrying amounts are greater than market value (including estimated lease values), which would result in recognition of a loss to the Company. At December 31, 1996, the Company's carrying amount of Stage 2 aircraft totaled $63.3 million (3.5% of the Company's total aircraft portfolio, including any aircraft held for sale or re-lease); however, all of the Company's Stage 2 aircraft will have book values approximating the aircraft's scrap value by the year 2000.
Although the Company is particularly subject to risks attendant to the airline and aircraft manufacturing industries, the ability of the Company to generate new business also is dependent upon, among other factors, the capital equipment requirements of United States and foreign businesses and the availability of capital.
Relationship With McDonnell Douglas
McDonnell Douglas is principally engaged in the design, development and production of government and commercial aerospace products. For the year ended December 31, 1996, McDonnell Douglas recorded revenues of $13.8 billion and net earnings of $788 million. At December 31, 1996, McDonnell Douglas had assets of $11.6 billion and shareholders' equity of $3.0 billion.
If the financial well-being of McDonnell Douglas (or any other future ultimate shareholder of the Company) were to decline significantly below current levels, the Company's ability to enter into significant amounts of new business in the future could be materially constrained. Two of the principal industry segments in which McDonnell Douglas operates, military aircraft and commercial aircraft, are especially competitive and have a limited number of customers. The commercial aircraft business is market sensitive, which causes disruptions in production and procurement and attendant costs, and requires large investments to develop new derivatives of existing aircraft or new aircraft. McDonnell Douglas announced in October 1996 that it decided not to build the MD-XX, a proposed new trijet, due to projected costs and other factors. McDonnell Douglas's market share of firm order backlog for new commercial aircraft has declined significantly in the past several years. McDonnell Douglas's commercial backlog decreased during 1996, while backlog for its two major competitors increased substantially. McDonnell Douglas's ability to generate additional orders is subject to its ability to operate successfully as a niche player. See "Commercial Aircraft Financing Segment," for further discussion of this risk. Approximately 39 percent of McDonnell Douglas's firm backlog for commercial aircraft is scheduled for delivery during 1997 and an additional 20 percent is scheduled during 1998. If difficulties recur in the commercial airline industry, airlines may decline deliveries of aircraft, request changes in delivery schedules, or default on contracts for firm orders. At December 31, 1996, McDonnell Douglas has provided $470.2 million of guaranties on the Company's aircraft portfolio, including first loss guaranties. In the event a substantial portion of the guaranties become payable and in the unlikely event that McDonnell Douglas is unable to honor its obligations under these guaranties, such event could have a material adverse effect on the Company's earnings, cash flow or financial position. In addition, McDonnell Douglas is the obligor in a small number of the Company's commercial aircraft transactions and largely as a result thereof, at December 31, 1996, McDonnell Douglas was the lessee for $83.9 million of the Company's commercial aircraft portfolio.
For a further description of significant factors which may affect McDonnell Douglas, see McDonnell Douglas's Form 10-K for the year ended December 31, 1996 (Securities and Exchange Commission file number 1-3685). Until the Boeing-McDonnell Douglas merger is completed, its impact, if any, on the Company's relationship with McDonnell Douglas cannot be determined. Consummation of the Boeing-McDonnell Douglas merger would result in the Company having a new ultimate shareholder and this could result in significant changes in the Company's relationship with McDonnell Douglas and the Operating Agreement and tax arrangement discussed below.
o Operating Agreement
The relationship between the Company and McDonnell Douglas is governed by an operating agreement (the "Operating Agreement"), which formalizes certain aspects of the relationship between the companies, principally those relating to the purchase and sale of McDonnell Douglas aircraft receivables, the leasing of McDonnell Douglas aircraft, the resale of McDonnell Douglas aircraft returned to, or repossessed by, the Company under leases or secured notes, and the allocation of federal income taxes between the companies.
Under the Operating Agreement, McDonnell Douglas is required to offer to the Company all promissory notes, conditional sales contracts and certain other receivables obtained by McDonnell Douglas in connection with the sale of its commercial transport aircraft, except for any receivable that McDonnell Douglas acquires in a transaction which, in its opinion, involves unusual or exceptional circumstances or which it acquires with the expressed intention of selling to a purchaser other than the Company.
The Company is obligated under the Operating Agreement to purchase all aircraft receivables offered by McDonnell Douglas, unless (a) it is unable or deems it inappropriate to obtain or allocate funds for the acquisition, (b) the receivables do not meet the Company's customary standards as to terms and conditions or creditworthiness, or (c) the amount of the receivable offered, when added to the amount of receivables of the same obligor then held by the Company, would exceed the amount that the Company deems prudent to hold.
The prices to be paid for notes receivable purchased from McDonnell Douglas are intended to produce reasonable returns to the Company, taking into account the rates of return realized by independent finance companies, the Company's assessment of the credit risk and the Company's projected borrowing costs and expenses. In cases where credit risks associated with a note receivable are not acceptable to the Company, the Company may refuse to accept the note receivable or may condition its acceptance upon receipt of a guaranty from McDonnell Douglas with a negotiated fee to be paid by the Company for the guaranty. See "Commercial Aircraft Financing Segment - Aircraft Financing Guaranties."
With respect to aircraft leasing activities, unlike the purchase of other aircraft receivables which are acquired by McDonnell Douglas and sold to the Company, the Company may make lease proposals directly to the prospective customers. If a lease proposal is accepted, the Company enters into a lease with the customer and purchases the aircraft from McDonnell Douglas on the terms negotiated between McDonnell Douglas and the customer. Under the Operating Agreement the Company may make a lease proposal to any customer desiring to lease an aircraft for two years or more, but the Company may decline to make a proposal or may condition its proposal upon a full or partial guaranty from McDonnell Douglas, with a negotiated fee, if any, to be paid by the Company for the guaranty.
The Company has the option under the Operating Agreement to tender to McDonnell Douglas any McDonnell Douglas aircraft returned to or repossessed by the Company under a lease or security instrument at a price equal to the fair market value of the aircraft less 10%. This provision does not include McDonnell Douglas aircraft leased under a partnership arrangement in which the Company is one of the partners, or McDonnell Douglas aircraft subject to third party liens or other security interests, unless the Company and McDonnell Douglas determine that purchase by McDonnell Douglas is desirable. At December 31, 1996, the carrying amount of McDonnell Douglas aircraft potentially excluded by this provision amounted to approximately $48.2 million.
o Federal Income Taxes
The Company and McDonnell Douglas presently file a consolidated federal income tax return, with the consolidated tax payments, if any, being made by McDonnell Douglas. The Operating Agreement provides that so long as consolidated federal tax returns are filed, payments shall be made, directly or indirectly, by McDonnell Douglas to the Company or by the Company to McDonnell Douglas, as appropriate, equal to the difference between the consolidated tax liability and McDonnell Douglas's tax liability computed without consolidation with the Company. If, subsequent to any such payments by McDonnell Douglas, it incurs tax losses which may be carried back to the year for which such payments were made, the Company nevertheless will not be obligated to repay to McDonnell Douglas any portion of such payments.
The Company and McDonnell Douglas have been operating since 1975 under an informal arrangement, which has entitled the Company to rely upon the realization of tax benefits for the portion of projected taxable earnings of McDonnell Douglas allocated to the Company. This has been important in planning the volume of and pricing for the Company's leasing activities. Under the current arrangement, McDonnell Douglas presently charges or credits the Company for the corresponding increase or decrease in McDonnell Douglas's taxes (disregarding alternative minimum taxes) resulting from the Company's inclusion in the consolidated federal income tax return of McDonnell Douglas. Intercompany payments are made when such taxes are due or tax benefits are realized by McDonnell Douglas based on the assumption, pursuant to an informal arrangement, that taxes are due or tax benefits are realized up to 100% of the amounts forecasted by the Company with the amounts in excess of such forecast due in the year realized by McDonnell Douglas.
The Company's ability to price its business competitively and obtain new business volume is significantly dependent on its ability to realize the tax benefits generated by its leasing business. In some cases, the yields on receivables, without regard to tax benefits, may be less than the Company's related financing costs. To the extent that McDonnell Douglas would be unable on a long-term basis to utilize such tax benefits, or if the informal arrangement is not continued in its present form, the Company would be required to restructure its financing activities and to reprice its new financing transactions so as to make them profitable without regard to McDonnell Douglas's utilization of tax benefits since there can be no assurance that the Company would be able to utilize such benefits currently. No assurances can be given that the Company would be successful in restructuring its financing activities. See "Competition and Economic Factors."
o Intercompany Services
McDonnell Douglas provides to the Company certain payroll, employee benefit, facilities and other services, for which the Company generally pays McDonnell Douglas the actual cost. See Note 9 of Notes to Consolidated Financial Statements included as Item 8.
o Intercompany Credit Arrangements
The Company and McDonnell Douglas maintain separate borrowing facilities and there are no arrangements for joint use of credit lines by the companies. Bank credit and other borrowing facilities are negotiated by the Company on its own behalf. There are no provisions in the Company's debt instruments that provide that a default by McDonnell Douglas on McDonnell Douglas debt constitutes a default on Company debt. There are no guaranties, direct or indirect, by McDonnell Douglas of the payment of any debt of the Company.
