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PROSPECTUS SUPPLEMENT
(to Prospectus dated March 31, 1995)
McDonnell Douglas Corporation
Medium-Term Notes
Due From And Exceeding Nine Months from Date of Issue
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McDonnell Douglas Corporation (the "Company") may offer from time to time up
to $198,000,000 aggregate initial offering price, or the equivalent thereof in
one or more foreign or composite currencies, of its Medium-Term Notes (the
"Notes"). Each Note will mature on a Business Day from and exceeding nine
months from the date of issue, as selected by the purchaser and agreed to by
the Company, and may be subject to redemption by the Company or repayment at
the option of the Holder thereof, in each case, in whole or in part, prior to
its Stated Maturity, as set forth therein and specified in a pricing supplement
hereto (each, a "Pricing Supplement"). As of the date of this Prospectus
Supplement, $122,000,000 of the Notes are outstanding.
The interest rate, if any, or the formula for the determination of any such
interest rate, applicable to each Note and other variable terms of the Notes as
described herein will be established by the Company at the date of issue of
such Note and will be set forth therein and specified in a Pricing Supplement.
Interest rates, interest rate formulae and such other variable terms are
subject to change by the Company, but no change will affect any Note already
issued or as to which an offer to purchase has been accepted by the Company.
Each Note will be issued in fully registered book-entry form (a "Book-Entry
Note") or definitive form (a "Definitive Note"), as set forth in the applicable
Pricing Supplement, in denominations of $1,000 and integral multiples thereof,
unless otherwise specified in the applicable Pricing Supplement. Each
Book-Entry Note will be represented by a global security deposited with or on
behalf of The Depository Trust Company (or such other depository as is
identified in an applicable Pricing Supplement) (the "Depository") and
registered in the name of the Depository's nominee. Interests in Book-Entry
Notes will be shown on, and transfers thereof will be effected only through,
records maintained by the Depository (with respect to its participants) and the
Depository's participants (with respect to beneficial owners).
Unless otherwise specified in an applicable Pricing Supplement, the Notes
will bear interest at fixed rates (the "Fixed Rate Notes") or at floating rates
(the "Floating Rate Notes"). The applicable Pricing Supplement will specify
whether a Floating Rate Note is a Regular Floating Rate Note, a Floating
Rate/Fixed Rate Note or Inverse Floating Rate Note or whether its rate of
interest is determined by reference to one or more of the CD Rate, the
Commercial Paper Rate, the Federal Funds Rate, LIBOR, the Prime Rate or the
Treasury Rate (each, an "Interest Rate Basis"), or any other interest rate
formula, as adjusted by any Spread and/or Spread Multiplier and will specify
such other terms applicable to such Note. See "Description of Notes." Interest
on Fixed Rate Notes will accrue from their date of issue and, unless otherwise
specified in the applicable Pricing Supplement, will be payable semiannually in
arrears on January 15 and July 15 of each year and at Maturity. The rate of
interest on each Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually or annually, as set forth therein and specified in the
applicable Pricing Supplement, and interest on each Floating Rate Note will
accrue from its date of issue and will be payable in arrears monthly,
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quarterly, semiannually or annually, as specified in the applicable Pricing
Supplement, and at Maturity. Notes may also be issued with original issue
discount, and such Notes may or may not currently pay interest. Notes may also
be issued with the principal amount payable at Maturity and/or interest to be
paid thereon to be determined with reference to the price or prices of
specified commodities or stocks, the exchange rate of one or more specified
currencies (including a composite currency such as the European Currency Unit)
relative to an indexed currency, or such other price or exchange rate as may be
specified in such Note ("Indexed Notes"), as set forth in an Indexed Note
Supplement.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT, THE PROSPECTUS OR ANY
SUPPLEMENT HERETO. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Agents' Discounts Proceeds to
Public(1) and Commissions(2)(3) the Company(2)(4)
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Per Note 100% .125%-.75% 99.875%-99.25%
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Total $198,000,000 $247,500-$1,485,000 $197,752,500-$196,515,000
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(1) Unless otherwise specified in an applicable Pricing Supplement, the Notes
will be issued at 100% of their principal amount.
(2) The Company will pay a commission ranging from .125% to .750% (or, with
respect to Notes for which the Stated Maturity is in excess of 30 years,
such commission as shall be agreed upon by the Company and the related
Agent at the time of sale) of the principal amount of a Note, depending
upon its Stated Maturity, to Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Chase Securities, Inc., Chemical Securities
Inc., J.P. Morgan Securities Inc. or Salomon Brothers Inc (each, an "Agent"
and collectively, the "Agents") and may sell Notes to one or more Agents,
as principal, for resale to investors and other purchasers at varying
prices related to prevailing market prices at the time of resale, as
determined by such Agent or, if so agreed, at a fixed public offering
price. Unless otherwise specified in the applicable Pricing Supplement, any
Note sold to an Agent as principal will be purchased by such Agent at a
price equal to 100% of the principal amount thereof less a percentage equal
to the commission applicable to an agency sale of a Note of identical
maturity.
(3) The Company has agreed to indemnify the Agents against, and to provide
contribution with respect to, certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Plan of Distribution."
(4) Before deducting expenses payable by the Company.
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<PAGE> 3
The Notes are being offered on a continuing basis by the Company through the
Agents, who have agreed to use their reasonable efforts to solicit offers to
purchase the Notes. The Company may also sell Notes to an Agent, as principal,
for resale to investors and other purchasers and has reserved the right to sell
Notes directly to investors on its own behalf. Unless otherwise specified in an
applicable Pricing Supplement, the Notes will not be listed on any securities
exchange and there can be no assurance that the Notes offered by this
Prospectus Supplement will be sold or that there will be a secondary market for
the Notes. The Company reserves the right to cancel or modify the offer made
hereby without notice. The Company or an Agent, if it solicits the offer, may
reject any offer to purchase Notes in whole or in part. See "Plan of
Distribution."
------------
Merrill Lynch & Co.
Chase Securities, Inc.
Chemical Securities Inc.
J.P. Morgan Securities Inc.
Salomon Brothers Inc
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The date of this Prospectus Supplement is March 31, 1995.
<PAGE> 4
DESCRIPTION OF NOTES
The Notes will be issued as a series of debt securities under an Indenture
dated as of September 1, 1985, as amended (the "Indenture"), between the
Company and The Bank of New York, as trustee (the "Trustee"), more fully
described in the attached Prospectus. The following summary of certain
provisions of the Notes and of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus Supplement and the accompanying Prospectus are a part. Capitalized
terms used but not defined herein have the meanings given to them in the
Indenture or the Notes, as the case may be. The term "Debt Securities", as used
under this caption, refers to all securities issued and issuable from time to
time under the Indenture and includes the Notes as a separate series of such
Debt Securities.
The following description of Notes will apply unless otherwise specified in
an applicable Pricing Supplement.
General
All Debt Securities, including the Notes, issued and to be issued under the
Indenture will be unsecured obligations of the Company and will rank on a
parity with all other unsecured and unsubordinated indebtedness of the Company
from time to time outstanding. The Indenture does not limit the aggregate
principal amount of Debt Securities which may be issued thereunder or of any
particular series of such Debt Securities and Debt Securities may be issued
thereunder from time to time as a single series or in two or more separate
series up to the aggregate principal amount from time to time authorized by the
Company for each series. The Company may, from time to time, without the
consent of the Holders of the Notes, provide for the issuance of Notes or other
Debt Securities under the Indenture in addition to the $198,000,000 aggregate
initial offering price of Notes authorized as of the date of this Prospectus
Supplement.
The Notes are currently limited to $198,000,000 aggregate initial offering
price. The Notes will be offered on a continuing basis and will mature on a
Business Day (as defined herein) from and exceeding nine months from the date
of issue, as selected by the purchaser and agreed to by the Company. Unless
otherwise specified in an applicable Pricing Supplement, interest-bearing Notes
will either be Fixed Rate Notes or Floating Rate Notes as specified in the
applicable Pricing Supplement. Notes may be issued at significant discounts
from their principal amount payable at Stated Maturity (or on any prior date on
which the principal or an installment of principal of a Note becomes due and
payable, whether by the declaration of acceleration, call for redemption at the
option of the Company, repayment at the option of the Holder or otherwise)(each
such date, a "Maturity"), and some Notes may not bear stated interest.
Unless otherwise indicated in a Note or in a foreign currency supplement
hereto (a "Multiple-Currency Supplement") or Indexed Note (as defined below)
supplement hereto (an "Indexed Note Supplement"), the Notes will be denominated
in United States dollars and payments of principal of, and premium, if any, and
interest on, the Notes will be made in United States dollars. If any of the
Notes are to be denominated other than in United States dollars or if the
principal of, and interest on, the Notes, and any premium provided for in any
Note is to be payable in or by reference to a currency (or in composite
<PAGE> 5
currency units or in amounts determined by reference to one or more currencies)
other than in which such Note is denominated, provisions with respect thereto
will be set forth in such Note and in the applicable Multi-Currency Supplement
or Indexed Note Supplement.
Interest rates, interest rate formulae and other variable terms of the Notes
are subject to change by the Company from time to time, but no such change will
affect any Note already issued or as to which an offer to purchase has been
accepted by the Company.
Each Note will be issued in fully registered book-entry form (a "Book-Entry
Note") or definitive form (a "Definitive Note"), in denominations of $1,000 and
integral multiples thereof, unless otherwise specified in the applicable
Pricing Supplement. Book-Entry Notes may be transferred or exchanged only
through a participating member of The Depository Trust Company (or such other
depository as is identified in an applicable Pricing Supplement) (the
"Depository"). See "Book-Entry Notes". Registration of transfer of
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Definitive Notes will be made at the office of the Trustee at 101 Barclay
Street, New York, New York 10286 (the "Corporate Trust Office"). No service
charge will be made by the Company, the Trustee or the Security Registrar for
any such registration of transfer or exchange of Notes, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith (other than exchanges pursuant to the
Indenture, not involving any transfer).
Payments of principal of, and premium and interest, if any, on Book-Entry
Notes will be made by the Company through the Trustee to the Depository. See
"Book-Entry Notes". In the case of Definitive Notes, payment of principal or
premium, if any, at the Maturity of each Definitive Note will be made in
immediately available funds upon presentation of the Definitive Note at the
Corporate Trust Office of the Trustee, or at such other place as the Company
may designate. Payment of interest due at Maturity will be made to the person
to whom payment of the principal of the Definitive Note shall be made. Payment
of interest due on Definitive Notes other than at Maturity will be made at the
Corporate Trust Office of the Trustee or, at the option of the Company, may be
made by check mailed to the address of the Person entitled thereto as such
address shall appear in the Security Register. Notwithstanding the foregoing, a
Holder of $10,000,000 or more in aggregate principal amount of Definitive Notes
having the same Interest Payment Dates will, at the option of the Company, be
entitled to receive interest payments (other than at Maturity) by wire transfer
of immediately available funds if appropriate wire transfer instructions have
been received in writing by the Trustee not less than 15 days prior to the
applicable Interest Payment Date.
Redemption at the Option of the Company
The Notes will not have a sinking fund but will be redeemable at the option
of the Company prior to their stated maturity only if an Initial Redemption
Date is specified therein and in the applicable Pricing Supplement. If so
indicated in the applicable Pricing Supplement, Notes will be subject to
redemption at the option of the Company on any date on and after the applicable
Initial Redemption Date specified in such Pricing Supplement. On and after the
Initial Redemption Date, if any, the related Note may be redeemed at any time
<PAGE> 6
in whole or from time to time in part in increments of $1,000 at the option of
the Company at the applicable Redemption Price (as defined below) together with
interest thereon payable to the Redemption Date, on notice given not more than
60 nor less than 30 days prior to the Redemption Date. "Redemption Price" with
respect to a Note will initially mean a percentage, the Initial Redemption
Percentage, of the principal amount of such Note to be redeemed specified in
the applicable Pricing Supplement and shall decline at each anniversary of the
Initial Redemption Date by a percentage, the Annual Redemption Percentage
Reduction, if any, specified in the applicable Pricing Supplement, of the
principal amount to be redeemed until the Redemption Price is 100% of such
principal amount.
Repayment at the Option of the Holder
If so indicated in an applicable Pricing Supplement, Notes will be repayable
by the Company in whole or in part at the option of the Holders thereof on
their respective Optional Repayment Dates specified in such Pricing Supplement.
If no Optional Repayment Date is indicated with respect to a Note, such Note
will not be repayable at the option of the Holder prior to Maturity. Any
repayment in part will be in increments of $1,000 provided that any remaining
principal amount of such Note will be an authorized denomination of such Note.
The repurchase price for any Note so repurchased will be 100% of the principal
amount to be repaid, together with interest thereon payable to the date of
repayment.
While the Notes are represented by Global Securities held by or on behalf of
the Depository, and registered in the name of the Depository's nominee, the
option for repayment may be exercised by the applicable Participant (as defined
below under "Description of Notes-Book-Entry Notes") on behalf of the
beneficial owners of such Notes by delivering a written notice to the Trustee
at the Corporate Trust Office, not more than 60 nor less than 30 days prior to
the Optional Repayment Date. Notices of elections from Participants on behalf
of beneficial owners of the Notes to exercise their option to have the Notes
repaid
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must be received by the Trustee by 5:00 p.m., New York City time, on the last
day for giving such notice. In order to ensure that a notice is received by the
Trustee on a particular day, the beneficial owner of Notes must so direct the
applicable Participant before such Participant's cut-off time for accepting
instructions for that day. Different firms may have different cut-off times for
accepting instructions from their customers. Accordingly, beneficial owners of
Notes should consult the Participants through which they own their interest in
the Notes for the cut-off times for such Participants. All notices shall be
executed by a duly authorized officer of such Participant (with signature
guaranteed) and shall be irrevocable. In addition, such beneficial owners of
Notes shall effect delivery of such Notes at the time such notices of election
are given to the Depository by causing the Participant to transfer such
beneficial owner's interest in the Notes, on the Depository's records, to the
Trustee. Conveyance of notices and other communications by the Depository to
Participants, by Participants to indirect Participants and by Participants and
indirect Participants to beneficial owners of the Notes will be governed by
agreements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
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Interest
General
Unless otherwise specified in an applicable Pricing Supplement, each Note
will bear interest from the date of issue at the rate per annum or, in the case
of a Floating Rate Note, pursuant to the interest rate formula stated therein
and in the applicable Pricing Supplement, until the principal thereof is paid
or made available for payment. Interest will be payable in arrears on each date
specified in the applicable Pricing Supplement on which an installment of
interest is due and payable (an "Interest Payment Date") and at Maturity.
Unless otherwise specified in an applicable Pricing Supplement, the first
payment of interest on any Note originally issued between a Regular Record Date
and the related Interest Payment Date will be made on the Interest Payment Date
immediately following the next succeeding Regular Record Date to the registered
Holder on such next succeeding Regular Record Date. Unless otherwise specified
in an applicable Pricing Supplement, a "Regular Record Date" for Floating Rate
Notes shall be the fifteenth day (whether or not a Business Day, as defined
below) immediately preceding the related Interest Payment Date and for Fixed
Rate Notes the January 1 or July 1 next preceding the Interest Payment Date.
Fixed Rate Notes
Unless otherwise specified in an applicable Pricing Supplement, each Fixed
Rate Note will bear interest from, and including, the date of issue, or the
most recent date to which interest has been paid or duly provided for, to, but
excluding, the Interest Payment Date or Maturity, as the case may be, at the
rate per annum stated on the face thereof until the principal amount thereof is
paid or made available for payment. Unless otherwise specified in an applicable
Pricing Supplement, interest on Fixed Rate Notes will be computed on the basis
of a 360-day year of twelve 30-day months.
Interest on Fixed Rate Notes will be payable semiannually on January 15 and
July 15 of each year, unless otherwise specified in an applicable Pricing
Supplement, and at Maturity. If any Interest Payment Date or the Maturity of a
Fixed Rate Note falls on a day that is not a Business Day, the related payment
of principal, premium, if any, or interest will be made on the next succeeding
Business Day as if made on the date such payment was due, and no interest will
accrue on the amount so payable for the period from and after such Interest
Payment Date or Maturity, as the case may be.
