<PAGE>1
PROSPECTUS
$109,300,000
McDonnell Douglas Finance Corporation
Series IX Medium-Term Notes
____________________
Due More Than Nine Months from Date of Issue
____________________
McDonnell Douglas Finance Corporation (the "Company") may offer from
time to time its Series IX Medium-Term Notes (the "Notes"), in an
aggregate principal amount up to $109,300,000 or the equivalent thereof
in other currencies, including composite currencies. Such Notes will be
in addition to the $439,200,000 aggregate principal amount of the
Company's Series IX Medium-Term Notes that are outstanding as of the date
of this Prospectus. If the Notes are to be denominated in a foreign
currency or currency unit, the provisions with respect thereto will be
set forth in a foreign currency supplement hereto ("Multi-Currency
Prospectus Supplement") and currency exchange rate information will be
set forth in the applicable Pricing Supplement. The Notes may be issued
as senior debt securities ("Senior Notes") or subordinated debt
securities ("Subordinated Notes"). The Notes will be unsecured
obligations of the Company. The Senior Notes will rank equally with all
other unsecured and unsubordinated indebtedness of the Company.
Subordinated Notes will be subordinate to all Senior Notes and to all
existing and future Senior Indebtedness (as hereinafter defined) of the
Company and, unless specifically designated as ranking junior to other
subordinated debt securities of the Company, will be pari passu with all
other subordinated debt securities of the Company which have not been
specifically designated as ranking junior to other subordinated debt
securities of the Company. See "Description of Notes--Subordination."
Unless otherwise specified in an applicable Pricing Supplement, the Notes
will bear interest at fixed rates ("Fixed Rate Notes") or at floating
rates ("Floating Rate Notes") determined by reference to one or more of
the Commercial Paper Rate, the 11th District Cost of Funds Rate, LIBOR,
the Prime Rate or the Treasury Rate (each, a "Base Rate"), or any other
interest rate formula, as adjusted by any Spread or Spread Multiplier
applicable to such Floating Rate Notes.
Unless otherwise specified in the applicable Pricing Supplement,
interest with respect to Senior Notes that are Fixed Rate Notes will be
payable semiannually on each March 15 and September 15 and interest with
respect to Subordinated Notes that are Fixed Rate Notes will be payable
semiannually on each January 15 and July 15 and in each case at maturity.
Interest on each Floating Rate Note will be payable on the dates set
forth in the applicable Pricing Supplement. Each Note will mature on a
day more than nine months from its date of issue, as set forth in the
applicable Pricing Supplement. See "Description of Notes." Unless
otherwise specified in the applicable Pricing Supplement, the Notes may
not be redeemed by the Company prior to maturity and will be issued in
fully registered form in denominations of $100,000 or any amount in
excess thereof which is an integral multiple of $1,000.
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Each Note will be represented either by a Global Note (as hereinafter
defined) registered in the name of a nominee of The Depository Trust
Company, as Depositary (a "Book-Entry Note"), or by a certificate issued
in definitive form (a "Certificated Note"), as set forth in the
applicable Pricing Supplement. Beneficial interests in Global Notes
representing Book-Entry Notes will be shown on, and transfers thereof
will be effected only through, records maintained by the Depositary and
its participants. Book-Entry Notes may not be denominated in foreign or
composite currencies and will not be issuable as Certificated Notes
except under the limited circumstances described herein. See
"Description of Notes--Book-Entry System."
SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
____________________
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.
Price to Agent's Proceeds to
Public<F1> Commissions<F2><F3> Company<F2><F4>
Per Note 100.00% .125% - .750% 99.875% - 99.250%
Total<F5> $109,300,000 $136,625 - $819,750 $109,163,375 -$108,480,250
<F1> Unless otherwise specified in the applicable Pricing
Supplement, Notes will be sold at 100% of their
principal amount. If the Company issues any Note at a
discount from or at a premium over its principal
amount, the price to public of such Note will be set
forth in the applicable Pricing Supplement.
<F2> The commission payable to each agent participating in
the distribution of the Notes (each an "Agent" and
collectively the "Agents") for each Note sold through
an Agent shall be computed based upon the price to
public of such Note and shall depend upon such Note's
maturity. The Company may also sell Notes to an
Agent, as principal, for resale to investors at
varying market prices at the time of resale, in either
case as determined by such Agent.
<F3> 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 (the "Act"). See
"Plan of Distribution."
