1
United States
Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 1993
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MCDONNELL DOUGLAS FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2564584 0-10795
(State or other (I.R.S. Employer (Commission
jurisdiction of Identification No.) File No.)
Incorporation
or Organization)
340 Golden Shore, Long Beach, California 90802
(Address of principal executive offices)
(310) 491-3225
(Registrant's telephone number, including area code)
__________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $100 per share
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. __X___
As of March 30, 1994, there were 50,000 shares of the Company's common stock
outstanding.
Registrant meets the conditions set forth in General Instruction J(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
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Table of Contents
Page
Part I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 24
Item 4. Submission of Matters to a Vote of Security Holders *
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 26
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 30
Item 8. Financial Statements and Supplementary Data . . . . . 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . 61
Part III
Item 10. Directors and Executive Officers of the Registrant *
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and Management *
Item 13. Certain Relationships and Related Transactions *
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . 61
Signatures . . . . . . . . . . . . . . . . . . . . . . 64
Exhibits . . . . . . . . . . . . . . . . . . . . . . . 65
*Omitted pursuant to General Instruction J(1)(a) and (b) of Form 10-K.
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Part I
Item 1. Business
General
McDonnell Douglas Finance Corporation and its subsidiaries (the "Company") is
a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation
("MDFS"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("MDC").
The Company was incorporated in Delaware in 1968 and originally financed only
MDC 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, 1993, the Company had approximately 110 employees.
Beginning in 1990, as a result of the lowering of the Company's credit
ratings, capital constraints imposed by MDC, the recession and the failure of
most of its non-core businesses to achieve a satisfactory return, the Company
significantly scaled back its operations and focused its new business efforts
almost entirely within its two core business units, commercial aircraft
financing and commercial equipment leasing ("CEL"), businesses in which the
Company historically has achieved satisfactory returns. For the five years
ended 1993, the core businesses earned $262.0 million or 133% of the total net
earnings of the Company, excluding the 1989 cumulative effect of change in
accounting principle. In 1991, the Company determined to exit each of its
non-core businesses as market conditions permitted.
The Company now operates in three segments: commercial aircraft financing, CEL
and non-core businesses. Non-core businesses represent market segments in
which the Company is no longer active. The non-core businesses consist
primarily of the remaining assets of three business units: McDonnell Douglas
Bank Limited ("MD Bank"), receivable inventory financing ("RIF") and real
estate financing ("RE"). Non-core new business volume in 1993 and 1992
represent previous contractual commitments and extensions of maturing
transactions. The Company does not intend to seek new contractual commitments
in its non-core businesses. The Company is actively managing the remaining
non-core business portfolios with a view toward liquidating those portfolios
over time.
Information on the Company's new business volume and portfolio balances is
included in the following tables.
New Business Volume
Years ended December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
Commercial aircraft $ 411.4 $153.2 $100.9 $ 155.4 $ 121.0
financing
Commercial equipment 41.5 50.7 91.8 189.1 305.4
leasing
Non-core businesses 0.1 2.6 38.6 416.8 536.2
$ 453.0 $206.5 $231.3 $ 761.3 $ 962.6
4
Portfolio Balances
December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
Commercial aircraft $ 1,237.5 $1,001.1 $ 907.8 $ 1,048.1 $ 948.1
financing
Commercial equipment 422.3 557.4 668.9 965.1 1,001.2
leasing
Non-core businesses 173.7 227.9 595.6 1,245.9 1,113.2
$ 1,833.5 $1,786.4 $2,172.3 $ 3,259.2 $ 3,062.5
For financial information about the Company's segments, see Notes to
Consolidated Financial Statements included in Item 8.
Commercial Aircraft Financing Segment
The Company's commercial aircraft financing group, located in Long Beach,
California, provides customer financing services to Douglas Aircraft Company,
a division of MDC, and finances the acquisition of MDC aircraft by purchasing
such aircraft subject to lease to airlines and by providing secured and
unsecured notes receivable financing in connection with the acquisition of
such aircraft. Beginning in 1986, the Company began providing financing to
airlines for aircraft manufactured by manufacturers other than MDC, but a
substantial majority of the commercial aircraft portfolio is comprised of
aircraft manufactured by MDC.
5
Portfolio balances for the Company's commercial aircraft financing segment are
summarized as follows:
Commercial Aircraft Portfolio by Product Type
December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
Aircraft leases:
Finance leases
Domestic $ 638.8 $601.5 $609.2 $ 798.2 $ 717.4
Foreign 297.3 54.6 70.9 71.5 83.6
Operating leases
Domestic 149.8 111.4 81.5 56.9 53.6
Foreign 50.3 39.9 10.9 10.9 -
1,136.2 807.4 772.5 937.5 854.6
Aircraft related notes
receivable:
Domestic obligors
Senior 51.5 88.0 47.1 20.4 25.5
Subordinated - - 14.5 13.5 13.6
Foreign obligors
Senior 49.8 105.7 73.7 76.7 54.4
101.3 193.7 135.3 110.6 93.5
$ 1,237.5 1,001.1 $907.8 $1,048.1 $ 948.1
6
Commercial Aircraft Portfolio by Aircraft Type
December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
MDC aircraft financing:
Finance leases $ 813.1 $ 506.2 $465.6 $ 604.7 $ 592.0
Operating leases 144.2 93.7 30.0 15.6 20.2
Notes receivable 77.7 169.4 107.4 66.6 82.6
1,035.0 769.3 603.0 686.9 694.8
Other commercial aircraft
financing:
Finance leases 123.0 149.9 214.6 265.0 209.0
Operating leases 55.9 57.6 62.3 52.2 33.4
Notes receivable 23.6 24.3 27.9 44.0 10.9
202.5 231.8 304.8 361.2 253.3
$1,237.5 $ 1,001.1 $907.8 $ 1,048.1 $ 948.1
At December 31, 1993, the Company's commercial aircraft portfolio was
comprised of finance leases to 23 customers (18 domestic and five foreign)
with a carrying amount of $936.1 million (51.1% of total Company portfolio),
notes receivable from eight customers (four domestic and four foreign) with a
carrying amount of $101.3 million (5.5% of total Company portfolio) and
operating leases to nine customers (seven domestic and two foreign) with a
carrying amount of $200.1 million (10.9% of total Company portfolio). The
five largest commercial aircraft financing customers accounted for $718.5
million (39.2% of total Company portfolio) and $445.1 million (24.9% of total
Company portfolio) at December 31, 1993 and 1992.
At December 31, 1993, 56.5% of the Company's total portfolio consisted of
financings related to MDC aircraft, compared with 43.1% and 27.8% in 1992 and
1991.
- - - Factors Affecting the Commercial Aircraft Financing Portfolio
A substantial portion of the Company's aircraft financings are to airlines
which either have recently emerged from bankruptcy or are in poor financial
health. The Company's two largest commercial aircraft financing customers,
Trans World Airlines, Inc. ("TWA") and Continental Airlines, Inc. and its
affiliated companies ("Continental"), have recently emerged from bankruptcy.
Company financings to TWA accounted for $253.2 million (13.8% of total
Company portfolio) and $102.9 million (5.8% of total Company portfolio) at
December 31, 1993 and 1992. On November 3, 1993, TWA emerged from Chapter
11 bankruptcy. At December 31, 1993, the Company had commitments to provide
additional aircraft-related financing to TWA of $22.9 million.
Company financings to Continental accounted for $116.4 million (6.4% of
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total Company portfolio) and $120.9 million (6.8% of total Company
portfolio) at December 31, 1993 and 1992. During periods in 1991 and 1992
when Continental was in bankruptcy, the Company agreed to accept the
deferral of certain payments due from Continental which totaled $6.1 million
at December 31, 1993. On April 27, 1993, Continental emerged from Chapter
11 bankruptcy.
Pursuant to the terms of supplemental guaranties recently executed by MDC in
favor of the Company, up to an additional $25.0 million of the Company's
financings to TWA and up to an additional $15.0 million of the Company's
financings to Continental are guaranteed by MDC. These guaranties
supplement individual guaranties provided by MDC with respect to certain of
the Company's financings to TWA and Continental 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 1996, but
may be extended under certain circumstances.
In June 1991, America West Airlines, Inc. ("America West") filed for
protection under Chapter 11 of the Federal Bankruptcy Code. The Company
participated in the financing of six aircraft which were returned by America
West in December 1992. Five of the aircraft are on lease to a new customer
and the sixth will be sold, subject to partial financing, in early 1994.
During 1993, the Company and America West entered into an agreement whereby
the Company settled its bankruptcy claims against America West in exchange
for America West airline passenger tickets. The Company continues to
market these tickets.
As part of a reorganization plan, on November 30, 1992, PWA Corporation
("PWA") ceased making payments to all of its creditors. Time Air, Inc.
("Time Air"), a subsidiary of PWA, became delinquent in December 1992 under
its financing of a commuter aircraft which as of December 31, 1993, had a
net carrying value of $5.7 million. The Company has agreed to a deferral of
certain payments with Time Air, which agreement was amended in February
1994 to lengthen the deferral.
The Company has not suffered a material adverse effect upon its financial
condition as a result of the above-mentioned bankruptcies. In addition,
the Company historically has not been materially adversely affected by
bankruptcies involving its commercial aircraft customers because of the
collateral value of the aircraft and, to a lesser extent, MDC guaranties
obtained in connection with certain of the financings. However, should one
or more of the Company's major airline customers encounter financial
difficulties and liquidate its fleet, the large number of aircraft which
would be added to the already saturated market would make it difficult for
the Company to realize the carrying value of the aircraft leased to such
airline(s).
In March 1994, the Company reached an agreement in principle with an airline
leasing an aircraft with a December 31, 1993 carrying amount of $23.0
million who had become delinquent on its lease payments. Pursuant to the
agreement in principle , the term of the lease was extended and the payment
schedule was adjusted.
8
- - - Current Commercial Aircraft Market Conditions
The current severe economic downturn within the airline industry has
diminished significantly the demand for new and used aircraft, with some
airlines defaulting on contracts for firm orders or postponing orders with
the manufacturer while also disposing of or grounding a portion of their
fleets. This has resulted in an oversupply of aircraft in the market, which
has materially adversely affected the values of the Company's aircraft. It
is not clear whether this decline in aircraft values will continue. Despite
the erosion of aircraft values, the Company believes that the value of
realizable sales prices at the end of the lease terms for substantially all
the aircraft the Company has leased exceeds the book value projected at the
end of the lease terms. If aircraft values remain depressed or continue to
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
financial condition of the Company. In this regard, the Company's financial
performance is dependent in part upon general economic conditions which may
affect the profitability of commercial airlines.
During 1993, the Company held for sale or lease 17 aircraft and successfully
remarketed 11 aircraft, reducing its inventory of aircraft to six at
December 31, 1993, with a carrying value of $26.3 million. At December 31,
1993, five of the six aircraft in inventory were the subject of lease
commitments with TWA and will be delivered during 1994. The remaining
aircraft will be sold to TWA, on a partially financed basis, in early 1994.
- - - 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, 1993, the Company owned or participated in the ownership of 109
leased commercial aircraft, including 56 jet transports manufactured by MDC.
- - - Factors Affecting Aircraft Financing Volume
As in the past, the Company anticipates continued fluctuations in the volume
of its aircraft financing transactions. Current market conditions may limit
many airlines' ability to access financing and present more opportunities to
the Company. The Company's decision to exit its non-core businesses and the
increased need of certain of MDC's commercial aircraft customers for
financing resulted in the Company financing a substantial amount of aircraft
manufactured by MDC in 1993. The Company had commitments to provide
aircraft related financing of $38.5 million at December 31, 1993 and $1.8
million at December 31, 1992. (See "Competition and Economic Factors.")
