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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 September 30, 1996
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 (or for each shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Common shares outstanding at November 13, 1996: 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 *
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 . . . . . . . . 9
* 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(2)(a) to Form 10-Q.
** Omitted pursuant to General Instruction H(2)(b) to Form 10-Q.
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Part I. Financial Information
Item 1. Financial Statements
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions, except
stated value and par value amounts)
September 30, December 31,
1996 1995
ASSETS
Financing receivables:
Investment in finance leases $1,376.4 $1,249.7
Notes receivable 294.3 263.5
1,670.7 1,513.2
Allowance for losses on
financing receivables (46.3) (42.3)
Financing receivables, net 1,624.4 1,470.9
Cash and cash equivalents 15.4 12.6
Equipment under operating leases, net 706.5 475.5
Equipment held for sale or re-lease 16.2 28.6
Accounts with McDonnell Douglas and MDFS - 18.5
Other assets 42.3 43.5
$2,404.8 $2,049.6
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 84.3 $ 13.7
Accounts payable and accrued expenses 23.1 41.8
Other liabilities 86.7 82.5
Deferred income taxes 333.8 305.4
Long-term debt:
Senior 1,451.5 1,206.3
Subordinated 114.8 119.7
2,094.2 1,769.4
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 166.1 135.7
310.6 280.2
$2,404.8 $2,049.6
See notes to consolidated financial statements.
4
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
Three months ended Nine months ended
September 30, September 30,
(Dollars in millions) 1996 1995 1996 1995
OPERATING INCOME
Finance lease income $ 30.0 $ 25.8 $ 87.3 $ 78.2
Interest income on notes
receivable 6.2 7.0 17.7 21.3
Operating lease income, net of
depreciation expense 14.9 10.5 41.2 30.4
Net an on disposal or re-lease
of assets 0.8 0.5 11.1 5.3
Other 0.5 1.9 3.1 5.9
52.4 45.7 160.4 141.1
EXPENSES
Interest expense 30.1 25.3 87.1 76.6
Provision for losses 3.5 3.0 10.8 7.4
Operating expenses 3.0 2.5 9.1 8.5
Other 1.4 2.5 2.6 3.9
38.0 33.3 109.6 96.4
Income before taxes on
income 14.4 12.4 50.8 44.7
Provision for income taxes 4.8 4.2 17.8 15.7
Net income 9.6 8.2 33.0 29.0
Income retained for growth 157.4 127.4 135.7 127.4
at beginning of period
Dividends (0.9) (9.4) (2.6) (30.2)
Income retained for growth
at end of period $ 166.1 $ 126.2 $ 166.1 $ 126.2
See notes to consolidated financial statements.
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McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows
Nine months ended September 30,
(Dollars in millions) 1996 1995
OPERATING ACTIVITIES
Net income $ 33.0 $ 29.0
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation expense -
equipment under operating leases 42.9 35.6
Net gain on disposal or re- (11.1) (5.3)
lease of assets
Provision for losses 10.8 7.4
Change in assets and
liabilities:
Accounts with MDC and MDFS 18.5 16.1
Other assets 1.2 (15.8)
Accounts payable (19.6) (25.5)
Other liabilities 4.2 (11.2)
Deferred income taxes 28.4 2.6
Other, net (3.1) 5.6
105.2 38.5
INVESTING ACTIVITIES
Net change in short-term notes
and lease receivables 10.4 67.5
Purchase of equipment for
operating leases (267.2) (124.8)
Proceeds from disposition of
equipment, notes and leases
receivable 41.5 91.8
Collection of notes and leases
receivable 139.6 83.4
Acquisition of notes and leases
receivable (335.4) (148.6)
(411.1) (30.7)
FINANCING ACTIVITIES
Net change in short-term 70.6 (73.4)
borrowings
Debt having maturities more than
90 days:
Proceeds 408.3 351.5
Repayments (168.5) (258.8)
Payment of cash dividends (1.7) (29.3)
308.7 (10.0)
Increase (decrease) in cash and
cash equivalents 2.8 (2.2)
Cash and cash equivalents at
beginning of year 12.6 13.1
Cash and cash equivalents at end
of period $ 15.4 $ 10.9
See notes to consolidated financial statements.