The Company has an arrangement with McDonnell Douglas, terminable at the discretion of either of the parties, pursuant to which the Company may borrow from McDonnell Douglas and McDonnell Douglas may borrow from the Company, funds for periods up to 30 days at a market rate of interest. Under these arrangements, there were no outstanding balances at December 31, 1996 and 1995. During 1996, the Company did not borrow under this agreement and did not lend to McDonnell Douglas.
Under a similar arrangement, the Company may borrow from MDFS, and MDFS may borrow from the Company, funds for periods up to 30 days at the Company's cost of funds for short-term borrowings. Under this arrangement, borrowings of $20.3 million and $3.7 million were outstanding at December 31, 1996 and 1995. During 1996, the Company's highest level of borrowings from MDFS and highest level of loans to MDFS were $40.5 million and $67.8 million, respectively.
Under another arrangement, McDonnell Douglas Realty Company, a wholly-owned subsidiary of McDonnell Douglas, owed the Company $1.7 million and $14.6 million at December 31, 1996 and 1995. The note is payable on demand and accrues interest at a rate equal to a market rate of interest.
Item 2.
Item 2. Properties
The Company leases all of its office space and other facilities. The Company's principal office is subleased from McDonnell Douglas, at fair market value. The Company believes that its properties, including the equipment located therein, are suitable and adequate to meet the requirements of its business.
Item 3.
Item 3. Legal Proceedings
On November 1, 1996, The Allen Austin Harris Group, Inc. ("Plaintiff") filed a complaint in the Superior Court of the State of California, County of Alameda, against the Company, McDonnell Douglas, McDonnell Douglas Aerospace - Middle East Limited and the Selah Group, Inc. (the "Defendants"). The Plaintiff, which had hoped to establish a manufacturing plant abroad with various assistance from the Defendants, seeks more than $57.0 million in alleged damages (primarily consisting of lost profits) based on various theories. The Company believes it has meritorious defenses to all of the allegations and that the litigation will have no material adverse effect on the Company's earnings, cash flow or financial condition.
A number of legal proceedings and claims are pending or have been asserted against the Company. A substantial number of such legal proceedings and claims are covered by third parties, including insurance companies. The Company believes that the final outcome of such proceedings and claims will not have a material adverse effect on its earnings, cash flow, or financial position.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
All of the Company's preferred and common stock is owned by MDFS. In 1996, the Company did not declare or pay any dividends to MDFS on its common stock compared to dividends of $27.5 million declared and paid in 1995. The Company paid $3.5 million in dividends on its preferred stock in 1996 and 1995. Preferred stock dividends of $0.6 million payable to MDFS were accrued at December 31, 1996.
The provisions of various credit and debt agreements require the Company to maintain a minimum net worth, restrict indebtedness, and limit cash dividends and other distributions. Under the most restrictive provision, $68.4 million of the Company's income retained for growth was available for dividends at December 31, 1996.
Item 6. Selected Financial Data
The selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements at December 31, 1996 and for the year then ended and with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The following table sets forth selected consolidated financial data for the Company:
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with the consolidated financial statements included in Item 8.
From time to time, the Company may make certain statements that contain projections or "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risk and uncertainty. Certain statements in this Form 10-K, and particularly in Items 1, 3 and 7, may contain forward-looking information. The subject matter of such statements may include, but are not limited to, the consummation of the Boeing-McDonnell Douglas merger and its possible effects, future earnings, costs, expenditures, losses, residual values, and various business environment trends. In addition to those contained herein, forward-looking statements and properties may be made by management orally or in writing including, but not limited to, various sections of the Company's filings with the Securities and Exchange Commission under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Actual results and trends in the future may differ materially from projections depending on a variety of factors including, but not limited to, the timing and consummation of the Boeing-McDonnell Douglas merger and the Company's relationship with McDonnell Douglas as well as its new ultimate shareholder, the capital equipment requirements of United States and foreign businesses, capital availability and cost, changes in laws and tax benefits, competition from other financial institutions, the Company's successful execution of internal operating plans, defaults by customers, regulatory uncertainties, and legal proceedings.
Capital Resources and Liquidity
The Company has significant liquidity requirements. The Company attempts to fund its business such that scheduled receipts from its portfolio will cover its expenses and debt payments as they become due. The Company believes that, absent a severe or prolonged economic downturn which results in defaults materially in excess of those provided for, receipts from the portfolio will cover the payment of expenses and debt payments when due. If cash provided by operations, issuance of commercial paper, borrowings under bank credit lines and term borrowings do not provide the necessary liquidity, the Company would be required to restrict its new business volume unless it obtained access to other sources of capital at rates that would allow for a reasonable return on new business. The Company has a $240 million revolving credit agreement which is reduced by borrowings of up to $16 million made by MDFS. At December 31, 1996 and 1995, borrowings under commercial paper and uncommitted short-term bank facilities totaling $141.0 million and $10.0 million, respectively, were supported by available unused commitments under the revolving credit agreement. The Company also accesses the public debt market and anticipates using proceeds from the issuance of additional public debt to fund future growth. In 1996, the Company issued $355.0 million of public senior and subordinated unsecured notes. See "Item 1. Business - - Borrowing Operations."
1996 vs. 1995
Finance lease income increased $14.3 million (13.7%) in 1996 compared to 1995, primarily attributable to increased volume for 1996 and the 1995 fourth quarter financings of two MD-11aircraft.
Interest on notes receivable in 1996 was $2.8 million (10.3%) lower than 1995, primarily attributable to aircraft repossessed under defaulted loans and leased in 1995 and notes that matured in 1995.
Operating lease income, net of depreciation expense, increased $14.0 million (34.1%) in 1996 compared to 1995, primarily attributable to the March 1996 financing of two MD-11s and the March 1995 financing of two MD-82 aircraft under operating lease agreements.
Net gain on disposal or re-lease of assets increased $10.9 million (greater than 125%) in 1996 compared to 1995, attributable primarily to equipment sales within the commercial equipment leasing portfolio and sales within the commercial aircraft financing portfolio.
Interest expense increased $15.4 million (15.1%) in 1996 compared to 1995, primarily attributable to a higher level of debt borrowings in 1996, resulting from increased financing activity.
Provision for losses increased $2.0 million (16.4%) during 1996 compared to 1995, primarily attributable to increased financing activity.
1995 vs. 1994
Portfolio income (lease and interest income) increased $4.0 million (2.4%), primarily attributable to increased financing volume.
Net gain on disposal or re-lease of assets decreased $2.4 million (21.6%) during 1995 compared to 1994, primarily attributable to a $1.3 million gain in 1994 from a sale of an executive jet within the CEL portfolio and $1.2 million of losses in 1995 due to a prepayment of a commercial aircraft financing note.
Other income increased $2.2 million (31.0%) during 1995 compared to 1994, primarily attributable to a $1.0 million gain recognized in 1995 related to a debt maturity, and $0.6 million recognized in 1995 related to certain arrangements in connection with the Company's deferral agreement with TWA.
Interest expense decreased $6.4 million (5.9%) during 1995 compared to 1994, primarily attributable to the Company's refinancing of a portion of its high coupon debt with lower coupon debt.
Provision for losses increased $2.3 million (23.2%) during 1995 compared to 1994, primarily attributable to the overall increase in the Company's portfolio balances. The allowance for losses on financing receivables as a percent of the portfolio at December 31, 1995 and December 31, 1994 was 2.1% and 2.2%, respectively.
Operating expenses decreased $3.9 million (25.7%) during 1995 compared to 1994, attributable primarily to the closing of certain of the Company's former non-core businesses.
Other expenses decreased $7.4 million (60.2%) during 1995 compared to 1994, attributable primarily to a decrease of $3.2 million related to real estate owned expenses and the 1994 realization of the Company's $3.5 million foreign translation loss.
Item 8. Financial Statements and Supplementary Data
The following pages include the consolidated financial statements of the Company as described in Item 14 (a) 1 and (a) 2 of Part IV herein.
Report of Independent Auditors
Shareholder and Board of Directors McDonnell Douglas Finance Corporation
We have audited the accompanying consolidated balance sheet of McDonnell Douglas Finance Corporation (a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income and income retained for growth, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDonnell Douglas Finance Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets as of December 31, 1994, 1993 and 1992, and the related consolidated statements of income and income retained for growth, and cash flows for the years ended December 31, 1993 and 1992 (none of which are presented separately herein); and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the selected financial data for each of the five years in the period ended December 31, 1996, appearing on pages 19 - 20 is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived.
/s/ ERNST & YOUNG LLP
January 22, 1997
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
McDonnell Douglas Finance Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1996
Note 1 -- Organization and Summary of Significant Accounting Policies
Organization McDonnell Douglas Finance Corporation (the "Company") is a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation ("MDFS"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("McDonnell Douglas"). The Company was incorporated in Delaware in 1968 and provides equipment financing and leasing arrangements to a diversified range of customers and industries. The Company's primary operations include two financial reporting segments: commercial aircraft financing and commercial equipment leasing. The commercial aircraft financing segment provides customer financing services to McDonnell Douglas components, primarily Douglas Aircraft Company, and also provides financing for the acquisition of non- McDonnell Douglas aircraft. The commercial equipment leasing segment is principally involved in large financing and leasing transactions for a diversified range of equipment.
Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 1996 presentation.
Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Finance Leases At lease commencement, the Company records the lease receivable, estimated residual value of the leased equipment and unearned lease income. Income from leases is recognized over the terms of the leases so as to approximate a level rate of return on the net investment. Residual values, which are reviewed periodically, represent the estimated amount to be received at lease termination from the disposition of leased equipment.