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<F4> Before deduction of estimated expenses payable by the
Company.
<F5> Or the equivalent thereof in other currencies,
including composite currencies.
<PAGE>
<PAGE>4
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 (the "Act"). See "Plan of
Distribution."
The Company may sell Notes to one or more Agents for resale to one or
more investors at varying prices related to prevailing market prices at
the time of resale or otherwise, to be determined by the Agents. No
termination date for the offering of the Notes has been established. The
Company or the Agents may reject any order in whole or in part. The
Company has reserved the right to sell Notes directly on its own behalf
to the public. The Notes will not be listed on any securities exchange,
and there can be no assurance that the Notes offered hereby will be sold
or that there will be a secondary market for the Notes. See "Plan of
Distribution."
____________________
The date of this Prospectus is August 19, 1994.
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<PAGE>5
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports and
other information can be inspected and copied at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following Regional Offices of the Commission: Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and New York Regional Office, 13th
Floor, Seven World Trade Center, New York, New York 10048. Copies of
such material can also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material also may be inspected at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005, on which exchange certain of the Company's
securities are listed.
This Prospectus constitutes a part of a Registration Statement on
Form S-3 (File No. 33-31419) (together with all exhibits thereto, the
"Registration Statement") filed with the Commission under the Act, with
respect to $1,000,000,000 aggregate principal amount of Senior Securities
and Subordinated Securities of the Company, including the Notes offered
hereby. This Prospectus does not contain all of the information
contained in the Registration Statement. Reference is made to the
Registration Statement for further information with respect to the
Company and the Notes offered hereby.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended
December 31, 1993, Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1994 and June 30, 1994 and Current Reports on Form 8-K dated
February 3, 1994 and July 7, 1994, each as filed with the Commission, are
hereby incorporated by reference into this Prospectus and made a part
hereof.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of this Prospectus and prior to the termination of the offering of
the Notes shall be deemed to be incorporated by reference into this
Prospectus and made a part hereof from the respective dates 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 statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
This Prospectus contains brief summaries of certain more detailed
information contained in documents incorporated herein by reference.
Such summaries are qualified in their entirety by the more detailed
information contained in the incorporated documents.
The Company will provide without charge to each person (including
any beneficial owner) to whom this Prospectus is delivered, upon the
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<PAGE>6
written or oral request of any such person (identified to the Company's
satisfaction), a copy of any or all documents incorporated by reference
into this Prospectus (other than exhibits to such documents). Requests
should be directed to:
McDonnell Douglas Finance Corporation
4060 Lakewood Boulevard, 6th Floor
Long Beach, California 90808-1700
Attention: Treasury Department
Telephone: (310) 627-3100
<PAGE>
<PAGE>7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial data appearing elsewhere in this
Prospectus, including information incorporated herein by reference. See
"RISK FACTORS" for certain information that should be considered by
prospective investors.
The Company
The Company is a commercial finance company primarily engaged in
commercial aircraft financing and commercial equipment leasing. The
Company is a wholly-owned subsidiary of McDonnell Douglas Financial
Services Corporation, a wholly-owned subsidiary of McDonnell Douglas
Corporation ("MDC").
In 1990, after years of expansion and diversification, the Company
commenced a program to significantly scale back its operations and focus
its new business efforts almost entirely within its two core business
units, commercial aircraft financing and commercial equipment leasing.
The Company now operates in three business segments: commercial aircraft
financing, commercial equipment leasing and non-core businesses.
The Company's commercial aircraft financing group, located in Long
Beach, California, primarily finances the acquisition of MDC aircraft by
purchasing such aircraft subject to lease to airlines and by providing
secured and unsecured notes receivable financing in connection with the
acquisition of such aircraft. Although in 1986 the Company began
providing financing to airlines for aircraft manufactured by
manufacturers other than MDC, aircraft manufactured by MDC continue to
comprise a substantial majority of the Company's commercial aircraft
portfolio. At December 31, 1993, the carrying amount of the Company's
commercial aircraft portfolio was $1,237.5 million, with 31 customers (19
domestic and 12 foreign). For the year ended December 31, 1993,
commercial aircraft financing accounted for $411.4 million of new
business volume (91% of all new business volume).