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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 ("MDFS"), a
wholly-owned subsidiary of McDonnell Douglas Corporation ("McDonnell Douglas").
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. 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. Operating results for the nine-month period ended September 30,
1996 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. 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, 1995.
Certain 1995 amounts have been reclassified to conform to the 1996
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, $90.6 million
of the Company's income retained for growth was available for
dividends at September 30, 1996.
Note 3 Commitments and Contingencies
On November 1, 1996, The Allen Austin Harris Group, Inc. ("Plaintiff")
filed a Complaint in the Superior Court of the State of California, County
of Alameda, against the Company, McDonnell Douglas Corporation, McDonnell
Douglas Aerospace - Middle East Limited and The Selah Group, Inc. (the
"Defendants"). The Plaintiff, which had hoped to establish a manufacturing
plant abroad with various assistance from the Defendants, seeks more than
$57.0 million in alleged damages (primarily consisting of lost profits) based
on various theories. The Company believes it has meritorious defenses to all of
the allegations and that the litigation will have no material adverse effect on
the Company's earnings, cash flow or financial condition.
A certain commercial aircraft customer of the Company, which filed for
bankruptcy protection in Venezuela, was in default under a loan from the
Company secured by an MD-83 aircraft. The amount due and payable to the
Company under the loan at June 30, 1996, was approximately $12.1 million, net
of maintenance reserves held by the Company of $1.0 million. During the third
quarter of 1996, the Company successfully negotiated the return of the MD-83
aircraft, which had been in the possession of a Venezuelan bankruptcy trustee.
The Company has accepted return of the aircraft, together with the maintenance
reserve payments held by the Company, in settlement of the borrower's
obligations under the loan agreement.
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The $100.0 million aircraft purchase bridge facility made available by the
Company to ValuJet Airlines, Inc. ("ValuJet") in 1995 was reduced in
maximum scope to $50.0 million by mutual agreement during the third quarter
of 1996. As of September 30, 1996, there were no outstanding receivables under
this facility, which had been utilized for a number of transactions by
ValuJet during the first half of 1996. On September 27, 1996, the
Company loaned approximately $10.4 million to ValuJet for a five-year term,
secured by two used DC-9-32 aircraft which had previously been held under the
aircraft purchase bridge facility.
Certain scheduled rental payments under the lease of a used DC-10 aircraft to a
Mexican charter operator are past due and the Company is pursuing legal action
to repossess the aircraft. The net asset value of the aircraft at September 30,
1996, was $13.6 million. Although it is too early to determine the ultimate
outcome, the Company does not expect to suffer a material adverse impact on
its earnings, cash flow or financial condition on account of this transaction.
In conjunction with prior asset dispositions and certain guarantees, at
September 30, 1996 the Company was subject to a maximum recourse of $28.6
million. Based on trends to date, the Company's loss related to such exposure
is not expected to be significant.
At September 30, 1996, the Company had commitments to provide leasing and other
financing totaling $201.4 million.
The Company leases aircraft under capital leases which have been subleased to
others. At September 30, 1996, the Company had guaranteed the repayment of $7.5
million in capital lease obligations associated with a 50% partner.
Item 2. Management's Analysis of Results of Operations
Finance lease income increased $9.1 million (11.6%) for the first nine months
of 1996, primarily attributable to increased volume for 1996.
Interest on notes receivable decreased $3.6 million (16.9%) for the first nine
months of 1996, primarily attributable to aircraft-related notes and real
estate notes that matured in 1995.
Operating lease income increased $10.8 million (35.5%) for the first nine
months of 1996, primarily attributable to the March 1996 financing of two
MD-11s and the March 1995 financing of two MD-82s under operating lease
agreements.
Net gain on disposal or re-lease of assets increased $5.8 million (greater
than 109.4%) for the first nine months of 1996, attributable primarily to
equipment sales within the commercial equipment leasing portfolio.