Floating Rate Notes
Unless otherwise specified in an applicable Pricing Supplement, Floating Rate
Notes will be issued as described below. Each applicable Pricing Supplement
will specify certain terms with respect to which such Floating Rate Note is
being delivered, including: whether such Floating Rate Note is a "Regular
Floating Rate Note" (as defined below), an "Inverse Floating Rate Note" (as
defined below) or a "Floating Rate/Fixed Rate Note" (as defined below); the
Interest Rate Basis or Bases, Initial Interest Rate, Interest Reset Dates,
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<PAGE> 8
Interest Reset Period, Regular Record Dates, Interest Payment Dates, Index
Maturity, maximum interest rate and minimum interest rate, if any, and the
"Spread" and/or "Spread Multiplier" (both as defined below), if any, as
described below.
The interest rate borne by the Floating Rate Notes will be determined as
follows:
(i) Unless such Floating Rate Note is designated as a Floating Rate/Fixed
Rate Note, an Inverse Floating Rate Note or as having an Addendum attached,
such Floating Rate Note will be designated a "Regular Floating Rate Note" and,
except as described below or in an applicable Pricing Supplement, will bear
interest at the rate determined by reference to the applicable Interest Rate
Basis (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied
by the applicable Spread Multiplier, if any. Commencing on the initial Interest
Reset Date, the rate at which interest on such Regular Floating Rate Note shall
be payable shall be reset as of each Interest Reset Date; provided, however,
that (i) the interest rate in effect for the period from the Original Issue
Date to the initial Interest Reset Date will be the Initial Interest Rate, and
(ii) unless otherwise specified in the applicable Pricing Supplement, the
interest rate in effect for the 10 days immediately prior to Maturity shall be
that in effect on the tenth day preceding such Maturity.
(ii) If such Floating Rate Note is designated as a "Floating Rate/Fixed Rate
Note," then, except as described below or in an applicable Pricing Supplement,
such Floating Rate Note will bear interest at the rate determined by reference
to the applicable Interest Rate Basis (i) plus or minus the applicable Spread,
if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any.
Commencing on the initial Interest Reset Date, the rate at which interest on
such Floating Rate/Fixed Rate Note shall be payable shall be reset as of each
Interest Reset Date; provided, however, that (i) the interest rate in effect
for the period from the Original Issue Date to the initial Interest Reset Date
will be the Initial Interest Rate; (ii) unless otherwise specified in the
applicable Pricing Supplement, the interest rate in effect for the 10 days
immediately prior to the Fixed Rate Commencement Date shall be that in effect
on the tenth day preceding the Fixed Rate Commencement Date; and (iii) the
interest rate in effect commencing on, and including, the Fixed Rate
Commencement Date to Maturity shall be the Fixed Interest Rate, if such rate is
specified in the applicable Pricing Supplement, or if no such Fixed Interest
Rate is so specified, the interest rate in effect thereon on the day
immediately preceding the Fixed Rate Commencement Date.
(iii) If such Floating Rate Note is designated as an "Inverse Floating Rate
Note," then, except as described below or in an applicable Pricing Supplement,
such Floating Rate Note will bear interest equal to the Fixed Interest Rate
specified in the related Pricing Supplement minus the rate determined by
reference to the Interest Rate Basis (i) plus or minus the applicable Spread,
if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any;
provided, however, that the interest rate thereon will not be less than zero.
Commencing on the initial Interest Reset Date, the rate at which interest on
such Inverse Floating Rate Note is payable shall be reset as of each Interest
Reset Date; provided, however, that (i) the interest rate in effect for the
period from the Original Issue Date to the initial Interest Reset Date will be
the Initial Interest Rate, and (ii) unless otherwise specified in the
applicable Pricing Supplement, the interest rate in effect for the 10 days
immediately prior to Maturity shall be that in effect on the tenth day
preceding such Maturity.
<PAGE> 9
Notwithstanding the foregoing, if such Floating Rate Note is designated as
having an Addendum attached as specified on the face thereof, such Floating
Rate Note shall bear interest in accordance with the terms described in such
Addendum and the applicable Pricing Supplement.
Unless otherwise provided in the applicable Pricing Supplement, each Interest
Rate Basis shall be the rate determined in accordance with the applicable
provisions below. Except as set forth above or in an applicable Pricing
Supplement, the interest rate in effect on each day shall be (a) if such day is
an Interest Reset Date, the interest rate determined on the Interest
Determination Date (as defined below) immediately preceding such Interest Reset
Date or (b) if such day is not an Interest Reset Date, the interest rate
determined on the Interest Determination Date immediately preceding the
immediately preceding Interest
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Reset Date; provided, however, that (i) the interest rate in effect for the
period from the Original Issue Date to the initial Interest Reset Date will be
the Initial Interest Rate, and (ii) unless otherwise specified in the
applicable Pricing Supplement, the interest rate in effect for the 10 days
immediately prior to Maturity shall be that in effect on the tenth day
preceding such Maturity.
Interest on Floating Rate Notes will be determined by reference to an
"Interest Rate Basis," which may be one or more of (i) the "CD Rate", (ii) the
"Commercial Paper Rate", (iii) the "Federal Funds Rate", (iv) "LIBOR", (v) the
"Prime Rate", (vi) the "Treasury Rate", or (vii) such other interest rate
formula as may be set forth in the applicable Pricing Supplement; provided,
however, that with respect to a Floating Rate/Fixed Rate Note, the interest
rate commencing on the Fixed Rate Commencement Date and continuing, unless
otherwise specified in the applicable Pricing Supplement, until Maturity shall
be the Fixed Interest Rate, if such rate is specified in the applicable Pricing
Supplement, or if no such Fixed Interest Rate is so specified, the interest
rate in effect thereon on the day immediately preceding the Fixed Rate
Commencement Date. In addition, a Floating Rate Note may bear interest in
respect of the lowest of two or more Interest Rate Bases.
The "Spread" is the number of basis points to be added to or subtracted from
the related Interest Rate Basis or Bases applicable to such Floating Rate Note.
The "Spread Multiplier" is the percentage of the related Interest Rate Basis or
Bases applicable to such Floating Rate Note by which such Interest Rate Basis
or Bases will be multiplied to determine the applicable interest rate on such
Floating Rate Note. The "Index Maturity" is the period to maturity of the
instrument or obligation with respect to which the Interest Rate Basis or Bases
will be calculated. The Spread, Spread Multiplier, Index Maturity and other
variable terms of the Floating Rate Notes are subject to change by the Company
from time to time, but no such change will affect any Floating Rate Note
previously issued or as to which an offer has been accepted by the Company.
<PAGE> 10
Each applicable Pricing Supplement will specify whether the rate of interest
on the related Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually, annually or such other specified period (each, an
"Interest Reset Period") and the dates on which such Interest Rate will be
reset (each, an "Interest Reset Date"). Unless otherwise specified in the
applicable Pricing Supplement, the Interest Reset Date will be, in the case of
Floating Rate Notes which reset: (i) daily, each Business Day; (ii) weekly, the
Wednesday of each week (with the exception of weekly reset Treasury Rate Notes
which will reset the Tuesday of each week, except as specified below); (iii)
monthly, the third Wednesday of each month; (iv) quarterly, the third Wednesday
of March, June, September and December of each year; (v) semiannually, the
third Wednesday of the two months specified in the applicable Pricing
Supplement; and (vi) annually, the third Wednesday of the month specified in
the applicable Pricing Supplement; provided, however, that, with respect to
Floating Rate/Fixed Rate Notes, the fixed rate of interest in effect for the
period from the Fixed Rate Commencement Date until Maturity shall be the Fixed
Interest Rate or the interest rate in effect on the day immediately preceding
the Fixed Rate Commencement Date, as specified in the applicable Pricing
Supplement. If any Interest Reset Date for any Floating Rate Note would
otherwise be a day that is not a Business Day, such Interest Reset Date will be
postponed to the next succeeding day that is a Business Day, except that in the
case of a Floating Rate Note as to which LIBOR is the applicable Interest Rate
Basis, if such Business Day falls in the next succeeding calendar month, such
Interest Reset Date will be the immediately preceding Business Day. As used
herein, "Business Day" means, unless otherwise specified in the applicable
Pricing Supplement, each Monday, Tuesday, Wednesday, Thursday or Friday which
is not a day on which banking institutions in The City of New York are
authorized or obligated by law to close. As used herein, "London Business Day"
means any day on which dealings in deposits in United States dollars are
transacted in the London interbank market.
A Floating Rate Note may also have either or both of the following: (i) a
maximum numerical limitation, or ceiling (a "Maximum Interest Rate"), on the
rate at which interest may accrue during any interest period and (ii) a minimum
numerical limitation, or floor (a "Minimum Interest Rate"), on the rate at
which interest may accrue during any interest period. In addition to any
Maximum Interest Rate that may be applicable to any Floating Rate Note pursuant
to the above provisions, the interest rate on Floating Rate Notes will in no
event be higher than the maximum rate permitted by New York law, as the same
may be modified by United States law of general application.
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Each Floating Rate Note will bear interest from the date of issue at the
rates specified herein until the principal thereof is paid or otherwise made
available for payment. Except as provided below or in an applicable Pricing
Supplement, interest will be payable in the case of Floating Rate Notes which
reset; (i) daily, weekly or monthly, on the third Wednesday of each month or on
the third Wednesday of March, June, September and December of each year as
specified in the applicable Pricing Supplement; (ii) quarterly, on the third
Wednesday of March, June, September and December of each year; (iii)
semiannually, on the third Wednesday of the two months of each year specified
in the applicable Pricing Supplement; and (iv) annually, on the third Wednesday
of the month of each year specified in the applicable Pricing Supplement (each,
an "Interest Payment Date") and, in each case, at Maturity. If any Interest
<PAGE> 11
Payment Date for any Floating Rate Note would otherwise be a day that is not a
Business Day, such Interest Payment Date will be the next succeeding day that
is a Business Day except that in the case of a Floating Rate Note as to which
LIBOR is an applicable Interest Rate Basis, if such Business Day falls in the
next succeeding calendar month, such Interest Payment Date will be the
immediately preceding Business Day. If the Maturity of a Floating Rate Note
falls on a day that is not a Business Day, the payment of principal, premium,
if any, and interest will be made on the next succeeding Business Day, and no
interest on such payment shall accrue for the period from and after such
Maturity.
All percentages resulting from any calculation on Floating Rate Notes will be
rounded upwards, if necessary, to the next highest one hundred-thousandth of a
percentage point (e.g., 9.876545% (or .09876545) would be rounded to 9.87655%
(or .0987655)), and all dollar amounts used in or resulting from such
calculation on Floating Rate Notes will be rounded to the nearest cent (with
one-half cent being rounded upward).
Unless otherwise specified in the applicable Pricing Supplement, interest
payments on Floating Rate Notes will equal the amount of interest accrued from
and including the next preceding Interest Payment Date in respect of which
interest has been paid (or from and including the date of issue, if no interest
has been paid with respect to such Floating Rate Notes), to but excluding the
related Interest Payment Date; provided, however, that in the case of Floating
Rate Notes on which the interest rate is reset daily or weekly, interest
payments will include interest accrued from and including the date of issue or
from but excluding the last Regular Record Date to which interest has been
paid, as the case may be, through and including the Regular Record Date next
preceding the applicable Interest Payment Date, unless otherwise specified in
the applicable Pricing Supplement; and provided further that, the interest
payments on Floating Rate Notes made at Maturity will include interest accrued
to but excluding the date of Maturity.
With respect to each Floating Rate Note, accrued interest is calculated by
multiplying its face amount by an accrued interest factor. Such accrued
interest factor is computed by adding the interest factor calculated for each
day from the date of issue, or from the last day to which interest has been
paid or duly provided for, to the date for which accrued interest is being
calculated. Unless otherwise specified in the applicable Pricing Supplement,
the interest factor for each such day will be computed by dividing the interest
rate applicable to such day by 360, in the case of Notes for which the Interest
Rate Basis is the CD Rate, the Commercial Paper Rate, the Federal Funds Rate,
LIBOR or the Prime Rate, or by the actual number of days in the year in the
case of Notes for which the Interest Rate Basis is the Treasury Rate. Unless
otherwise specified in an applicable Pricing Supplement, the interest factor
for Notes for which the interest rate is calculated with reference to two or
more Interest Rate Bases will be calculated in each period in the same manner
as if only one of the applicable Interest Rate Bases applied.
<PAGE> 12
The interest rate applicable to each Interest Reset Period commencing on the
Interest Reset Date with respect to such Interest Reset Period will be the rate
determined on the applicable "Interest Determination Date". Unless otherwise
specified in the applicable Pricing Supplement, the Interest Determination Date
with respect to the CD Rate, the Commercial Paper Rate, the Federal Funds Rate
and the Prime Rate will be the second Business Day preceding each Interest
Reset Date for the related Note; the Interest Determination Date with respect
to LIBOR will be the second London Business Day preceding each Interest Rate
Date. With respect to the Treasury Rate, unless otherwise specified in an
applicable Pricing Supplement, the
S-7
Interest Determination Date will be the day in the week in which the related
Interest Reset Date falls on which day Treasury Bills (as defined below) are
normally auctioned (Treasury Bills are normally sold at auction on Monday of
each week, unless that day is a legal holiday, in which case the auction is
normally held on the following Tuesday, except that such auction may be held on
the preceding Friday); provided, however, that if an auction is held on the
Friday of the week preceding the week in which the related Interest Reset Date
falls, the related Interest Determination Date will be such preceding Friday;
and provided, further, that if an auction falls on any Interest Reset Date,
then the related Interest Reset Date will instead be the first Business Day
following such auction. Unless otherwise specified in the applicable Pricing
Supplement, the Interest Determination Date pertaining to a Floating Rate Note
the interest rate of which is determined with reference to two or more Interest
Rate Bases will be the latest Business Day which is at least two Business Days
prior to such Interest Reset Date for such Floating Rate Note on which each
Interest Rate Basis is determinable. Each Interest Rate Basis will be
determined and compared on such date, and the applicable interest rate will
take effect on the related Interest Reset Date.
Unless otherwise provided in the applicable Pricing Supplement, The Bank of
New York will be the "Calculation Agent". Upon request of the Holder of any
Floating Rate Note, the Trustee will provide the interest rate then in effect
and, if determined, the interest rate that will become effective as a result of
a determination made for the next Interest Reset Date with respect to such
Floating Rate Note. Unless otherwise specified in the applicable Pricing
Supplement, the "Calculation Date," if applicable, pertaining to any Interest
Determination Date will be the earlier of (i) the tenth calendar day after such
Interest Determination Date, or, if such day is not a Business Day, the next
succeeding Business Day, or (ii) the Business Day prior to the Interest Payment
Date on which such accrued interest will be payable.
