1
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
_X_ Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1995
OR
Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to _________________
MCDONNELL DOUGLAS FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2564584 0-10795
(State or other (I.R.S. Employer (Commission File No.)
jurisdiction of Identification No.)
Incorporation or
Organization)
4060 Lakewood Boulevard, 6th Floor - Long Beach, California 90808-1700
(Address of principal executive offices)
(310) 627-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No ____
Common shares outstanding at August 10, 1995: 50,000 shares
Registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
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Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements . . . . . . . . . . . . . . 3
Item 2. Management's Analysis of Results of Operations * 7
Part II Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . 8
Item 2. Changes in Securities **
Item 3. Defaults Upon Senior Securities **
Item 4. Submission of Matters to a Vote of Security Holders **
Item 5. Other Information . . . . . . . . . . . . . . . 8
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 11
________________
* Management's Analysis of Results of Operations included in lieu of
Management's Discussion and Analysis of Financial Condition and
Results of Operations, which is omitted pursuant to General
Instruction H(1)(a) to Form 10-Q.
** Omitted pursuant to General Instruction H(1)(b) to Form 10-Q.
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Part I
Item 1. Financial Statements
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions, except stated value June 30, December 31,
and par value amounts) 1995 1994
ASSETS
Financing receivables:
Investment in finance leases $ 1,096.2 $ 1,090.3
Notes receivable 296.3 351.7
1,392.5 1,442.0
Allowance for losses on financing
receivables (41.0) (40.7)
Financing receivables, net 1,351.5 1,401.3
Cash and cash equivalents 19.1 13.1
Equipment under operating leases, net 458.6 374.3
Equipment held for sale or re-lease 13.3 12.1
Accounts with MDC and MDFS 42.9 44.9
Other assets 112.0 83.9
$ 1,997.4 $ 1,929.6
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 131.6 $ 103.8
Accounts payable and accrued expenses 29.9 44.0
Other liabilities 93.8 92.5
Deferred income taxes 304.2 306.1
Long-term debt:
Senior 1,081.1 1,023.8
Subordinated 84.8 87.5
1,725.4 1,657.7
Commitments and contingencies - Note 3
Shareholder's equity:
Preferred stock - no par value; authorized
100,000 shares:
Series A; $5,000 stated value; authorized,
issued and outstanding 10,000 shares 50.0 50.0
Common stock - $100 par value; authorized
100,000 shares; issued and outstanding
50,000 shares 5.0 5.0
Capital in excess of par value 89.5 89.5
Income retained for growth 127.5 127.4
272.0 271.9
$ 1,997.4 $ 1,929.6
See notes to consolidated financial statements.
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McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
Three months Six months
ended ended
June 30, June 30,
(Dollars in millions) 1995 1994 1995 1994
OPERATING INCOME
Finance lease income $ 26.4 $ 24.9 $ 52.4 $ 50.2
Interest income on notes receivable 5.9 7.8 14.3 15.4
Operating lease income, net of
depreciation expense 10.3 10.1 19.9 19.9
Net gain on disposal or re-lease of
assets 3.2 3.6 4.8 6.1
Other 3.2 1.9 4.5 4.7
49.0 48.3 95.9 96.3
EXPENSES
Interest expense 25.6 28.6 51.3 56.8
Provision for losses 1.7 2.0 4.4 3.8
Operating expenses 2.9 3.4 6.0 7.8
Other 0.5 2.7 1.4 3.1
30.7 36.7 63.1 71.5
Income before taxes on income 18.3 11.6 32.8 24.8
Provision for income taxes 7.2 4.4 12.0 9.4
Net income 11.1 7.2 20.8 15.4
Income retained for growth at beginning 127.2 131.4 127.4 129.6
of period
Dividends (10.8) (6.3) (20.7) (12.7)
Income retained for growth at end of $127.5 $132.3
period $127.5 $132.3
See notes to consolidated financial statements.
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McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows
Six months ended June 30,
(Dollars in millions) 1995 1994
OPERATING ACTIVITIES
Net income $ 20.8 $ 15.4
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation expense - equipment under
operating leases 23.1 19.1
Net gain on disposal or re-lease of
assets (4.8) (6.1)
Provision for losses 4.4 3.8
Change in assets and liabilities:
Accounts with MDC and MDFS 2.0 16.6
Other assets (28.1) (17.3)
Accounts payable (14.1) (18.2)
Other liabilities 1.3 13.9
Deferred income taxes (1.9) 2.0
Other, net 6.5 (13.9)
9.2 15.3
INVESTING ACTIVITIES
Net change in short-term notes and
lease receivables 64.1 (113.2)
Purchase of equipment for operating
leases (104.2) (12.7)
Proceeds from disposition of equipment,
notes and leases receivable 74.0 48.0
Collection of notes and leases receivable 28.3 139.5
Acquisition of notes and leases receivable (119.0) (72.5)
(56.8) (10.9)
FINANCING ACTIVITIES
Net change in short-term borrowings 27.8 (116.3)
Debt having maturities more than 90 days:
Proceeds 210.0 209.9
Repayments (163.5) (135.1)
Payment of cash dividends (20.7) (12.7)
53.6 (54.2)
Increase (decrease) in cash and cash 6.0 (49.8)
equivalents
Cash and cash equivalents at beginning of 13.1 65.5
year
Cash and cash equivalents at end of period $ 19.1 $ 15.7
See notes to consolidated financial statements.