Initial Direct Costs Initial direct costs are deferred and amortized over the related financing terms.
Cash Equivalents The Company considers all cash investments with original maturities of three months or less to be cash equivalents. Cash equivalents at December 31, 1996 and 1995 were $15.3 million and $10.0 million. At December 31, 1996 and 1995, the Company has classified as other assets restricted cash deposited with banks in interest bearing accounts of $42.5 million and $37.2 million for specific lease rents and contractual purchase options related to certain aircraft leased by the Company under capital lease obligations, and security against recourse provisions related to certain note and lease receivable sales.
Allowance for Losses on Financing Receivables The allowance for losses on financing receivables includes consideration of such factors as the risk rating of individual credits, economic and political conditions, guaranties, prior loss experience and results of periodic credit reviews.
Collateral that is repossessed in satisfaction of a receivable is transferred to equipment held for sale or re-lease at the lower of the former receivable amount or estimated net realizable value.
Equipment Under Operating Leases Rental equipment subject to operating leases is recorded at cost and depreciated over its useful life or lease term to an estimated salvage value, primarily on a straight-line basis.
During 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption thereof had no material effect on the Company's financial position or operating results.
Income Taxes The operations of the Company are included in the consolidated federal income tax return of McDonnell Douglas. McDonnell Douglas presently charges or credits the Company for the corresponding increase or decrease in McDonnell Douglas's taxes resulting from such inclusion. Intercompany payments are made when such taxes are due or tax benefits are realized by McDonnell Douglas based on the assumption, pursuant to an informal arrangement, that taxes are due or tax benefits are realized up to 100% of the amounts forecasted by the Company with the amounts in excess of such forecast due in the year realized by McDonnell Douglas.
Taxes on income are computed at current tax rates after adjusting income for items that do not have tax consequences. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes.
Note 2 -- Proposed Merger with The Boeing Company
On December 14, 1996, McDonnell Douglas and The Boeing Company ("Boeing") entered into a definitive agreement whereby a wholly owned subsidiary of Boeing will merge into McDonnell Douglas in a stock-for-stock transaction, as a result of which McDonnell Douglas will become a wholly owned subsidiary of Boeing. Under the terms of the transaction, McDonnell Douglas shareholders will receive 0.65 share (1.3 shares if the previously announced Boeing 2-for-1 stock split is approved by Boeing shareholders prior to consummation of the merger) of Boeing common stock for each share of McDonnell Douglas common stock. The transaction is subject to approval by the shareholders of both companies and certain regulatory agencies; it is expected to close as early as mid-1997.
Note 3 -- Investment in Finance Leases
The following lists the components of the investment in finance leases at December 31:
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:
At December 31, 1996, finance lease receivables of $63.3 million serve as collateral to senior long-term debt.
At December 31, 1996, finance lease receivables are due in installments as follows: 1997, $504.7 million; 1998, $216.1 million; 1999, $237.9 million; 2000, $190.7 million; 2001, $173.0 million; 2002 and thereafter, $929.7 million.
Under a finance lease agreement, the Company leases a DC-10-30 aircraft to McDonnell Douglas. The lease requires monthly rent payments of $0.4 million through April 14, 2004. At December 31, 1996 and 1995, the carrying amount of this aircraft was $28.5 million and $30.1 million.
Note 4 -- Notes Receivable
The following lists the components of notes receivable at December 31:
At December 31, 1996, notes receivables are due in installments as follows: 1997, $69.7 million; 1998, $23.5 million; 1999, $28.1 million; 2000, $25.8 million; 2001, $37.3 million; 2002 and thereafter, $121.9 million.
The $100.0 million aircraft purchase bridge facility made available by the Company to ValuJet Airlines, Inc. ("ValuJet") in 1995 was reduced in maximum scope to $50.0 million by mutual agreement during the third quarter of 1996. This facility expires upon delivery to ValuJet of the first scheduled new McDonnell Douglas MD-95 aircraft, presently expected to occur in 1999. Borrowings under this agreement must be repaid within 180 days and the interest rate is based on the London Interbank Offering Rate ("LIBOR"). There were no amounts outstanding under this agreement at December 31, 1996. At December 31, 1995, receivables outstanding pursuant to this agreement totaled $8.7 million.
Note 5 -- Equipment Under Operating Leases
Equipment under operating leases consisted of the following at December 31:
At December 31, 1996, future minimum rentals scheduled to be received under the noncancelable portion of operating leases are as follows: 1997, $112.8 million; 1998, $95.7 million; 1999, $81.4 million; 2000, $60.4 million; 2001, $52.8 million; 2002 and thereafter, $392.7 million.
At December 31, 1996, equipment under operating leases of $8.7 million are assigned as collateral to senior long-term debt. Equipment under operating leases of $203.1 million at December 31, 1996, relate to commercial aircraft leased by the Company under capital lease obligations.
Under an operating lease agreement, the Company leases two MD-82 aircraft to McDonnell Douglas. The leases require quarterly rent payments of $1.0 million through May 31, 2002. At December 31, 1996, the carrying amount of these aircraft was $26.5 million. Prior to 1996, the Company leased four MD-82 aircraft to McDonnell Douglas. At December 31, 1995, the carrying amount of these aircraft was $54.0 million.
During 1996, the Company entered into an operating lease agreement, to lease a DC-10-30 aircraft to McDonnell Douglas. The lease requires monthly rent payment of $0.4 million through 2004. At December 31, 1996, the carrying amount of this aircraft was $28.9 million.
Under a separate operating lease agreement, the Company leases an executive aircraft to McDonnell Douglas. The lease requires monthly rent payments of $0.2 million through January 2002. At December 31, 1996 and 1995, the carrying amount of this aircraft was $15.6 million and $16.2 million.
Note 6 -- Income Taxes
The components of the provision (benefit) for taxes on income for the years ended December 31 were as follows:
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:
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:
During December 1994, the Company disposed of its investment in McDonnell Douglas Bank Limited, a former United Kingdom company and an indirect wholly-owned subsidiary of the Company, for $23.8 million and recognized a loss on disposition totaling $3.2 million. The cumulative foreign currency translation adjustment was recognized and charged to other expenses. In addition, tax benefits totaling $3.2 million were recognized as a result of this sale.
MDFS is currently under examination by the Internal Revenue Service ("IRS") for the tax years 1986 through 1992. The outcome of the IRS audit is not expected to have a material effect on the Company's financial condition or results of operations.
The Company received income tax refunds from MDC of $15.4 million and $2.1 million in 1996 and 1995. The Company made income tax payments to MDC of $15.2 million in 1994.
Note 7 -- Indebtedness
Short-term notes payable consisted of the following at December 31:
During 1996, MDFS and the Company amended their joint revolving credit agreement to provide, among other things, for increased borrowing capacity and to extend the maturity date to August 2001. Under the amended agreement, the Company may borrow a maximum of $240.0 million, reduced by MDFS borrowings under this same agreement, which are limited to $16.0 million. The interest rate, at the option of MDFS or the Company, is either a floating rate, generally based on a defined prime rate, or fixed rate related to LIBOR. There were no amounts outstanding under this agreement at December 31, 1996. At December 31, 1996 and 1995, borrowings under commercial paper and uncommitted short-term bank facilities totaling $141.0 million and $10.0 million, respectively, were supported by available unused commitments under the revolving credit agreement.
The Company has available approximately $95.0 million in uncommitted, short-term bank credit facilities whereby the Company may borrow, at interest rates which are negotiated at the time of the borrowings, upon such terms as the Company and the banks may mutually agree. At December 31, 1996 and 1995, borrowings on these credit facilities totaled $45.0 million and $10.0 million.
Senior long-term debt consisted of the following at December 31:
Subordinated long-term debt consisted of the following at December 31:
The Company uses interest rate swap agreements to manage interest costs and risks associated with changing interest rates. The differential to be paid or received is accrued as interest rates change and is recognized in interest expense over the life of the agreements. The Company believes it has no market rate risk as the interest rate swaps are matched with specific debt. Counterparties to the interest rate swap contracts are major financial institutions and credit loss from counterparty non-performance is not anticipated. At December 31, 1996, the Company had interest rate swap agreements outstanding as follows:
As of December 31, 1996, $55.1 million of senior long-term debt was collateralized by equipment. This debt is composed of the 7.0% Notes due through 1998 and the 6.9% - 9.4% Notes due through 2001.
Payments required on long-term debt and capital lease obligations during the years ending December 31 are as follows:
The provisions of various credit and debt agreements require the Company to maintain a minimum net worth, restrict indebtedness, and limit cash dividends and other distributions. Under the most restrictive provision, $68.4 million of the Company's income retained for growth was available for dividends at December 31, 1996.
Interest payments totaled $113.9 million in 1996, $99.2 million in 1995 and $110.8 million in 1994.
Note 8 -- Commitments and Contingencies
On November 1, 1996, The Allen Austin Harris Group, Inc. ("Plaintiff") filed a complaint in the Superior Court of the State of California, County of Alameda, against the Company, McDonnell Douglas, McDonnell Douglas Aerospace - Middle East Limited and the Selah Group, Inc. (the "Defendants"). The Plaintiff, which had hoped to establish a manufacturing plant abroad with various assistance from the Defendants, seeks more than $57.0 million in alleged damages (primarily consisting of lost profits) based on various theories. The Company believes it has meritorious defenses to all of the allegations and that the litigation will have no material adverse effect on the Company's earnings, cash flow or financial condition.