CD Rate. CD Rate Notes will bear interest at the rates (calculated with
reference to the CD Rate and the Spread and/or Spread Multiplier, if any)
specified in such CD Rate Notes and in any applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, "CD Rate"
means, with respect to any Interest Determination Date relating to a CD Rate
Note or any Floating Rate Note for which the interest rate is determined with
reference to the CD Rate (a "CD Rate Interest Determination Date"), the rate on
such date for negotiable certificates of deposit having the Index Maturity
specified in the applicable Pricing Supplement as published in "Statistical
Release H.15(519), Selected Interest Rates" or any successor publication
<PAGE> 13
("H.15(519)") under the heading "CDs (Secondary Market)," or, if not published
by 3:00 P.M., New York City time, on the related Calculation Date, the rate on
such CD Rate Interest Determination Date for negotiable certificates of deposit
of the Index Maturity specified in the applicable Pricing Supplement as
published by the Federal Reserve Bank of New York in its daily statistical
release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any
successor publication ("Composite Quotations") under the heading "Certificates
of Deposit". If such rate is not yet published in either H.15(519) or Composite
Quotations by 3:00 P.M., New York City time, on the related Calculation Date,
then the CD Rate on such CD Rate Interest Determination Date will be calculated
by the Calculation Agent and will be the arithmetic mean of the secondary
market offered rates as of 10:00 A.M., New York City time, on such CD Rate
Interest Determination Date, of three leading nonbank dealers in negotiable
United States dollar certificates of deposit in The City of New York selected
by the Calculation Agent (after consultation with and agreement by the Company)
for negotiable certificates of deposit of major United States money center
banks of the highest credit standing for negotiable certificates of deposit
with a remaining maturity closest to the Index Maturity designated in the
applicable Pricing Supplement in denominations of $5,000,000; provided,
however, that if any of the dealers so selected by the Calculation Agent are
not quoting as set forth above, the CD Rate with respect to such CD Rate
Interest Determination Date will be the CD Rate in effect on such CD Rate
Interest Determination Date.
Commercial Paper Rate. Commercial Paper Rate Notes will bear interest at the
rates (calculated with reference to the Commercial Paper Rate and the Spread
and/or Spread Multiplier, if any) specified in such Commercial Paper Rate Notes
and in any applicable Pricing Supplement.
S-8
Unless otherwise specified in the applicable Pricing Supplement, "Commercial
Paper Rate" means, with respect to any Interest Determination Date relating to
a Commercial Paper Rate Note or any Floating Rate Note for which the interest
rate is determined with reference to the Commercial Paper Rate (a "Commercial
Paper Rate Interest Determination Date"), the Money Market Yield (as defined
below) on such date of the rate for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement as published by the Board of
Governors of the Federal Reserve System in H.15(519) under the heading
"Commercial Paper". In the event that such rate is not published by 3:00 P.M.,
New York City time, on the related Calculation Date, then the Commercial Paper
Rate will be the Money Market Yield on such Commercial Paper Rate Interest
Determination Date of the rate for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement as published in Composite
Quotations under the heading "Commercial Paper" (with an Index Maturity of one
month or three months being deemed to be equivalent to an Index Maturity of 30
days or 90 days, respectively). If by 3:00 P.M., New York City time, on the
related Calculation Date such rate is not yet published in either H.15(519) or
Composite Quotations, then the Commercial Paper Rate for such Commercial Paper
Rate Interest Determination Date will be calculated by the Calculation Agent
and will be the Money Market Yield of the arithmetic mean of the offered rates
at approximately 11:00 A.M., New York City time, on such Commercial Paper Rate
Interest Determination Date of three leading dealers of commercial paper in The
City of New York selected by the Calculation Agent for commercial paper having
<PAGE> 14
the Index Maturity designated in the applicable Pricing Supplement placed for
an industrial issuer whose bond rating is "AA", or the equivalent, from a
nationally recognized securities rating agency; provided, however, that if any
of the dealers so selected by the Calculation Agent (after consultation with
and agreement by the Company) are not quoting as mentioned in this sentence,
the Commercial Paper Rate determined on such Commercial Paper Rate Interest
Determination Date will be the rate in effect on such Commercial Paper Rate
Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage rounded to the
nearest one ten-thousandth of a percent, with five one hundred-thousandths of a
percent rounded upward) calculated in accordance with the following formula:
Money Market Yield =
D ~ 360
----------
360 - (D ~ M)
~ 100
where "D" refers to the applicable per annum rate for commercial paper quoted
on a bank discount basis and expressed as a decimal, and "M" refers to the
actual number of days in the interest period for which interest is being
calculated.
Federal Funds Rate. Federal Funds Rate Notes will bear interest at the rates
(calculated with reference to the Federal Funds Rate and the Spread and/or
Spread Multiplier, if any) specified in such Federal Funds Rate Notes and in
any applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, "Federal
Funds Rate" means, with respect to any Interest Determination Date relating to
a Federal Funds Rate Note or any Floating Rate Note for which the interest rate
is determined with reference to the Federal Funds Rate (a "Federal Funds Rate
Interest Determination Date"), the rate on such date for Federal Funds as
published in H.15(519) under the heading "Federal Funds (Effective)" or, if not
published by 3:00 P.M., New York City time, on the related Calculation Date,
the rate on such Federal Funds Rate Interest Determination Date as published in
Composite Quotations under the heading "Federal Funds/Effective Rate". If such
rate is not published in either H.15(519) or Composite Quotations by 3:00 P.M.,
New York City time, on the related Calculation Date, the Federal Funds Rate for
such Federal Funds Rate Interest Determination Date will be calculated by the
Calculation Agent and will be the arithmetic mean of the rates for the last
transaction in overnight United States dollar federal funds arranged by three
leading brokers of federal funds transactions in The City of New York selected
by the Calculation Agent (after consultation with and agreement by the Company)
as of 11:00 A.M., New York City time on such Federal Funds Rate Interest
Determination Date; provided,
S-9
however, that if any of the brokers so selected by the Calculation Agent are
not quoting as mentioned in this sentence, the Federal Funds Rate with respect
to such Federal Funds Rate Interest Determination Date will be the Federal
Funds Rate in effect on such Federal Funds Rate Interest Determination Date.
<PAGE> 15
LIBOR. LIBOR Notes will bear interest at the rates (calculated with reference
to LIBOR and the Spread and/or Spread Multiplier, if any) specified in such
LIBOR Notes and in any applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, "LIBOR"
means the rate determined by the Calculation Agent in accordance with the
following provisions:
(i) With respect to an Interest Determination Date relating to a LIBOR Note
or any Floating Rate Note for which the interest rate is determined with
reference to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be
determined on the basis of the offered rates for deposits in United States
dollars for the period of any Index Maturity specified in the applicable
Pricing Supplement, commencing on the second London Business Day immediately
following the related LIBOR Interest Determination Date, which appear on the
Reuters Screen LIBO Page (as defined below) at approximately 11:00 A.M., London
time, on such LIBOR Interest Determination Date. If at least two such offered
rates appear on the Reuters Screen LIBO Page, LIBOR determined on the LIBOR
Interest Determination Date will be the arithmetic mean (rounded, if necessary,
to the nearest one hundred-thousandth of a percent) of such offered rates
determined by the Calculation Agent. If fewer than two offered rates appear,
LIBOR in respect of the related LIBOR Interest Determination Date will be
determined as if the parties had specified the rate described in clause (ii)
below. "Reuters Screen LIBO Page" means the display designated as Page "LIBO"
on the Reuters Monitor Money Rate Service (or such other page as may replace
the LIBOR Page on that service for the purpose of displaying London interbank
offered rates of major banks).
(ii) With respect to a LIBOR Interest Determination Date on which fewer than
two offered rates appear on the Reuters Screen LIBO Page as specified in clause
(i) above, the Calculation Agent will request the principal London offices of
each of four major banks in the London interbank market, as selected by the
Calculation Agent (after consultation with and agreement by the Company), to
provide the Calculation Agent with its offered quotation for deposits in United
States dollars for the period of the Index Maturity designated in the
applicable Pricing Supplement, commencing on the second London Business Day
immediately following such LIBOR Interest Determination Date, to prime banks in
the London interbank market at approximately 11:00 A.M., London time, on such
LIBOR Interest Determination Date and in a principal amount that is
representative for a single transaction in such market at such time. The
Calculation Agent will request the principal London office of each of such
banks to provide a quotation of its rate. If at least two such quotations are
provided, LIBOR determined on such LIBOR Interest Determination Date will be
the arithmetic mean of such quotations. If fewer than two quotations are
provided, LIBOR determined on such LIBOR Interest Determination Date will be
the arithmetic mean of the offered rates quoted at approximately 11:00 A.M.,
New York City time, on such LIBOR Interest Determination Date by three major
banks in The City of New York selected by the Calculation Agent (after
consultation with and agreement by the Company) for loans in United States
dollars to leading European banks, having the Index Maturity designated in the
applicable Pricing Supplement and in a principal amount that is representative
for a single transaction in such market at such time; provided, however, that
if any of the banks so selected by the Calculation Agent are not quoting as
mentioned in this sentence, LIBOR determined on such LIBOR Interest
Determination Date will be LIBOR in effect on such LIBOR Interest Determination
Date.
<PAGE> 16
Prime Rate. Prime Rate Notes will bear interest at the rates (calculated with
reference to the Prime Rate and the Spread and/or Spread Multiplier, if any)
specified in such Prime Rate Notes and in any applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, "Prime Rate"
means, with respect to any Interest Determination Date relating to a Prime Rate
Note or any Floating Rate Note for which the interest rate is determined with
reference to the Prime Rate (a "Prime Rate Determination Date") the rate
S-10
on that day set forth in H.15(519) opposite the caption "Bank Prime Loan". If
such rate is not yet published in H.15(519) by 3:00 P.M., New York City time,
on the Calculation Date, the Prime Rate will be the arithmetic mean of the
rates of interest publicly announced by each bank that appears on the Reuters
Screen NYMF Page (as defined below) as such bank's prime rate or base lending
rate as in effect for such Prime Rate Determination Date. If fewer than four
such rates appear on such Reuters Screen NYMF Page for such Prime Rate
Determination Date, the Prime Rate will be determined by the Calculation Agent
and will be the arithmetic mean of the prime rates quoted on the basis of the
actual number of days in the year divided by a 360-day year as of the close of
business on such Prime Rate Determination Date by three, or two if only two
such rates are quoted, major money center banks in New York City selected by
the Calculation Agent (after consultation with and agreement by the Company).
If fewer than two such rates are quoted as aforesaid, the Prime Rate will be
determined by the Calculation Agent on the basis of the prime rates quoted in
New York City by three, or two if only two are available, substitute banks or
trust companies organized and doing business under the laws of the United
States, or any State thereof, having total equity capital of at least $500
million and being subject to supervision or examination by a Federal or State
authority, selected by the Calculation Agent (after consultation with and
agreement by the Company) to provide such rates; provided, however, that if
fewer than two of such substitute banks or trust companies selected as
aforesaid by the Calculation Agent are not quoting as mentioned in this
sentence, the Prime Rate will be the Prime Rate then in effect on such Prime
Rate Determination Date. "Reuters Screen NYMF Page" means the display
designated as page "NYMF" on the Reuters Monitor Money Rates Service (or such
other page as may replace the NYMF page on that service for the purpose of
displaying prime rates or base lending rates of major United States banks).
Treasury Rate. Treasury Rate Notes will bear interest at the rates
(calculated with reference to the Treasury Rate and the Spread and/or Spread
Multiplier, if any) specified in such Treasury Rate Notes and in any applicable
Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, "Treasury
Rate" means, with respect to any Interest Determination Date relating to a
Treasury Rate Note or any Floating Rate Note for which the interest rate is
determined by reference to the Treasury Rate (a "Treasury Rate Interest
Determination Date"), the rate applicable to the most recent auction of direct
obligations of the United States ("Treasury Bills") having the Index Maturity
specified in the applicable Pricing Supplement, as such rate is published in
H.15(519) under the heading "U.S. Government Securities/Treasury Bills-auction
average (investment)" or, if not published by 3:00 P.M., New York City time, on
the related Calculation Date, the auction average rate (expressed as a bond
<PAGE> 17
equivalent on the basis of a year of 365 or 366 days, as applicable, and
applied on a daily basis) as otherwise announced by the United States
Department of Treasury. In the event that the results of the auction of
Treasury Bills having the Index Maturity designated in the applicable Pricing
Supplement are not reported as provided by 3:00 P.M., New York City time, on
such Calculation Date, or if no such auction is held in a particular week, then
the Treasury Rate will be calculated by the Calculation Agent and will be a
yield to maturity (expressed as a bond equivalent on the basis of a year of 365
or 366 days, as applicable, and applied on a daily basis) of the arithmetic
mean of the secondary market bid rates, as of approximately 3:30 P.M., New York
City time, on such Treasury Rate Interest Determination Date, of three leading
primary United States government securities dealers (which may include one or
more of the Agents) selected by the Calculation Agent (after consultation with
and agreement by the Company), for the issue of Treasury Bills with a remaining
maturity closest to the Index Maturity designated in the applicable Pricing
Supplement; provided, however, that if any of the dealers so selected by the
Calculation Agent are not quoting as mentioned in this sentence, the Treasury
Rate with respect to such Treasury Rate Interest Determination Date will be the
Treasury Rate in effect on such Treasury Rate Interest Determination Date.
Other Provisions; Addenda
Any provisions with respect to the determination of an Interest Rate Basis,
the specification of Interest Rate Basis, calculation of the interest rate
applicable to a Fixed or Floating Rate Note, its Interest Payment Dates or any
other matter relating thereto may be modified by the terms as specified under
"Other Provisions" on the face thereof or in an Addendum relating thereto, if
so specified on the face thereof and in the applicable Pricing Supplement.
S-11
Original Issue Discount Notes
Notes may be issued at a price less than their redemption price at Maturity,
resulting in such Notes being treated as issued with original issue discount
for United States federal income tax purposes ("Original Issue Discount
Notes"). Such Original Issue Discount Notes may currently pay no interest or
interest at a rate which at the time of issuance is below market rates. Certain
additional considerations relating to any Original Issue Discount Notes may be
described in the Pricing Supplement relating thereto.
Indexed Notes
Notes also may be issued with the principal amount payable at Maturity and/or
interest to be paid thereon to be determined with reference to the price or
prices of specified commodities or stocks, the exchange rate of one or more
specified currencies (including a composite currency such as the European
Currency Unit) relative to an indexed currency, or such other price or exchange
rate as may be specified in such Note ("Indexed Notes"), as set forth in an
Indexed Note Supplement. Holders of such Notes may receive a principal amount
at Maturity that is greater than or less than the face amount of the Notes
depending upon the relative value at Maturity of the specified indexed item.
Information as to the method for determining the principal amount payable at
Maturity, certain historical information with respect to the specified indexed
item and tax considerations associated with investment in Indexed Notes will be
set forth in the applicable Indexed Note Supplement.
<PAGE> 18
Book-Entry Notes
Upon issuance, all Book-Entry Notes having the same Original Issue Date,
Stated Maturity and otherwise having identical terms and provisions will be
represented by a single global security (each, a "Global Security"); provided,
however, that if by reason of the foregoing, a single Global Security would
exceed $150,000,000 in aggregate principal amount, one Global Security will be
issued to represent each $150,000,000 of aggregate principal amount and an
additional Global Security will be issued to represent any remaining principal
amount. Each Global Security representing Book-Entry Notes will be deposited
with, or on behalf of, the Depository, registered in the name of the Depository
or a nominee thereof. Except as set forth below, a Global Security may not be
transferred except as a whole by the Depository to a nominee of the Depository
or by a nominee of the Depository to the Depository or another nominee of the
Depository or by the Depository or any nominee to a successor of the Depository
or a nominee of such successor.
The Depository Trust Company, New York, New York, will be the initial
Depository with respect to the Notes. The Depository has advised the Company
and the Agents that it is a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. The Depository was created to hold
securities of its participants ("Participants") and to facilitate the clearance
and settlement of securities transactions among its Participants in such
securities through electronic book-entry changes in accounts of the
Participants, thereby eliminating the need for physical movement of securities
certificates. The Depository's Participants include securities brokers and
dealers (including the Agents), banks, trust companies, clearing corporations
and certain other organizations. The Depository is owned by a number of
Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the Depository's book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by the
Depository only through Participants.
Upon the issuance of the Notes represented by a Global Security, the
Depository will credit, on its book-entry registration and transfer system, the
principal amounts of the Notes represented by such Global Security to the
accounts of Participants. The accounts to be credited will be designated by the
relevant Agent.
S-12
Ownership of beneficial interests in the Global Security will be limited to
Participants or persons that hold interests through Participants. Ownership of
beneficial interest in the Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the Depository
(with respect to interests of Participants in the Depository), or by
Participants in the Depository or persons that may hold interest through such
Participants (with respect to persons other than Participants in the
Depository). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limitations and such laws may impair the ability of beneficial owners of the
Notes to transfer beneficial interests in a Global Security.