The following lists information on new business volume for the Company's
commercial aircraft financing segment:
9
Years ended December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
MDC aircraft financing
volume:
Finance leases $ 357.3 $ 95.0 $ 19.2 $ 29.7 $ 37.3
Operating leases 33.8 53.5 30.0 - -
Notes receivable 19.1 4.7 21.5 - -
410.2 153.2 70.7 29.7 37.3
Other commercial
aircraft financing
volume:
Finance leases - - 23.9 69.3 67.9
Operating leases 0.7 - 6.3 21.0 13.8
Notes receivable 0.5 - - 35.4 2.0
1.2 - 30.2 125.7 83.7
$ 411.4 $ 153.2 $ 100.9 $ 155.4 $ 121.0
- - - Aircraft Financing Guaranties
At December 31, 1993, the Company had $318.2 million of guaranties with
respect to its commercial aircraft financing portfolio relating to
transactions with a carrying value of $1,237.5 million (25.7% of the
commercial aircraft financing portfolio). The following table summarizes
such guaranties:
(Dollars in millions) Domestic Foreign Total
Amounts guaranteed by:
MDC $127.2 $134.4 $261.6
Foreign governments - 14.5 14.5
Other 28.3 13.8 42.1
Total guaranties $155.5 $162.7 $318.2
The Company has no reason to believe that any such guaranteed amounts will
be ultimately unenforceable or uncollectible. See "Relationship With MDC."
Commercial Equipment Leasing Segment
CEL provides single-investor, tax-oriented lease financing as its primary
product. CEL, which maintains its principal operation 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 over-the-
road transportation equipment, executive aircraft, machine tools, shipping
containers, printing equipment, textile manufacturing equipment and other
types of equipment which it believes will maintain strong collateral and
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residual values. The lease term is generally between three and ten years and
transaction sizes usually range between $2.0 million and $10.0 million. In
addition to financing transactions for the Company, CEL arranges third party
financings of equipment.
Portfolio balances for the Company's CEL segment are summarized as follows:
December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
Finance leases $ 235.2 $325.9 $ 425.9 $ 655.8 $ 705.4
Operating leases 157.5 179.9 198.7 244.8 222.3
Notes receivable 28.8 50.7 41.5 59.4 64.0
Preferred and preference 0.8 0.9 2.8 5.1 9.5
stock
$ 422.3 $557.4 $ 668.9 $ 965.1 $ 1,001.2
- - - Factors Affecting CEL Volume
The Company's recent CEL volume has been affected by limitations on the
availability of capital to commit to new transactions and higher cost of
capital. In addition, there has been an increased need of certain of MDC's
commercial aircraft customers for financing, resulting in the Company
devoting a higher percentage of its available capital to MDC aircraft
financing. Based on the Company's current increased availability to lower
cost funds, CEL's new business volume in 1994 is expected to exceed its 1993
volume. At December 31, 1993 and 1992, the Company had commitments to
provide CEL leasing and financing of $4.6 million and $20.7 million.
The following lists information on new business volume for the Company's
CEL segment:
Years ended December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
Finance leases $ 15.3 $ 24.9 $ 55.6 $ 109.4 $ 143.6
Operating leases 22.9 18.2 30.3 73.2 98.3
Notes receivable 3.3 7.6 5.9 6.5 63.5
$ 41.5 $ 50.7 $ 91.8 $ 189.1 $ 305.4
Non-Core Businesses Segment
Since 1990, the Company has significantly scaled back its operations and is
focusing its new business efforts within its two core businesses, commercial
aircraft financing and CEL. The non-core businesses consist primarily of the
following three business units:
- - - McDonnell Douglas Bank Limited
While MD Bank is an indirect wholly-owned subsidiary of MDC, through
intercompany arrangements between MDC and the Company, MD Bank is treated as
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a wholly-owned subsidiary of the Company. MD Bank, located in the United
Kingdom, has not written any new business since 1991 and in 1993,
surrendered its banking license and returned deposits. The remaining
portfolio of MD Bank is being run off and disposed of as conditions permit.
- - - Receivable Inventory Financing
RIF finances dealers of rent-to-own products such as home appliances,
electronics and furniture through note arrangements secured by the products
and the rental amounts to be collected. RIF ceased pursuing new business
during 1991, but continues to service and finance its existing customers.
- - - Real Estate Financing
RE previously specialized in fixed-rate, medium-term loans secured by a
first deed-of-trust or mortgage on commercial real estate properties such
as office buildings and small shopping centers. RE ceased originating new
transactions in 1990 but continues to manage its current portfolio.
On September 28, 1993, the Company sold, at estimated fair value, six real
estate owned properties to McDonnell Douglas Realty Company, a wholly-owned
subsidiary of MDC, and financed the sale by taking a $28.9 million note.
The Company recorded a pretax loss of $5.7 million (after applying reserves)
on the transfer, which is reflected in other expenses in the consolidated
statement of income. The note is payable on demand and accrues interest at
a rate equal to the average borrowing cost of MDFS.
At December 31, 1993, the largest concentration of the Company's real estate
assets was in the Western region of the U.S., representing $70.3 million or
54.6% of the Company's real estate holdings. At December 31, 1993, the
Company had $33.9 million or 26.3% of its real estate holdings in Southern
California, where values continue to remain depressed. Office buildings,
which represent the largest Southern California real estate holding, totaled
$41.8 million at December 31, 1993. At December 31, 1993 and 1992, real
estate owned through foreclosure totaled $12.9 million and $55.2 million.
Portfolio balances for the Company's non-core businesses segment are
summarized as follows:
December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
Finance leases $ 2.2 $ 11.8 $ 174.1 $ 587.2 $ 464.8
Operating leases 0.6 1.7 121.1 181.6 192.7
Notes receivable 170.9 214.4 300.4 477.1 455.7
$ 173.7 $ 227.9 $ 595.6 $ 1,245.9 $ 1,113.2
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Business units comprising the Company's non-core businesses segment portfolio
are summarized as follows:
(Dollars in millions) December 31,
Business Unit 1993 1992 1991 1990 1989
Real estate financing $ 115.8 $ 136.9 $ 181.9 $ 213.9 $ 264.0
Receivable inventory 31.0 43.5 52.8 55.8 40.0
financing
McDonnell Douglas Bank 20.7 36.0 216.3 354.9 205.0
Limited
Marketable debt securities 3.3 7.4 24.2 130.6 120.6
Business credit group 2.2 2.6 2.9 100.9 65.2
McDonnell Douglas Capital
Corporation 0.7 1.5 44.9 66.1 85.9
McDonnell Douglas Auto
Leasing Corporation - - - 210.1 211.1
McDonnell Douglas Truck - - 72.6 113.6 121.4
Services Inc.
$ 173.7 $ 227.9 $ 595.6 $ 1,245.9 $ 1,113.2
- - - Factors Affecting Non-Core Business Volume
As a result of the Company's decision to exit its non-core businesses, there
has been almost no new business volume since 1991. Non-core new business
volume in 1993 and 1992 represent previous contractual commitments and
extensions of maturing transactions. The Company does not intend to seek
new contractual commitments in its non-core businesses. The Company is
actively managing the remaining non-core business portfolios with a view
toward liquidating those portfolios over time. At December 31, 1993 and
1992, unused credit lines available to RIF customers totaled $6.6 million
and $14.3 million. The Company had no commitments to provide non-core
business financing at December 31, 1993 and had commitments of $0.6 million
at December 31, 1992.
The following lists information on new business volume for the Company's
non-core businesses:
Years ended December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
Finance leases $ - $ - $ 12.8 $ 240.7 $ 331.0
Operating leases - 0.8 5.5 39.7 95.6
Notes receivable 0.1 1.8 20.1 136.4 109.6
$ 0.1 $ 2.6 $ 38.6 $ 416.8 $ 536.2
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Non-U.S. Financing
A portion of the Company's business, primarily in the commercial aircraft
financing segment, is conducted with non-U.S. companies. In evaluating non-
U.S. transactions, the Company must take into account certain additional risks
not encountered in U.S. transactions. For example, payment obligations of
non-U.S. obligors from time to time may be subject to foreign exchange
restrictions of their respective countries. Additionally, equipment financing
is subject to potential risks related to taxation, national policies,
political and economic instability, limitations on legal remedies, and
currency fluctuations. The Company has not experienced any material problems
related to such risks, but no assurances can be given that such factors will
not adversely affect the Company in the future. (See "Competition and
Economic Factors" and Notes to Consolidated Financial Statements included in
Item 8.)
Cross-Border Outstandings
The extension of credit to borrowers located outside of the U.S. 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
according to contractual terms. Other risks associated with these credits
include the possibility of insufficient foreign exchange and restrictions on
its availability. To minimize country risk, the Company monitors its foreign
credits in each country with specific consideration given to maturity,
currency, industry and geographic concentration of the credits.
The Company has minimal local currency outstandings to the individual
countries listed in the following table that are not hedged or are not funded
by local currency borrowings.
The countries in which the Company's cross border outstandings exceeded 1% of
consolidated assets consist of the following at December 31:
(Dollars in
millions)
December 31,
Country
Finance Notes Operating
1993 Leases Receivable Leases Guaranties Total
Indonesia $154.8 $ - $ - $ - $154.8
Mexico 23.0 - 23.6 - 46.6
United Kingdom 14.3 23.0 - - 37.3
$192.1 $ 23.0 $ 23.6 $ - $238.7
1992
Canada $ 12.7 $ 5.7 $ 0.3 $ 3.5 $ 22.2
Mexico 24.3 - 26.5 - 50.8
United Kingdom 23.9 42.7 0.4 - 67.0
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$ 60.9 $ 48.4 $ 27.2 $ 3.5 $ 140.0
1991
Mexico $ 39.9 $ 4.0 $ - $ - 43.9
United Kingdom 184.4 34.8 10.0 - 229.2
$ 224.3 $ 38.8 $ 10.0 $ - $ 273.1
As of December 31, 1993, the Company had equipment in the Netherlands under an
operating lease agreement with a net carrying amount of $18.0 million,
representing outstandings between 0.75% and 1% of the Company's total assets.
As of December 31, 1992 and 1991, there were no countries whose outstandings
were between 0.75% and 1% of the Company's total assets.
Maturities and Sensitivity to Interest Rate Changes
The following table shows the maturity distribution and sensitivity to changes
in interest rates of the Company's domestic and foreign financing receivables
at December 31, 1993:
(Dollars in millions)
Maturity Distribution Domestic Foreign Total
1994 $ 259.1 $ 64.0 $ 323.1
1995 203.3 40.3 243.6
1996 166.0 37.7 203.7
1997 137.7 34.7 172.4
1998 131.8 37.2 169.0
1999 and thereafter 547.7 308.5 856.2
$ 1,445.6 $ 522.4 $ 1,968.0
Financing Receivables Due
1995 and Thereafter
Fixed interest rates $ 1,127.6 $ 269.0 $ 1,396.6
Variable interest rates 57.7 189.4 247.1
$ 1,185.3 $ 458.4 $ 1,643.7
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Allowance for Losses on Financing Receivables and Credit Loss Experience
Analysis of Allowance for Losses on Financing Receivables
December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
Allowance for losses on
financing $ 37.4 $ 46.7 $ 61.6 $ 46.9 $ 44.1
receivables at beginning
of year
Provision for losses 8.6 19.1 47.2 57.3 13.2
Write-offs, net of (10.4) (27.4) (56.7) (44.1) (11.4)
recoveries
Other - (1.0) (5.4) 1.5 1.0
Allowance for losses on
financing receivables at $ 35.6 $ 37.4 $ 46.7 $ 61.6 $ 46.9
end of year
Allowance as percent of 1.9% 2.1% 2.2% 1.9% 1.5%
total portfolio
Net write-offs as percent
of average portfolio 0.6% 1.4% 2.0% 1.4% 0.4%
More than 90 days
delinquent:
Amount of delinquent $ 3.7 $ 4.6 $ 19.0 $ 5.2 $ 6.5
instalments
Total receivables due
from delinquent obligors $ 108.4 $ 10.5 $ 42.8 $ 42.1 $ 52.8
Total receivables due
from delinquent obligors
as a percentage of total 5.9% 0.6% 2.0% 1.3% 1.7%
portfolio
The 1993 increase of total receivables from delinquent obligors is primarily
attributable to rent not paid by a single airline customer who has agreed to
repay the past due rents in 1994.