The commercial equipment leasing business segment provides single-
investor, tax-oriented lease financing as its primary product. This
segment, which maintains its principal operations in Long Beach,
California and has marketing offices in Chicago, Illinois and Detroit,
Michigan, obtains its business primarily through direct solicitation by
its marketing personnel. The commercial equipment leasing business
segment specializes in leasing equipment such as over-the-road
transportation equipment, executive aircraft, machine tools, printing
equipment, shipping containers, textile manufacturing equipment and other
types of equipment which it believes will maintain strong collateral and
residual values. At December 31, 1993, the carrying amount of the
Company's commercial equipment leasing portfolio was $422.3 million. For
the year ended December 31, 1993, commercial equipment leasing accounted
for $41.5 million of new business volume (9% of all new business volume).
The non-core businesses consist primarily of the remaining assets of
three business units: a commercial equipment leasing affiliate in the
United Kingdom, receivable inventory financing and real estate financing.
At December 31, 1993, the non-core business portfolio was $173.7 million.
For the year ended December 31, 1993, the non-core businesses accounted
for $0.1 million of new business volume. The non-core business volume
represents previous contractual commitments and extensions of maturing
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<PAGE>8
transactions. The Company does not intend to seek new contractual
commitments in its non-core businesses. Since 1991, the Company has been
liquidating or selling the assets of its non-core businesses. The
Company is actively managing the non-core business portfolios with a view
toward liquidating these portfolios over time. See "MCDONNELL DOUGLAS
FINANCE CORPORATION."
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<PAGE>9
RISK FACTORS
Prior to deciding to invest in the Notes, potential purchasers
should carefully consider the following factors, together with the
information herein contained and incorporated herein by reference.
Erosion of Commercial Aircraft Values. The current severe economic
downturn within the airline industry has diminished significantly the
demand for new and used aircraft, with some airlines defaulting on
contracts for firm orders or postponing orders with the manufacturer
while also disposing of or grounding a portion of their fleets. This has
resulted in an oversupply of aircraft in the market, which has materially
adversely affected the value of the Company's aircraft. It is not clear
whether this decline in aircraft values will continue. Despite the
erosion of aircraft values, the Company believes that the value of
realizable sales prices at the end of the lease terms for substantially
all the aircraft the Company has leased exceeds the book value projected
at the end of the lease terms. A substantial portion of the Company's
aircraft financings are to airlines which either have recently emerged
from bankruptcy or are in poor financial health. Two of the Company's
largest commercial aircraft financing customers emerged from bankruptcy
in 1993. In addition, a substantial portion of the Company's total
portfolio is concentrated among a small number of the Company's
commercial aircraft finance customers. Repossession of aircraft in the
currently depressed aircraft market could materially adversely affect
earnings from continuing operations. In addition, if aircraft values
remain depressed or continue to decline and the Company is required as a
result of customer defaults to repossess a substantial number of aircraft
prior to the expiration of the related lease or financing, the Company
could incur substantial losses in remarketing the aircraft which could
have a material adverse effect on the financial condition of the Company.
In this regard, the Company's financial performance is dependent in part
upon general economic conditions which may affect the profitability of
commercial airlines.
Liquidity and Capital Resources. The Company has significant
liquidity requirements. If cash provided by operations, borrowings under
bank credit lines, unsecured term borrowings and the normal run off of
the Company's portfolio do not provide the necessary liquidity, the
Company would be required to restrict its new business volume unless it
obtained access to other sources of capital at rates that would allow for
a reasonable return on new business. The Company has been accessing the
public debt market since mid-1993 and anticipates using proceeds from the
issuance of additional public debt to fund future growth. However, no
assurances can be made that the Company will be successful in accessing
the public debt market at rates that would allow for a reasonable return
on new business. See "Use of Proceeds."
Relationship with MDC. The financial well-being of MDC is vital to
the Company's ability to enter into significant amounts of new business
in the future. Primarily as a result of certain downgrades in the credit
ratings of MDC in 1991 and in early 1993, the Company's credit ratings
were downgraded at the same time. Beginning in the early 1990's and
continuing through mid-1993, the Company's access to new capital was
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<PAGE>10
severely limited due to a lowering of the Company's credit ratings, the
recession and constraints imposed by MDC. However, as 1993 progressed,
all of these factors had a much smaller impact on the Company and,
consequently, the Company's access to new capital improved. In March
1994, Moody's Investor Service announced the upgrade to Baa3, Ba2 and P3
for MDC's and the Company's senior debt, subordinated debt and commercial
paper credit ratings. Approximately 25% of the receivables from the
Company's total aircraft portfolio are supported by guarantees from MDC.