A number of legal proceedings and claims are pending or have been asserted against the Company. A substantial number of such legal proceedings and claims are covered by third parties, including insurance companies. The Company believes that the final outcome of such proceedings and claims will not have a material adverse effect on its earnings, cash flow, or financial position.
Trans World Airlines, Inc. "(TWA") accounted for $249.5 million (9.5% of total Company portfolio) and $279.9 million (14.1% of total Company portfolio) at December 31, 1996 and 1995. TWA continues to operate under a reorganization plan, confirmed by the United States Bankruptcy Court in 1995, that restructured its indebtedness and leasehold obligations to its creditors. In addition, TWA continues to face financial and operational challenges due in part to an airliner crash in July 1996 and turnover of key management, which occurred during 1996. McDonnell Douglas provides guaranties to the Company under the various lease agreements between the Company and TWA. At December 31, 1996, the maximum aggregate coverage under such guaranties was $45.6 million. In addition, McDonnell Douglas provides supplemental guaranties in favor of the Company for up to an additional $10.0 million of the Company's financings to TWA. These guaranties supplement individual guaranties provided by McDonnell Douglas with respect to certain of the Company's financings to TWA to the extent that the estimated fair market value of the financings (after applying the individual guaranties) is less than the net asset value of the financings on the Company's books. The supplemental guaranties terminate in March 1998, but may be extended under certain limited circumstances. The reorganization plan and TWA's current financial condition have not had and, assuming TWA's financial condition does not further deteriorate, are not expected to have a material adverse effect on the Company's earnings, cash flow, or financial position.
A United States based operator of commuter aircraft is in arrears in the payment of rent under the lease of two Embraer Brasilia commuter aircraft. The airline has stated that it will submit to the Company a proposal for repayment of the delinquent sums. The net asset value of the aircraft leased to this airline at December 31, 1996, totaled $14.4 million. The Company does not expect to suffer a material adverse impact on its earnings, cash flow, or financial condition on the account of this transaction.
At December 31, 1996 and 1995, the Company had commitments to provide leasing and other financing totaling $76.6 million and $116.6 million.
In conjunction with prior asset dispositions, at December 31, 1996, the Company is subject to a maximum recourse of $28.5 million. Based on trends to date, the Company's exposure to such loss is not expected to be significant.
The Company leases aircraft under capital leases which have been subleased to others. At December 31, 1996, the Company had guaranteed the repayment of $7.0 million in capital lease obligations associated with a 50% partner.
The Company's principal office is leased from McDonnell Douglas under an operating lease agreement, expiring in 1999. Rent expense for all office leases under operating lease agreements in 1996, 1995 and 1994 totaled $0.3 million, $0.9 million and $1.1 million. At December 31, 1996, the minimum future rental commitments under these noncancelable leases payable over the remaining lives of the leases aggregate $1.8 million.
Note 9 -- Transactions with McDonnell Douglas and MDFS
Accounts with McDonnell Douglas and MDFS consisted of the following at December 31:
The Company has arrangements with McDonnell Douglas, terminable at the discretion of either of the parties, pursuant to which the Company may borrow from McDonnell Douglas and McDonnell Douglas may borrow from the Company, funds for periods up to 30 days at a market rate of interest. Under these arrangements, there were no outstanding balances at December 31, 1996 and 1995.
Under a similar arrangement, the Company may borrow from MDFS and MDFS and its subsidiaries may borrow from the Company, funds for periods up to 30 days at the Company's cost of funds for short-term borrowings. Under these arrangements, borrowings of $20.3 million and $3.7 million were outstanding at December 31, 1996 and 1995.
At December 31, 1996 and 1995, the Company had a note receivable from McDonnell Douglas Realty Company, a wholly owned subsidiary of McDonnell Douglas, of $1.7 million and $14.6 million. The note is payable on demand and accrues interest at a rate equal to a market rate of interest.
During 1995, the Company sold, at net book value, McDonnell Douglas aircraft subject to direct finance leases to MDFS totaling $60.1 million.
During 1996, 1995 and 1994, the Company purchased aircraft subject to leases from McDonnell Douglas in the amount of $501.9 million, $276.8 million and $227.1 million, respectively. During 1996, 1995 and 1994, the Company recorded operating income from McDonnell Douglas relating to financings aggregating $14.9 million, $16.2 million and $14.8 million, respectively.
At December 31, 1996 and 1995, $470.2 million and $285.2 million of the commercial aircraft financing portfolio was guaranteed by McDonnell Douglas. Fees related to these guaranties that were paid to McDonnell Douglas totaled $1.6 million, $1.9 million and $0.9 million in 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, the Company collected $2.1 million, $0.5 million and $1.7 million, respectively, under these guaranties.
The Series A Preferred Stock is redeemable at the Company's option at $5,000 per share, has no voting privileges and is entitled to cumulative semi-annual dividends of $175 per share. Such dividends have priority over cash dividends on the Company's common stock. Accrued dividends on preferred stock amounted to $0.6 million at December 31, 1996 and 1995.
Substantially all employees of McDonnell Douglas and its subsidiaries are members of defined benefit pension plans and insurance plans. McDonnell Douglas also provides eligible employees the opportunity to participate in savings plans that permit both pretax and after-tax contributions. McDonnell Douglas generally charges the Company with the actual cost of these plans attributable to the Company's employees which are included with other McDonnell Douglas charges for support services and reflected in operating expenses. McDonnell Douglas charges for services provided during 1996, 1995 and 1994 totaled $1.3 million, $1.1 million and $0.9 million, respectively. Additionally, the Company was compensated by certain affiliates for a number of support services, which are netted against operating expenses, amounting to $0.9 million, $1.2 million and $0.2 million in 1996, 1995 and 1994, respectively.
Note 10 -- Fair Value of Financial Instruments
The estimated fair value amounts of the Company's financial instruments have been determined by the Company, using appropriate market information and valuation methodologies. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and Cash Equivalents The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Notes Receivable Fair values for variable rate notes that reprice frequently and with no significant change in credit risk are based on carrying values. The fair values of fixed rate notes are estimated in discounted cash flow analyses, with the use of interest rates currently offered on loans with similar terms to borrowers of similar credit quality.
Short and Long-Term Debt Carrying amounts of borrowings under the short-term revolving credit agreements approximate their fair value. The fair values of long-term debt, excluding capital lease obligations, are estimated according to public quotations or discounted cash flow analyses, which are based on current incremental borrowing rates for similar types of borrowing arrangements.
Interest Rate Hedges The fair values of the Company's interest rate swaps are based on quoted market prices of comparable instruments.
Financing Commitments Risks associated with changes in interest rates are minimized during the commitment term because the rates are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded.
The notional amounts, carrying amounts and estimated fair values of the Company's financial instruments at December 31 were as follows:
Note 11 -- Segment Information and Concentration of Credit Risk
The Company's financing and leasing portfolio consisted of the following at December 31:
A substantial portion of the Company's total portfolio is concentrated among a small number of the Company's largest commercial aircraft financing customers. The single largest commercial aircraft financing customer accounted for $316.1 million (12.0% of total Company portfolio) and $220.4 million (11.1% of total Company portfolio) at December 31, 1996 and 1995. The second largest commercial aircraft financing customer accounted for $279.4 million (10.6% of total Company portfolio) and $182.7 million (9.2% of total Company portfolio) at December 31, 1996 and 1995. The five largest commercial aircraft financing customers accounted for $1,172.4 million (44.6% of total Company portfolio) and $865.2 million (43.5% of total Company portfolio) at December 31, 1996 and 1995. At December 31, 1996 and 1995, there were no significant concentrations by customer within the commercial equipment leasing portfolio.
In 1996, 1995 and 1994, a single aircraft financing customer accounted for 18.0%, 21.6% and 19.8% of the Company's operating income; no other customer accounted for more than 10% of the Company's operating income.
The Company generally holds title to all leased equipment and generally has a perfected security interest in the assets financed through note and loan arrangements.
Information about the Company's operations in its different financial reporting segments for the past three years ending December 31 is as follows:
Operating income from financing of assets located outside the United States totaled $45.5 million, $45.7 million and $41.7 million in 1996, 1995 and 1994, respectively.
McDonnell Douglas Finance Corporation and Subsidiaries Schedule II -- Valuation and Qualifying Accounts
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page Number in Form 10-K (a) 1. Financial Statements: Report of Independent Auditors..................................23 Consolidated Balance Sheet at December 31, 1996 and 1995........24 Consolidated Statement of Income and Income Retained for Growth for the Years Ended December 31, 1996, 1995and 1994..................................................25 Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994..............................26 Notes to Consolidated Financial Statements......................27
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts..................40
Schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission (the "SEC"), except Schedule II, which is included herein, have been omitted because they are not required, or the information is set forth in the financial statements or notes thereto.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company dated June 29, 1989, incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1993.
3.2 By-Laws of the Company, as amended to date, incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1993.
4.1 Indenture, dated as of April 1, 1983, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(a) to the Company's Form S-3 Registration Statement (File No. 2-83007).