The portfolio at December 31, 1993 includes 13 CEL obligors, two airline
obligors and four non-core obligors to which payment extensions have been
granted. At December 31, 1993, payments so extended amounted to $14.8 million
($5.4 million airline-related), and the aggregate carrying amount of the
related receivables was $167.8 million ($122.2 million airline-related).
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Receivable Write-offs, Net of Recoveries by Business Unit
The following table summarizes the loss experience for each of the business
units:
Years ended % of Respective
December 31, Average Portfolio
(Dollars in millions) 1993 1992 1993 1992
Commercial aircraft financing $ (1.5) $ 6.6 (0.15)% 0.68%
Commercial equipment leasing 3.9 5.3 0.80 0.89
Core businesses 2.4 11.9
Non-Core Businesses:
Real estate financing 6.4 7.7 5.15 4.67
Receivable inventory financing - 3.2 - 6.77
Marketable debt securities 0.8 1.2 12.75 6.77
McDonnell Douglas Bank Limited 0.3 2.8 1.26 1.81
McDonnell Douglas Truck Services - 0.5 - 2.88
Inc.
McDonnell Douglas Capital 0.1 0.1 5.53 0.47
Corporation
Business credit group 0.4 - 20.90 -
8.0 15.5
$ 10.4 $ 27.4
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 $8.6 million and $19.1 million in 1993 and 1992 for
losses. The Company believes that the allowance for losses on financing
receivables is adequate at December 31, 1993 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 real estate, 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, have decreased in 1993
as compared to 1992. The decrease is largely due to the substantial
liquidation during 1992 and 1991 of the asset portfolios in the non-core
businesses segment.
- - - The commercial aircraft financing segment experienced recoveries of $1.5
million and write-offs of $6.6 million in 1993 and 1992 related to
aircraft returned by America West.
- - - The asset portfolios in the non-core businesses segment have declined from
$1,245.9 million at December 31, 1990 to $173.7 million at December 31,
1993 and, therefore, net write-offs also have declined.
17
Nonaccrual and Past Due Financing Receivables
Financing receivables accounted for on a nonaccrual basis consisted of the
following at December 31:
(Dollars in millions) 1993 1992
Domestic $ 17.1 $ 25.0
Foreign 23.7 0.9
$ 40.8 $ 25.9
Financing receivables being accrued which are contractually past due 90 days
or more as to principal and interest payments consisted of domestic financings
of $76.6 million and $2.7 million at December 31, 1993 and 1992.
Borrowing Operations
The following table sets forth the average debt of the Company by borrowing
classification:
(Dollars in millions)
Average Average
Years ended Short-Term Long-Term Average
December 31, Debt Debt Total
Debt
1993 $ 113.0 1,153.7$ $1,266.7
1992 118.2 1,513.1 1,631.3
1991 341.1 1,750.4 2,091.5
1990 393.2 1,888.0 2,281.2
1989 263.6 1,656.3 1,919.9
The weighted average interest rates on all outstanding indebtedness computed
for the relevant period were as follows:
Weighted Average Weighted Average Weighted Average
Years ended Short-Term Long-Term Total Debt
December 31, Interest Rate Interest Rate Interest Rate
1993 5.97% 9.53% 9.19%
1992 12.38 8.75 9.00
1991 10.28 9.73 9.82
1990 10.86 9.62 9.83
1989 10.56 9.85 9.95
(See Schedule IX - "Short Term Borrowings" and Notes to Consolidated Financial
Statements included in Item 8.)
In February 1993, Moody's Investor Service ("Moody's") announced the downgrade
of MDC's debt credit ratings. Concurrent with this downgrade of the parent,
Moody's reduced the Company's senior debt, subordinated debt and commercial
paper to Ba1, Ba3 and Not Prime, respectively. In March 1994, Moody's
announced the upgrade to Baa3, Ba2 and P3 for MDC's and the Company's senior
debt, subordinated debt and commercial paper credit ratings.
18
In June 1993, Duff and Phelps, Inc. rated the Company's senior and
subordinated debt as BBB and BBB-, and Standard and Poor's Corporation
affirmed the Company's senior and subordinated debt ratings of BBB and BBB-.
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
"Relationship With MDC.") Competitive factors also include, among other
things, the Company's ability to be 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 MDC
aircraft. The Company's relationship with MDC has in many cases presented
opportunities for such business and has caused MDC to offer to the Company
substantially all of the notes receivable taken by MDC upon the sale of its
aircraft. (See "Relationship With MDC".) In past years many customers have
obtained their financing for MDC aircraft through sources other than the
Company or MDC, reflecting a broader range of competitive financing
alternatives available to MDC customers. However, the worldwide downturn in
the airline business, together with the general tightening of credit has
presented and may continue to present increased opportunities for aircraft
financing business for the Company. The Company's ability to take advantage
of these opportunities depends in substantial part on its ability to obtain
the necessary capital. The consolidation in the U.S. airline industry as a
result of bankruptcies and mergers has resulted in an increase in the
concentration of the Company's MDC aircraft financings in a smaller number of
larger airlines at the same time that the Company's decision to exit its non-
core businesses has resulted in a greater concentration of the Company's
portfolio in commercial aircraft financing. With a larger portion of the
portfolio concentrated in MDC aircraft financings, the risk to the Company
resulting from the declining creditworthiness of many airlines has increased.
(See "Commercial Aircraft Financing Segment" and "Analysis of Allowance for
Losses on Financing Receivables and Credit Loss Experience.")
Aircraft owned or financed by the Company may become significantly less
valuable because of the introduction of new aircraft models, which may be more
economical to operate, the aging of particular aircraft, technological
obsolescence such as that caused by legislation for noise abatement which will
over time prohibit the use of older, noisier (Stage 2) aircraft in the U.S.,
or an oversupply of aircraft for sale (such as presently exists). In any such
event, carrying amounts on the Company's books may be reduced if, in the
19
judgment of management, such carrying amounts are greater than market value,
which would result in recognition of a loss to the Company. At December 31,
1993, the Company's carrying amount of Stage 2 aircraft totaled $68.4 million
(5.4% of the Company's total aircraft portfolio, including held for sale or
re-lease), which includes $26.3 million of aircraft held for sale or re-lease.
Although the Company is particularly subject to risks attendant to the airline
and aircraft manufacturing industries, the ability of the Company to generate
new business also is dependent upon, among other factors, the capital
equipment requirements of U.S. businesses and the availability of capital.
Relationship With MDC
MDC is principally engaged in the design, development and production of
defense and commercial aerospace products. For the year ended December 31,
1993, MDC recorded revenues of $14.5 billion and net earnings of $396.0
million. At December 31, 1993, MDC had assets of $12.0 billion and
shareholders' equity of $3.4 billion. One of the five directors of the
Company is a director of MDC and four of the Company's directors are officers
of MDC.
The financial well-being of MDC is vital to the Company's ability to enter
into significant amounts of new business in the future. Primarily as a result
of certain downgrades in the credit ratings of MDC in 1991 and in early 1993,
the Company's credit ratings were downgraded at the same time. Beginning in
the early 1990's and continuing through mid-1993, the Company's access to new
capital was severely limited due to a lowering of the Company's credit
ratings, the recession and constraints imposed by MDC. However, as 1993
progressed, all of these factors had a much smaller impact on the Company and
consequently, the Company's access to new capital improved. Approximately 25%
of the receivables from the Company's total aircraft portfolio are supported
by guaranties from MDC. In the event a substantial portion of the guaranties
become payable and in the unlikely event that MDC is unable to honor its
obligations under these guaranties, such event could have a material adverse
effect on the financial condition of the Company. In addition, MDC
participates as an intermediary in financings to a small number of the
Company's commercial aircraft customers and largely as a result thereof, MDC
is the fourth largest commercial aircraft financing customer of the Company.
Two of the principal industry segments in which MDC operates, military
aircraft and commercial aircraft, are especially competitive and have a
limited number of customers. As the Company focuses on its core businesses,
and primarily aircraft financing, its future business prospects become more
closely tied to the success of MDC, and especially the ability of MDC's
commercial aircraft business to generate additional sales. The commercial
aircraft business is market sensitive, which causes disruptions in production
and procurement and attendant costs, and requires large investments to develop
new derivatives of existing aircraft or new aircraft. The depressed
conditions in the airline industry have resulted and may continue to result in
airlines not taking deliveries of commercial transport aircraft, defaulting on
contracts for firm orders, requests for changes in delivery schedules of
existing orders, not exercising options or reserves and a dramatic decline in
new orders. MDC expects the weakness of the commercial aircraft market to
continue during 1994 and MDC does not expect a strong industry-wide resumption
in orders for new aircraft until 1995, at the earliest. MDC's market share of
firm order backlog for new commercial aircraft has declined significantly in
20
the past several years and operating revenues for MDC's commercial aircraft
segment decreased 28% in 1993. MDC also has made guaranties to non-affiliate
third parties in connection with the marketing of commercial aircraft. MDC
does not anticipate that the existence of such guaranties will have a material
adverse effect upon its financial condition. In addition, some existing
commercial aircraft contracts contain provisions requiring MDC to repurchase
used aircraft at the option of the commercial customers. In view of the
current market conditions for used aircraft, MDC's earnings and cash flows
could be adversely impacted by the exercise of such options. However, it is
not anticipated that the existence of such repurchase obligations will have a
material adverse effect on MDC's cash flow or financial position. The trend
of reduced commercial aircraft orders and reduced defense spending has
resulted in a significant downsizing of MDC over the last several years.
MDC's most significant customer in its military aircraft and missiles, space,
and electronic systems segments is the U.S. Government. In addition to the
risks found in any business, companies engaged in supplying military and space
equipment to the U.S. Government are subject to a number of other risks,
including dependence on Congressional appropriations and annual administrative
allotment of funds, general reductions in the U.S. defense budget, and changes
in Government policies. Defense spending by the U.S. Government has declined
and is likely to continue to decline. Further significant reductions in
defense spending and a decision made by the U.S. Government to emphasize
weapons research over production may have a material impact on MDC. The loss
of a major program or a major reduction or stretch-out in one or more programs
could have a material adverse impact on MDC's future revenues, earnings and
cash flow. MDC also incurs risk if it enters into firm fixed-price contracts
with the U.S. Government pursuant to which work is performed and paid for at a
fixed amount without adjustment for actual costs experienced in connection
with the contract. While this arrangement offers MDC opportunities for
increased profits if costs are lower than expected, risk of loss due to
increased cost is also borne by MDC. MDC, as a large defense contractor, is
subject to many audits, reviews and investigations by the U.S. Government of
its negotiation and performance of, accounting for, and general practices
relating to U.S. Government contracts. An indictment of a contractor may
result in suspension from eligibility for award of any new government
contract, and a guilty plea or conviction may result in debarment from
eligibility for awards. The U.S. Government may, in certain cases, also
terminate existing contracts, recover damages, and impose other sanctions and
penalties. Contracts may be terminated by the U.S. Government either for
default, if the contractor materially breaches the contract, or "for the
convenience" of the Government. Under contracts terminated for the
convenience of the Government, a contractor is generally entitled to receive
payments for its contract cost and the proportionate share of its fee or
earnings for work done, subject to availability of funding.