<PAGE> 19
So long as the Depository for a Global Security, or its nominee, is the
registered owner of such Global Security, the Depository or its nominee, as the
case may be, will be considered the sole owner or Holder of the Notes
represented by such Global Security for all purposes under the Indenture.
Except as provided below, owners of beneficial interests in the Notes
represented by a Global Security will not be entitled to have the Notes
represented by such Global Security registered in their names, will not receive
or be entitled to receive physical delivery of the Notes in definitive form and
will not be considered the owners or Holders thereof under the Indenture.
Accordingly, each Person owning a beneficial interest in a Global Security must
rely on the procedures of the Depository and, if such Person is not a
Participant, on the procedures of the Participant through which such Person
owns its interest, to exercise any rights of a Holder under the Indenture. The
Company understands that under existing industry practices, in the event that
the Company requests any action of Holders or that an owner of a beneficial
interest in such a Global Security desires to give or take any action which a
Holder is entitled to give or take under the Indenture, the Depository would
authorize the Participants holding the relevant beneficial interests to give or
take such action, and such Participants would authorize beneficial owners
owning through such Participants to give or take such action or would otherwise
act upon the instructions of beneficial owners through them. Conveyance of
notices and other communications by the Depository to Participants, by
Participants to indirect Participants, and by Participants and indirect
Participants to beneficial owners of interests in the Global Security will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Payments of principal of and interest on the Notes will be made by the
Company through the Trustee to the Depository or its nominee, as the case may
be, as the registered owner of a Global Security. Neither the Company nor the
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of a
Global Security or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. The Company expects that the
Depository, upon receipt of any payment of principal or interest in respect of
a Global Security, will credit the accounts of the related Participants with
payment in amounts proportionate to their respective holdings in principal
amount of beneficial interest in such Global Security as shown on the records
of the Depository. The Company also expects that payments by Participants to
owners of beneficial interests in a Global Security will be governed by
standing customer instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name" and will be the responsibility of such Participants.
If (x) the Depository is at any time unwilling or unable to continue as
Depository and a successor Depository is not appointed by the Company within 60
days, (y) the Company executes and delivers to the Trustee a Company Order to
the effect that the Global Securities shall be exchangeable or (z) an Event of
Default has occurred and is continuing with respect to the Notes, the Global
Securities will be exchangeable for Notes in definitive form of like tenor and
of an equal aggregate principal amount, in denominations of $1,000 and integral
multiples thereof. Such definitive Notes shall be registered in such name or
names as the Depository shall instruct the Trustee. It is expected that such
instructions may be based upon directions received by the Depository from
Participants with respect to ownership of beneficial interests in such Global
Securities.
S-13
<PAGE> 20
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Distribution Agreement, the Notes
are being offered on a continuing basis for sale by the Company through one or
more of the Agents, who have agreed to use their reasonable efforts to solicit
offers to purchase the Notes and the Company may also sell Notes to an Agent,
as principal, for resale to investors and other purchasers at varying prices
related to prevailing market prices at the time of resale to be determined by
such Agent or, if so agreed, at a fixed public offering price. The Company also
reserves the right to sell Notes directly on its own behalf or through
additional agents, acting either as agent or principal, on substantially
identical terms as those applicable to the Agents. The Company reserves the
right to withdraw, cancel or modify the offer made hereby without notice and
may reject orders in whole or in part whether placed directly with the Company
or through one of the Agents. The Agents will have the right, in their
discretion reasonably exercised, to reject in whole or in part any offer to
purchase Notes received by them. The Company will pay the related Agent, in the
form of a discount or otherwise, a commission, ranging from .125% to .750%,
depending on the Stated Maturity of the Note (or, with respect to Notes for
which the Stated Maturity is in excess of 30 years, such commission as shall be
agreed upon by the Company and the related Agent at the time of sale), of the
principal amount of any Note sold through such Agent.
In addition, with the Company's consent, the Agents may offer the Notes they
have purchased as principal to other dealers. The Agents may sell Notes to any
dealer at a discount and, unless otherwise specified in the applicable Pricing
Supplement, such discount allowed to any dealer will not be in excess of 662/3%
of the discount to be received by such Agent from the Company. Unless otherwise
indicated in the applicable Pricing Supplement, any Note sold to an Agent as
principal will be purchased by such Agent at a price equal to 100% of the
principal amount thereof less a percentage equal to the commission applicable
to any agency sale of a Note of identical maturity, and may be resold by the
Agent to investors and other purchasers from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale or may be resold to
certain dealers as described above. After the initial public offering of Notes
to be resold to investors and other purchasers on a fixed public offering price
basis, the public offering price, concession and discount may be changed.
Unless otherwise specified in an applicable Pricing Supplement, payment of
the purchase price of the Notes will be required to be made in immediately
available funds in New York City on the date of settlement.
No Note will have an established trading market when issued. The Notes will
not be listed on any securities exchange. Each of the Agents may from time to
time purchase and sell Notes in the secondary market, but no Agent is obligated
to do so, and there can be no assurance that there will be a secondary market
for the Notes or liquidity in the secondary market if one develops. From time
to time, each of the Agents may make a market in the Notes.
Each Agent may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). The Company has
agreed to indemnify the Agents against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments the Agents
may be required to make in respect thereof. The Company has agreed to reimburse
each of the Agents for certain expenses.
<PAGE> 21
In the ordinary course of their respective business, certain of the Agents
and/or their affiliates engage and may in the future engage in commercial
banking and investment banking transactions with the Company and affiliates of
the Company.
S-14
<PAGE> 22
PROSPECTUS
MCDONNELL DOUGLAS CORPORATION
Debt Securities and Debt Warrants
McDonnell Douglas Corporation (the "Company") from time to time may offer and
sell up to $198,000,000 aggregate principal amount (or net proceeds in the case
of securities issued at an original issue discount), or its equivalent, based
on the applicable exchange rate at the time of offering, in such foreign
currencies, units or composites of two or more thereof as shall be designated
by the Company at the time of offering, of its debt securities (the "Debt
Securities") and of warrants to purchase Debt Securities (the "Debt Warrants").
As of the date of this Prospectus, $122,000,000 of the Debt Securities are
outstanding. The Debt Securities and Debt Warrants, which are collectively
referred to herein as the "Securities," may be offered in one or more separate
series in amounts, at prices and on terms to be determined at the time of sale.
The Company may sell Securities to or through dealers, acting as principals for
their own account or as agents, and also may sell Securities directly to other
purchasers. See "Plan of Distribution."
The Debt Securities will be unsecured obligations of the Company and will
rank equally with all other unsecured and unsubordinated indebtedness of the
Company. See "Description of Debt Securities" and "Description of Debt
Warrants."
The terms of the Securities, including, where applicable, the specific
designation, aggregate principal amount, authorized denominations, maturity,
interest rate (which may be fixed or variable) and time of payment of interest,
if any, terms for any extension, redemption or repayment at the option of the
Company or the holder, terms for sinking fund payment, if any, whether the
Securities are Debt Securities or Debt Warrants, the initial public offering
price or purchase price, the names of, and the principal amounts to be
purchased by dealers, if any, the compensation of such dealers and the proceeds
to be received by the Company and the other terms in connection with the
offering and sale of the Securities in respect of which this Prospectus is
being delivered, are set forth in the accompanying Prospectus Supplement (the
"Prospectus Supplement"). As used herein, Securities shall include securities
denominated in United States dollars or, at the option of the Company if so
specified in the applicable Prospectus Supplement, in any other currency or
units or composite currencies or in amounts determined by reference to an
index.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------
<PAGE> 23
The Securities may be sold to underwriters for public offering pursuant to
terms of an offering fixed at the time of sale. Such underwriters may include,
or may be a group of underwriters represented by, Merrill Lynch, Pierce, Fenner
& Smith Incorporated or one or more other firms. In addition, the Securities
may be sold by the Company directly or through agents. No Securities may be
sold without delivery of a Prospectus Supplement describing such issue of
Securities and the method and terms of offering thereof.
------------
The Date of this Prospectus is March 31, 1995.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") Registration Statements on Form S-3 with respect to the
Securities under the Securities Act of 1933, as amended (the "Act"). This
Prospectus does not contain all of the information set forth in such
Registration Statements, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information pertaining
to these Securities and the Company, reference is made to the Registration
Statements. The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance
therewith files reports and other information with the Commission. Reports,
information statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Company's common stock is listed on the New York Stock Exchange and Pacific
Stock Exchange. Reports, proxy and information statements and other information
concerning the Company may also be inspected at the offices of the New York
Stock Exchange and Pacific Stock Exchange.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1994, as filed with the Commission, is hereby incorporated by reference into
this Prospectus and made a part hereof.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the
termination of the offering of the Securities shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein, or contained in
this Prospectus, shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
<PAGE> 24
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy
(without exhibits) of any or all documents incorporated by reference into this
Prospectus. Requests for such copies should be directed to Mr. James F. Palmer,
Vice President-Treasurer, McDonnell Douglas Corporation, P.O. Box 516, Mailcode
1001330, St. Louis, Missouri 63166-0516; telephone number (314) 234-7032.
Unless otherwise indicated, currency amounts in this Prospectus and the
Prospectus Supplement are stated in United States dollars ("U.S. dollars,"
"dollars," "$" or "U.S. $").
2
<PAGE> 25
THE COMPANY
General
The Company was incorporated in Maryland in 1939 under the name McDonnell
Aircraft Corporation. On April 19, 1967, the shareholders approved the merger
with Douglas Aircraft Company and the name of the corporation was changed to
McDonnell Douglas Corporation (the "Company" or "The Company"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein for a discussion of recent developments relating to the
Company.
The Company, its divisions and its subsidiaries operate principally in four
industry segments: military aircraft; missiles, space and electronic systems;
commercial aircraft; and financial services and other. Operations in the first
two industry segments are conducted primarily by McDonnell Douglas Aerospace,
an unincorporated operating division of the Company, which is engaged in
design, development, production, and support of the following major products:
military transport aircraft; combat aircraft and training systems; commercial
and military helicopters and ordnance; missiles; space launch vehicles and
space station systems; and defense and commercial electronics, lasers, sensors,
and command, control, communications, and intelligence systems. Operations in
the commercial aircraft segment are conducted by Douglas Aircraft Company
("DAC"), an unincorporated operating division of the Company, which designs,
develops, produces and sells commercial transport aircraft and related spare
parts.
DAC separated its commercial and government programs into two operating units
effective January 1, 1992. Prior to the reorganization of DAC, the results of
operations of both the commercial and military programs were reported under the
combined caption of "transport aircraft". The "military aircraft" segment now
includes the former "combat aircraft" segment plus the C-17 Globemaster III
program and other minor military programs reported under the "transport
aircraft" caption prior to 1992. The "commercial aircraft" segment includes the
commercial programs previously reported under the caption "transport aircraft".
In August 1992, the DAC military programs became part of the McDonnell Douglas
Aerospace division.
Through its McDonnell Douglas Financial Services Corporation ("MDFS")
subsidiary, the Company is engaged in aircraft financing and commercial
equipment leasing. The Company's subsidiary, McDonnell Douglas Realty Company
("MDRC"), was established in 1972 to develop the Company's surplus real estate.
While continuing to serve that role, MDRC has become a full-service developer
and property manager in the commercial real estate market as well as for the
Company's aerospace business.
The Company is a major participant in both the defense and the commercial
aerospace industries. The Company has a wide range of programs in production
and development, and is the world's leading producer of military aircraft. The
Company is one of the largest U.S. defense contractors and NASA prime
contractors based on prime contracts awarded. The Company is one of the three
principal manufacturers of large commercial transport aircraft outside the
former Soviet Union. Programs and products comprising most of the Company's
business volume are of a highly technical nature, comparatively few in number,
high in unit cost, and have traditionally enjoyed relatively long production
lives.
<PAGE> 26
Military Aircraft
The Company's McDonnell Douglas Aerospace division is currently producing the
F-15 Eagle, the F/A-18 Hornet, the C-17 Globemaster III, the AV-8B Harrier II,
and the T-45 Goshawk and military training systems. The F-15 Eagle is a
supersonic, tactical fighter that is currently operated by the U.S. Air Force,
Japan, Saudi Arabia and Israel. The F/A-18 Hornet is a multi-mission strike
fighter produced primarily for the U.S. Navy and Marine Corps. The F/A-18
Hornet is also currently operated by Canada, Australia, Spain and Kuwait, and
has been selected by Finland, Switzerland, and Malaysia. The Company is the
prime contractor for the U.S. Air Force C-17 Globemaster III military
transport. The C-17 is designed to carry outsize cargo over intercontinental
distances into austere airfields. The AV-8B Harrier II is a
3
vertical/short takeoff and landing attack aircraft which began U.S. Marine
Corps service in January 1984. The AV-8B Harrier II is also currently operated
by the United Kingdom, Spain, and Italy. The T-45 Goshawk is a carrier capable
single engine trainer which the U.S. Navy selected in 1984 to replace its
intermediate T-2C and advanced TA-4J trainers. McDonnell Douglas Helicopter
Company, which operationally is part of the McDonnell Douglas Aerospace
division, currently produces the AH-64 Apache, an advanced attack helicopter
for the U.S. Army, Israel, Egypt, Saudi Arabia, United Arab Emirates, and
Greece. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" herein for further discussion.
Missiles, Space and Electronic Systems
The Company, through its McDonnell Douglas Aerospace division, is also
engaged in a wide variety of programs in tactical missiles and related systems.
The division produces several missile systems, including the Harpoon anti-ship
missile and the Standoff Land Attack Missile.
In addition, the McDonnell Douglas Aerospace division includes the Delta
Launch Vehicle, Space Products, Space Station, payload fairings and technical
services businesses. The McDonnell Douglas Aerospace division also develops and
produces a variety of defense and electronic systems and products, including
commercial and military aircraft avionics; command and information systems;
surveillance, detection, and tracking systems; and laser systems. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein for further discussion.
Commercial Aircraft
The Company, through DAC, is currently engaged in production of the MD-80 and
MD-90 twin jets and MD-11 trijet commercial aircraft, and support of commercial
aircraft, spare parts and related services. The MD-90 is an advanced derivative
of the MD-80, featuring additional seat capacity and new fuel-efficient engines
with reduced noise and exhaust emissions. Initial customer deliveries of the
MD-90 took place in early 1995. The MD-11 is an advanced technology trijet
designed to fulfill airline needs in the l990s and beyond. Current customers
for the Company's commercial transport aircraft include American Airlines,
Delta Air Lines, and Federal Express Corporation in the United States; and
Alitalia, China Eastern, Garuda Indonesia, Japan Airlines, Japan Air Systems,
KLM Royal Dutch Airlines, Korean Air, Swissair, and Varig, among international
carriers. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" herein for further discussion.
<PAGE> 27
Financial Services
MDFS, headquartered in Long Beach, California, is the parent company of
McDonnell Douglas Finance Corporation ("MDFC"), a subsidiary that is engaged in
aircraft financing and commercial equipment leasing. During 1991 and 1992, MDFS
significantly scaled back its operations, disposed of certain selected lines of
business and assets, and focused its new business efforts almost entirely
within its two core business lines, aircraft financing and commercial equipment
leasing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" herein for further discussion.
MDRC, a subsidiary of the Company, was established to develop the Company's
surplus real estate. MDRC has since become a full-service developer and
property manager in the commercial real estate market. MDRC is active in
developing property adjacent to the Company's offices and plants, and is
involved in other property and construction projects that are not connected
with the Company's own requirements.
Address of Company
The Company's principal executive offices are located at the intersection of
J. S. McDonnell Boulevard and Airport Road, P.O. Box 516, St. Louis, Missouri
63166-0516; telephone (314) 232-0232.