4.2 First Supplemental Indenture, dated as of June 12, 1995, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.3 Subordinated Indenture, dated as of June 15, 1988, by and between the Company and Bankers Trust Company of California, N.A., as Subordinated Indenture Trustee, incorporated by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.4 First Supplemental Subordinated Indenture, dated as of June 12, 1995, between the Company and Bankers Trust Company, as successor Trustee to Bankers Trust Company of California, N.A., incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.5 Indenture, dated as of April 15, 1987, incorporated herein by reference to Exhibit 4 to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.6 Form of Series II Medium Term Note, incorporated by reference to Exhibit 4(c) to the Form 8-K of the Company dated as of August 22, 1983.
4.7 Form of Series III Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 2-98001).
4.8 Form of Series V Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration (File No. 33-13735).
4.9 Form of Series VI Medium Term Note, incorporated by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company, as filed with the SEC on April 24, 1987.
4.10 Form of Series VII Medium Term Note, incorporated by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company, as filed with the SEC on April 24, 1987.
4.11 Form of Series VIII Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.12 Form of Series VIII Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.13 Form of Series IX Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Company's Form S-3 Registration Statement (File No. 33-31419).
4.14 Form of Series IX Senior Federal Funds Medium Term Note, incorporated herein by reference to Exhibit 4(d) of the Company's Form 8-K dated May 16, 1995.
4.15 Form of Series IX Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration (File No. 33-31419).
4.16 Form of General Term Note(R), incorporated herein by reference to Exhibit 4(c) to the Company's Form 8-K dated May 26, 1993.
4.17 Form of Series X Senior Fixed Rate Medium Term Note, incorporated herein by reference to Exhibit 4(e) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.18 Form of Series X Senior Floating Rate Medium Term Note, incorporated herein by reference to Exhibit 4(h) to the Company's Form S-3 Registration Statement (File No. 33-58989.)
4.19 Form of series X Subordinated Fixed Rate Medium Term Note, incorporated herein by reference to Exhibit 4(f) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.20 Form of Series X Subordinated Floating Rate Medium Term Note, incorporated herein by reference to Exhibit 4(g) to the Company's Form S-3 Registration Statement (File No. 33-58989).
Pursuant to Item 601 (b)(4)(iii) of Regulation S-K, the Company is not filing certain instruments with respect to its long-term debt because the total amount of securities currently provided for under each of such instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request.
10.1 Amended and Restated Operating Agreement, dated as of April 12, 1993, among McDonnell Douglas, the Company and MDFS, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-K for the year ended December 31, 1993.
10.2 Operating Agreement, effective as of February 8, 1989, by and between the Company and MDFS, incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 1989.
10.3 By-Laws of McDonnell Douglas, as amended March 6, 1996, incorporated by reference from McDonnell Douglas's Exhibit 3.2 to its Form 10-K Report for the year ended December 31, 1995 (file No. 1-3685).
10.4 Supplemental Guaranty Agreement, dated as of December 30, 1993, by and between the Company and McDonnell Douglas, incorporated herein by reference to Exhibit 10.4 to the Company's Form 10-K for the year ended December 31, 1993.
10.5 Amendment No. 1 to Supplemental Guaranty Agreement, dated as of March 28, 1996.
10.6 Guaranty Amendment Agreement, dated as of June 28, 1996, by and between the Company and McDonnell Douglas.
10.7 Supplemental Guaranty Agreement, dated as of December 30, 1993, by and between the Company and McDonnell Douglas, incorporated herein by reference to Exhibit 10.5 to the Company's Form 10-K for the year ended December 31, 1994.
10.8 Amendment No. 1 to Supplemental Guaranty Agreement, dated as of March 28, 1996, between the Company and McDonnell Douglas.
10.9 Agreement, dated as of December 30, 1994, by and between the Company and McDonnell Douglas incorporated herein by reference to Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1994.
10.10 Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein incorporated herein by reference to Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1994.
10.11 Amendment No. 1, dated as of August 31, 1995, to Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein, incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the quarterly period ended September 30, 1995.
10.12 Amendment No. 2, dated as of August 16, 1996, to Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein, incorporated by reference to Exhibit 10 to the Company's Form 10-Q for the quarterly period ended September 30, 1996.
12 Statement regarding computation of ratio of earnings to fixed charges.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
McDonnell Douglas Finance Corporation
By /s/ STEVEN W. VOGEDING ---------------------------------- Steven W. Vogeding March 31, 1997 Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ JAMES F. PALMER March 31, 1997 - ---------------------------------- -------------- James F. Palmer Chairman and Director
/s/ THOMAS J. MOTHERWAY - ---------------------------------- Thomas J. Motherway President and Director March 31, 1997 -------------- (Principal Executive Officer)
/s/ STEVEN W. VOGEDING - ---------------------------------- Steven W. Vogeding Vice President and March 31, 1997 Chief Financial Officer -------------- (Principal Financial Officer)
/s/ F. MARK KUHLMANN March 31, 1997 - ---------------------------------- -------------- F. Mark Kuhlmann Director
- ---------------------------------- -------------- Michael M. Sears Director
/s/ MAURA R. MIZUGUCHI March 31, 1997 - ---------------------------------- -------------- Maura R. Mizuguchi Controller (Principal Accounting Officer)
/s/ DANIEL O. ANDERSON March 31, 1997 - ---------------------------------- -------------- Daniel O. Anderson Vice President - Operations and Director
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
All of the Company's preferred and common stock is owned by MDFS. In 1996, the Company did not declare or pay any dividends to MDFS on its common stock compared to dividends of $27.5 million declared and paid in 1995. The Company paid $3.5 million in dividends on its preferred stock in 1996 and 1995. Preferred stock dividends of $0.6 million payable to MDFS were accrued at December 31, 1996.
The provisions of various credit and debt agreements require the Company to maintain a minimum net worth, restrict indebtedness, and limit cash dividends and other distributions. Under the most restrictive provision, $68.4 million of the Company's income retained for growth was available for dividends at December 31, 1996.
Item 6.
Item 6. Selected Financial Data
The selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements at December 31, 1996 and for the year then ended and with "Item 7.
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.
Item 8. Financial Statements and Supplementary Data
The following pages include the consolidated financial statements of the Company as described in Item 14 (a) 1 and (a) 2 of Part IV herein.
Report of Independent Auditors
Shareholder and Board of Directors McDonnell Douglas Finance Corporation
We have audited the accompanying consolidated balance sheet of McDonnell Douglas Finance Corporation (a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income and income retained for growth, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDonnell Douglas Finance Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets as of December 31, 1994, 1993 and 1992, and the related consolidated statements of income and income retained for growth, and cash flows for the years ended December 31, 1993 and 1992 (none of which are presented separately herein); and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the selected financial data for each of the five years in the period ended December 31, 1996, appearing on pages 19 - 20 is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived.
/s/ ERNST & YOUNG LLP
January 22, 1997
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
McDonnell Douglas Finance Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1996
Note 1 -- Organization and Summary of Significant Accounting Policies
Organization McDonnell Douglas Finance Corporation (the "Company") is a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation ("MDFS"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("McDonnell Douglas"). The Company was incorporated in Delaware in 1968 and provides equipment financing and leasing arrangements to a diversified range of customers and industries. The Company's primary operations include two financial reporting segments: commercial aircraft financing and commercial equipment leasing. The commercial aircraft financing segment provides customer financing services to McDonnell Douglas components, primarily Douglas Aircraft Company, and also provides financing for the acquisition of non- McDonnell Douglas aircraft. The commercial equipment leasing segment is principally involved in large financing and leasing transactions for a diversified range of equipment.
Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 1996 presentation.
Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Finance Leases At lease commencement, the Company records the lease receivable, estimated residual value of the leased equipment and unearned lease income. Income from leases is recognized over the terms of the leases so as to approximate a level rate of return on the net investment. Residual values, which are reviewed periodically, represent the estimated amount to be received at lease termination from the disposition of leased equipment.
Initial Direct Costs Initial direct costs are deferred and amortized over the related financing terms.
Cash Equivalents The Company considers all cash investments with original maturities of three months or less to be cash equivalents. Cash equivalents at December 31, 1996 and 1995 were $15.3 million and $10.0 million. At December 31, 1996 and 1995, the Company has classified as other assets restricted cash deposited with banks in interest bearing accounts of $42.5 million and $37.2 million for specific lease rents and contractual purchase options related to certain aircraft leased by the Company under capital lease obligations, and security against recourse provisions related to certain note and lease receivable sales.
Allowance for Losses on Financing Receivables The allowance for losses on financing receivables includes consideration of such factors as the risk rating of individual credits, economic and political conditions, guaranties, prior loss experience and results of periodic credit reviews.
Collateral that is repossessed in satisfaction of a receivable is transferred to equipment held for sale or re-lease at the lower of the former receivable amount or estimated net realizable value.
Equipment Under Operating Leases Rental equipment subject to operating leases is recorded at cost and depreciated over its useful life or lease term to an estimated salvage value, primarily on a straight-line basis.
During 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption thereof had no material effect on the Company's financial position or operating results.
Income Taxes The operations of the Company are included in the consolidated federal income tax return of McDonnell Douglas. McDonnell Douglas presently charges or credits the Company for the corresponding increase or decrease in McDonnell Douglas's taxes resulting from such inclusion. Intercompany payments are made when such taxes are due or tax benefits are realized by McDonnell Douglas based on the assumption, pursuant to an informal arrangement, that taxes are due or tax benefits are realized up to 100% of the amounts forecasted by the Company with the amounts in excess of such forecast due in the year realized by McDonnell Douglas.
Taxes on income are computed at current tax rates after adjusting income for items that do not have tax consequences. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes.