One of MDC's largest programs for the U.S. Government is the C-17 Globemaster
III. The C-17 program is completing development and moving into full
production. However, MDC has incurred significant C-17 related losses as a
result of its cost estimate at completion exceeding the fixed-price ceiling
set for development and initial production. In addition, as of December 31,
1993, the U.S.Air Force had withheld approximately $312 million from MDC's
progress payment requests principally as a result of the higher cost estimates
and the reclassification of certain costs. In May 1993, a Defense Acquisition
Board initiated by the Under Secretary of Defense for Acquisition began a
review of the C-17 program in an effort to resolve outstanding issues and to
make recommendations regarding the C-17's future. In connection with the
21
review, MDC provided data and participated in numerous discussions. In
January 1994, MDC and the Department of Defense agreed to a business
settlement of a variety of issues concerning the C-17. MDC and the U.S. Air
Force will be developing plans and contractual modifications and agreements to
implement the business settlement, which is subject to Congressional
authorization and appropriations. This process is expected to be completed
during 1994. The settlement covered issues open as of the date of the
settlement, including the allocation of sustaining engineering costs to the
development and production contracts, the sharing of flight test costs over a
previous level, and the resolution of claims and of performance/specification
issues. The settlement also stipulated that MDC will expend additional funds
in an effort to achieve product and systems improvements. MDC estimated the
financial impact of the settlement in conjunction with a review of the
estimated remaining costs on the C-17 development and initial production
contracts. As a result, MDC recorded a loss provision of $450 million
(excluding general and administrative and other period expenses) in the fourth
quarter of 1993.
On June 7, 1991, the U.S. Navy notified MDC and General Dynamics Corporation
("GD") that it was terminating for default the contract for development and
initial production of the A-12 aircraft. The Navy has agreed to continue to
defer repayment of $1.335 billion alleged to be due, with interest, from MDC
and GD as a result of the termination for default of the A-12 program. The
agreement provides that it will remain in force until the dispute as to the
type of termination is resolved by pending litigation in the U.S. Court of
Federal Claims or negotiated settlement, subject to review by the U.S.
Government annually on December 1, to determine if there has been a
substantial change in the financial condition of either MDC or GD such that
deferment is no longer in the best interest of the Government. The
Government, which extended the December 1, 1993 review beyond the time to
which MDC and GD agreed, has not advised the contractors of the results of
that review. However, the United States Court of Federal Claims has issued an
order deferring rulings on the merits of the A-12 termination case until
July 21, 1994. The court's order is based upon an undertaking by the
Government that it would not seek to terminate the A-12 deferment agreement
between MDC, GD and the Navy in the interim. MDC firmly believes it is
entitled to continuation of the deferment agreement in accordance with its
terms. However, if the agreement is not continued, MDC intends to contest
collection efforts. If payment of the deferred amounts were required, such
payment would have a material adverse effect on MDC's cash flows. Although
MDC has established a provision of $350 million for loss on the contract, if,
contrary to MDC's belief, the termination of the contract is not determined to
be for the convenience of the U.S. Government, it is estimated that an
additional loss would be incurred which could amount to approximately $1.2
billion.
Also, a 1991 Securities and Exchange Commission investigation looking into
whether MDC violated certain federal securities laws in connection with
disclosures about, and accounting for, the A-12 aircraft has been broadened to
include the C-17 and possibly other programs.
For a further description of these and other factors which may affect MDC's
financial condition, see MDC's Form 10-K for the year ended December 31, 1993
(Securities and Exchange Commission file number 1-3685.)
22
- - - Operating Agreement
The relationship between the Company and MDC 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 MDC aircraft receivables, the leasing of MDC aircraft,
the resale of MDC 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, MDC is required to offer to the Company all
promissory notes, conditional sales contracts and certain other receivables
obtained by MDC in connection with the sale of its commercial transport
aircraft, except for any receivable that MDC 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 to it, 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 MDC 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 will refuse to accept the
note receivable or will condition its acceptance upon receipt of a guaranty
from MDC 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 MDC 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 MDC on the terms negotiated between
MDC 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 MDC, with a negotiated fee to
be paid by the Company for the guaranty.
The Company has the option under the Operating Agreement to tender to MDC
any MDC 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 MDC aircraft leased
under a partnership arrangement in which the Company is one of the partners,
or MDC aircraft subject to third party liens or other security interests,
unless the Company and MDC determine that purchase by MDC is desirable. At
December 31, 1993, the carrying amount of MDC aircraft and MDC aircraft held
23
for sale or lease excluded by this provision amounts to approximately $127.4
million and $1.3 million, respectively.
- - - Federal Income Taxes
The Company and MDC presently file consolidated federal income tax returns,
with the consolidated tax payments, if any, being made by MDC. The
Operating Agreement provides that so long as consolidated federal tax
returns are filed, payments shall be made, directly or indirectly, by MDC to
the Company or by the Company to MDC, as appropriate, equal to the
difference between the consolidated tax liability and MDC's tax liability
computed without consolidation with the Company. If, subsequent to any such
payments by MDC, 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 MDC any portion of such payments.
The Company and MDC 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 MDC allocated
to the Company. This has been important in planning the volume of and
pricing for the Company's leasing activities. Under this arrangement, the
Company is entitled to receive on a current basis not less than 50% of the
potential tax savings generated by the Company's leasing activities with the
remaining portion of such tax benefits to be deferred for a one-year period.
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 MDC 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 MDC's
utilization of tax benefits since there can be no assurance that the Company
would be able to utilize such benefits currently. No assurances can be
given that the Company would be successful in restructuring its financing
activities. (See "Competition and Economic Factors.")
- - - Intercompany Services
MDC provides to the Company certain payroll, employee benefit, facilities
and other services, for which the Company generally pays MDC the actual
cost. (See Notes to Consolidated Financial Statements included in Item 8.)
Commencing in the second quarter of 1994, the Company will move to new
facilities to be leased by the Company from MDC.
The Company formerly provided substantial financial services to MDC in
connection with MDC's marketing of its aircraft, particularly in assisting
its customers in obtaining financing for their aircraft acquisitions. The
Company's function in this area included assistance with respect to the form
and terms of MDC's participation in such financing where necessary, and
negotiation of these terms with the customer on behalf of MDC. In January
1994, the 10 Company employees who were primarily responsible for providing
these services were transferred to Douglas Aircraft Company, a division of
MDC, to more closely align them with the primary focus of their efforts.
24
- - - Intercompany Credit Arrangements
The Company and MDC 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 MDC on MDC debt constitutes a default on Company
debt. There are no guaranties, direct or indirect, by MDC of the payment of
any debt of the Company.
The Company has an arrangement with MDC, terminable at the discretion of
either of the parties, pursuant to which the Company may borrow from MDC and
MDC may borrow from the Company, funds for 30-day periods at a market rate
of interest or at MDFS's average borrowing rate. Under these arrangements,
there were no outstanding balances at December 31, 1993 and at December 31,
1992, $49.0 million was receivable from MDC. During 1992, the Company made
no borrowings under this agreement and the maximum receivable from MDC under
this arrangement was $49.0 million.
Under a similar borrowing arrangement, McDonnell Douglas Realty Company owed
the Company $29.6 million at December 31, 1993. As of that date, the
Company was also owed $18.3 million by MDFS under a borrowing based on
short-term borrowing costs of the Company, supporting a bridge financing
which was repaid in March 1994.
Item 2. Properties
The Company leases all of its office space and other facilities. Commencing
in the second quarter of 1994, the Company will sublease from MDC, at fair
market value, approximately 40,000 square feet of office space to be used as
the Company's principal offices. The Company believes that its properties,
including the equipment located therein, are suitable and adequate to meet the
requirements of its business.
Item 3. Legal Proceedings
In 1990, the Company was named as a defendant in three class action suits (the
Carpi, Edelman, and Waldman "Actions") for alleged violations of securities
laws in connection with the public offering of limited partnership interests
in certain equipment leasing limited partnerships, the sponsor of which was
McDonnell Douglas Capital Corporation ("MDCC"), a wholly-owned subsidiary of
the Company. A court-approved settlement of the Carpi, Edelman, and Waldman
Actions became effective as of December 1, 1993, pursuant to which the
defendants will pay plaintiffs approximately $14.8 million, approximately
$13.4 million of which will be paid by MDCC, its corporate affiliates and the
individual defendants (a portion of which will be paid from the officers and
directors liability insurance covering the individual defendants). As part of
the settlement, MDCC purchased the equipment portfolios of the limited
partnerships for 121% of the $1.0 million net book value. The Company
adequately reserved for the settlement of the Actions and the settlement will
not have a significant adverse impact on its financial condition or results of
operations.
In March 1993, Wilmington Trust Company, CoreStates Bank, N.A., Midlantic
National Bank and Continental Bank (collectively the "Banks") filed suit
25
against the Company's wholly-owned subsidiary, MDFC Equipment Leasing
Corporation ("ELC"), in the Superior Court of the State of Delaware seeking to
recover payments made under letters of credit issued by the Banks in an
aggregate amount of $2.8 million plus interest on such payments. In March
1994, ELC reached an agreement in principle to settle the suit by agreeing to
pay the Banks a de minimus amount.
26
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 1993,
the Company declared and paid no dividends to MDFS on its common stock
compared to $102.3 million declared and paid in 1992. The 1992 common stock
dividends declared and paid were unusually high due to the downsizing of the
Company. The Company paid $3.6 million and $3.5 million in dividends on its
preferred stock in 1993 and 1992. Preferred stock dividends of $0.5 million
payable to MDFS were accrued at December 31, 1993. The Company currently
expects to pay common stock dividends of at least $13.0 million to MDFS in
1994.
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, $49.4 million
of the Company's income retained for growth was available for dividends at
December 31, 1993.
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, 1993 and for
the year then ended and with Item 7. The following table sets forth selected
consolidated financial data for the Company:
27
Years Ended December 31,
(Dollars in millions) 1993 1992 1991 1990 1989
Financing volume $ 453.0 $ 206.5 $ 231.3 $ 761.3 $ 962.6
Operating income:
Finance lease income $ 94.7 $ 113.0 $ 179.3 $ 210.0 $ 174.2
Interest on notes 35.8 47.9 61.5 80.8 65.8
receivable
Operating lease 34.3 33.3 34.1 36.9 32.7
income, net
Net gain on disposal
or re-lease 23.7 37.1 45.8 90.0 34.8
of assets
Postretirement - 2.8 - - -
benefit curtailment
Other 9.9 20.6 21.6 13.1 13.2
198.5 254.7 342.3 430.8 320.7
Expenses:
Interest expense 116.4 145.9 198.5 216.4 184.0
Provision for losses 8.6 19.1 47.2 57.3 13.2
Operating expenses 20.3 27.4 35.6 55.1 41.5
Other 12.4 14.3 3.8 3.1 6.4
157.7 206.7 285.1 331.9 245.1
Income from
continuing operations
before income taxes 40.8 48.0 57.2 98.9 75.6
and cumula-
tive effect of
accounting change
Provision for taxes 24.0 15.9 19.1 34.6 24.9
on income
Income from
continuing operations
before cumulative 16.8 32.1 38.1 64.3 50.7
effect of
accounting change
Discontinued - (2.5) (1.4) 1.2 (1.0)
operations, net
Cumulative effect of - (1.9) - - 100.0
accounting change
Net income $ 16.8 $ 27.7 $ 36.7 $ 65.5 $ 149.7
Cash dividends paid $ 3.6 $ 105.8 $ 59.0 $ 23.5 $ 142.2
Ratio of income to 1.34 1.32 1.28 1.45 1.41
fixed charges<F1>
Balance sheet data:
Total assets $2,063.1 $1,999.0 $2,582.3 $3,443.7 $ 3,133.7
Total debt 1,361.2 1,330.4 1,730.7 2,443.2 2,222.3
28
Shareholder's equity 269.4 256.4 340.5 364.9 317.0
Dividends accrued on
preferred stock at $ 0.6 $ 0.5 $ 0.5 $ 0.5 $ 0.5
year end
29
(1) For the purpose of computing the ratio of income to
fixed charges, income consists of income from
continuing operations before income taxes, cumulative
effect of accounting change and fixed charges; and
fixed charges consist of interest expense and
preferred stock dividends.
30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with the consolidated financial
statements included in Item 8.
Capital Resources and Liquidity
The Company has significant liquidity requirements. If cash provided by
operations, borrowings under bank credit lines, unsecured term borrowings and
the normal run-off of the Company's portfolio 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 been accessing
the public debt market since mid-1993 and anticipates using proceeds from the
issuance of additional public debt to fund future growth.
The Company has traditionally attempted to match-fund its business such that
scheduled receipts from its portfolio will at least 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.