In the event a substantial portion of the guarantees become payable and
in the unlikely event that MDC is unable to honor its obligations under
these guarantees, such event could have a material adverse effect on the
financial condition of the Company. In addition, MDC participates as an
intermediary in certain financings to a small number of the Company's
commercial aircraft customers and largely as a result thereof, MDC is the
fourth largest commercial aircraft financing customer of the Company.
Two of the principal industry segments in which MDC operates,
military aircraft and commercial aircraft, are especially competitive and
have a limited number of customers. As the Company focuses on its core
businesses, and primarily aircraft financing, its future business
prospects become more closely tied to the success of MDC, and especially
the ability of MDC's commercial aircraft business to generate additional
sales. At June 30, 1994, 62.1% of the Company's total portfolio
consisted of financings related to MDC aircraft, compared with 56.5%,
43.1% and 27.8% at December 31, 1993, 1992 and 1991, respectively. The
commercial aircraft business is market sensitive, which causes
disruptions in production and procurement and attendant costs, and
requires large investments to develop new derivatives of existing
aircraft or new aircraft. The depressed conditions in the airline
industry have resulted and may continue to result in airlines not taking
deliveries of commercial transport aircraft, defaulting on contracts for
firm orders, requests for changes in delivery schedules of existing
orders, not exercising options or reserves and a dramatic decline in new
orders. Operating revenues for MDC's commercial aircraft segment
decreased substantially in 1993 and in the first two quarters of 1994 and
MDC's market share of firm order backlog for new commercial aircraft has
declined significantly in the past several years. MDC expects the
weakness of the commercial aircraft market to continue at least during
the remainder of 1994. MDC also has made guarantees to non-affiliate
third parties in connection with the marketing of commercial aircraft.
MDC'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. Restructuring discussions with this airline
were initiated during the second quarter of 1994. MDC does not
anticipate that the existence of these or other guarantees made to non-
affiliate third parties in connection with the marketing of commercial
aircraft will have a material adverse effect upon its financial
condition. In addition, some existing commercial aircraft contracts
contain provisions requiring MDC to repurchase used aircraft at the
option of the commercial customers. In view of the current market
conditions for used aircraft, MDC's earnings and cash flows could be
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<PAGE>11
adversely impacted by the exercise of such options. However, it is not
anticipated that the existence of such repurchase obligations will have a
material adverse effect on MDC's cash flow or financial position. The
trend of reduced commercial aircraft orders and reduced defense spending
has resulted in a downsizing of MDC over the last several years.
MDC's most significant customer in its military aircraft and
missiles, space, and electronic systems segments is the U.S. Government.
In addition to the risks found in any business, companies engaged in
supplying military and space equipment to the U.S. Government are subject
to a number of other risks, including dependence on Congressional
appropriations and annual administrative allotment of funds, general
reductions in the U.S. defense budget, and changes in Government
policies. Defense spending by the U.S. Government has declined and is
likely to continue to decline. Further significant reductions in defense
spending and a decision made by the U.S. Government to emphasize weapons
research over production may have a material impact on MDC. The loss of
a major program or a major reduction or stretch-out in one or more
programs could have a material adverse impact on MDC's future revenues,
earnings and cash flow. MDC also incurs risk if it enters into firm
fixed-price contracts with the U.S. Government pursuant to which work is
performed and paid for at a fixed amount without adjustment for actual
costs experienced in connection with the contract. While this
arrangement offers MDC opportunities for increased profits if costs are
lower than expected, risk of loss due to increased cost is also borne by
MDC. MDC, as a large government contractor, is subject to many audits,
reviews and investigations by the U.S. Government of its negotiation and
performance of, accounting for, and general practices relating to U.S.
Government contracts. An indictment of a contractor may result in
suspension from eligibility for award of any new government contract, and
a guilty plea or conviction may result in debarment from eligibility for
awards. The U.S. Government may, in certain cases, also terminate
existing contracts, recover damages, and impose other sanctions and
penalties. Contracts may be terminated by the U.S. Government either for
default, if the contractor materially breaches the contract, or "for the
convenience" of the Government. Under contracts terminated for the
convenience of the Government, a contractor is generally entitled to
receive payments for its contract cost and the proportionate share of its
fee or earnings for work done, subject to availability of funding.