Note 2 -- Proposed Merger with The Boeing Company
On December 14, 1996, McDonnell Douglas and The Boeing Company ("Boeing") entered into a definitive agreement whereby a wholly owned subsidiary of Boeing will merge into McDonnell Douglas in a stock-for-stock transaction, as a result of which McDonnell Douglas will become a wholly owned subsidiary of Boeing. Under the terms of the transaction, McDonnell Douglas shareholders will receive 0.65 share (1.3 shares if the previously announced Boeing 2-for-1 stock split is approved by Boeing shareholders prior to consummation of the merger) of Boeing common stock for each share of McDonnell Douglas common stock. The transaction is subject to approval by the shareholders of both companies and certain regulatory agencies; it is expected to close as early as mid-1997.
Note 3 -- Investment in Finance Leases
The following lists the components of the investment in finance leases at December 31:
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:
At December 31, 1996, finance lease receivables of $63.3 million serve as collateral to senior long-term debt.
At December 31, 1996, finance lease receivables are due in installments as follows: 1997, $504.7 million; 1998, $216.1 million; 1999, $237.9 million; 2000, $190.7 million; 2001, $173.0 million; 2002 and thereafter, $929.7 million.
Under a finance lease agreement, the Company leases a DC-10-30 aircraft to McDonnell Douglas. The lease requires monthly rent payments of $0.4 million through April 14, 2004. At December 31, 1996 and 1995, the carrying amount of this aircraft was $28.5 million and $30.1 million.
Note 4 -- Notes Receivable
The following lists the components of notes receivable at December 31:
At December 31, 1996, notes receivables are due in installments as follows: 1997, $69.7 million; 1998, $23.5 million; 1999, $28.1 million; 2000, $25.8 million; 2001, $37.3 million; 2002 and thereafter, $121.9 million.
The $100.0 million aircraft purchase bridge facility made available by the Company to ValuJet Airlines, Inc. ("ValuJet") in 1995 was reduced in maximum scope to $50.0 million by mutual agreement during the third quarter of 1996. This facility expires upon delivery to ValuJet of the first scheduled new McDonnell Douglas MD-95 aircraft, presently expected to occur in 1999. Borrowings under this agreement must be repaid within 180 days and the interest rate is based on the London Interbank Offering Rate ("LIBOR"). There were no amounts outstanding under this agreement at December 31, 1996. At December 31, 1995, receivables outstanding pursuant to this agreement totaled $8.7 million.
Note 5 -- Equipment Under Operating Leases
Equipment under operating leases consisted of the following at December 31:
At December 31, 1996, future minimum rentals scheduled to be received under the noncancelable portion of operating leases are as follows: 1997, $112.8 million; 1998, $95.7 million; 1999, $81.4 million; 2000, $60.4 million; 2001, $52.8 million; 2002 and thereafter, $392.7 million.
At December 31, 1996, equipment under operating leases of $8.7 million are assigned as collateral to senior long-term debt. Equipment under operating leases of $203.1 million at December 31, 1996, relate to commercial aircraft leased by the Company under capital lease obligations.
Under an operating lease agreement, the Company leases two MD-82 aircraft to McDonnell Douglas. The leases require quarterly rent payments of $1.0 million through May 31, 2002. At December 31, 1996, the carrying amount of these aircraft was $26.5 million. Prior to 1996, the Company leased four MD-82 aircraft to McDonnell Douglas. At December 31, 1995, the carrying amount of these aircraft was $54.0 million.
During 1996, the Company entered into an operating lease agreement, to lease a DC-10-30 aircraft to McDonnell Douglas. The lease requires monthly rent payment of $0.4 million through 2004. At December 31, 1996, the carrying amount of this aircraft was $28.9 million.
Under a separate operating lease agreement, the Company leases an executive aircraft to McDonnell Douglas. The lease requires monthly rent payments of $0.2 million through January 2002. At December 31, 1996 and 1995, the carrying amount of this aircraft was $15.6 million and $16.2 million.
Note 6 -- Income Taxes
The components of the provision (benefit) for taxes on income for the years ended December 31 were as follows:
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:
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:
During December 1994, the Company disposed of its investment in McDonnell Douglas Bank Limited, a former United Kingdom company and an indirect wholly-owned subsidiary of the Company, for $23.8 million and recognized a loss on disposition totaling $3.2 million. The cumulative foreign currency translation adjustment was recognized and charged to other expenses. In addition, tax benefits totaling $3.2 million were recognized as a result of this sale.
MDFS is currently under examination by the Internal Revenue Service ("IRS") for the tax years 1986 through 1992. The outcome of the IRS audit is not expected to have a material effect on the Company's financial condition or results of operations.
The Company received income tax refunds from MDC of $15.4 million and $2.1 million in 1996 and 1995. The Company made income tax payments to MDC of $15.2 million in 1994.
Note 7 -- Indebtedness
Short-term notes payable consisted of the following at December 31:
During 1996, MDFS and the Company amended their joint revolving credit agreement to provide, among other things, for increased borrowing capacity and to extend the maturity date to August 2001. Under the amended agreement, the Company may borrow a maximum of $240.0 million, reduced by MDFS borrowings under this same agreement, which are limited to $16.0 million. The interest rate, at the option of MDFS or the Company, is either a floating rate, generally based on a defined prime rate, or fixed rate related to LIBOR. There were no amounts outstanding under this agreement at December 31, 1996. At December 31, 1996 and 1995, borrowings under commercial paper and uncommitted short-term bank facilities totaling $141.0 million and $10.0 million, respectively, were supported by available unused commitments under the revolving credit agreement.
The Company has available approximately $95.0 million in uncommitted, short-term bank credit facilities whereby the Company may borrow, at interest rates which are negotiated at the time of the borrowings, upon such terms as the Company and the banks may mutually agree. At December 31, 1996 and 1995, borrowings on these credit facilities totaled $45.0 million and $10.0 million.
Senior long-term debt consisted of the following at December 31:
Subordinated long-term debt consisted of the following at December 31:
The Company uses interest rate swap agreements to manage interest costs and risks associated with changing interest rates. The differential to be paid or received is accrued as interest rates change and is recognized in interest expense over the life of the agreements. The Company believes it has no market rate risk as the interest rate swaps are matched with specific debt. Counterparties to the interest rate swap contracts are major financial institutions and credit loss from counterparty non-performance is not anticipated. At December 31, 1996, the Company had interest rate swap agreements outstanding as follows:
As of December 31, 1996, $55.1 million of senior long-term debt was collateralized by equipment. This debt is composed of the 7.0% Notes due through 1998 and the 6.9% - 9.4% Notes due through 2001.
Payments required on long-term debt and capital lease obligations during the years ending December 31 are as follows:
The provisions of various credit and debt agreements require the Company to maintain a minimum net worth, restrict indebtedness, and limit cash dividends and other distributions. Under the most restrictive provision, $68.4 million of the Company's income retained for growth was available for dividends at December 31, 1996.
Interest payments totaled $113.9 million in 1996, $99.2 million in 1995 and $110.8 million in 1994.
Note 8 -- Commitments and Contingencies
On November 1, 1996, The Allen Austin Harris Group, Inc. ("Plaintiff") filed a complaint in the Superior Court of the State of California, County of Alameda, against the Company, McDonnell Douglas, McDonnell Douglas Aerospace - Middle East Limited and the Selah Group, Inc. (the "Defendants"). The Plaintiff, which had hoped to establish a manufacturing plant abroad with various assistance from the Defendants, seeks more than $57.0 million in alleged damages (primarily consisting of lost profits) based on various theories. The Company believes it has meritorious defenses to all of the allegations and that the litigation will have no material adverse effect on the Company's earnings, cash flow or financial condition.
A number of legal proceedings and claims are pending or have been asserted against the Company. A substantial number of such legal proceedings and claims are covered by third parties, including insurance companies. The Company believes that the final outcome of such proceedings and claims will not have a material adverse effect on its earnings, cash flow, or financial position.
Trans World Airlines, Inc. "(TWA") accounted for $249.5 million (9.5% of total Company portfolio) and $279.9 million (14.1% of total Company portfolio) at December 31, 1996 and 1995. TWA continues to operate under a reorganization plan, confirmed by the United States Bankruptcy Court in 1995, that restructured its indebtedness and leasehold obligations to its creditors. In addition, TWA continues to face financial and operational challenges due in part to an airliner crash in July 1996 and turnover of key management, which occurred during 1996. McDonnell Douglas provides guaranties to the Company under the various lease agreements between the Company and TWA. At December 31, 1996, the maximum aggregate coverage under such guaranties was $45.6 million. In addition, McDonnell Douglas provides supplemental guaranties in favor of the Company for up to an additional $10.0 million of the Company's financings to TWA. These guaranties supplement individual guaranties provided by McDonnell Douglas with respect to certain of the Company's financings to TWA to the extent that the estimated fair market value of the financings (after applying the individual guaranties) is less than the net asset value of the financings on the Company's books. The supplemental guaranties terminate in March 1998, but may be extended under certain limited circumstances. The reorganization plan and TWA's current financial condition have not had and, assuming TWA's financial condition does not further deteriorate, are not expected to have a material adverse effect on the Company's earnings, cash flow, or financial position.
A United States based operator of commuter aircraft is in arrears in the payment of rent under the lease of two Embraer Brasilia commuter aircraft. The airline has stated that it will submit to the Company a proposal for repayment of the delinquent sums. The net asset value of the aircraft leased to this airline at December 31, 1996, totaled $14.4 million. The Company does not expect to suffer a material adverse impact on its earnings, cash flow, or financial condition on the account of this transaction.