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McDonnell Douglas Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation
McDonnell Douglas Finance Corporation (the "Company") is a wholly-owned
subsidiary of McDonnell Douglas Financial Services Corporation, a wholly-
owned subsidiary of McDonnell Douglas Corporation ("MDC"). In the
opinion of management, the accompanying consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are necessary to present fairly the consolidated balance sheet and the
related consolidated statements of income and income retained for growth
and cash flows for the interim periods presented. The statements should
be read in conjunction with the notes to the consolidated financial
statements included in the Company's Form 10-K for the year ended
December 31, 1994.
Certain 1994 amounts have been reclassified to conform to the 1995
presentation.
Note 2 - Credit Agreements and Long-Term Debt
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,
$51.8 million of the Company's income retained for growth was available
for dividends at June 30, 1995.
Note 3 - Commitments and Contingencies
In 1994, certain debtors of the Company commenced actions against the
Company seeking damages in excess of $14.0 million based on various
contractual and tort claims arising out of financing and loan agreements.
Concurrently, the Company brought actions against the debtors to collect
overdue amounts under the loans provided by the Company. No response to
discovery has taken place in any of these actions. At this early stage
of the legal proceedings it is not possible to predict with any certainty
the ultimate outcome of these related legal proceedings. The Company
intends to vigorously defend such claims. Based on information currently
available, the Company believes it has meritorious defenses to all of the
allegations of wrongdoing and that there will be no material adverse
effect on the Company's earnings, cash flow or financial position.
At June 30, 1995 and December 31, 1994, the Company had commitments to
provide leasing and other financing totaling $112.0 million and $94.4
million.
In conjunction with prior asset dispositions, at June 30, 1995, the
Company was subject to a maximum recourse of $28.5 million. Based on
trends to date, the Company's exposure to such loss is not expected to
be significant.
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The Company leases aircraft under capital leases which have been
subleased to others. At June 30, 1995, the Company had guaranteed the
repayment of $8.4 million in capital lease obligations associated with a
50% partner.
On March 31, 1995, MDC, the Company and the Company's largest customer
signed a term sheet agreement under which the Company is to be paid, over
a 28-month period, amounts due from this customer aggregating $29.1
million, which had been deferred from October 1, 1994 through March 31,
1995. This customer is current on its payments under this agreement, but
no assurance can be given that this customer will be able to perform its
obligations thereunder. Due to the increased amount owing from this
customer to the Company, caused by the foregoing payment deferrals since
December 31, 1994, MDC has increased the aggregate amount of its
guaranties of this customer's obligations to the Company. On June 30,
1995, this customer filed a prepackaged plan under Chapter 11 of the U.S.
bankruptcy laws, under which most agreements with its creditors,
including those with MDC discussed above, were negotiated in advance. On
August 4, 1995, the prepackaged plan was confirmed by the bankruptcy
court and the agreements with MDC have been assumed in accordance with
their terms.
Item 2. Management's Analysis of Results of Operations
Net gain on disposal or re-lease of assets for the first half of 1995
decreased $1.3 million (21.3%) from the first half of 1994, primarily
attributable to a 1994 sale of an executive jet within the commercial
equipment leasing portfolio.
Operating expenses for the first half of 1995 decreased $1.8 million
(23.1%) from the first half of 1994, attributable primarily to closing
the offices of McDonnell Douglas Capital Corporation, McDonnell Douglas
Bank Limited and the Company's receivable inventory financing group, and
reductions in the Company's personnel.
Interest expense for the first half of 1995 decreased $5.5 million (9.7%)
from the first half of 1994, primarily due to the Company refinancing its
high coupon debt with lower coupon debt.
Other expenses for the first half of 1995 decreased $1.7 million (54.8%)
from the first half of 1994, attributable to a 1994 writedown of real
estate owned properties.
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Part II
Item 1. Legal Proceedings
In 1994, certain debtors of the Company commenced actions against the
Company seeking damages in excess of $14.0 million based on various
contractual and tort claims arising out of financing and loan agreements.
Concurrently, the Company brought actions against the debtors to collect
overdue amounts under the loans provided by the Company. No response to
discovery has taken place in any of these actions. At this early stage
of the legal proceedings it is not possible to predict with any certainty
the ultimate outcome of these related legal proceedings. The Company
intends to vigorously defend such claims. Based on information currently
available, the Company believes it has meritorious defenses to all of the
allegations of wrongdoing and that there will be no material adverse
effect on the Company's earnings, cash flow or financial position.
Item 5. Other Information
Information on the Company's portfolio balances; new business volume;
analysis of allowance for losses on financing receivables and credit loss
experience; receivable writeoffs, net of recoveries by business unit; and
commercial aircraft financing are summarized below.