One of MDC's largest programs for the U.S. Government is the C-17
Globemaster III. MDC has incurred significant C-17 related losses as a
result of its cost estimate at completion exceeding the fixed-price
ceiling set for development and initial production. In addition, as of
June 30, 1994, the U.S. Air Force had withheld approximately $303 million
from MDC's progress payment requests principally as a result of the
higher cost estimates and the reclassification of certain costs. In
May 1993, a Defense Acquisition Board initiated by the Under Secretary of
Defense for Acquisition began a review of the C-17 program in an effort
to resolve outstanding issues and to make recommendations regarding the
C-17's future. In connection with the review, MDC provided data and
participated in numerous discussions. In January 1994, MDC and the
Department of Defense agreed to a business settlement of many issues
concerning the C-17. MDC and the U.S. Air Force will be developing plans
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<PAGE>12
and contractual modifications and agreements to implement the business
settlement. MDC has begun to implement certain aspects of the settlement
pending Congressional authorization and appropriations expected to be
completed during 1994. 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. The settlement also
stipulated that MDC will expend funds in an effort to achieve product and
systems improvements. During the fourth quarter of 1993, MDC recorded a
$450 million pretax charge associated with the business settlement
arranged with the Department of Defense and with cost growth on the
development and initial production lots. Based upon further definition
and pricing of issues in the settlement, in the first quarter of 1994,
MDC reduced cost estimates associated with the settlement. At the same
time, MDC recognized additional cost growth for work yet to be completed
in the development and initial production lots. During the second
quarter, MDC recognized losses in the development and initial production
lots. These losses, however, were offset by increased earnings in the
current production lots. Although completion of the full scale
engineering and development portion of the C-17 program is approaching,
MDC continues to bear additional costs in the development and initial
production contracts.
On June 7, 1991, the U.S. Navy notified MDC and General Dynamics
Corporation ("GD") that it was terminating for default the contract for
development and initial production of the A-12 aircraft. The Navy has
agreed to continue to defer repayment of $1.335 billion alleged to be
due, with interest, from MDC and GD as a result of the termination for
default of the A-12 program. The agreement provides that it will remain
in force until the dispute as to the type of termination is resolved by
pending litigation in the U.S. Court of Federal Claims or negotiated
settlement, subject to review by the U.S. Government annually on
December 1, to determine if there has been a substantial change in the
financial condition of either MDC or GD such that deferment is no longer
in the best interest of the Government. The Government, which extended
the December 1, 1993 review beyond the time to which MDC and GD agreed,
has not advised the contractors of the results of that review. However,
the United States Court of Federal Claims has issued an order deferring
rulings on the merits of the A-12 termination case until July 21, 1994.
The court's order is based upon an undertaking by the Government that it
would not seek to terminate the A-12 deferment agreement between MDC, GD
and the Navy in the interim. MDC firmly believes it is entitled to
continuation of the deferment agreement in accordance with its terms.
However, if the agreement is not continued, MDC intends to contest
collection efforts. If payment of the deferred amounts were required,
such payment would have a material adverse effect on MDC's cash flows.
Although MDC has established a provision of $350 million for loss on the
contract, if, contrary to MDC's belief, the termination of the contract
is not determined to be for the convenience of the U.S. Government, it is
estimated that an additional loss would be incurred which could amount to
approximately $1.2 billion.
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A 1991 Securities and Exchange Commission investigation looking into
whether MDC violated certain federal securities laws in connection with
disclosures about, and accounting for, the A-12 aircraft has been
broadened to include the C-17 and possibly other programs.
The Company and MDC presently file consolidated income tax returns
and an arrangement between the Company and MDC allows the Company to
receive payments from MDC for most of the potential tax benefits
generated by the Company's leasing activities. The Company's ability to
price its business competitively and obtain new business volume is
significantly dependent on its ability to realize tax benefits generated
by its leasing business. In some cases, the Company's yields on
receivables, without regard to tax benefits, may be less than the
Company's related financing costs. To the extent that MDC would be
unable on a long-term basis to utilize such tax benefits, or if for any
reason the above-described arrangement is not continued in its present
form, the Company would be required to restructure its financing
activities and to reprice its new financing transactions so as to make
them profitable without regard to MDC's utilization of tax benefits since
there can be no assurance that the Company would be able to utilize such
benefits currently. No assurances can be given that the Company would be
successful in so restructuring and repricing its financing activities.
These factors relating to MDC could have a material adverse effect
on the financial condition of the Company and, accordingly, could affect
the market value of the Notes.