At December 31, 1996 and 1995, the Company had commitments to provide leasing and other financing totaling $76.6 million and $116.6 million.
In conjunction with prior asset dispositions, at December 31, 1996, the Company is subject to a maximum recourse of $28.5 million. Based on trends to date, the Company's exposure to such loss is not expected to be significant.
The Company leases aircraft under capital leases which have been subleased to others. At December 31, 1996, the Company had guaranteed the repayment of $7.0 million in capital lease obligations associated with a 50% partner.
The Company's principal office is leased from McDonnell Douglas under an operating lease agreement, expiring in 1999. Rent expense for all office leases under operating lease agreements in 1996, 1995 and 1994 totaled $0.3 million, $0.9 million and $1.1 million. At December 31, 1996, the minimum future rental commitments under these noncancelable leases payable over the remaining lives of the leases aggregate $1.8 million.
Note 9 -- Transactions with McDonnell Douglas and MDFS
Accounts with McDonnell Douglas and MDFS consisted of the following at December 31:
The Company has arrangements with McDonnell Douglas, terminable at the discretion of either of the parties, pursuant to which the Company may borrow from McDonnell Douglas and McDonnell Douglas may borrow from the Company, funds for periods up to 30 days at a market rate of interest. Under these arrangements, there were no outstanding balances at December 31, 1996 and 1995.
Under a similar arrangement, the Company may borrow from MDFS and MDFS and its subsidiaries may borrow from the Company, funds for periods up to 30 days at the Company's cost of funds for short-term borrowings. Under these arrangements, borrowings of $20.3 million and $3.7 million were outstanding at December 31, 1996 and 1995.
At December 31, 1996 and 1995, the Company had a note receivable from McDonnell Douglas Realty Company, a wholly owned subsidiary of McDonnell Douglas, of $1.7 million and $14.6 million. The note is payable on demand and accrues interest at a rate equal to a market rate of interest.
During 1995, the Company sold, at net book value, McDonnell Douglas aircraft subject to direct finance leases to MDFS totaling $60.1 million.
During 1996, 1995 and 1994, the Company purchased aircraft subject to leases from McDonnell Douglas in the amount of $501.9 million, $276.8 million and $227.1 million, respectively. During 1996, 1995 and 1994, the Company recorded operating income from McDonnell Douglas relating to financings aggregating $14.9 million, $16.2 million and $14.8 million, respectively.
At December 31, 1996 and 1995, $470.2 million and $285.2 million of the commercial aircraft financing portfolio was guaranteed by McDonnell Douglas. Fees related to these guaranties that were paid to McDonnell Douglas totaled $1.6 million, $1.9 million and $0.9 million in 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, the Company collected $2.1 million, $0.5 million and $1.7 million, respectively, under these guaranties.
The Series A Preferred Stock is redeemable at the Company's option at $5,000 per share, has no voting privileges and is entitled to cumulative semi-annual dividends of $175 per share. Such dividends have priority over cash dividends on the Company's common stock. Accrued dividends on preferred stock amounted to $0.6 million at December 31, 1996 and 1995.
Substantially all employees of McDonnell Douglas and its subsidiaries are members of defined benefit pension plans and insurance plans. McDonnell Douglas also provides eligible employees the opportunity to participate in savings plans that permit both pretax and after-tax contributions. McDonnell Douglas generally charges the Company with the actual cost of these plans attributable to the Company's employees which are included with other McDonnell Douglas charges for support services and reflected in operating expenses. McDonnell Douglas charges for services provided during 1996, 1995 and 1994 totaled $1.3 million, $1.1 million and $0.9 million, respectively. Additionally, the Company was compensated by certain affiliates for a number of support services, which are netted against operating expenses, amounting to $0.9 million, $1.2 million and $0.2 million in 1996, 1995 and 1994, respectively.
Note 10 -- Fair Value of Financial Instruments
The estimated fair value amounts of the Company's financial instruments have been determined by the Company, using appropriate market information and valuation methodologies. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and Cash Equivalents The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Notes Receivable Fair values for variable rate notes that reprice frequently and with no significant change in credit risk are based on carrying values. The fair values of fixed rate notes are estimated in discounted cash flow analyses, with the use of interest rates currently offered on loans with similar terms to borrowers of similar credit quality.
Short and Long-Term Debt Carrying amounts of borrowings under the short-term revolving credit agreements approximate their fair value. The fair values of long-term debt, excluding capital lease obligations, are estimated according to public quotations or discounted cash flow analyses, which are based on current incremental borrowing rates for similar types of borrowing arrangements.
Interest Rate Hedges The fair values of the Company's interest rate swaps are based on quoted market prices of comparable instruments.
Financing Commitments Risks associated with changes in interest rates are minimized during the commitment term because the rates are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded.
The notional amounts, carrying amounts and estimated fair values of the Company's financial instruments at December 31 were as follows:
Note 11 -- Segment Information and Concentration of Credit Risk
The Company's financing and leasing portfolio consisted of the following at December 31:
A substantial portion of the Company's total portfolio is concentrated among a small number of the Company's largest commercial aircraft financing customers. The single largest commercial aircraft financing customer accounted for $316.1 million (12.0% of total Company portfolio) and $220.4 million (11.1% of total Company portfolio) at December 31, 1996 and 1995. The second largest commercial aircraft financing customer accounted for $279.4 million (10.6% of total Company portfolio) and $182.7 million (9.2% of total Company portfolio) at December 31, 1996 and 1995. The five largest commercial aircraft financing customers accounted for $1,172.4 million (44.6% of total Company portfolio) and $865.2 million (43.5% of total Company portfolio) at December 31, 1996 and 1995. At December 31, 1996 and 1995, there were no significant concentrations by customer within the commercial equipment leasing portfolio.
In 1996, 1995 and 1994, a single aircraft financing customer accounted for 18.0%, 21.6% and 19.8% of the Company's operating income; no other customer accounted for more than 10% of the Company's operating income.
The Company generally holds title to all leased equipment and generally has a perfected security interest in the assets financed through note and loan arrangements.
Information about the Company's operations in its different financial reporting segments for the past three years ending December 31 is as follows:
Operating income from financing of assets located outside the United States totaled $45.5 million, $45.7 million and $41.7 million in 1996, 1995 and 1994, respectively.
McDonnell Douglas Finance Corporation and Subsidiaries Schedule II -- Valuation and Qualifying Accounts
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page Number in Form 10-K (a) 1. Financial Statements: Report of Independent Auditors..................................23 Consolidated Balance Sheet at December 31, 1996 and 1995........24 Consolidated Statement of Income and Income Retained for Growth for the Years Ended December 31, 1996, 1995and 1994..................................................25 Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994..............................26 Notes to Consolidated Financial Statements......................27
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts..................40
Schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission (the "SEC"), except Schedule II, which is included herein, have been omitted because they are not required, or the information is set forth in the financial statements or notes thereto.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company dated June 29, 1989, incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1993.
3.2 By-Laws of the Company, as amended to date, incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1993.
4.1 Indenture, dated as of April 1, 1983, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(a) to the Company's Form S-3 Registration Statement (File No. 2-83007).
4.2 First Supplemental Indenture, dated as of June 12, 1995, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.3 Subordinated Indenture, dated as of June 15, 1988, by and between the Company and Bankers Trust Company of California, N.A., as Subordinated Indenture Trustee, incorporated by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.4 First Supplemental Subordinated Indenture, dated as of June 12, 1995, between the Company and Bankers Trust Company, as successor Trustee to Bankers Trust Company of California, N.A., incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.5 Indenture, dated as of April 15, 1987, incorporated herein by reference to Exhibit 4 to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.6 Form of Series II Medium Term Note, incorporated by reference to Exhibit 4(c) to the Form 8-K of the Company dated as of August 22, 1983.
4.7 Form of Series III Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 2-98001).
4.8 Form of Series V Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration (File No. 33-13735).
4.9 Form of Series VI Medium Term Note, incorporated by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company, as filed with the SEC on April 24, 1987.
4.10 Form of Series VII Medium Term Note, incorporated by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company, as filed with the SEC on April 24, 1987.
4.11 Form of Series VIII Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.12 Form of Series VIII Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.13 Form of Series IX Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Company's Form S-3 Registration Statement (File No. 33-31419).
4.14 Form of Series IX Senior Federal Funds Medium Term Note, incorporated herein by reference to Exhibit 4(d) of the Company's Form 8-K dated May 16, 1995.
4.15 Form of Series IX Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration (File No. 33-31419).
4.16 Form of General Term Note(R), incorporated herein by reference to Exhibit 4(c) to the Company's Form 8-K dated May 26, 1993.
4.17 Form of Series X Senior Fixed Rate Medium Term Note, incorporated herein by reference to Exhibit 4(e) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.18 Form of Series X Senior Floating Rate Medium Term Note, incorporated herein by reference to Exhibit 4(h) to the Company's Form S-3 Registration Statement (File No. 33-58989.)
4.19 Form of series X Subordinated Fixed Rate Medium Term Note, incorporated herein by reference to Exhibit 4(f) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.20 Form of Series X Subordinated Floating Rate Medium Term Note, incorporated herein by reference to Exhibit 4(g) to the Company's Form S-3 Registration Statement (File No. 33-58989).