In funding its operations, the Company had traditionally obtained cash from
operating activities, placements of term debt, issuance of commercial paper
and the normal run-off of its portfolio. However, beginning in the early
1990's and continuing through mid-1993, the Company's access to new capital
was severely limited due to a lowering of the Company's credit ratings, the
recession, and capital constraints imposed by MDC (see "Relationship With
MDC") and, as a result, the Company used asset sales and secured borrowings as
a source of funding at various times during this period. However, as 1993
progressed, all of these conditions had a much smaller impact on the Company
and the Company's access to new capital improved. Beginning late in the
second quarter of 1993, the Company resumed issuing public debt. In June 1993
the Company commenced offering securities as part of a $250 million retail
medium term note program. As of December 31, 1993, the Company had issued
$81.1 million of retail medium term notes. Beginning in the fourth quarter of
1993, the Company returned to the institutional medium term note market,
issuing $90.0 million in debt as of December 31, 1993.
During the years ended 1993, 1992 and 1991, the Company reduced the portfolio
amount in its non-core businesses segment by a total of $1,117.4 million. The
majority of the proceeds received from this reduction has been used to repay
outstanding debt.
At December 31, 1993, the Company had committed revolving credit agreements
under which it could borrow a maximum of $170.0 million through January 31,
1994. The maximum amount which the Company can borrow will be reduced by
$25.0 million each quarter through January 1995. At December 31, 1993, the
Company had borrowed $53.0 million under these facilities, leaving $117.0
million unused.
31
1993 vs. 1992
Finance lease income decreased $18.3 million (16.2%) in 1993 compared to 1992
primarily due to the 1992 disposition of a significant portion of the assets
of MD Bank and the normal run-off of the portfolio.
Interest on notes receivable in 1993 was $12.1 million (25.3%) lower than
1992, reflecting an overall smaller portfolio.
Net gain on disposal or re-lease of assets decreased $13.4 million (36.1%) in
1993, primarily attributable to 1992 non-recurring gains aggregating $9.4
million recorded in connection with the disposition of a significant portion
of the assets of MD Bank.
A lower level of short-term investments largely contributed to the 1993
decrease of $10.7 million (51.9%) in other income. The higher level of short-
term investments during 1992 resulted from excess cash generated from the 1992
sales of selected assets and the sale of the Company's full-service leasing
segment, operating as McDonnell Douglas Truck Services, Inc.
Interest expense decreased $29.5 million (20.2%) in 1993 compared to 1992,
resulting from decreased bank borrowings, retirement of debt with call options
due to increased liquidity of the Company, offset by issuances of debt with
favorable interest rates.
The provision for losses decreased $10.5 million (55.0%) during 1993 compared
to 1992, primarily as a result of the 1992 disposition of MD Bank assets,
decreased write-offs within the real estate portfolio and an overall smaller
portfolio.
Operating expenses decreased $7.1 million (25.9%) during 1993 compared to
1992, attributable primarily to reductions in the Company's personnel and
lower costs associated with administering a smaller asset portfolio.
During the third quarter of 1993, the Company's effective tax rate was
affected by an additional tax provision of $8.4 million associated with the
tax rate increase included in the Omnibus Budget Reconciliation Act of 1993.
1992 vs. 1991
Finance lease income decreased $66.3 million (37.0%) in 1992 compared to 1991
due to the 1991 sale of substantially all the assets of McDonnell Douglas Auto
Leasing Corporation ("MDAL") and the business credit group ("BCG"), the 1992
disposition of a significant portion of the assets of MD Bank, the sale of
selected assets and the normal run-off of the portfolio.
Interest on notes receivable in 1992 was $13.6 million (22.1%) lower than 1991
reflecting the sale of high-yield corporate bonds, delinquent real estate
loans on nonaccrual status and an overall smaller portfolio.
Interest expense decreased $52.6 million (26.5%) in 1992 compared to 1991,
resulting from decreased short-term bank borrowings by MD Bank, the repurchase
of debt securities, scheduled debt maturities and retirement of debt with call
options. Total debt decreased to $1.3 billion at December 31, 1992 from $1.7
billion at December 31, 1991.
32
The provision for losses decreased $28.1 million (59.5%) during 1992 compared
to 1991, primarily as result of a change in the classification to other
expenses of foreclosure expenses and writedowns of real estate owned totaling
$7.9 million in 1992, which were previously charged to the allowance, the 1991
sale of substantially all of the assets of MDAL and BCG and decreased write-
offs in 1992.
Operating expenses decreased $8.2 million (23.0%) during 1992 compared to 1991
due primarily to major reductions in the Company's personnel and lower costs
attendant to administering a smaller portfolio. At December 31, 1992, the
Company had approximately 175 employees, reduced from 600 employees at
December 31, 1991.
Other expenses increased $10.5 million in 1992 compared to 1991 attributable
to foreclosure expenses and writedowns in 1992 of real estate owned. These
expenses were charged to the allowance in 1991.
New Accounting Standards
In December 1992, the Financial Accounting Standards Board issued SFAS No.
112, "Employers' Accounting for Postemployment Benefits." The Statement is
effective in 1994 and requires using an accrual approach for accounting for
benefits other than retiree health care to former or inactive employees. The
impact of the Company's adoption of this Statement is not expected to be
material.
In May 1993, the Financial Accounting Standards Board issued Statement
No. 114, "Accounting by Creditors for Impairment of a Loan." This Statement
requires that impaired loans be measured on the present value of expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. Adoption of this Statement is required no later than
1995, although earlier application is permitted. The Company presently
intends to adopt this pronouncement in 1995. The effect of applying this
Statement is not expected to have a material impact on the financial
statements of the Company.
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 2. herein.
33
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, 1993 and
1992, 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, 1993. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of McDonnell Douglas Finance Corporation and subsidiaries at December 31, 1993
and 1992, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets as of December 31, 1991,
1990 and 1989, and the related consolidated statements of income and income
retained for growth, and cash flows for the years ended December 31, 1990 and
1989 (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, 1993, appearing on pages 26 -
28, is fairly stated in all material respects in relation to the consolidated
financial statements from which it has been derived.
As discussed in the notes to the consolidated financial statements, in 1992
the Company changed its method of accounting for retiree health care benefits.
/s/ Ernst & Young
Orange County, California
January 18, 1994
34
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Balance Sheet
December 31,
(Dollars in millions,
except per share amounts) 1993 1992
ASSETS
Financing receivables:
Investment in finance leases $1,173.5 $ 993.8
Notes receivable 301.8 459.7
1,475.3 1,453.5
Allowance for losses on financing (35.6) (37.4)
receivables
Financing receivables, net 1,439.7 1,416.1
Cash and cash equivalents 65.5 11.6
Equipment under operating leases, net 358.2 332.9
Equipment held for sale or re-lease 32.0 56.6
Real estate owned 12.9 55.2
Accounts with MDC and MDFS 70.4 40.9
Other assets 84.5 85.7
$2,063.2 $ 1,999.0
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 202.6 $ 133.5
Accounts payable and accrued expenses 59.2 41.2
Other liabilities 74.5 73.9
Deferred income taxes 298.9 297.1
Long-term debt:
Senior 1,080.8 1,104.2
Subordinated 77.8 92.7
1,793.8 1,742.6
Commitments and contingencies - Note 8
Shareholder's equity:
Preferred stock - no par value;
authorized 100,000 shares:
Series A; $5,000 stated value;
authorized, issued and outstanding 50.0 50.0
10,000 shares
35
Common stock $100 par value;
authorized 100,000 shares; issued 5.0 5.0
and
outstanding 50,000 shares
Capital in excess of par value 89.5 89.5
Income retained for growth 129.6 116.4
Cumulative foreign currency (4.7) (4.5)
translation adjustment
269.4 256.4
$2,063.2 $ 1,999.0
See notes to consolidated financial statements.
36
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
Years ended December 31,
(Dollars in millions) 1993 1992 1991
OPERATING INCOME
Finance lease income $ 94.7 $ 113.0 $ 179.3
Interest income on notes receivable 35.8 47.9 61.5
Operating lease income, net of
depreciation expense of $39.0, $48.8 34.4 33.3 34.1
and $60.0 in 1993, 1992 and 1991,
respectively
Net gain on disposal or re-lease of 23.7 37.1 45.8
assets
Postretirement benefit curtailment - 2.8 -
gain
Other 9.9 20.6 21.6
198.5 254.7 342.3
EXPENSES
Interest expense 116.4 145.9 198.5
Provision for losses 8.6 19.1 47.2
Operating expenses 20.3 27.4 35.6
Other 12.4 14.3 3.8
157.7 206.7 285.1
Income from continuing operations
before income taxes and cumulative 40.8 48.0 57.2
effect of accounting change
Provision for income taxes 24.0 15.9 19.1
Income from continuing operations
before cumulative effect 16.8 32.1 38.1
of accounting change
Discontinued operations, net - (2.5) (1.4)
Cumulative effect of new accounting
standard for postretirement benefits - (1.9) -
Net income 16.8 27.7 36.7
37
Income retained for growth at beginning 116.4 194.5 216.8
of year
Dividends (3.6) (105.8) (59.0)
Income retained for growth at end of $ 129.6 $ 116.4 $ 194.5
year
See notes to consolidated financial statements.
38
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows
Years Ended December 31,
(Dollars in millions) 1993 1992 1991
OPERATING ACTIVITIES
Income from continuing operations
before cumulative effect of $ 16.8 $ 32.1 $ 38.1
accounting change
Adjustments to reconcile income
from continuing operations before
cumulative effect of accounting
change to net cash provided by
(used in) operating activities:
Depreciation expense - 39.0 48.8 60.0
equipment under operating
leases
Net gain on disposal or re- (23.7) (37.1) (45.8)
lease of assets
Provision for losses 8.6 19.1 47.2
Change in assets and liabilities:
Accounts with MDC and MDFS (29.5) 18.4 (58.1)
Other assets 1.2 (8.2) (9.9)
Accounts payable 18.0 (16.1) (32.5)
Other liabilities 0.6 (6.2) 5.3
Deferred income taxes 1.8 (76.6) (97.3)
Other, net 4.2 (16.2) 1.7
Discontinued operations - 0.4 18.5
37.0 (41.6) (72.8)
INVESTING ACTIVITIES
Net change in short-term notes and 91.3 (77.9) (21.2)
leases receivable
Purchase of equipment for operating (57.4) (71.8) (66.7)
leases
Proceeds from disposition of 139.5 323.2 790.6
equipment, notes and leases
receivable
Collection of notes and leases 202.7 278.7 354.5
receivable
Acquisition of notes and leases (385.7) (153.2) (168.9)
receivable
Discontinued operations - 69.4 19.8
39
(9.6) 368.4 908.1
FINANCING ACTIVITIES
Net change in short-term borrowings 69.1 16.5 (444.4)
Debt having maturities more than 90
days:
Proceeds 183.0 34.9 585.6
Repayments (222.0) (440.8) (840.9)
Payment of cash dividends (3.6) (105.8) (59.0)
Discontinued operations - (6.9) (2.7)
26.5 (502.1) (761.4)
Increase (decrease) in cash and cash 53.9 (175.3) 73.9
equivalents
Cash and cash equivalents at 11.6 186.9 113.0
beginning of year
Cash and cash equivalents $ 65.5 $ 11.6 $ 186.9
at end of year
See notes to consolidated financial statements.
40
McDonnell Douglas Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1993
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 ("MDC").
The Company was incorporated in Delaware in 1968 and provides a diversified
range of equipment financing and leasing arrangements to commercial and
industrial markets.
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 amounts have been
reclassified to conform to the 1993 presentation.
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, 1993 were $58.8 million. There were no cash equivalents at
December 31, 1992. At December 31, 1993 and 1992, the Company has classified
as other assets restricted cash deposited with banks in interest bearing
accounts of $44.3 million and $39.7 million for compensating balances,
specific lease rents and contractual purchase price 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, prior loss
experience and results of periodic credit reviews.