Subordinated Notes. The Subordinated Notes will be subordinated in
right of payment to the prior payment in full of the Senior Notes and all
other Senior Indebtedness (as hereinafter defined) of the Company and,
unless specifically designated as ranking junior to other subordinated
debt securities of the Company, will be pari passu with all other
subordinated debt securities of the Company which have not specifically
been designated as ranking junior to other subordinated debt securities
of the Company. The indentures under which the Notes will be issued will
not limit the incurrence of additional indebtedness by the Company,
including Senior Indebtedness. As of June 30, 1994, there was
approximately $1,228.1 million of Senior Indebtedness of the Company
outstanding. See "Description of Notes-Subordination."
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<PAGE>14
MCDONNELL DOUGLAS FINANCE CORPORATION
General
The Company is a wholly-owned subsidiary of McDonnell Douglas
Financial Services Corporation, a wholly-owned subsidiary of MDC. The
Company was incorporated in Delaware in 1968 and originally financed only
MDC manufactured commercial jet transport aircraft. While this continues
to represent a significant portion of the Company's business, the Company
also provides a diversified range of financing including loans, finance
leases and operating leases, primarily involving equipment for commercial
and industrial customers. At June 30, 1994, the Company had
approximately 91 employees. The principal executive office of the
Company is located at 4060 Lakewood Boulevard, 6th Floor, Long Beach,
California 90808-1700, telephone number (310) 627-3000.
Company Operations
In 1990, after years of expansion and diversification, the Company
commenced a program to significantly scale back its operations and focus
its new business efforts almost entirely within its two core business
units, commercial aircraft financing and commercial equipment leasing.
The Company now operates in three business segments: commercial aircraft
financing, commercial equipment leasing and non-core businesses. In
1991, the Company decided to exit each of the non-core businesses as
market conditions permitted.
Set forth below are the portfolio balances and new business volume
for each of the Company's three business segments:
Portfolio Balances
December 31,
1993 1992 1991 1990 1989
(Dollars in millions)
Commercial aircraft $1,237.5 $1,001.1 $ 908.3 $1,048.1 $ 948.1
financing . . . . .
Commercial 422.3 557.4 668.9 965.1 1,001.2
equipment leasing .
Non-core businesses 173.7 227.9 595.1 1,245.9 1,113.2
$1,833.5 $1,786.4 $2,172.3 $3,259.2 $3,062.5
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New Business Volume
Years Ended December 31,
1993 1992 1991 1990 1989
(Dollars in millions)
Commercial aircraft $411.4 $153.2 $100.9 $155.4 $121.0
financing . . . . .
Commercial 41.5 50.7 91.8 189.1 305.4
equipment leasing .
Non-core businesses 0.1 2.6 38.6 416.8 536.2
$453.0 $206.5 $231.3 $761.3 $962.6
Non-core business new volume in 1993 and 1992 represents previous
contractual commitments and extensions of maturing transactions. The
Company does not intend to seek new contractual commitments in its non-
core businesses.
Commercial Aircraft Financing. The Company's commercial aircraft
group, located in Long Beach, California, finances the acquisition of MDC
aircraft by purchasing such aircraft subject to lease to airlines and by
providing secured and unsecured notes receivable financing in connection
with the acquisition of such aircraft. Additionally, this group assists
Douglas Aircraft Company's ("DAC's") own aircraft financing group with
respect to financing of some of DAC's aircraft. Beginning in 1986, the
Company began providing financing to airlines for aircraft manufactured
by manufacturers other than MDC, but a substantial majority of the
commercial aircraft portfolio is comprised of aircraft manufactured by
MDC. Primarily due to the increased need of certain of MDC's commercial
aircraft customers for financing, the Company financed a substantial
amount of aircraft manufactured by MDC in 1993. At June 30, 1994, 62.1%
of the Company's total portfolio consisted of financings related to MDC
aircraft, compared with 56.5%, 43.1% and 27.8% at December 31, 1993, 1992
and 1991, respectively.
At December 31, 1993, the Company's commercial aircraft portfolio
was comprised of finance leases to 22 customers (18 domestic and four
foreign) with a carrying amount of $936.1 million (51.1% of total Company
portfolio), notes receivable from nine customers (four domestic and five
foreign) with a carrying amount of $101.3 million (5.5% of total Company
portfolio) and operating leases to nine customers (seven domestic and two
foreign) with a carrying amount of $200.1 million (10.9% of total Company
portfolio).