Pursuant to Item 601 (b)(4)(iii) of Regulation S-K, the Company is not filing certain instruments with respect to its long-term debt because the total amount of securities currently provided for under each of such instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request.
10.1 Amended and Restated Operating Agreement, dated as of April 12, 1993, among McDonnell Douglas, the Company and MDFS, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-K for the year ended December 31, 1993.
10.2 Operating Agreement, effective as of February 8, 1989, by and between the Company and MDFS, incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 1989.
10.3 By-Laws of McDonnell Douglas, as amended March 6, 1996, incorporated by reference from McDonnell Douglas's Exhibit 3.2 to its Form 10-K Report for the year ended December 31, 1995 (file No. 1-3685).
10.4 Supplemental Guaranty Agreement, dated as of December 30, 1993, by and between the Company and McDonnell Douglas, incorporated herein by reference to Exhibit 10.4 to the Company's Form 10-K for the year ended December 31, 1993.
10.5 Amendment No. 1 to Supplemental Guaranty Agreement, dated as of March 28, 1996.
10.6 Guaranty Amendment Agreement, dated as of June 28, 1996, by and between the Company and McDonnell Douglas.
10.7 Supplemental Guaranty Agreement, dated as of December 30, 1993, by and between the Company and McDonnell Douglas, incorporated herein by reference to Exhibit 10.5 to the Company's Form 10-K for the year ended December 31, 1994.
10.8 Amendment No. 1 to Supplemental Guaranty Agreement, dated as of March 28, 1996, between the Company and McDonnell Douglas.
10.9 Agreement, dated as of December 30, 1994, by and between the Company and McDonnell Douglas incorporated herein by reference to Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1994.
10.10 Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein incorporated herein by reference to Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1994.
10.11 Amendment No. 1, dated as of August 31, 1995, to Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein, incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the quarterly period ended September 30, 1995.
10.12 Amendment No. 2, dated as of August 16, 1996, to Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein, incorporated by reference to Exhibit 10 to the Company's Form 10-Q for the quarterly period ended September 30, 1996.
12 Statement regarding computation of ratio of earnings to fixed charges.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
McDonnell Douglas Finance Corporation
By /s/ STEVEN W. VOGEDING ---------------------------------- Steven W. Vogeding March 31, 1997 Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ JAMES F. PALMER March 31, 1997 - ---------------------------------- -------------- James F. Palmer Chairman and Director
/s/ THOMAS J. MOTHERWAY - ---------------------------------- Thomas J. Motherway President and Director March 31, 1997 -------------- (Principal Executive Officer)
/s/ STEVEN W. VOGEDING - ---------------------------------- Steven W. Vogeding Vice President and March 31, 1997 Chief Financial Officer -------------- (Principal Financial Officer)
/s/ F. MARK KUHLMANN March 31, 1997 - ---------------------------------- -------------- F. Mark Kuhlmann Director
- ---------------------------------- -------------- Michael M. Sears Director
/s/ MAURA R. MIZUGUCHI March 31, 1997 - ---------------------------------- -------------- Maura R. Mizuguchi Controller (Principal Accounting Officer)
/s/ DANIEL O. ANDERSON March 31, 1997 - ---------------------------------- -------------- Daniel O. Anderson Vice President - Operations and Director
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page Number in Form 10-K (a) 1. Financial Statements: Report of Independent Auditors..................................23 Consolidated Balance Sheet at December 31, 1996 and 1995........24 Consolidated Statement of Income and Income Retained for Growth for the Years Ended December 31, 1996, 1995and 1994..................................................25 Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994..............................26 Notes to Consolidated Financial Statements......................27
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts..................40
Schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission (the "SEC"), except Schedule II, which is included herein, have been omitted because they are not required, or the information is set forth in the financial statements or notes thereto.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company dated June 29, 1989, incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1993.
3.2 By-Laws of the Company, as amended to date, incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1993.
4.1 Indenture, dated as of April 1, 1983, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(a) to the Company's Form S-3 Registration Statement (File No. 2-83007).
4.2 First Supplemental Indenture, dated as of June 12, 1995, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.3 Subordinated Indenture, dated as of June 15, 1988, by and between the Company and Bankers Trust Company of California, N.A., as Subordinated Indenture Trustee, incorporated by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.4 First Supplemental Subordinated Indenture, dated as of June 12, 1995, between the Company and Bankers Trust Company, as successor Trustee to Bankers Trust Company of California, N.A., incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.5 Indenture, dated as of April 15, 1987, incorporated herein by reference to Exhibit 4 to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.6 Form of Series II Medium Term Note, incorporated by reference to Exhibit 4(c) to the Form 8-K of the Company dated as of August 22, 1983.
4.7 Form of Series III Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 2-98001).
4.8 Form of Series V Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration (File No. 33-13735).
4.9 Form of Series VI Medium Term Note, incorporated by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company, as filed with the SEC on April 24, 1987.
4.10 Form of Series VII Medium Term Note, incorporated by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company, as filed with the SEC on April 24, 1987.
4.11 Form of Series VIII Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.12 Form of Series VIII Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration Statement (File No. 33-26674).
4.13 Form of Series IX Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Company's Form S-3 Registration Statement (File No. 33-31419).
4.14 Form of Series IX Senior Federal Funds Medium Term Note, incorporated herein by reference to Exhibit 4(d) of the Company's Form 8-K dated May 16, 1995.
4.15 Form of Series IX Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration (File No. 33-31419).
4.16 Form of General Term Note(R), incorporated herein by reference to Exhibit 4(c) to the Company's Form 8-K dated May 26, 1993.
4.17 Form of Series X Senior Fixed Rate Medium Term Note, incorporated herein by reference to Exhibit 4(e) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.18 Form of Series X Senior Floating Rate Medium Term Note, incorporated herein by reference to Exhibit 4(h) to the Company's Form S-3 Registration Statement (File No. 33-58989.)
4.19 Form of series X Subordinated Fixed Rate Medium Term Note, incorporated herein by reference to Exhibit 4(f) to the Company's Form S-3 Registration Statement (File No. 33-58989).
4.20 Form of Series X Subordinated Floating Rate Medium Term Note, incorporated herein by reference to Exhibit 4(g) to the Company's Form S-3 Registration Statement (File No. 33-58989).
Pursuant to Item 601 (b)(4)(iii) of Regulation S-K, the Company is not filing certain instruments with respect to its long-term debt because the total amount of securities currently provided for under each of such instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request.
10.1 Amended and Restated Operating Agreement, dated as of April 12, 1993, among McDonnell Douglas, the Company and MDFS, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-K for the year ended December 31, 1993.
10.2 Operating Agreement, effective as of February 8, 1989, by and between the Company and MDFS, incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 1989.
10.3 By-Laws of McDonnell Douglas, as amended March 6, 1996, incorporated by reference from McDonnell Douglas's Exhibit 3.2 to its Form 10-K Report for the year ended December 31, 1995 (file No. 1-3685).
10.4 Supplemental Guaranty Agreement, dated as of December 30, 1993, by and between the Company and McDonnell Douglas, incorporated herein by reference to Exhibit 10.4 to the Company's Form 10-K for the year ended December 31, 1993.
10.5 Amendment No. 1 to Supplemental Guaranty Agreement, dated as of March 28, 1996.
10.6 Guaranty Amendment Agreement, dated as of June 28, 1996, by and between the Company and McDonnell Douglas.
10.7 Supplemental Guaranty Agreement, dated as of December 30, 1993, by and between the Company and McDonnell Douglas, incorporated herein by reference to Exhibit 10.5 to the Company's Form 10-K for the year ended December 31, 1994.
10.8 Amendment No. 1 to Supplemental Guaranty Agreement, dated as of March 28, 1996, between the Company and McDonnell Douglas.
10.9 Agreement, dated as of December 30, 1994, by and between the Company and McDonnell Douglas incorporated herein by reference to Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1994.
10.10 Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein incorporated herein by reference to Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1994.
10.11 Amendment No. 1, dated as of August 31, 1995, to Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein, incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the quarterly period ended September 30, 1995.
10.12 Amendment No. 2, dated as of August 16, 1996, to Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein, incorporated by reference to Exhibit 10 to the Company's Form 10-Q for the quarterly period ended September 30, 1996.
12 Statement regarding computation of ratio of earnings to fixed charges.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
McDonnell Douglas Finance Corporation
By /s/ STEVEN W. VOGEDING ---------------------------------- Steven W. Vogeding March 31, 1997 Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ JAMES F. PALMER March 31, 1997 - ---------------------------------- -------------- James F. Palmer Chairman and Director
/s/ THOMAS J. MOTHERWAY - ---------------------------------- Thomas J. Motherway President and Director March 31, 1997 -------------- (Principal Executive Officer)
/s/ STEVEN W. VOGEDING - ---------------------------------- Steven W. Vogeding Vice President and March 31, 1997 Chief Financial Officer -------------- (Principal Financial Officer)
/s/ F. MARK KUHLMANN March 31, 1997 - ---------------------------------- -------------- F. Mark Kuhlmann Director
- ---------------------------------- -------------- Michael M. Sears Director
/s/ MAURA R. MIZUGUCHI March 31, 1997 - ---------------------------------- -------------- Maura R. Mizuguchi Controller (Principal Accounting Officer)
/s/ DANIEL O. ANDERSON March 31, 1997 - ---------------------------------- -------------- Daniel O. Anderson Vice President - Operations and Director