Portfolio Balances
Portfolio balances for the Company's various business segments is
summarized as follows:
June 30, December 31,
(Dollars in millions) 1995 1994
MDC aircraft financing:
Finance leases $ 753.2 $ 748.2
Operating leases 253.8 197.8
Notes receivable 109.1 194.8
1,116.1 1,140.8
Other commercial aircraft financing:
Finance leases 129.1 125.2
Operating leases 48.9 43.1
Notes receivable 23.0 23.9
201.0 192.2
Commercial equipment leasing:
Finance leases 213.9 216.8
Operating leases 155.8 133.4
Notes receivable 57.7 18.5
Preferred and preference stock 0.7 0.7
428.1 369.4
Non-core businesses:
Notes receivable 105.9 113.9
$ 1,851.1 $ 1,816.3
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New Business Volume
New business volume for the Company's various business segments are
summarized as follows:
Six months Year ended
ended June 30, December 31,
(Dollars in millions) 1995 1994
MDC aircraft financing $ 109.4 $ 110.0
Other commercial aircraft financing 7.6 7.9
Commercial equipment leasing 104.5 84.1
$ 221.5 $ 202.0
Analysis of Allowance for Losses on Financing Receivables and Credit Loss
Experience
June 30, December31,
(Dollars in millions) 1995 1994
Allowance for losses on financing receivables at
beginning of year $ 40.7 $ 35.6
Provision for losses 4.4 9.9
Write-offs, net of recoveries (4.1) (4.9)
Other - 0.1
Allowance for losses on financing receivables at
end of period $ 41.0 $ 40.7
Allowance as percent of total portfolio 2.2% 2.2%
Net write-offs as percent of average portfolio 0.4% 0.3%
More than 90 days delinquent:
Amount of delinquent installments $ 5.6 $ 2.8
Total receivables due from delinquent obligors $ 44.6 $ 43.2
Total receivables due from delinquent obligors
as a percentage of total portfolio 2.4% 2.4%
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Receivable Write-offs, Net of Recoveries by Business Unit
The following table summarizes the loss experience of each of the
business units:
Six months Year ended
ended June 30, December 31,
(Dollars in millions) 1995 1994
Commercial aircraft financing $ 1.6 $ (1.9)
Commercial equipment leasing 1.2 2.5
Non-core businesses 1.3 4.3
$ 4.1 $ 4.9
Commercial Aircraft Financing
On March 31, 1995, MDC, the Company and Trans World Airlines, Inc.
("TWA") signed a term sheet agreement under which the Company is to be
paid, over a 28-month period, amounts due from TWA aggregating $29.1
million, which have been deferred from the period from October 1, 1994
through March 31, 1995. TWA is current on its payments under this
agreement, but no assurance can be given that TWA will be able to perform
its obligations thereunder. Due to the increased amount owing from TWA
to the Company, caused by the foregoing payment deferrals since
December 31, 1994, MDC has increased the aggregate amount of its
guaranties of TWA's obligations to the Company. On June 30, 1995, TWA
filed a prepackaged plan under Chapter 11 of the U.S. bankruptcy laws,
under which most agreements with its creditors, including those with MDC
discussed above, were negotiated in advance. On August 4, 1995, the
prepackaged plan was confirmed by the bankruptcy court and the agreements
with MDC have been assumed in accordance with their terms.
Borrowing Operations
In May 1995, Duff & Phelps Credit Rating Co. raised the rating of the
Company's senior debt to BBB+ and subordinated debt to BBB and assigned
an initial rating to its commercial paper of D2.
During the second quarter of 1995, the Company filed a shelf registration
statement relating to up to $750 million aggregate principal amount of
debt securities with the Securities and Exchange Commission (the "SEC").
On June 15, 1995, the SEC declared such registration statement effective
and the Company established a $500 million medium-term note program. The
interest rate applicable to each note and certain other variable terms
are established at the date of issue.
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Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 12 Computation of ratio of income to fixed charges.
Exhibit 27 Financial Data Schedule.
B. Reports on Form 8-K
On May 16, 1995, the Company filed a Current Report on Form 8-K, which
included as Exhibit 4(b) a form of the Company's Federal Funds Medium-
Term Note.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its principal accounting officer, thereunto duly authorized.
McDonnell Douglas Finance Corporation
August 10, 1995 /s/ Thomas J. Lawlor, Jr.
__________________________________
Thomas J. Lawlor, Jr.
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer) and Registrant's Authorized
Officer
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McDonnell Douglas Finance Corporation and Subsidiaries
Computation of Ratio of Income to Fixed Charges
Six months ended June 30,
(Dollars in millions) 1995 1994
Income:
Income before taxes on income $ 32.8 $ 24.8
Fixed charges 53.0 58.5
Income before taxes on income and fixed
charges $ 85.8 $ 83.3
Fixed charges:
Interest expense $ 51.3 $ 56.8
Preferred stock cash dividends 1.7 1.7
$ 53.0 $ 58.5
Ratio of income before taxes on income and
fixed charges to fixed charges 1.62 1.42
Exhibit 12