4
SUMMARY FINANCIAL INFORMATION
The following table presents selected consolidated financial information
concerning the Company and its consolidated subsidiaries. The information in
the table and the notes thereto should be read in conjunction with the
consolidated financial statements and related notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994. See
"Incorporation of Certain Documents by Reference."
<PAGE> 28
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- ------- ------ -------
(Dollar amounts in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations(1)
Revenues by industry segment:(2)
Military aircraft.................................... $7,804 $6,852 $7,238 $7,795 $7,707
Commercial aircraft.................................. 3,155 4,760 6,595 6,752 3,935
Missiles, space and electronic systems............... 1,877 2,575 3,169 2,979 3,188
Financial services and other......................... 326 287 352 519 658
------ ------ ------ ------ ------
Operating revenues(2)................................ 13,162 14,474 17,354 18,045 15,488
Earnings from continuing operations before cumulative
effect of accounting change.......................... 598 359 698 (4) 357 258(6)
Per share(3)......................................... 5.05 3.06 5.99 (4) 3.11 2.24(6)
Net earnings (loss).................................. 598 396 (781)(5) 423 306(6)
Per share(3)......................................... 5.05 3.37 (6.70)(5) 3.68 2.66(6)
Interest expense:
Aerospace segments(2)................................ 131(7) 89(7) 309 232(7) 343
Financial services and other segment................. 118 126 159 221 233
----- ------ ------ ------ ------
Total(2)............................................. 249 215 468 453 576
Balance Sheet Information(1)
Total assets......................................... $12,216 $12,026 $13,781 $14,601 $14,692
Notes payable and long-term debt:
Aerospace segments................................... 1,272 1,625 2,767 2,324 2,944
Financial services and other segment................. 1,297 1,513 1,474 1,891 2,614
Shareholders' equity................................. 3,872 3,413 3,022 3,877 3,514
Per share(3)......................................... 33.17 28.93 25.70 33.66 30.57
Debt-to-equity ratios:
Aerospace segments................................... .36 .52 1.01 .66 .95
Financial services and other segment................. 4.14 5.22 5.42 5.25 6.55
Other Information(8)
Firm backlog......................................... $17,503 $19,379 $24,052 $30,448 $36,544
Total backlog(9)..................................... $29,232 $35,698 $41,806 $42,577 $52,770
Ratio of Earnings to Fixed Charges(1)(2)(10)......... 4.2x 2.8x 3.1x 2.2x 1.6x
/TABLE>
(Notes to table appear on following page.)
5
<PAGE> 29
- ------
(1) Summary of Operations, Balance Sheet Information and Ratio of Earnings to
Fixed Charges have been restated to reflect discontinued operations. The
captions "military aircraft" and "commercial aircraft" were shown as
"combat aircraft" and "transport aircraft" prior to 1992. "Military
aircraft" now includes the former "combat aircraft" segment plus the C-17
program and other minor military programs previously included in the
"transport aircraft" segment.
(2) In 1993, the Company reclassified certain income and expense related to an
executive life insurance program to general and administrative expenses.
These items were previously reflected as revenues or interest expense.
Years prior to 1993 have been restated.
(3) Per share data has been restated to reflect the 1994 three-for-one stock
split.
(4) Includes a gain of $676 million ($5.80 per share) from a postretirement
benefit curtailment relating to Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions."
(5) Includes a net charge of $860 million ($7.38 per share) relating to the
initial adoption and subsequent curtailment gain associated with SFAS No.
106.
(6) Includes $376 million earnings ($3.27 per share) from pension settlement.
(7) Includes reduction of $107 million in 1991, $135 million in 1993, and $10
million in 1994 from resolution of several issues with the Internal
Revenue Service.
(8) Unaudited.
(9) Total backlog includes firm backlog plus (a) U.S. and other government
orders not yet funded, (b) U.S. and other government orders being
negotiated as continuations of authorized programs, and (c) unearned price
escalation on firm commercial aircraft orders. Backlog is that of the
aerospace segments. Customer options and products produced for short-term
lease are excluded from backlog.
(10) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" have been calculated by adding interest expense (including
amortization of capitalized interest) and the portion of rentals estimated
to represent the interest factor to earnings from continuing operations
before income taxes and cumulative effect of accounting change, and
eliminating therefrom the undistributed earnings of less than 50% owned
affiliates. "Fixed charges" include interest charges (including
capitalized interest) and the portion of rentals estimated to represent
the interest factor.
6
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.
Overview
The Company completed 1994 at a strong pace, achieving records for the year
in net earnings and operating earnings. Highlights in 1994 included record
revenues and operating earnings in the military aircraft segment, continued
profitability in the commercial aircraft business in spite of reduced
deliveries, and continued significant cash flow, as evidenced by further debt
reduction and accumulation of cash. Cash flow from aerospace operations was
slightly less than one billion dollars for 1994, prior to being reduced by a
third quarter tax and interest payment of approximately $165 million related to
prior years' tax audit and by $85 million that was used by the Company to
purchase approximately 1.8 million shares of its common stock. Aerospace debt
decreased $353 million during 1994 after decreasing $1.142 billion during 1993.
The year-end 1994 aerospace debt level fell to $1.272 billion, the lowest in
seven years. In addition, aerospace cash and cash equivalents increased to $408
million at December 31, 1994, compared with $15 million at the end of 1993.
Earnings for 1994 were $5.05 per share, a 50% increase over 1993.
Results of Operations
The Company's revenues decreased 9% in 1994 to $13.176 billion, down from
$14.487 billion in 1993 and $17.365 billion in 1992. The 1994 decrease resulted
principally from reduced deliveries in the commercial aircraft segment and
lower volume on the downsized Space Station and several missile and electronic
systems programs. Revenues for the military aircraft segment were at a record
level in 1994, a 14% increase over the 1993 level. The 1993 decrease from 1992
resulted principally from reduced deliveries in the commercial aircraft segment
and lower volume in the F-15 program, and to a lesser extent from the winding
down of the Advanced Cruise Missile program and reduced commercial space
launches.
In spite of the revenue decrease, the Company's 1994 earnings increased to
$598 million. That compares with 1993 earnings of $396 million and 1992
earnings of $79 million, after excluding from 1992 a charge of $1.536 billion
related to the adoption of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and a subsequent curtailment gain
of $676 million related to the termination of certain postretirement health
care benefits. The Company had a 1992 net loss of $781 million including these
SFAS No. 106 items. Excluding curtailment gains, after-tax retiree health care
costs associated with SFAS No. 106 were approximately $120 million higher in
1992 than in 1993 and 1994.
Military aircraft segment operating earnings were at a record level in 1994,
and 33% better than 1993 even after excluding from 1993 the $450 million C-17
charge. Earnings in the commercial aircraft segment were comparable in 1994
with 1993, and down from the 1992 level due to significant reductions in MD-80
deliveries. Earnings in the missiles, space and electronic systems segment were
down from the record 1993 level, although the return on sales increased in 1994
from the 1993 level. Both 1994 and 1993 return on sales more than doubled the
1992 rate of return.
<PAGE> 31
Net earnings in 1993 and 1992 included gains from discontinued operations of
$37 million and $57 million, respectively. Earnings in 1994 and 1993 included
$21 million and $158 million, respectively, associated with successful
resolution of issues with the IRS, partially offset in 1993 by $13 million
resulting from an additional tax provision related to the Omnibus Budget
Reconciliation Act. Earnings in 1993 also include a $43 million postretirement
benefit curtailment gain.
Neither the first quarter 1992 one-time charge for adoption of the accounting
change for postretirement health care benefits nor the subsequent
postretirement benefit curtailment gains impacted the revenues or operating
earnings of the business segments.
7
Years Ended December 31
--------------------------
1994 1993 1992
-------- -------- --------
(Dollar amounts in millions
REVENUES
Military aircraft.............................. $ 7,804 $ 6,852 $ 7,238
Commercial aircraft............................ 3,155 4,760 6,595
Missiles, space and electronic systems......... 1,877 2,575 3,169
Financial services and other................... 326 287 352
-------- -------- --------
Operating revenues............................. 13,162 14,474 17,354
Non-operating income........................... 14 13 11
-------- -------- --------
Total Revenues................................. $13,176 $14,487 $17,365
======== ======== ========
EARNINGS (LOSS)
Military aircraft.............................. $ 708 $83 $ 8
Commercial aircraft............................ 47 40 102
Missiles, space and electronic systems......... 262 338 191
Financial services and other................... 50 31 20
-------- -------- --------
Operating earnings from continuing operations.. 1,067 492 321
Non-operating income........................... (3) (5) (4)
Discontinued operations........................ 37 57
General corporate expenses..................... (13) (9) (12)
Postretirement benefit curtailment............. 70 1,090
Interest expense............................... (131) (89) (309)
Income taxes................................... (322) (100) (388)
Cumulative effect of accounting change......... (1,536)
-------- -------- --------
Net Earnings (Loss)............................ $ 598 $ 396 $ (781)
======== ======== ========
Military Aircraft
Operating revenues in the military aircraft segment increased 14% in 1994
after a 5% decrease in 1993. The 1994 increase was primarily attributed to the
F/A-18 and the C-17 programs. The 1993 decrease was largely due to reduced
volume in the F-15 program, partially offset by increased revenue in the C-17
program.
<PAGE> 32
The military aircraft segment reported record operating earnings of $708
million in 1994. Improved earnings in the F/A-18 program and current production
lots of the C-17 program, along with continued strong performance in most other
major programs contributed to the record results in 1994. Operating earnings in
this segment were $533 million in 1993 and $391 million in 1992, prior to being
reduced by pre-tax loss provisions of $450 million in 1993 and $383 million in
1992 on the C-17 program. During 1994, the Company recognized cost growth in
the development and initial production lots and at the same time reduced cost
estimates associated with the 1993 C-17 omnibus settlement. Increased earnings
recorded during 1994 in current production lots, however, resulted in net
positive earnings for the C-17 program. A 1993 charge of $450 million reflected
the estimated impact of the C-17 settlement with the Department of Defense
("DoD") and other increases in the estimated remaining cost on the development
and initial production contracts. Charges in 1992 reflected the estimated cost
of strengthening the C-17 wing, which was damaged during stress tests in
October 1992, and other cost growth in test, assembly and procurement. For
additional information regarding Government claims and inquiries on the C-17
program, see also "Government Business Audits, Reviews and Investigations,"
page 15.
While comparable in 1994 and 1993, pre-tax retiree health care costs in this
segment were $82 million higher in 1992, prior to the elimination or reduction
of company-paid health care for many current and future retirees.
8
Commercial Aircraft
Operating revenues in the commercial aircraft segment decreased 34% in 1994
after a 28% decline in 1993. The decrease in 1994 and 1993 revenues was due to
reduced aircraft deliveries. The Company delivered 22 MD-80 twin jets in 1994,
as compared with 42 MD-80 twin jets (including eight under lease arrangements)
in 1993, and 84 in 1992. The Company delivered 17 trijets in 1994, compared
with 36 trijets (including three under lease arrangements) in 1993, and 42 in
1992. Current commercial aircraft production plans for 1995 anticipate MD-80/90
twin jet deliveries in the low 30s, with slightly higher deliveries of MD-80s
compared to MD-90s. MD-11 trijet deliveries in 1995 are expected to be in the
high teens. Based on current orders and scheduled delivery dates, MD-11
deliveries in the next few years will be lower than in 1995. The Company does
and will continue to evaluate the production rate on the MD-11 line consistent
with the rate of existing and new orders, and will reduce or increase the rate
as appropriate.
The commercial aircraft segment reported operating earnings of $47 million in
1994, comparable to the $40 million in 1993 and slightly less than half of the
$102 million in 1992. Earnings from the support of commercial aircraft, sale of
spare parts and related services were comparable in all three years. Similar to
revenues, reductions from the 1992 level of earnings were the result of fewer
MD-80 and MD-11 deliveries. The MD-11 program continues to operate at a loss
after deducting period costs, although the loss in 1994 was lower than in 1993.
The Company is accounting for the MD-11 program on a delivery basis using the
program-average cost method whereby cost of sales is computed as a percentage
of the sales price of the aircraft. The percentage is calculated as the total
of estimated tooling and production costs for the entire program divided by the
estimated sales prices of all aircraft in the program. A constant gross margin
<PAGE> 33
is achieved by deferring or accelerating a portion of the average unit cost on
each unit delivered. Under this method, certain production costs incurred
during assembly of early MD-11 aircraft as well as tooling costs are being
deferred and will be recognized on delivery of aircraft in future years based
on a planned number of aircraft in the program. Production costs, combined with
an allocation of tooling costs, on most of the aircraft delivered in 1994 and
1993 were less than program-average costs. Deferred costs in total on the MD-11
program decreased $132 million in 1994, after decreasing $175 million in 1993.
The 1994 decrease occurred with less than half of the deliveries as compared to
the levels in 1993. Program development costs and general and administrative
costs are expensed as incurred as period costs. Commercial products in process
for the MD-11 program at December 31, 1994, includes net deferred production
costs of $1.202 billion and unamortized tooling of $247 million. These amounts
are to be applied to the remainder of the 301 aircraft pool. Under the current
costing percentage, an estimated $1.0 billion of current and future deferred
costs will be recovered from firm orders received after December 31, 1994.
The Company periodically, and at least annually, reviews its assumptions as
to the size of the MD-11 pool, the estimated period over which the units will
be delivered and the estimated future costs and revenues associated with the
program. As part of this analysis during 1994, the estimated total cost to
complete the 301 aircraft in the pool reflected decreases related to
subcontractor costs, such as the cost of the MD-11 fuselage currently being
produced by a subcontractor but scheduled to be produced by the Company
beginning in early 1996, and production and assembly costs, where the Company
continues to improve efficiency in the production process from procurement
through assembly and delivery. However, these decreases were offset by
increased cost related to extending the period over which the 301 aircraft in
the pool will be delivered. In the aggregate, these changes had an offsetting
impact and as a result, there was no change in the costing percentage used by
the Company on the MD-11 program. The percent used to charge cost of sales has
remained constant since 1992, as cost increases related to extending the
estimated delivery period were offset by operational efficiencies. The
estimates of future cost and revenues were revised in the second quarter of
1992 resulting in an increase of approximately 4% of the airplane sales price
to the percent used to charge cost of sales. Currently, estimated proceeds from
the undelivered aircraft in the pool exceed the production and tooling costs in
inventory at December 31, 1994, plus the estimated additional production and
tooling costs to be incurred. However, if fewer than 301 MD-11 aircraft are
sold, if the proceeds from future sales of MD-11 aircraft are less than
currently estimated, or if the costs to complete the program exceed
9
current estimates, substantial amounts of unrecoverable costs may be charged to
expense in subsequent fiscal periods. The Company believes that the slowdown in
MD-11 orders is temporary and that it will sell in excess of 301 MD-11 aircraft
over the life of the program. As of December 31, 1994, the Company has
delivered 129 MD-11 aircraft.
Reduced development costs contributed to the segment's continued
profitability in both 1994 and 1993. Development expenditures decreased $27
million in 1994 after an $111 million decrease in 1993. The lower costs in 1994
principally related to reduced spending on the MD-90 twin jet, which received
certification in the 1994 fourth quarter, and the MD-11 trijet products. MD-90
development costs were reduced by $32 million in 1994, $27 million in 1993 and
<PAGE> 34
$5 million in 1992 received from risk sharing subcontractors. Operating
earnings for the commercial aircraft segment included charges in 1994 related
to several items associated with the twin jet program that more than offset the
proceeds from the risk sharing customers. Operating earnings in 1993 included a
$41 million pre-tax gain from the sale of McDonnell Douglas' 25% interest in
Irish Aerospace, more than offset by charges of $61 million related to a
commercial lease guarantee, a product enhancement associated with a commercial
customer, and other items.
Missiles, Space and Electronic Systems
Operating revenues in the missiles, space and electronic systems segment
decreased 27% in 1994, after declining 19% in 1993 as compared with 1992.