Collateral that is formally or substantively repossessed in satisfaction of a
receivable is written down to estimated fair value and is transferred to
equipment held for sale or re-lease or real estate owned. Subsequent to such
transfer, these assets are carried at the lower of cost or estimated net
realizable value.
In May 1993, the Financial Accounting Standards Board issued Statement
No. 114, "Accounting by Creditors for Impairment of a Loan." This Statement
requires that impaired loans be measured on the present value of expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Adoption of this Statement is required no later
41
than 1995, although earlier application is permitted. The Company presently
intends to adopt this pronouncement in 1995. The effect of applying this
Statement is not expected to have a material impact on the financial condition
or results of operations of the Company.
Equipment Under Operating Leases Rental equipment subject to operating leases
is recorded at cost and depreciated over its useful life or lease term to an
estimated salvage value, primarily on a straight-line basis.
Income Taxes The operations of the Company and its subsidiaries are included
in the consolidated federal income tax return of MDC. MDC presently charges
or credits the Company for the corresponding increase or decrease in MDC's
taxes resulting from such inclusion. Intercompany payments are made when such
taxes are due or tax credits are realized by MDC.
Investment tax credits (which were repealed by the Tax Reform Act of 1986)
related to property subject to financing transactions are deferred and
amortized over the terms of the financing transactions.
The provision for taxes on income is computed at current tax rates and
adjusted for items that do not have tax consequences, temporary differences
and the cumulative effect of any changes in tax rates from those previously
used to determine deferred income taxes. In 1992, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." The impact of the adoption of SFAS No. 109 had no material
effect on the Company's accounting for income taxes. SFAS No. 109 requires
financial statements reflect deferred income taxes for future tax consequences
of events recognized in different years for financial and tax reporting
purposes.
Foreign Currency Translation McDonnell Douglas Bank Limited ("MD Bank"), a
United Kingdom company, is an indirect wholly-owned subsidiary of MDC.
Through intercompany arrangements between MDC and the Company, MD Bank is
consolidated as if it were a wholly-owned subsidiary of the Company.
Adjustments from translating the assets and liabilities of MD Bank from the
functional currency of the pound sterling into U.S. dollars at the year-end
exchange rate are accumulated and reported as a separate component of equity.
Operating results are translated at average monthly exchange rates.
Note 2 - Dispositions
During the second quarter of 1992, the Company completed the sale of the
remaining assets of its full-service leasing segment, operating as McDonnell
Douglas Truck Services Inc. ("MDTS"). These assets were sold to various
parties for approximately $58.6 million. This segment has been reported as a
discontinued operation. Accordingly, the consolidated financial statements
for 1992 and 1991 have been reclassified to report separately the operating
results of this discontinued operation.
Included in 1992 discontinued operations is the MDTS loss on sale of $1.6
million, net of income tax benefits of $0.9 million and the MDTS loss from
operations of $0.9 million, net of income tax benefits of $0.5 million.
Included in 1991 discontinued operations is the MDTS loss from operations of
$1.4 million, net of income tax benefits of $0.8 million. Operating income of
MDTS was $3.4 million and $22.9 million for 1992 and 1991.
42
During 1992, in three separate transactions, MD Bank sold a significant
portion of its portfolio and received cash proceeds of approximately $70.8
million and an amortizing note receivable of $29.7 million. These sales
resulted in pretax gains aggregating $9.4 million. The cash proceeds were
applied to reduce MD Bank's bank borrowings, resulting in losses totaling $2.3
million on the termination of interest rate swaps. The note, which was
concurrently sold to the Company at par, bears an interest rate of LIBOR plus
1.5%. At December 31, 1993 and 1992, $4.5 million and $18.7 million was
outstanding under this note. At December 31, 1993, the Company had an
outstanding foreign currency swap agreement to hedge this note. Foreign
currency transaction losses incurred in conjunction with this note amounted to
$0.4 million and $1.2 million in 1993 and 1992.
During the fourth quarter 1992, the Company sold substantially all of the
assets of McDonnell Douglas Capital Corporation ("MDCC"), a wholly-owned
subsidiary of the Company, for $13.5 million, resulting in a pretax gain of
$1.3 million. The assets consisted primarily of equipment subject to
operating leases. Operating income of MDCC was $5.9 million and $4.7 million
in 1992 and 1991.
On October 18, 1991, the Company completed the sale of substantially all of
the assets of McDonnell Douglas Auto Leasing Corporation ("MDAL"), a wholly-
owned subsidiary of the Company, for $154.7 million. The Company recorded a
pretax loss of $2.5 million on the disposition. Operating income of MDAL was
$17.2 million in 1991.
In two separate transactions, the Company sold substantially all of the assets
of the business credit group ("BCG"). The first transaction, occurring in May
1991, resulted in proceeds of $19.9 million and a pretax loss of $1.2 million.
On July 1, 1991, the second transaction was consummated and provided the
Company with proceeds of $58.7 million and a pretax gain of $0.6 million.
Note 3 - Investment in Finance Leases
The following lists the components of the investment in finance leases at
December 31:
(Dollars in millions) 1993 1992
Minimum lease payments receivable $ 1,668.9 $ 1,326.7
Estimated residual value of leased assets 273.2 221.7
Unearned income (772.3) (558.8)
Deferred initial direct costs 3.7 4.2
$ 1,173.5 $ 993.8
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 leased to others:
(Dollars in millions) 1993 1992
Minimum lease payments receivable $ 81.2 $ 88.5
43
Estimated residual value of leased 15.1 15.1
assets
Unearned income (41.1) (45.9)
Deferred initial direct costs 0.2 0.2
$ 55.4 $ 57.9
At December 31, 1993, finance lease receivables of $267.9 million serve as
collateral to senior long-term debt.
At December 31, 1993, finance lease receivables are due in installments as
follows: 1994, $216.6 million; 1995, $187.4 million; 1996, $166.8 million;
1997, $150.1 million; 1998, $141.0 million; 1999 and thereafter, $807.0
million.
During 1993, the Company leased, under a finance lease agreement, a DC-10-30
aircraft to MDC with a carrying amount of $32.9 million at December 31, 1993.
The lease requires monthly rent payments of $0.4 million through April 14,
2004.
Note 4 - Notes Receivable
The following lists the components of notes receivable at December 31:
(Dollars in millions) 1993 1992
Principal $ 299.1 $ 454.2
Accrued interest 2.8 5.6
Unamortized discount (1.3) (1.7)
Deferred initial direct costs 1.2 1.6
$ 301.8 $ 459.7
At December 31, 1993, notes receivables are due in installments as follows:
1994, $106.5 million; 1995, $56.2 million; 1996, $36.9 million; 1997, $22.3
million; 1998, $28.0 million; 1999 and thereafter, $49.2 million.
44
Note 5 - Equipment Under Operating Leases
Equipment under operating leases consists of the following at December 31:
(Dollars in millions) 1993 1992
Commercial aircraft $ 216.4 $ 160.1
Executive aircraft 88.7 91.9
Highway vehicles 76.7 108.2
Printing equipment 32.0 17.2
Medical equipment 21.9 26.8
Machine tools and production equipment 21.1 27.1
Computers and related equipment 9.3 4.1
Other 3.1 2.6
469.2 438.0
Accumulated depreciation and (106.6) (103.4)
amortization
Rentals receivable 5.0 7.8
Deferred lease income (10.8) (11.1)
Deferred initial direct costs 1.4 1.6
$ 358.2 $ 332.9
At December 31, 1993, future minimum rentals scheduled to be received under
the noncancelable portion of operating leases are as follows: 1994, $60.3
million; 1995, $45.6 million; 1996, $38.6 million; 1997, $34.1 million; 1998,
$27.4 million; 1999 and thereafter, $41.1 million.
At December 31, 1993, equipment under operating leases of $30.4 million are
assigned as collateral to senior long-term debt. Equipment under operating
leases of $15.3 million at December 31, 1993, relate to commercial aircraft
leased by the Company under capital lease obligations.
Under an operating lease agreement, the Company leases four MD-82 aircraft to
MDC. The leases require quarterly rent payments of $2.1 million through
May 31, 2002. At December 31, 1993 and 1992, the carrying amount of these
aircraft was $60.4 million and $64.6 million.
45
Note 6 - Income Taxes
The components of the provision (benefit) for taxes on income from continuing
operations before cumulative effect of accounting change are as follows:
(Dollars in millions) 1993 1992 1991
Current:
Federal $ 19.8 $ 48.1 $ 100.2
State 2.4 3.4 2.7
22.2 51.5 102.9
Deferred:
Federal 1.0 (36.6) (82.7)
Foreign 0.8 1.0 (1.1)
1.8 (35.6) (83.8)
$ 24.0 $ 15.9 $ 19.1
Temporary differences represent the cumulative taxable or deductible amounts
recorded in the financial statements in different years than recognized in the
tax returns. The components of the net deferred income tax liability consist
of the following at December 31:
(Dollars in millions) 1993 1992
Deferred tax assets:
Allowance for losses $ 11.9 $ 12.8
Other 20.0 2.6
31.9 15.4
Deferred tax liabilities:
Leased assets (311.6) (291.9)
Deferred installment sales (2.8) (3.4)
MD Bank - (3.7)
Other (16.4) (13.5)
(330.8) (312.5)
Net deferred tax liability $ (298.9) $ (297.1)
46
Income taxes computed at the United States federal income tax rate and the
provision for taxes on income from continuing operations before cumulative
effect of accounting change differ as follows:
(Dollars in millions) 1993 1992 1991
Tax computed at federal $ 14.3 $ 16.3 $ 19.4
statutory rate
State income taxes, net of 1.5 1.3 1.8
federal tax benefit
Effect of foreign tax rates 0.1 0.8 -
U.S. tax effect on foreign 0.8 (2.1) -
income
Effect of investment tax (0.6) (1.1) (1.7)
credits
Effect of tax rate change 8.4 - -
Other (0.5) 0.7 (0.4)
$ 24.0 $ 15.9 $ 19.1
During the third quarter of 1993, the Company's effective tax rate was
affected by an additional tax provision of $8.4 million associated with the
tax rate increase included in the Omnibus Budget Reconciliation Act of 1993.
MDFS is currently under examination by the Internal Revenue Service ("IRS")
for the tax years 1986 through 1989. The IRS audit is not expected to have a
material effect on the Company's financial condition or results of operations.
Provisions have been made for estimated United States and foreign income taxes
which may be incurred upon the repatriation of MD Bank's undistributed
earnings.
Income taxes paid by the Company totaled $54.0 million in 1993, $86.1 million
in 1992 and $76.2 million in 1991.
Note 7 - Indebtedness
Short-term notes payable consist of the following at December 31:
(Dollars in millions) 1993 1992
Short-term bank borrowings $ 149.6 $ -
Lines of credit 53.0 124.0
MDFS - 9.5
$ 202.6 $ 133.5
At December 31, 1993, the Company had a revolving credit agreement under which
it could borrow a maximum of $125.0 million to be reduced by $25.0 million
each quarter through January 1995. The interest rate, at the option of the
Company, is either a floating rate generally based on a defined prime rate, a
fixed rate related to either LIBOR or a certificate of deposit rate, or a rate
as quoted under a competitive bid. Borrowings of $53.0 million and $108.0
million were outstanding under this agreement at December 31, 1993 and 1992.
47
At December 31, 1993, MDFS and the Company had a joint revolving credit
agreement under which MDFS could borrow a maximum of $6.0 million and the
Company could borrow a maximum of $45.0 million, reduced by any MDFS
borrowings under this agreement. The interest rate, at the option of the
Company, is either a floating rate generally based on a defined prime rate or
fixed rate related to LIBOR. There were no outstanding borrowings under this
agreement at December 31, 1993.
At December 31, 1993, the Company had non-recourse short-term bank borrowings
totaling $149.6 million, at LIBOR based interest rates, due and payable on
November 4, 1994.
MD Bank borrowings of $16.0 million were outstanding at December 31, 1992
under a committed credit agreement which subsequently expired.