Interest expense increased $10.5 million (13.7%) for the first nine months
of 1996, primarily attributable to a higher level of debt borrowings in 1996,
resulting from increased financing activity.
Provision for losses increased $3.4 million (45.9%) for the first nine months
of 1996, primarily attributable to increased financing activity.
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Part II. Other Information
Item 1. Legal Proceedings
On November 1, 1996, The Allen Austin Harris Group, Inc. ("Plaintiff") filed a
Complaint in the Superior Court of the State of California, County of Alameda,
against the Company, McDonnell Douglas Corporation, McDonnell Douglas Aerospace
- Middle East Limited and The Selah Group, Inc. (the "Defendants"). The
Plaintiff, which had hoped to establish a manufacturing plant abroad with
various assistance from the Defendants, seeks more than $57.0 million in
alleged damages (primarily consisting of lost profits) based on various
theories. The Company believes it has meritorious defenses to all of the
allegations.
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;
and receivable write-offs, net of recoveries by business unit are summarized
below.
Portfolio Balances
Portfolio balances are summarized as follows:
September 30, December 31,
(Dollars in millions) 1996 1995
McDonnell Douglas aircraft financing
Finance leases $ 938.8 $ 857.4
Operating leases 443.5 256.8
Notes receivable 89.2 110.9
1,471.5 1,225.1
Other commercial aircraft financing
Finance leases 141.5 126.1
Operating leases 57.1 49.6
Notes receivable 4.6 4.9
203.2 180.6
Commercial equipment leasing
Finance leases 296.0 266.3
Operating leases 205.9 169.1
Notes receivable 143.2 67.0
645.1 502.4
Other 57.4 80.6
$ 2,377.2 $ 1,988.7
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New Business Volume
New business volume summarized is as follows:
Nine months Year ended
ended December
September 30, 31,
(Dollars in millions) 1996 1995
McDonnell Douglas aircraft financing $ 338.8 $ 338.7
Other commercial aircraft financing 20.1 11.0
Commercial equipment leasing 236.6 241.1
$ 595.5 $ 590.8
Analysis of Allowance for Losses on Financing Receivables
and Credit Loss Experience
Nine months Year ended
ended December
September 30, 31,
(Dollars in millions) 1996 1995
Allowance for losses on financing
receivables at beginning $ 42.3 $ 40.7
of year
Provision for losses 10.8 12.2
Write-offs, net of recoveries (4.9) (10.6)
Other (1.9) -
Allowance for losses on financing
receivables at end of period $ 46.3 $ 42.3
Allowance as percent of total
portfolio 2.0% 2.1%
Net write-offs as percent of average
portfolio 0.3% 0.6%
More than 90 days delinquent:
Amount of delinquent installments $ 1.4 $ 10.0
Total receivables due from
delinquent obligors $ 4.2 $ 12.1
Total receivables due from
delinquent obligors
as a percentage of total
portfolio 0.2% 0.6%
Receivable Write-offs, Net of Recoveries by Business Unit
The following table summarizes the loss experience of each of the
Company's continuing businesses:
Nine months
ended Year ended
September 30, December 31,
(Dollars in millions) 1996 1995
Commercial aircraft financing $ - $ 5.0
Commercial equipment leasing 3.3 1.7
$ 3.3 $ 6.7
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Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 10 Amendment No. 2, dated as of August 16, 1996, to Credit
Agreement, dated as of September 29, 1994, among the
Company and MDFS and the banks listed therein.
Exhibit 12 Computation of ratio of income to fixed charges.
Exhibit 27 Financial Data Schedule.
B. Reports on Form 8-K
None.
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 financial officer and principal
accounting officer, thereunto duly authorized.
McDonnell Douglas Finance Corporation
November 13, 1996 /s/ STEVEN W. VOGEDING
__________________________________
Steven W. Vogeding
Vice President and Chief Financial
Officer (Principal Financial Officer) and
Registrant's Authorized Officer
/s/ MAURA R. MIZUGUCHI
__________________________________
Maura R. Mizuguchi
Controller (Principal Accounting Officer)