Decreased revenues in 1994 were attributable to lower volume on the downsized
Space Station and several missile and electronic systems programs. Decreased
revenues in 1993 were primarily as a result of the winding down of the Advanced
Cruise Missile program, which was terminated by the U.S. Government in 1992,
lower electronic systems' revenues as a result of reduced defense budgets on
the Strategic Defense Initiative Organization ("SDIO") and surveillance
activity, and lower Delta and other space systems program activities.
Operating earnings of the missiles, space and electronic systems segment were
$262 million in 1994, down from record 1993 earnings of $338 million. Operating
earnings for this segment were $191 million in 1992. Although earnings were
lower in 1994, the return on sales increased in 1994 from the 1993 level. Both
1994 and 1993 return on sales more than doubled the 1992 return, due to the
realization of lower costs in missile programs brought about by a Company-wide
organizational restructuring in the fourth quarter of 1992 and overall improved
contract performance. The electronic systems programs' 1993 results included
$70 million in pre-tax loss provisions recorded as a result of difficulties in
several electronic systems programs. In addition, 1993 earnings included a $20
million bonus earned for achieving 100% launch success on a Delta Global
Positioning Satellite contract for the Air Force. The electronic systems 1992
results included $38 million in pre-tax loss provisions on the Air Force
Defense Support Program, a program terminated for convenience of the government
during 1993. While comparable in 1994 and 1993, pre-tax retiree health care
costs in this segment were $52 million higher in 1992, prior to the elimination
or reduction of company-paid health care for many current and future retirees.
Financial Services and Other
Operating revenues in the financial services and other segment increased to
$326 million in 1994 compared with $287 million in 1993 and $352 million in
1992.
Operating earnings of the segment were $50 million in 1994 as compared with
$31 million in 1993 and $20 million in 1992. The 1994 operating earnings
included a $20 million pre-tax gain from a sale of property by McDonnell
Douglas Realty Company. Gains on sale and re-lease of equipment, including
aircraft, were $11 million in 1994 as compared with $24 million in 1993 and $37
million in 1992. Operating earnings of the financial services and other segment
have been reduced by interest expense, an operating expense of that segment.
Interest Expense
Interest expense related to aerospace segments was $141 million in 1994, down
from $224 million in 1993, after excluding from 1994 the reversal of $10
million and from 1993 the reversal of $135 million of
10
<PAGE> 35
previously accrued Internal Revenue Service ("IRS") settlement related interest
expense. Aerospace interest expense was $309 million in 1992. The interest
expense decrease reflects lower debt levels in both years and reduced interest
rates in 1993.
Interest expense in the financial services and other segment decreased 6% in
1994 to $118 million, and 21% in 1993 to $126 million. The decreases are a
result of significant reductions in both short-term and long-term average
borrowings as business volume decreased and the segment sold assets to generate
cash and improve liquidity.
The Company settled certain accounting method and tax credit issues with the
IRS in 1993 and 1994 in connection with the IRS' audit of the years 1986
through 1989. The resolution of these issues resulted in net earnings of $158
million in 1993, of which $83 million ($135 million pre-tax) related to
reductions in accrued interest. Issues resolved in 1994 resulted in net
earnings of $21 million, of which $6 million related to reductions in accrued
interest. Upon substantial completion of the 1986-1989 audit in August 1994,
the Company made a tax and interest payment to the IRS of approximately $165
million.
Discontinued Operations
Earnings from discontinued operations were $37 million in 1993 and $57
million in 1992. The 1993 discontinued operations represent the gain related to
the sale of McDonnell Douglas Information Systems International ("MDISI").
Discontinued operations for 1992 include the gain related to the sale of
TeleCheck Services, Inc. and the 1992 operations related to MDISI.
Liquidity
As detailed in the following, the Company believes that it has sufficient
sources of capital to meet anticipated needs.
Debt and Credit Arrangements. The Company has in place a number of credit
facilities with banks and other institutions. At December 31, 1994, the Company
had a revolving credit agreement under which the Company could borrow up to
$1.25 billion through July 1998. There were no amounts outstanding under the
credit agreement at December 31, 1994.
In August 1992, the Company commenced an offering of up to $550 million
aggregate principal amount of its medium-term notes pursuant to a shelf
registration filed with the SEC. As of December 31, 1994, $218 million of
securities registered under the shelf registration remain unissued.
The Company has an agreement with a financial institution to sell a
participation interest in a designated pool of government and commercial
receivables, with limited recourse, in amounts up to $300 million. Under the
agreement, participation interests in new receivables are sold as previously
sold amounts are collected. The participation interests are sold at a discount
which is included in general and administrative expenses in the consolidated
statement of operations. The Company acts as an agent for the purchaser by
performing record keeping and collection functions. At December 31, 1994,
accounts receivable are net of $35 million representing receivable interests
sold.
<PAGE> 36
During 1994, rating agencies raised and/or affirmed their ratings of the
Company and McDonnell Douglas Finance Corporation ("MDFC") debt. Moody's
Investors Service Inc. ("Moody's") raised its ratings of the Company's senior
debt to Baa-3 from Ba-2, and upgraded the short-term debt rating for commercial
paper to Prime-3 from Not Prime. Moody's also raised ratings on MDFC's senior
debt to Baa-3 from Ba-1 and MDFC's subordinated debt to Ba-2 from Ba-3.
Standard and Poor's Ratings Group, a division of McGraww-Hill, Inc.
("Standard and Poor's"), raised its rating on the commercial paper of the
Company and MDFC to A-2 from A-3. Standard and Poor's also affirmed the
Company's and MDFC's senior long-term debt credit rating at BBB, MDFC's
subordinated debt credit rating at BBB-, and MDFC's medium-term notes
credit rating at BBB. Duff & Phelps Credit Rating Company ("Duff & Phelps")
raised its rating of the Company's senior debt to BBB from BBB-.
MDFC's previous ratings by Duff & Phelps of BBB and BBB- on its senior
unsecured debt and subordinated debt, respectively, were unchanged by this
action.
11
Shareholder Initiatives. On October 28, 1994, the Company's Board of
Directors authorized an increase in the quarterly dividend, a three for one
stock split, and a stock repurchase plan. The quarterly dividend was increased
from 12 cents per share to 20 cents per share payable on January 3, 1995, to
shareholders of record on December 2, 1994. The stock split was implemented by
a stock dividend of two shares for each share outstanding to shareholders of
record on December 2, 1994, distributable on January 3, 1995. The stock
repurchase plan authorizes the Company to purchase up to 18 million shares, or
about 15 percent of the Company's common stock. Although funds are available
under existing credit agreements, the Company intends to use excess cash flow
to finance the stock repurchase program and does not expect the program to
affect negatively the Company's ability to fund capital spending, research and
development, or acquisitions. The Board of Directors also amended the Company's
stock rights plan by adjusting the purchase price of each right to $125 and
extending the term of the plan to December 31, 2004.
C-17 Settlement. During January 1994, the Company reached a settlement with
the DoD which covered a range of issues related to the C-17 military aircraft
program. During the third quarter of 1994, the C-17 settlement was given
Congressional approval as provided for in the FY 95 defense authorization and
appropriations bills. The Company and the Air Force executed modifications to
implement the settlement in February 1995. The settlement is not expected to
have any significant adverse cash impact and is expected to have a positive
cash impact during the first quarter of 1995.
Commercial Aircraft Financing. Difficulties in the commercial airline
industry may continue to result in airlines not taking deliveries of aircraft,
requesting changes in delivery schedules, or defaulting on contracts for firm
orders. Aircraft delivery delays or defaults by commercial aircraft customers
not anticipated by the Company could have a negative short-term impact on cash
flow. During recent years, several airlines filed for protection under the
Federal Bankruptcy Code or became delinquent on their obligations for
commercial aircraft. The Company also has outstanding guarantees of $387
million related to the marketing of commercial aircraft. The Company does not
anticipate that the existence of such guarantees will have a material adverse
effect upon its cash flow or financial position.
<PAGE> 37
The Company has also made offers totaling $649 million to lease aircraft
scheduled for delivery during 1995 to 1998. Although earnings, cash flows, and
financial position could be adversely impacted, the Company does not anticipate
that the existence of such lease offers will have a material adverse effect on
earnings, cash flow or financial position.
The Company's outstanding guarantees include approximately $125 million
related to MD-11s operated by a foreign carrier. During March 1994, this
carrier notified its aircraft lenders and lessors that it was temporarily
suspending payments pending a restructuring of its financial obligations, and
requested a "standstill" agreement to protect itself from default remedies for
sixty days. The Company has made and will continue through the first half of
1995 to make lease payments on behalf of the carrier. These payments are not
expected to have a significant adverse effect on the Company's earnings, cash
flow or financial position. The Company and the carrier have tentatively
negotiated a repayment schedule calling for payments to begin later in 1995.
During October 1994, Trans World Airlines, Inc. ("TWA"), the Company's
largest aircraft leasing customer, proposed a restructuring plan relating to
its indebtedness and leasehold obligations to its creditors. As part of its
overall plan, TWA requested the Company to defer six months of lease and other
payments. TWA and the Company have reached agreement in principle to defer
payments for a period of six months. Under the proposed agreement, deferred
amounts will be repaid to the Company over a two year period beginning in April
1995. While the ultimate outcome of the proposed restructuring plan is
dependent upon factors beyond the control of the Company, it is not expected to
be materially adverse to the Company.
Capital Expenditures. The Company's capital expenditures were $112 million in
1994, $64 million in 1993, and $217 million in 1992. At December 31, 1994, the
Company was not committed to the purchase of
12
a significant amount of property, plant and equipment. Capital expenditures are
expected to increase in 1995, but still remain lower than the 1992 level.
Asset Sales. In 1993, the Company closed the sale of its Visual Simulation
Systems ("VSS") business unit and the sale of its remaining information
technology business, MDISI.
Operations. Employment levels were reduced 6% during 1994 to 65,760 as a
result of continued consolidation and streamlining of the Company's government
aerospace companies, and reduced production on several major programs.
Financial Services. Financial Services debt on December 31, 1994, was
approximately $1.3 billion, down from approximately $1.6 billion at December
31, 1993. McDonnell Douglas Financial Services Corporation ("MDFS"), through
its MDFC subsidiary, has traditionally obtained cash from operating activities,
placements of debt, issuances of commercial paper and the normal run-off of its
portfolio to fund its operations. In June 1993, MDFC commenced an offering of
up to $250 million of its General Term Notes and subsequently commenced
offerings of up to an aggregate of $399 million of its medium-term notes. As of
December 31, 1994, approximately $91 million associated with the June 1993
offering and $310 million associated with the medium-term notes offerings had
been sold.
<PAGE> 38
MDFC has also used, and in the future anticipates using, cash provided by
operations, commercial paper borrowings, borrowings under bank credit lines and
unsecured term borrowings as its primary sources of funding. MDFC anticipates
using proceeds from the issuance of additional public debt to fund future
growth.
Business and Market Considerations
General
The Company is a major participant in both the defense and commercial
aerospace industries. The Company has a wide range of programs in production
and development, and is the world's leading producer of military aircraft. The
Company is one of the largest U.S. defense contractors and NASA prime
contractors based on prime contracts awarded. The Company is one of the three
principal manufacturers of large commercial transport aircraft outside the
former Soviet Union. Programs and products comprising most of the Company's
business volume are of a highly technical nature, comparatively few in number,
high in unit cost, and have traditionally enjoyed relatively long production
lives.
The Company's aerospace segments compete in an industry composed of a few
major competitors and a limited number of customers. The number of competitors
in the military segment of the business has decreased over the past few years
due to consolidations brought about by reduced defense spending. However,
competition remains significant both in military and commercial programs.
The trend of reduced defense spending and reduced commercial aircraft orders
has resulted in the downsizing of the Company over the last several years. The
Company has reduced its capital expenditures from $396 million in 1990 to $112
million in 1994 and total employment from 132,960 at June 30, 1990 to 65,760 at
December 31, 1994.
Downsizing has had and continues to have a negative impact on the utilization
of the Company's facilities and capacity, and on labor costs due to
inefficiencies caused by the reassignment of workers as a result of layoffs.
During 1992, the Company consolidated its six government aerospace companies
into one division and since then has closed several of its manufacturing
facilities to streamline operations and create greater efficiencies. The
Company also communicated its strategy to concentrate on its principal
aerospace businesses, and as a result sold non-core business assets to
implement this strategy. As a result of this strategy, the Company: sold
TeleCheck in July 1992; signed a 10-year outsourcing agreement with,
transferred 1,400
13
employees to, and sold its data processing assets to Integrated Systems
Solutions Corp. in December 1992; completed the sale of its VSS business in
January 1993; and in March 1993 sold its remaining information technology
business, MDISI, to a group of investors in the United Kingdom.
<PAGE> 39
In early March 1995, the Company announced that in late 1995 it will close
two facilities, one in Titusville, Florida and another in St. Charles,
Missouri, as part of its continuing consolidation of facilities due to excess
capacity throughout the Company. The plant in Titusville will close after
production of Tomahawk cruise missiles for the U.S. Navy and other operations
come to an end there in August 1995. Operations at the St. Charles facility,
which included production of electrical wire bundles and ground support
equipment for aircraft and missile systems, will be reassigned to other Company
locations.
Military Aerospace Business
The Company's most significant customer in the military aircraft and
missiles, space and electronic systems segments is the U.S. Government. Certain
foreign governments also purchase a significant share of the Company's
aerospace products. Companies engaged in supplying military and space equipment
to the U.S. Government are subject to risks in addition to those found in
commercial business. These additional risks include dependence on Congressional
appropriations and annual administrative allotment of funds, general reductions
in the U.S. and worldwide defense budgets, and changes in Government policies,
including weapons export policies. In addition, at times the Company invests
funds in programs that are both competitive and still in the pre-development
stage yet may never result in production. Moreover, the costs of maintaining
adequate research and development as well as manufacturing capabilities are
substantial.
The U.S. Government may terminate its contracts (i) for its convenience
whenever it believes that such termination would be in the best interest of the
Government or (ii) for default. 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 the
work done, subject to the availability of funding. The U.S. Government may
terminate a contract for default if the contractor materially breaches the
contract.
Defense spending by the U.S. Government, which has declined in recent years,
is expected to be relatively flat during 1995 based upon the FY 95 defense
budget. In an era of shrinking defense budgets, military customers are more
constrained in their ability to support new development programs. Declines in
new development programs can have a negative impact on defense contractors.
Additionally, 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 the Company's
future revenues, earnings and cash flow. However, any such impact could be
mitigated by foreign sales and by programs to upgrade existing products.
Certain foreign sales may require some portion of the production to be
completed in the purchasing country. The Company believes that it is well
positioned in this declining defense era. As the largest producer of military
aircraft, the extension of existing programs can have favorable competitive
results. In light of the uncertainty regarding the changes in defense spending,
reported financial information may not be indicative of the Company's future
operating results. Production contracts awarded under the FY 95 budget will
generally continue through 1997.
<PAGE> 40
Commercial Aircraft Business
The Company is currently engaged in production of the MD-80 and MD-90 twin
jets and MD-11 trijet commercial aircraft, and support of commercial aircraft,
spare parts and related services. 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.
Due to increasing air travel, particularly in the Asia/Pacific region, an
aging fleet, stricter noise and pollution standards and the desire to assure
delivery positions in production lines that were near capacity, a large number
of commercial transport aircraft were ordered during 1988 through 1990. Since
then, as airlines dealt with falling profits, orders for all types of aircraft
have dramatically declined. Difficulties in the commercial aircraft industry
have resulted and may continue to result in airlines not taking deliveries of
14
aircraft, requesting changes in delivery schedules, defaulting on contracts for
firm orders, or not exercising options or reserves. These difficulties could
have a negative short-term impact on cash flows; the impact could be mitigated
by the Company's retention of progress payments on firm orders. See also
"Backlog," page 17, for a discussion of certain risks related to commercial
aircraft customers and "Commercial Aircraft," page 9, for a discussion of the
status of commercial aircraft orders.