Senior long-term debt consists of the following at December 31:
(Dollars in millions) 1993 1992
9.0% Note due through 1993 $ - $ 9.7
7.75% - 7.91% Notes due through 1993 - 3.3
5.0% Note due through 1994, net of
discount based on imputed interest rate 0.5 1.1
of 7.95%
13.0% Notes due through 1995 0.6 1.1
9.15% Note due 1994 19.4 17.4
8.46% Note due 1995 8.0 8.0
10.52% Note due 1995 52.0 52.0
7.0% Notes due through 1996 2.1 3.0
7.0% Notes due through 1998, net of
discount based on imputed interest rate 3.4 4.1
of 10.8%
3.9% Notes due through 1999, net of
discount based on imputed interest 9.4 10.9
rates of 9.15% - 10.6%
5.75% - 6.875% Notes due through 2000,
net of discount based on imputed 11.8 13.3
interest rates of 9.75% - 11.4%
6.65% - 10.18% Notes due through 2001 93.2 94.9
5.25% - 8.375% Retail medium term notes 79.1 -
due through 2008
4.625% - 13.55% Medium term notes due 713.4 792.0
through 2005
Capital lease obligations due through 87.9 93.4
2003
$ 1,080.8 $ 1,104.2
The 9.15% Note due 1994, related to a borrowing denominated in Japanese yen,
and the 10.52% Note due 1995, related to a borrowing denominated in Swiss
francs, have been adjusted by $20.9 million at December 31, 1993 ($19.0
million at December 31, 1992) to reflect the dollar value of each liability at
the current exchange rate. To hedge against the risk of future currency
exchange rate fluctuations on such debt, the Company entered into foreign
48
currency swap agreements at the time of borrowing whereby it may purchase
foreign currency sufficient to retire such debt at exchange rates in effect at
the initial dates of the agreements. Changes in the market value of the swap
agreements due to changes in exchange rates are included in other assets and
effectively offset changes in the value of the foreign denominated
obligations.
As of December 31, 1993, $98.6 million of senior long-term debt was
collateralized by equipment. This debt is composed of the 7.0% Notes due
through 1996, 7.0% Notes due through 1998, and the 6.65% - 10.18% Notes due
through 2001.
The Company leases aircraft under capital leases which have been sub-leased to
others. The Company has guaranteed the repayment of $9.7 million in capital
lease obligations associated with a 50% partner.
Subordinated long-term debt consists of the following at December 31:
(Dollars in millions) 1993 1992
12.63% Note due 1993 $ - $ 5.0
8.25% - 9.26% Notes due through 1996 5.0 10.0
10.25% Notes due through 1997 20.0 25.0
12.35% Note due 1997 20.0 20.0
8.93% - 9.92% Medium term notes due through 32.8 32.7
1999
$ 77.8 $ 92.7
Payments required on long-term debt and capital lease obligations during the
years ending December 31 are as follows:
Long-Term Capital
(Dollars in millions) Debt Leases
1994 $ 185.7 $ 15.1
1995 202.2 15.1
1996 98.5 15.1
1997 106.4 15.1
1998 135.8 15.1
1999 and thereafter 347.4 62.1
1,076.0 137.6
Deferred debt expenses (5.4) (0.9)
Imputed interest - (48.8)
$ 1,070.6 $ 87.9
The provisions of various credit and debt agreements require the Company to
maintain a minimum net worth, restrict indebtedness, and limit cash dividends
and other distributions. Under the most restrictive provision, $49.4 million
of the Company's income retained for growth was available for dividends at
December 31, 1993.
49
Interest payments totaled $116.3 million in 1993, $154.0 million in 1992 and
$205.2 million in 1991.
Note 8 - Commitments and Contingencies
At December 31, 1993 and 1992, the Company had unused credit lines available
to customers totaling $6.6 million and $14.3 million; and commitments to
provide leasing and other financing totaling $43.6 million and $23.1 million.
In 1990, the Company was named as a defendant in three class action suits (the
"Actions") for alleged violations of securities laws in connection with the
public offering of limited partnership interests in certain equipment leasing
limited partnerships, the sponsor of which was MDCC. In 1993, the Company
settled the Actions for approximately $14.8 million. As part of the
settlement, MDCC purchased the equipment portfolios of the limited
partnerships for 121% of the $1.0 million net book value, which approximated
fair value. The Company adequately reserved for the settlement of the
Actions.
At December 31, 1993, in conjunction with prior asset dispositions, at
December 31, 1993, the Company is subject to a maximum recourse of $42.0
million. Based on trends to date, the Company's exposure to such loss is not
expected to be significant.
Note 9 - Transactions with MDC and MDFS
Accounts with MDC and MDFS consist of the following at December 31:
(Dollars in millions) 1993 1992
Notes receivable $ 47.9 $ 49.0
Federal income tax payable 25.8 (15.4)
State income tax receivable - 8.3
Other payables (3.3) (1.0)
$ 70.4 $ 40.9
The Company has arrangements with MDC, terminable at the discretion of either
of the parties, pursuant to which the Company may borrow from MDC and MDC may
borrow from the Company, funds for 30-day periods at a market rate of interest
or at MDFS's average borrowing rate. Under these arrangements, there were no
outstanding balances at December 31, 1993 and at December 31, 1992, $49.0
million was receivable from MDC.
Under a similar arrangement, the Company may borrow from MDFS and MDFS may
borrow from the Company, funds for 30-day periods at the Company's cost of
funds for short-term borrowings. Under these arrangements, receivables of
$18.3 million and borrowings of $9.5 million were outstanding at December 31,
1993 and 1992.
On September 28, 1993, the Company sold, at estimated fair value, real estate
owned properties to McDonnell Douglas Realty Company, a wholly-owned
subsidiary of MDC, and financed the sale by taking a $28.9 million note. The
Company recorded a pretax loss of $5.7 million on the transfer, which is
included in other expenses in the consolidated statement of income. The note
is payable on demand and accrues interest at a rate equal to the average
50
borrowing cost of MDFS. At December 31, 1993, $29.6 million was outstanding
under this note.
During 1993, 1992 and 1991, the Company purchased aircraft and aircraft
related notes from MDC in the amount of $400.2 million, $160.5 million and
$119.1 million, respectively.
At December 31, 1993 and 1992, $270.0 million and $152.2 million of the
commercial aircraft financing portfolio was guaranteed by MDC. During 1993,
1992 and 1991, the Company collected $0.2 million, $0.6 million and $0.8
million, respectively, under these guaranties.
On September 29, 1992, the Company purchased a bridge note issued by Irish
Aerospace Leasing Limited, a wholly-owned subsidiary of Irish Aerospace
Limited, which previously was 25% owned by MDC, for $22.0 million with an
effective interest rate of 9.4%. This note was repaid in 1993.
On December 31, 1991, MDC sold an MD-11 flight simulator to the Company for
$30.0 million and simultaneously leased it back under an operating lease
agreement. On March 5, 1992, the Company sold the MD-11 flight simulator to a
third party for approximately book value.
During 1992, the $9.9 million long-term debt issued by MDFS to MD Bank in 1990
was prepaid. This note was payable in ten equal semi-annual instalments
beginning on May 20, 1996, at LIBOR based interest rates.
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 and $0.5 million at December 31, 1993 and 1992.
Substantially all employees of MDC and its subsidiaries are members of defined
benefit pension plans and insurance plans. MDC also provides eligible
employees the opportunity to participate in savings plans that permit both
pretax and after-tax contributions. MDC generally charges the Company with
the actual cost of these plans which are included with other MDC charges for
support services and reflected in operating expenses. MDC charges for
services provided during 1993, 1992 and 1991 totaled $1.1 million, $2.1
million and $2.9 million, respectively. Additionally, the Company was
compensated by certain affiliates for a number of support services, which are
net against operating expenses, amounting to $1.8 million, $2.5 million and
$2.7 million in 1993, 1992 and 1991, respectively.
Prior to 1992, Company-paid retiree health care benefits were included in
costs as covered expenses were actually incurred. In December 1990, the
Financial Accounting Standards Board issued SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The Statement
required companies to change, by 1993, their method of accounting for the
costs of these benefits to one that accelerates the recognition of costs by
causing their full accrual over the employees' years of service up to their
date of full eligibility. MDC, and therefore the Company, elected to
implement this Statement for 1992 by immediately recognizing the
January 1, 1992 accumulated postretirement benefit obligation of $3.1 million
($1.9 million after-tax).
51
On October 8, 1992, effective January 1, 1993, MDC terminated Company-paid
retiree health care for both current and future non-union retirees and their
survivors and replaced it with a new arrangement that will be funded entirely
by participant contributions. The Company recorded a pretax curtailment gain
of $2.8 million ($1.7 million after-tax) in the fourth quarter of 1992,
reflecting the termination of Company-paid retiree health care for both
current and future non-union retirees.
In December 1992, the Financial Accounting Standards Board issued SFAS No.
112, "Employers' Accounting for Postemployment Benefits." The Statement will
be effective in 1994 and will require using an accrual approach for accounting
for benefits other than retiree health care to former or inactive employees.
The impact of the Company's adoption of this Statement is not expected to be
material.
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 Because of the short maturity of these instruments,
the carrying amount approximates fair value.
Notes Receivable For variable rate notes that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values of fixed rate notes are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Short and Long-Term Debt The carrying amount of the Company's short-term
borrowings approximates its fair value. The fair value of the Company's long-
term debt is estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
Off-Balance Sheet Instruments Fair values for the Company's off-balance sheet
instruments (swaps and financing commitments) are based on quoted market
prices of comparable instruments (currency and interest rate swaps); and the
counterparties' credit standing, taking into account the remaining terms of
the agreements (financing commitments).
52
The estimated fair values of the Company's financial instruments consist of
the following at December 31:
(Dollars in millions) 1993 1992
Carrying Fair Carrying Fair
Asset (Liability) Amount Value Amount Value
ASSETS
Cash and cash equivalents $ 65.5 $ 65.5 $ 11.6 $ 11.6
Notes receivable 301.8 301.8 459.7 458.2
LIABILITIES
Short-term notes payable (203.3) (203.3) (124.2) (124.2)
to banks
Long-term debt:
Senior, excluding capital (1,014.0) (1,090.3) (1,034.8) (1,055.2)
lease obligations
Subordinated (80.7) (89.1) (96.1) (99.2)
OFF BALANCE SHEET
INSTRUMENTS
Commitments to extend (50.2) (50.2) (16.8) (16.8)
credit
Foreign currency swaps 20.9 18.5 19.0 13.3
Interest rate swaps (0.2) (0.7) (0.1) (1.4)
Note 11 - Segment Information
The Company provides a diversified range of financing and leasing arrangements
to customers and industries throughout the United States, the United Kingdom
and, to a lesser extent, other countries.
The Company's operations include three financial reporting segments:
commercial aircraft financing, commercial equipment leasing and non-core
businesses. The commercial aircraft financing segment provides customer
financing services to MDC components, primarily Douglas Aircraft Company, and
also provides financing for the acquisition of non-MDC aircraft. The
commercial equipment leasing segment is principally involved in large
financing and leasing transactions for a diversified range of equipment. Non-
core businesses represent market segments in which the Company is no longer
active. The non-core businesses consist primarily of the remaining assets of
three business units: MD Bank, receivable inventory financing and real estate
financing. MD Bank provided financing in the United Kingdom similar to that
provided in the United States by the commercial equipment leasing segment.
Receivable inventory financing provides financing to dealers of rent-to-own
products. Real estate financing previously specialized in fixed rate, medium
term commercial real estate loans.