A substantial portion of the Company's aircraft financings are to
airlines which either have recently emerged from bankruptcy or are in
poor financial health. The Company's second and third largest commercial
aircraft financing customers, Trans World Airlines, Inc. ("TWA") and
Continental Airlines, Inc. and its affiliated companies ("Continental"),
emerged from bankruptcy in 1993. Company financings to TWA accounted for
$275.2 million (14.8% of total Company portfolio) at June 30, 1994 and
$102.9 million (5.8% of total Company portfolio) at December 31, 1992.
<PAGE>
<PAGE>16
At June 30, 1994, the Company had commitments to provide additional
aircraft-related financing to TWA of $14.0 million. Company financings
to Continental accounted for $111.9 million (6.0% of total Company
portfolio) at June 30, 1994 and $120.9 million (6.8% of total Company
portfolio) at December 31, 1992. Pursuant to the terms of supplemental
guarantees recently executed by MDC in favor of the Company, up to an
additional $25.0 million of the Company's financings to TWA and up to an
additional $15.0 million of the Company's financings to Continental are
guaranteed by MDC. These guarantees supplement individual guarantees
provided by MDC with respect to certain of the Company's financings to
TWA and Continental to the extent that the estimated fair market value of
the financings (after applying the individual guarantees) is less than
the net asset value of the financings on the Company's books. The
supplemental guarantees terminate in March 1996, but may be extended
under certain circumstances.
A substantial portion of the Company's total portfolio is
concentrated among a small number of the Company's largest commercial
aircraft finance customers. P.T. Garuda Indonesia, which recently became
the Company's single largest commercial aircraft financing customer,
accounted for $276.9 million (14.9% of total Company portfolio) and
$181.0 million (9.9% of total Company portfolio) at June 30, 1994 and
December 31, 1993. The five largest commercial aircraft financing
customers accounted for $827.3 million (44.5% of total Company portfolio)
and $718.5 million (39.2% of Company total portfolio) at June 30, 1994
and December 31, 1993.
Commercial Equipment Leasing. The Company's commercial equipment
leasing group ("CEL") provides single-investor, tax-oriented lease
financing as its primary product. CEL, which maintains its principal
operations in Long Beach, California and has marketing offices in
Chicago, Illinois and Detroit, Michigan, obtains its business primarily
through direct solicitation by its marketing personnel. CEL specializes
in leasing equipment such as over-the-road transportation equipment,
executive aircraft, machine tools, printing equipment, shipping
containers, textile manufacturing equipment and other types of equipment
which it believes will maintain strong collateral and residual values.
The lease term is generally between three and ten years and transaction
sizes usually range between $2.0 million and $10.0 million. In addition
to financing transactions for the Company, CEL arranges third party
financings of equipment.
At December 31, 1993, the Company's CEL portfolio was comprised of
finance leases with a carrying amount of $235.2 million (12.8% of total
Company portfolio), operating leases with a carrying amount of $157.5
million (8.6% of total Company portfolio), notes receivable with a
carrying amount of $28.8 million (1.6% of total Company portfolio) and
preferred and preference stock with a carrying amount of $0.8 million
(.04% of total Company portfolio).
Non-Core Businesses. The non-core businesses represent markets in
which the Company is no longer active. The non-core businesses consist
primarily of the remaining assets of three business units: McDonnell
Douglas Bank Limited ("MD Bank"), receivable inventory financing ("RIF")
<PAGE>
<PAGE>17
and real estate financing ("RE"). Since 1991, the Company has been
liquidating or selling the assets of its non-core businesses.
Until it ceased writing new business in 1991, MD Bank provided
financing in the United Kingdom similar to that provided in the United
States by CEL. Additionally, MD Bank provides certain traditional
commercial banking services, although on a limited basis.
RIF finances dealers of rent-to-own products such as home
appliances, electronics and furniture through note arrangements secured
by the products and the rental amounts to be collected. RIF ceased
pursuing new business during 1991, but continues to service and finance
existing customers.
RE previously specialized in fixed-rate, medium-term loans secured
by a first deed-of-trust or mortgage on commercial real estate properties
such as office buildings and small shopping centers. RE ceased
originating new transactions in 1990, but continues to manage its current
portfolio. On September 28, 1993, the Company sold, at estimated fair
value, a majority of the foreclosed properties comprising a portion of
its RE assets. These properties were sold to an affiliate of MDC at a
pre-tax loss of approximately $5.7 million (after applying reserves).