In July 1994, the Company began to solicit airline orders for a new 100-seat,
medium range twin jet, called the MD-95, proposed to serve airline needs on
routes with relatively light traffic or where demand for frequent departures
limits the number of passengers on each flight. The proposed plane will involve
a team of companies to produce the plane, and thus share the risks, with the
Company acting as the program manager responsible for systems integration,
configuration, sales, and product support. Formal launch of the MD-95 is
subject to meeting certain launch criteria, including receipt of sufficient
orders from airline and leasing company customers.
Over the past few years, the Company has explored the feasibility of
strategic alliances with organizations around the world. A variation of this
strategy is the utilization of risk-sharing subcontractors, similar to that
proposed on the MD-95 discussed above.
Government Business Audits, Reviews and Investigations
The Company, 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 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 Government
may, in certain cases, also terminate existing contracts, recover damages, and
impose other sanctions and penalties. Based upon presently known facts, the
Company believes that it has not engaged in any criminal misconduct with
respect to any of these matters currently known to be under investigation and
that the ultimate resolution of these investigations will not have a material
adverse effect on the Company's financial position.
<PAGE> 41
In March 1991, the Securities and Exchange Commission ("SEC") issued a Formal
Order of Private Investigation (the "1991 SEC Investigation") looking into
whether the Company violated the Securities Act of 1933 and the Securities
Exchange Act of 1934 in connection with disclosures about and accounting for
the A-12. In February 1993, the SEC issued subpoenas requesting additional
information and broadened its inquiry to include the C-17 and possibly other
programs. The Company believes that it has properly reported and disclosed
information and accounted for its programs in accordance with generally
accepted accounting principles.
In January 1993, the DoD Inspector General ("IG") completed an inquiry into
an allegation of favoritism and advantageous treatment accorded the Company by
the DoD in connection with the C-17 Globemaster III program. The IG's report
questioned contracting actions and payments by the U.S. Air Force and related
information provided by the U.S. Air Force and Company personnel. The Company
believes that it properly reported and disclosed information relative to the
C-17 contract and that it properly submitted bills to and was paid by the U.S.
Air Force in accordance with DoD rules then in effect for work performed. In
April 1993, the Air Force issued an extensive report responding to the
allegations made by the IG. Although the Air Force report reflected the
difference between the parties concerning the segregation and payment of
certain C-17 engineering costs, the report concluded that there was no illegal
or improper plan or actions taken to provide payments to the Company and that
the integrity of the acquisition system had not been compromised. In a November
1993 reply, the IG reasserted his conclusion that there had been an Air Force
plan to assist the Company that exceeded the limits of what was permissible.
In May 1993, a Defense Acquisition Board ("DAB") initiated by the Under
Secretary of Defense for Acquisitions began a review of the C-17 program in an
effort to resolve outstanding issues and to make
15
recommendations regarding the C-17's future. The DoD, in conjunction with the
DAB, submitted a proposal to the Company in December 1993 for a business
settlement of a variety of issues concerning the C-17 program. In January 1994,
the Company and the DoD agreed to such a settlement.
The settlement covered many 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. Terms of
the settlement also stipulated that the Company will expend funds in an effort
to achieve product and systems improvements. During 1994, the C-17 settlement
was given Congressional approval in the FY 95 defense authorization and
appropriations bills. The Company and the Air Force executed contract
modifications to implement the settlement in February 1995.
The Navy on January 7, 1991, notified the Company and General Dynamics
Corporation ("the Team") that it was terminating for default the Team's
contract for development and initial production of the A-12 aircraft. On June
7, 1991, the Team filed a legal action to contest the Navy's termination for
default on the A-12 contract. The Navy has agreed to continue to defer
repayment of $1.334 billion alleged to be due with interest from January 7,
1991, from the Company and General Dynamics Corporation ("GD") as a result of
the termination for default of the A-12 program. The agreement provides that it
<PAGE> 42
remains in force until the dispute as to the type of termination is resolved by
the 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 the Company or GD such that deferment is no longer in the best interest
of the Government. On December 9, 1994, the U.S. Court of Federal Claims
ordered the January 7, 1991 decision terminating the contract for default
vacated because that decision was not properly made. A trial of all remaining
issues related to the termination is scheduled to commence in late 1995.
At December 31, 1994, Contracts in Process and Inventories include
approximately $562 million of recorded costs on the A-12 contract, against
which the Company has established a loss provision of $350 million. The amount
of the provision, which was established in 1990, was based on the Company's
belief that the termination for default would be converted to a termination for
convenience, that the Team will establish a minimum of $250 million in claims
adjustments, that there is a range of reasonably possible results on
termination for convenience, and that it is prudent to provide for what the
Company believes is the upper range of possible loss on termination for
convenience, namely $350 million. In the Company's opinion, this loss provision
continues to provide adequately for the reasonably possible reduction in value
of A-12 net contracts in process and nonreimbursed supplier termination
payments as of December 31, 1994, as a result of a termination of the contract
for the convenience of the Government. The Company has been provided with an
opinion of outside counsel that the Government's termination of the contract
for default was contrary to law and fact, that the rights and obligations of
the Company are the same as if the termination had been issued for the
convenience of the Government, and that, subject to sustaining that the
termination is properly one for the convenience of the Government, the probable
claims adjustments are not less than $250 million.
The Company and GD have reported different financial results for the program.
For the quarter ended June 30, 1990, GD reported a $450 million pre-tax
provision for loss on the full-scale development and test portion and the first
production option on the contract which included reversing $24 million of
earnings it had previously recognized on the contract. At that time, the
Company reported no loss on the contract (including the first production
option) based on cost estimates that differed from those used by GD, the
recognition of the probable recovery of claims as future revenue, and the fact
that it had not previously recognized earnings on the contract. For the fourth
quarter of 1990, GD announced an additional loss provision on the A-12 contract
of $274 million, and the Company established a pre-tax provision of $350
million for loss on the contract.
16
Environmental Expenditures
The Company believes that expenditures which may be required to comply with
federal, state, and local provisions regulating the discharge of materials into
the environment or otherwise relating to the environment will not be material
in relation to the financial position of the Company. Compliance with such
regulations has not had a material effect on earnings, cash flow or the
financial position of the Company; however, the costs of complying with
environmental regulations is increasing.
<PAGE> 43
The Company is a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund, or similar state statutes. The Company has been identified
as a potentially responsible party ("PRP") at 29 sites. Of these, the Company
believes that it has de minimis liability at 19 sites, including 14 sites at
which it believes that it has no future liability. At eight of the sites at
which the Company's liability is not considered to be de minimis, either final
or interim cost sharing agreements have been effected between the cooperating
PRPs, although such agreements do not fix the amount of cleanup costs which the
parties will bear. At the two remaining sites, the Company lacks sufficient
information to determine its probable share or amount of liability. In
addition, the Company is remediating, or has begun environmental engineering
studies to determine cleanup requirements, at certain of its current operating
sites or former sites of industrial activity.
The Company estimates total reasonably possible costs of approximately $42
million for study and remediation expenditures at Superfund sites and for the
Company's current and former operating sites, of which $27 million is accrued
at December 31, 1994. Claims for recovery have not been netted against the
disclosed environmental liabilities. While ongoing litigation may eventually
result in recovery of costs expended at certain of the waste sites, any gain is
contingent upon a successful outcome and has not been accrued.
The Company believes any amounts paid in excess of the accrued liability will
not have a material effect on its financial position, results of operations,
liquidity or cash flow.
Union Negotiations
The Company has union contracts with the United Aerospace Workers in Long
Beach, California and various other locations which expire in the second
quarter of 1995, and with the International Association of Machinists and
Aerospace Workers in Huntington Beach, Long Beach, and Torrance, California and
various other unions which expire in the fourth quarter of 1995. New contract
negotiations are underway.
Backlog
Several risk factors should be considered in evaluating the Company's firm
backlog for commercial customers. Approximately 64% of the firm backlog at
December 31, 1994 for commercial aircraft is scheduled for delivery after 1995.
Difficulties in the commercial airline industry could result in less than
currently anticipated airline equipment requirements resulting in requests to
negotiate rescheduling, or defaults by customers, of firm orders. Also,
approximately 19% of the commercial aircraft backlog represents orders from
leasing companies which may be at risk if not supported by firm contracts
between such leasing companies and airlines. Orders from customers which have
filed for bankruptcy, and purchase options and announced orders for which
definitive contracts have not been executed are excluded from firm backlog.
Inflation
The effects of inflation have not been significant to the Company because
inflation rates have been relatively low. Contracts for both government and
commercial products generally either include estimates of inflation or adjust
for inflation's effect.
17
<PAGE> 44
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Securities
to finance inventories, to provide other working capital, to repay short-term
and/or long-term borrowings and for general corporate purposes. Management of
the Company expects that it will, on a recurrent basis, engage in additional
financings as the need arises to finance the operations of the Company and its
subsidiaries or to lengthen the average maturity of its borrowings.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be issued under an indenture, as amended (the
"Indenture"), between the Company and The Bank of New York, as trustee
("Trustee"). A copy of the Indenture is filed as an exhibit to the Registration
Statement. The Indenture provides that there may be more than one Trustee
thereunder, each with respect to one or more series of Debt Securities.
The following information concerning the Debt Securities and certain
provisions of the Indenture is intended to provide a summary thereof and does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the Indenture, including the definitions
therein of certain terms. Wherever reference is made to defined terms (which
are capitalized herein) of the Indenture, such defined terms are incorporated
herein by reference.
General
Reference is made to the Prospectus Supplement relating to a particular
series of Debt Securities offered thereby for the following terms of such Debt
Securities: (1) the title of such Debt Securities and the series of which such
Debt Securities shall be a part; (2) whether such Debt Securities are issuable
in global form; (3) the aggregate principal amount of such Debt Securities; (4)
the date or dates on which such Debt Securities will mature; (5) the rate or
rates per annum (which may be fixed or variable) at which such Debt Securities
will bear interest, if any; (6) the times at which such interest, if any, will
be payable; (7) the provisions for redemption, if any, of such Debt Securities
and the redemption prices; (8) the sinking fund requirements, if any, with
respect to such Debt Securities; (9) whether the Debt Securities are
denominated or provide for payment in United States dollars or a foreign
currency, units or composites of two or more foreign currencies; (10) whether
payment of the Debt Securities is to be determined by reference to an index,
formula or other method based on a coin or currency other than that in which
the Debt Securities are stated to be payable; (11) additional provisions, if
any, for the defeasance of such Debt Securities; and (12) any other terms of
such Debt Securities (which terms shall not be inconsistent with the provisions
of the Indenture).
The Debt Securities may be issued as Original Issue Discount Debt Securities
to be sold at a substantial discount below their principal amount and may be
denominated in currencies other than United States dollars. Special United
States federal income tax considerations applicable to any such Debt Securities
will be set forth in a Prospectus Supplement relating thereto.
The Debt Securities will be unsecured obligations of the Company and will
rank on a parity with all other unsecured and unsubordinated indebtedness of
the Company.
<PAGE> 45
The Indenture does not limit the aggregate principal amount of Debt
Securities that may be issued thereunder or of any particular series of such
Debt Securities and provides that securities, in addition to the Debt
Securities, may be issued thereunder from time to time in one or more series.
All Debt Securities issued under the Indenture will rank equally and ratably
with any such additional securities issued under the Indenture.
18
Under the Indenture, the Company will have the ability, in addition to the
ability to issue Debt Securities with terms the same as or different from those
of Debt Securities previously issued, to "reopen" a previous series of Debt
Securities and issue additional Debt Securities of such series.
Form, Exchange, Registration and Transfer
The Debt Securities of a series may be issued only in fully registered form
without coupons and may be issuable in whole or in part in the form of one or
more global Debt Securities, as described below under "Global Securities."
Debt Securities may be presented for exchange, and, unless otherwise
indicated in an applicable Prospectus Supplement, may be presented for
registration of transfer (duly endorsed, or accompanied by a duly executed
written instrument of transfer), at the office of The Bank of New York, 101
Barclay Street, New York, New York, Attention: Corporate Trust Office (Trustee
being a "Security Registrar"), in each case, without service charge and upon
payment of any taxes and other governmental charges as described in the
Indenture. In addition, Debt Securities may be presented for exchange or
registration of transfer at the office of any transfer agent designated by the
Company for such purpose with respect to any series of Debt Securities and
referred to in the Prospectus Supplement relating thereto. Such transfer or
exchange will be effected by the Security Registrar, being satisfied with the
documents of title and identity of the person making the request. If a
Prospectus Supplement refers to any transfer agents (in addition to the
Security Registrar) designated by the Company with respect to any series of
Debt Securities, the Company may at any time rescind the designation of any
such transfer agent or approve a change in the location through which any such
transfer agent acts. The Company may at any time designate additional transfer
agents with respect to any series of Debt Securities.
In the event of any partial redemption of Debt Securities of any series, the
Company will not be required to (i) issue, register the transfer of or exchange
Debt Securities of that series during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Debt Securities selected for redemption and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed
in part.
<PAGE> 46
Payment and Paying Agents
Unless otherwise indicated in the Prospectus Supplement relating thereto,
payment of principal of and interest, if any, on Debt Securities will be made
at the office of such Paying Agent or Paying Agents as the Company may
designate from time to time, except that at the option of the Company, payment
of any interest may be made (i) by check mailed to the address of the Person
entitled thereto as such address shall appear in the security register, or (ii)
by wire transfer to an account maintained by the Person entitled thereto as
specified in such security register. Unless otherwise indicated in the
Prospectus Supplement relating thereto, payment of any installment of interest
on Debt Securities will be made to the Person in whose name such Debt Security
is registered at the close of business on the Regular Record Date for such
interest.
Unless otherwise indicated in the Prospectus Supplement relating thereto, the
principal office of The Bank of New York will be designated as the Company's
sole Paying Agent for payments with respect to Debt Securities. Any Paying
Agents outside the United States and any other Paying Agents in the United
States initially designated by the Company for the Debt Securities will be
named in an applicable Prospectus Supplement. The Company may at any time
designate additional Paying Agents or rescind the designation of any Paying
Agent or approve a change in the office through which any Paying Agent acts.
All moneys paid by the Company to the applicable Paying Agent for the payment
of principal of or interest, if any, on any Debt Security which remain
unclaimed at the end of three years after such principal
19
or interest shall have become due and payable, will be repaid to the Company
and the Holder of any such Debt Security will thereafter look only to the
Company for payment thereof.
Global Securities
The Indenture provides that the Debt Securities may be issued in global form.
If any series of Debt Securities is issuable in global form, the applicable
Prospectus Supplement will describe the circumstances, if any, under which
beneficial owners of interests in any such global Debt Securities may exchange
such interests for Debt Securities of such series and of like tenor and
principal amount in any authorized form and denomination. Principal of, and any
premium and interest on, a global Debt Security will be payable in the manner
described in the applicable Prospectus Supplement.
Certain Defined Terms
The definitions which follow are qualified in their entirety by reference to
the definitions contained in the Indenture.
"Net Tangible Assets" is defined to mean the aggregate amount at which assets
of the Company and all Restricted Subsidiaries are reported on the asset side
of the consolidated statement of financial position (after deducting all
related depreciation, amortization and other valuation reserves and after
excluding patents, trademarks, goodwill and similar intangibles and investments
in and advances to Subsidiaries other than Restricted Subsidiaries) less all
current liabilities (excluding deferred taxes) on the consolidated statement of
financial position.
<PAGE> 47
"Original Issue Discount Security" is defined as any Security which provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the Maturity thereof, as provided in the
Indenture.
"Principal Property" is defined to mean any manufacturing plant owned by the
Company or any Restricted Subsidiary which is located within North America and
the gross book value of which (without deduction of any depreciation reserves)
on the date as of which the determination is being made exceeds 5% of Net
Tangible Assets. Principal Property excludes, however, (i) aircraft and
aerospace products and spare parts, (ii) certain other types of personal
property and equipment, (iii) property financed through tax-exempt state or
municipal securities and (iv) any real property held for development, lease or
sale.