53
The Company's financing and leasing portfolio consists of the following at
December 31:
(Dollars in millions) 1993 1992
Commercial aircraft
financing:
MDC aircraft financing $ 1,035.1 56.5% $ 769.3 43.1%
Other commercial aircraft 202.4 11.0 231.8 13.0
financing
1,237.5 67.5 1,001.1 56.1
Commercial equipment
leasing:
Transportation services 69.3 3.8 96.9 5.4
Transportation equipment 42.7 2.3 39.0 2.2
Trucking and warehousing 38.7 2.1 66.6 3.7
Other 271.6 14.8 354.9 19.9
422.3 23.0 557.4 31.2
Non-core businesses:
Real estate 123.6 6.7 146.7 8.2
Furniture and home furnishings stores 31.0 1.7 43.2 2.4
Air transportation 5.1 0.3 5.5 0.3
Other 14.0 0.8 32.5 1.8
173.7 9.5 227.9 12.7
Total portfolio $1,833.5 100.0% $1,786.4 100.0%
The single largest commercial aircraft financing customer accounted for $253.2
million (13.8% of total Company portfolio) and $120.9 million (6.8% of total
Company portfolio) at December 31, 1993 and 1992. The five largest commercial
aircraft financing customers accounted for $718.5 million (39.2% of total
Company portfolio) and $445.1 million (24.9% of total Company portfolio) at
December 31, 1993 and 1992. There were no significant concentrations by
customer within the commercial equipment leasing and non-core businesses
portfolios.
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.
54
Information about the Company's operations in its different financial
reporting segments for the past three years is as follows:
(Dollars in millions) 1993 1992 1991
Operating income:
Commercial aircraft financing $ 107.4 $ 107.7 $ 125.6
Commercial equipment leasing 64.0 79.1 117.5
Non-core businesses 24.4 56.1 94.3
Corporate 2.7 11.8 4.9
$ 198.5 $ 254.7 $ 342.3
Income (loss) from continuing
operations
before income taxes and cumulative
effect of accounting change:
Commercial aircraft financing $ 26.3 $ 28.3 $ 50.7
Commercial equipment leasing 30.8 31.1 42.0
Non-core businesses (10.7) (11.4) (25.6)
Corporate (5.6) - (9.9)
$ 40.8 $ 48.0 $ 57.2
Identifiable assets at
December 31:
Commercial aircraft $ 1,369.0 $ 1,085.2 $ 1,106.7
financing
Commercial equipment leasing 420.2 590.5 747.2
Non-core businesses 247.6 301.2 694.3
Corporate 26.4 22.1 34.1
$ 2,063.2 $ 1,999.0 $ 2,582.3
Depreciation expense - equipment
under operating
leases:
Commercial aircraft financing $ 10.1 $ 5.9 $ 2.6
Commercial equipment leasing 28.2 31.8 39.4
Non-core businesses 0.7 11.1 18.0
$ 39.0 $ 48.8 $ 60.0
55
Equipment acquired for operating leases, at cost:
Commercial aircraft financing $ 34.5 $ 53.5 $ 36.3
Commercial equipment leasing 22.9 18.2 30.3
Non-core businesses - 0.1 0.1
$ 57.4 $ 71.8 $ 66.7
The Company's operations are classified into two geographic segments, the
United States and the United Kingdom. United Kingdom operations consist of MD
Bank. Information about the Company's operations in its different geographic
segments for the past three years is as follows:
(Dollars in millions) 1993 1992 1991
Operating income:
United States $ 194.1 $227.7 $305.7
United Kingdom 4.4 27.0 36.6
$ 198.5 $254.7 $342.3
Income (loss) from continuing
operations before income taxes and
cumulative effect of
accounting change:
United States $ 41.2 $ 41.0 $ 60.5
United Kingdom (0.4) 7.0 (3.3)
$ 40.8 $ 48.0 $ 57.2
Identifiable assets at
December 31:
United States $ 2,033.7 $ 1,950.0 $ 2,347.8
United Kingdom 29.5 49.0 234.5
$ 2,063.2 $ 1,999.0 $ 2,582.3
Operating income from financing of assets located outside the United States by
the Company's United States geographic segment totaled $20.9 million, $21.6
million and $18.1 million in 1993, 1992 and 1991, respectively.
56
McDonnell Douglas Finance Corporation and Subsidiaries
Schedule II - Amounts Receivable From Related Parties and Underwriters,
Promoters, and Employees Other Than Related Parties
Balance at
(Dollars in End of
millions) Deductions Year
------------------- -----------------
Balance at Amounts
Beginning of Amounts Written Non
Year Additions Collected Off Current Current
1993:
Irish $ 22.3 $ - $ 22.3 $ - $ - $ -
1992:
Irish $ 6.3 $ 22.3 $ 6.3 $ - $ 22.3 $ -
1991:
Irish $ - $ 6.3 $ - $ - $ 6.3 $ -
57
McDonnell Douglas Finance Corporation and Subsidiaries
Schedule VIII - Valuation and Qualifying Accounts
(Dollars in millions)
Balance Charged
Allowance for at to Balance
Losses on Beginning Costs at end
Financing of and Other Deductions of
Receivables Year Expenses <F1> <F2> Year
1993 $ 37.4 $ 8.6 $ - $ (10.4) $ 35.6
1992 $ 46.7 $ 19.1 $ (1.0) $ (27.4) $ 37.4
1991 $ 61.6 $ 47.2 $ (5.4) $ (56.7) $ 46.7
58
<F1> The 1991 amount includes allowances that were
reclassified in conjunction with the sale of
substantially all of the assets of MDAL and BCG.
<F2> Write-offs net of recoveries.
59
McDonnell Douglas Finance Corporation and Subsidiaries
Schedule IX - Short-Term Borrowings<F1>
(Dollars in millions) Weighted Average Weighted
Average Maximum <F2> <F3><F4>
Interest Amount Amount Average
Balance Rate Outstanding Outstanding Interest
Category of at End of at End During the During the Rate
Aggregate Period of Period Period Period During the
Short-term Period
Borrowings
Year ended December 31, 1993:
MDC $ - - % $ 190.4 $ 23.0 4.33%
MDFS - - 27.5 6.0 4.96
Banks - U.S. 202.6 4.35 203.0 72.8 4.66
Banks - U.K. - - 15.9 11.3 13.13
Year ended December 31, 1992:
MDFS $9.5 5.94% $ 16.1 $ 6.4 5.35%
Banks - U.S. 108.0 6.00 108.0 24.5 3.94
Banks - U.K. 16.0 12.44 124.1 87.3 14.68
Year ended December 31, 1991:
Commercial $ - -% $ 44.0 $ 2.1 9.20%
paper
MDC - - 4.6 0.5 8.85
MDFS 4.4 5.83 22.9 1.0 8.02
Banks - U.S. - - 300.0 140.2 7.10
Banks - U.K. 158.0 12.25 289.3 197.2 12.34
60
<F1> Commercial paper was issued from time to time at
various maturities and short-term notes payable to MDC
are issued for 30 days.
<F2> Computed by dividing the total of daily principal
balances by the number of days in the year.
<F3> Computed by dividing the actual interest expense by
average short-term debt outstanding.
<F4> The effective interest rate on short-term borrowings
including the effect of fees was 5.97% in 1993, 12.38%
in 1992 and 10.28% in 1991.
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 33
Consolidated Balance Sheet at December 31, 1993
and 1992 34
Consolidated Statement of Income and Income
Retained for Growth for the Years Ended
December 31, 1993,
1992 and 1991 36
Consolidated Statement of Cash Flows
for the Years Ended December 31,
1993, 1992 and 1991 38
Notes to Consolidated Financial Statements 40-55
2. Financial Statement Schedules
Schedule II - Amounts Receivable From Related
Parties and Underwriters, Promoters, and
Employees Other Than Related
Parties 56
Schedule VIII - Valuation and
Qualifying Accounts 58
Schedule IX - Short-Term Borrowings 60
Schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission (the
"SEC"), except Schedules II, VIII and IX which are 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
61
3.1 Restated Certificate of Incorporation of the Company dated June
29, 1989.
3.2 By-Laws of the Company, as amended to date.
4.4 Form of Indenture, dated as of April 1, 1983, between the
Company and Bankers Trust Company, incorporated herein by
reference to Exhibit 4(a) to Amendment No. 1 to the Form S-3
Registration Statement of the Company effective April 22, 1983.
4.5 Form of 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 Form S-3 Registration Statement
of the Company, as filed with the SEC on June 24, 1988.
4.6 Form of Indenture, dated as of April 15, 1987, incorporated
herein by reference to Exhibit 4 to the Form S-3 Registration
Statement of the Company as filed with the SEC on April 24,
1987.
4.7 Form of Series I Medium Term Note, incorporated herein by
reference to Exhibit 4(b) to the Form S-3 Registration Statement
of the Company effective April 22, 1983.
4.8 Form of Series II Medium Term Note, incorporated herein by
reference to Exhibit 4(c) to the Form 8-K of the Company dated
August 22, 1983.
4.9 Form of Series III Medium Term Note, incorporated herein by
reference to Exhibit 4(b) to the Form S-3 Registration Statement
of the Company effective June 17, 1985.
4.10 Form of Series IV Medium Term Note, incorporated herein by
reference to Exhibit 4 to the Form S-3 Registration Statement
of the Company effective June 17, 1985.
4.11 Form of Series V Medium Term Note, incorporated herein by
reference to Exhibit 4 to the Form S-3 Registration Statement
of the Company , as filed with the SEC on April 24, 1987.
4.12 Form of Series VI Medium Term Note, incorporated herein by
reference to Exhibit 4 to the Form S-3 Registration Statement
of the Company, as filed with the SEC on April 24, 1987.
4.13 Form of Series VII Medium Term Note, incorporated herein by
reference to Exhibit 4 to the Form S-3 Registration Statement
of the Company, as filed with the SEC on April 24, 1987.
4.14 Form of Series VIII Senior Medium Term Note, incorporated
herein by reference to Exhibit 4(c) to the Form S-3
Registration Statement of the Company, as filed with the SEC
on June 24, 1988.
4.15 Form of Series VIII Subordinated Medium Term Note,
incorporated herein by reference to Exhibit 4(d) to the Form
62
S-3 Registration Statement of the Company, as filed with the
SEC on June 24, 1988.
4.16 Form of Series IX Senior Medium Term Note, incorporated herein
by reference to Exhibit 4(c) to the Form S-3 Registration
Statement of the Company, as filed with the SEC on October 4,
1989.
4.17 Form of Series IX Subordinated Medium Term Note, incorporated
herein by reference to Exhibit 4(d) to the Form S-3
Registration Statement of the Company, as filed with the SEC
on October 4, 1989.
4.18 Form of General Term Note(R), incorporated herein by reference
to Exhibit 4(c) to Form 8-K of the Company dated May 26, 1993.
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 since 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 among MDC, the
Company and MDFS dated as of April 12, 1993.
10.2 Operating Agreement by and between the Company and MDFS
effective as of February 8, 1989, 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 MDC as amended January 29, 1993, incorporated by
reference from MDC's Exhibit 3.2 to its Form 8-K Report filed
February 1, 1993 (file No. 1-3685).
10.4 Supplemental Guaranty Agreement by and between the Company and
MDC, dated as of December 30, 1993.
10.5 Supplemental Guaranty Agreement by and between the Company and
MDC, dated as of December 30, 1993.
12.1 Statement regarding computation of ratio of earnings to fixed
charges.
23.1 Consent of Ernst & Young.
(b) Reports on Form 8-K
On February 3, 1994, the Company filed a current report on Form 8-K,
which included the Company's Consolidated Balance Sheet at
December 31, 1993 and 1992 and Consolidated Statement of Income and
Income Retained for Growth for each of the years ended December 31,
1993, 1992 and 1991.
63
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/ Douglas E. Scudamore
March 30, 1994
Vice President and Controller
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/ Herbert J. Lanese Chairman March 30, 1994
/s/ George M. Rosen President and Director March 30, 1994
(Principal Executive
Officer)
/s/ Robert W. Owsley Sr. Vice President March 30, 1994
(Principal & Treasurer
Financial Officer)
/s/ Douglas E. Scudamore Vice President March 30, 1994
(Principal & Controller
Accounting Officer)
F. Mark Kuhlmann Director
/s/ Thomas J. Lawlor, Jr. Director March 30, 1994
John F. McDonnell Director