"Restricted Subsidiary" is defined as a Subsidiary other than MDRC, MDFC,
MDFS or any other Subsidiary which is primarily engaged in the business of
financing or leasing.
"Subsidiary" of the Company is defined as a corporation more than 50% of the
voting stock of which is owned by the Company and/or one or more Subsidiaries.
Limitations on Liens
The Indenture provides that if the Company or any Restricted Subsidiary shall
issue, assume or guarantee any evidence of indebtedness for money borrowed
("indebtedness") secured by a mortgage, security interest, pledge or lien
("mortgage") on any Principal Property of the Company or any Restricted
Subsidiary, or shares of stock or indebtedness of any Restricted Subsidiary,
the Company will secure or cause such Restricted Subsidiary to secure the Debt
Securities equally and ratably with such secured indebtedness, unless the
aggregate amount of all such secured indebtedness, together with all
indebtedness with respect to sale and lease-back transactions involving
Principal Properties (with the exception of such transactions which are
excluded as described in "Limitations on Sale and Lease-Back Transactions"
below), would not exceed 10% of Net Tangible Assets.
20
Such limitation will not apply to indebtedness secured by (a) mortgages on
property of any corporation existing at the time such corporation becomes a
Restricted Subsidiary, (b) mortgages on any property existing at the date of
the Indenture or at the time of acquisition by the Company or a Restricted
Subsidiary (including acquisition through merger or consolidation), (c)
mortgages securing indebtedness of a Restricted Subsidiary to the Company or to
another Restricted Subsidiary, (d) purchase money and construction mortgages
entered into within specified time limits, (e) mechanics' liens, tax liens,
liens in favor of any governmental body to secure progress, advance or other
payments for the acquisition of real or personal property from such
governmental body pursuant to contract or provision of statute; any other
liens, charges and encumbrances incidental to construction, conduct of business
or ownership of property of the Company or any Restricted Subsidiary which were
not incurred in connection with borrowing money, obtaining advances or credits
for the acquisition of property and which in the aggregate, do not materially
impair use of any Principal Property, or which are being contested in good
<PAGE> 48
faith, or (f) any extension, renewal or replacement of any of the
aforementioned mortgages not in excess of the principal amount of such
indebtedness plus the fee incurred in connection with such transaction.
Limitations on Sale and Lease-Back Transactions
The Indenture provides that neither the Company nor any Restricted Subsidiary
may enter into any Sale and Lease-Back Transaction involving any Principal
Property, unless the aggregate amount of all attributable debt (as defined in
the Indenture) with respect to such transaction plus all indebtedness secured
by mortgages on Principal Properties (with the exception of secured
indebtedness which is excluded as described in "Limitations on Liens" above)
would not exceed 10% of Net Tangible Assets.
Such limitation will not apply to any sale and lease-back transaction if (a)
the lease is for a period of not more than three years, (b) the sale or
transfer of the Principal Property is made within a specified period after its
acquisition or construction, (c) the rent payable pursuant to such lease is to
be reimbursed under a contract with the United States Government or any
instrumentality or agency thereof, (d) the transaction is between the Company
and a Restricted Subsidiary or between Restricted Subsidiaries, or (e) the
Company or such Restricted Subsidiary, within 180 days after the sale is
completed, applies to the retirement of indebtedness of the Company or a
Restricted Subsidiary, an amount not less than the greater of (i) the net
proceeds of the sale of the Principal Property leased or (ii) the fair market
value of the Principal Property leased. In lieu of applying proceeds to the
retirement of indebtedness, debentures or notes (including the Debt Securities)
of the Company or a Restricted Subsidiary may be surrendered to the applicable
trustee for cancellation at a value equal to the redemption price thereof or
the Company or a Restricted Subsidiary may credit the principal amount of
indebtedness voluntarily retired within 180 days after such sale.
Consolidation, Merger and Transfer of Assets
The Company, without the consent of any Holder of Outstanding Debt
Securities, may consolidate or merge with or into, or transfer or lease its
assets substantially as an entirety to, any corporation or may acquire or lease
the assets of any Person, provided that the corporation formed by such
consolidation or into which the Company is merged or which acquires or leases
the assets of the Company substantially as an entirety is organized under the
laws of any United States jurisdiction and assumes the Company's obligations on
the Debt Securities and under the Indenture, that after giving effect to the
transaction no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have happened and be
continuing, and that certain other conditions are met.
The Indenture provides that neither the Company nor any Restricted Subsidiary
may transfer any Principal Property to MDRC, MDFC, MDFS or to any other
Subsidiary other than to a Restricted Subsidiary.
21
<PAGE> 49
Modification and Waiver
Modification and amendment of the Indenture may be effected by the Company
and the Trustee with the consent of the Holders of 662/3% in principal amount
of the outstanding Debt Securities of each series affected thereby, provided
that no such modification or amendment may, without the consent of the Holder
of each outstanding Debt Security affected thereby, (a) change the Stated
Maturity of any installment of principal of, or interest on, any Debt Security
or change the Redemption Price; (b) reduce the principal amount of, or the
interest on, any Debt Security or reduce the amount of principal which could be
declared due and payable prior to the Stated Maturity; (c) change the place or
currency of any payment of principal or interest on any Debt Security; (d)
impair the right to institute suit for the enforcement of any payment on or
with respect to any Debt Security; (e) reduce the percentage in principal
amount of the outstanding Debt Securities of any series, the consent of whose
Holders is required to modify or amend such Indenture; or (f) modify the
foregoing requirements or reduce the percentage of outstanding Debt Securities
necessary to waive any past default to less than a majority. Except with
respect to certain fundamental provisions, the Holders of at least a majority
in principal amount of outstanding Debt Securities of any series may, with
respect to such series, waive past defaults under the Indenture and waive
compliance by the Company with certain provisions of the Indenture.
Defeasance
If the terms of the particular series of Debt Securities so provide, the
Company may discharge its indebtedness and its obligations under the Indenture
with respect to such series by depositing funds or obligations issued or
guaranteed by the United States with the Trustee. The Prospectus Supplement
will more fully describe the provisions, if any, relating to such discharge.
Events of Default
Under the Indenture, the following will be Events of Default with respect to
any series of Debt Securities: (a) default in the payment of any interest upon
any Debt Security of that series when due, continued for 30 days; (b) default
in the payment of any principal or premium, if any, on any Debt Security of
that series when due; (c) default in the deposit of any sinking fund payment,
when due, in respect of any Debt Security of that series; (d) default in the
performance of any other covenant of the Company contained in the Indenture or
in the Debt Securities of such series, continued for 90 days after written
notice as provided in the Indenture; (e) acceleration of any indebtedness for
money borrowed in an aggregate principal amount exceeding $10 million by the
Company or any Restricted Subsidiary under the terms of the instrument under
which such indebtedness is issued or secured, if such acceleration is not
annulled, or such indebtedness is not discharged, within 10 days after written
notice as provided in the Indenture; (f) certain events in bankruptcy,
insolvency or reorganization; and (g) any other Event of Default provided with
respect of Securities of that series. The Trustee or the Holders of 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or such lesser amount as may be provided for in the Debt
Securities of that series) of all outstanding Debt Securities of that series
due and payable immediately if an Event of Default with respect to Debt
Securities of such series shall occur and be continuing at the time of
declaration. At any time after a declaration of acceleration has been made with
<PAGE> 50
respect to Debt Securities of any series but before a judgment or decree for
payment of money due has been obtained by the Trustee, the Holders of a
majority in principal amount of the outstanding Debt Securities of that series
may rescind any declaration of acceleration and its consequences, if all
payments due (other than those due as a result of acceleration) have been made
and all Events of Default have been remedied or waived. Any Event of Default
with respect to Debt Securities of any series may be waived by the Holders of a
majority in principal amount of all outstanding Debt Securities of that series,
except (i) in a case of failure to pay principal or premium, if any, or
interest on any Debt Security of that series for which payment had not been
subsequently made or (ii) in respect of a covenant or provision which cannot be
modified or amended without the consent of the Holder of each Outstanding
Security of such series affected.
22
The Holders of a majority in principal amount of the outstanding Debt
Securities of a series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to Debt Securities of such series,
provided that such direction shall not be in conflict with any rule of law or
the Indenture. Before proceeding to exercise any right or power under the
Indenture at the direction of such Holders, the Trustee shall be entitled to
receive from such Holders reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in complying with any
such direction.
The Company will be required to furnish to the Trustee annually a statement
as to the fulfillment by the Company of all of its obligations under the
Indenture.
The Trustees Under the Indentures
The Bank of New York is the Trustee under the Indenture. The Company
maintains banking and borrowing relations with The Bank of New York.
DESCRIPTION OF DEBT WARRANTS
The Company may issue, together with Debt Securities or separately, Debt
Warrants for the purchase of Debt Securities. The Debt Warrants are to be
issued under Debt Warrant Agreements (each a "Debt Warrant Agreement") to be
entered into between the Company and a bank or trust company, as Debt Warrant
Agent (the "Debt Warrant Agent"), all as shall be set forth in the Prospectus
Supplement relating to Debt Warrants being offered thereby. A copy of the form
of Debt Warrant Agreement, including the form of Warrant Certificates
representing the Debt Warrants (the "Debt Warrant Certificates"), reflecting
the alternative provisions to be included in the Debt Warrant Agreements that
will be entered into with respect to particular offerings of Debt Warrants, is
filed as an exhibit to the Registration Statement relating to the Securities.
The following summaries of certain provisions of the Debt Warrant Agreement and
the Debt Warrant Certificates do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all the provisions of the
Debt Warrant Agreement and the Debt Warrant Certificates, respectively,
including the definitions therein of certain terms.
<PAGE> 51
General
The applicable Prospectus Supplement will describe the terms of Debt Warrants
offered thereby, the Debt Warrant Agreement relating to such Debt Warrants and
the Debt Warrant Certificates representing such Debt Warrants, including the
following: (1) the designation, aggregate principal amount and terms of the
Debt Securities purchasable upon exercise of such Debt Warrants and the
procedures and conditions relating to the exercise of such Debt Warrants; (2)
the designation and terms of any related Debt Securities with which such Debt
Warrants are issued and the number of such Debt Warrants issued with each such
Debt Security; (3) the date, if any, on and after which such Debt Warrants and
the related Debt Securities will be separately transferable; (4) the principal
amount of Debt Securities purchasable upon exercise of each Debt Warrant and
the price at which such principal amount of Debt Securities may be purchased
upon such exercise; (5) the date on which the right to exercise such Debt
Warrants shall commence and the date on which such right shall expire (the
"Expiration Date"); (6) if the Debt Securities purchasable upon exercise of
such Debt Warrants are Original Issue Discount Debt Securities, a discussion of
federal income tax considerations applicable thereto; and (7) where Debt
Warrant Certificates may be transferred and registered.
Debt Warrant Certificates will be exchangeable for new Debt Warrant
Certificates of different denominations and Debt Warrants may be exercised at
the corporate trust office of the Debt Warrant Agent or any other office
indicated in the Prospectus Supplement. Prior to the exercise of their Debt
Warrants, holders of Debt Warrants will not have any of the rights of Holders
of the Debt Securities purchasable upon
23
such exercise and will not be entitled to payments of principal or premium, if
any, or interest, if any, on the Debt Securities purchasable upon such
exercise.
Exercise of Debt Warrants
Each Debt Warrant will entitle the Holder to purchase for cash (or such other
consideration as may be set forth in the Prospectus Supplement relating to the
Debt Warrants offered thereby) such principal amount of Debt Securities at such
exercise price as shall in each case be set forth in, or be determinable as set
forth in, the Prospectus Supplement relating to the Debt Warrants offered
thereby. Debt Warrants may be exercised at any time up to the close of business
on the Expiration Date set forth in the Prospectus Supplement relating to the
Debt Warrants offered thereby. After the close of business on the Expiration
Date, unexercised Debt Warrants will become void.
Debt Warrants may be exercised as set forth in the Prospectus Supplement
relating to the Debt Warrants offered thereby. Upon receipt of payment and the
Debt Warrant Certificate properly completed and duly executed at the corporate
trust office of the Debt Warrant Agent or any other office indicated in the
Prospectus Supplement, the Company will, as soon as practicable, forward the
Debt Securities purchasable upon such exercise. If less than all of the Debt
Warrants represented by such Debt Warrant Certificate are exercised, a new Debt
Warrant Certificate will be issued for the remaining amount of Debt Warrants.
<PAGE> 52
PLAN OF DISTRIBUTION
The Company may sell the Securities to or through underwriters, and also may
sell the Securities directly to other purchasers or through agents. Such
underwriters may include Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") or may be a group of underwriters represented by Merrill
Lynch or one or more other firms. Only underwriters named in the Prospectus
Supplement are deemed to be underwriters in connection with the Securities
offered thereby.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of Securities, underwriters may receive
compensation from the Company or from purchasers of the Securities for whom
they may act as agents in the form of discounts, concessions or commissions.
Underwriters, dealers and agents that participate in the distribution of the
Securities may be deemed to be underwriters, and any discounts or commissions
received by them and any profit on the resale of the Securities by them may be
deemed to be underwriting discounts and commissions under the Act. Any such
underwriter or agent will be identified, and any such compensation will be
described, in the Prospectus Supplement.
If so indicated in the Prospectus Supplement, the Company will authorize the
underwriters to solicit offers by certain institutions to purchase Securities
from the Company pursuant to Delayed Delivery Contracts providing for payment
and delivery on the date stated in the Prospectus Supplement. Delayed Delivery
Contracts will not be subject to any conditions except that the purchase by an
institution of the Securities covered thereby shall not at the time of delivery
be prohibited under the laws of any jurisdiction to which such institution is
subject.
Under agreements which may be entered into by the Company, underwriters,
dealers and agents who participate in the distribution of the Securities may be
entitled to indemnification by the Company against certain liabilities,
including liabilities under the Act, or to contribution with respect to
payments which the underwriters, dealers or agents may be required to make in
respect thereof.
24
The Company may authorize dealers or other persons acting as the Company's
agents to solicit offers by certain institutions to purchase the Securities
from the Company pursuant to contracts providing for payment and delivery on a
future date. The dealers and such other persons acting as the Company's agents
will not have any responsibility in respect of the validity or performance of
such contracts.
LEGAL MATTERS
The validity of each issue of the Securities will be passed upon for the
Company by F. Mark Kuhlmann, Esq., Senior Vice President-Administration and
General Counsel of the Company, and for the underwriters or agents by Brown &
Wood.
<PAGE> 53
EXPERTS
The consolidated financial statements of McDonnell Douglas Corporation and
subsidiaries incorporated by reference in the Company's annual report (Form
10-K) for the year ended December 31, 1994 have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
25
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No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus Supplement or the Prospectus in
connection with the offer made by this Prospectus Supplement and the Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or any Underwriter or Agent.
Neither the delivery of this Prospectus Supplement and the Prospectus nor any
sale made hereunder and thereunder shall under any circumstance create an
implication that there has been no change in the affairs of the Company since
the date hereof. This Prospectus Supplement and the Prospectus do not
constitute an offer or solicitation by anyone in any state in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
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TABLE OF CONTENTS
Page
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Prospectus Supplement
Description of Notes.. S-2
Plan of Distribution.. S-14
Prospectus
Available Information.................. 2
Incorporation of Certain Documents by
Reference.............................. 2
The Company............................ 3
Summary Financial Information.......... 5
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 7
Use of Proceeds........................ 18
Description of Debt Securities......... 18
Description of Debt Warrants........... 23
Plan of Distribution................... 24
Legal Matters.......................... 25
Experts................................ 25
<PAGE> 54
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McDonnell
Douglas
Corporation
Medium-Term Notes
------------
PROSPECTUS SUPPLEMENT
------------
Merrill Lynch & Co.
Chase Securities, Inc.
Chemical Securities Inc.
J.P. Morgan Securities Inc.
Salomon Brothers Inc
March 31, 1995
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</TABLE>