Consequently, real estate owned through foreclosure totaled $12.9 million
at December 31, 1993 compared to $55.2 million at December 31, 1992. RE
accounted for the largest write-off of any business unit for each of the
past four years. In addition, the Company's real estate assets are
largely concentrated in the western region of the United States,
principally in southern California, where values remain depressed. At
December 31, 1993, the Company had $33.9 million or 26.3% of its real
estate holdings in southern California. Office buildings, which
represent the largest southern California real estate holding, totaled
$41.8 million at December 31, 1993.
At December 31, 1993, the Company's non-core business segment
portfolio was comprised of finance leases with a carrying amount of $2.2
million (0.1% of total Company portfolio), operating leases with a
carrying amount of $0.6 million (.03% of total Company portfolio) and
notes receivable with a carrying amount of $170.9 million (9.3% of total
Company portfolio).
While the Company is actively managing the non-core business
portfolios with a view toward liquidating these portfolios over time,
there can be no assurances that the Company will be successful in
profitably managing such portfolios.
SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of certain consolidated financial
information of the Company and its subsidiaries at the dates or for each
of the periods indicated. The selected consolidated financial data at
and for each of the years ended December 31, 1993, 1992 and 1991 have
been derived from, should be read in conjunction with, and is qualified
in its entirety by reference to, the audited consolidated financial
<PAGE>
<PAGE>18
statements and notes thereto of the Company included in its Annual Report
on Form 10-K for the year ended December 31, 1993, incorporated by
reference in this Prospectus. The selected consolidated financial data
at and for the six months ended June 30, 1994 has been derived from,
should be read in conjunction with, and is qualified in its entirety by
reference to, the unaudited interim consolidated financial statements and
notes thereto of the Company included in its Quarterly Report on Form 10-
Q for the three months ended June 30, 1994, incorporated by reference in
this Prospectus. In the opinion of the Company, such unaudited interim
consolidated financial statements have been prepared on the same basis as
the audited consolidated financial statements and include all
adjustments, consisting only of normal accruals, necessary for a fair
presentation of the results for the interim periods. Results for the six
months ended June 30, 1994 are not necessarily indicative of results that
may be expected for any other interim period or for the entire year
ending December 31, 1994.
Year Ended December 31, Six Months Ended
1993 1992 1991 1990 1989 June 30, June 30,
1994 1993
Unaudited Unaudited
(Dollars in millions)
Selected earnings data:
Operating income
$ 198.5 $ 254.7 $ 342.3 $ 430.8 $ 320.7 $ 96.3 $ 92.1
Interest Expense
116.4 145.9 198.5 216.4 184.0 56.8 59.0
Net Income
149.7<F1> 15.4 9.8 6.8 27.7 36.7 65.5
Ratio of earnings to fixed charges (Unaudited)<F2>
1.34x 1.32x 1.28x 1.45x 1.41x 1.42x 1.25x
Selected balance sheet data:
Total assets
$2,001.3 $1,886.2 $2,055.5 $1,999.0 $2,582.3 $3,443.7 $3,133.7
Total debt
1,361.2 1,330.4 1,730.7 2,443.2 2,222.3 1,305.9 1,216.0
Shareholder's equity
269.4 256.4 340.5 364.9 317.0 272.8 263.6
Cash dividends paid<F3>
3.6 105.8 59.0 23.5 142.2 12.7 1.8
<PAGE>
<PAGE>19
<F1> Included in the earnings for 1989 is a $100 million
tax credit related to the adoption of FASB Statement
Number 96.
<F2> For the purpose of computing the ratio of earnings to
fixed charges, earnings consists of earnings from
continuing operations before income taxes, cumulative
effect of accounting changes and fixed charges and
fixed charges consist of interest expense and
preferred stock dividends.
<F3> The provisions of various credit and debt agreements
require the Company to maintain a minimum net worth,
restrict indebtedness, and limit cash dividends and
other distributions. At December 31, 1993, at least
$49.4 million of earnings retained for growth was
available for dividends.
<PAGE>
<PAGE>20
INFORMATION CONCERNING MCDONNELL DOUGLAS CORPORATION
MDC, 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
the McDonnell Douglas Aerospace operating division, which is engaged in
design, development and production of the following major products:
military transport aircraft; combat aircraft and training systems;
missiles; space launch vehicles and space station systems and
integration; defense and commercial electronics, lasers, sensors, and
command, control, communications, and intelligence systems; and
commercial and military helicopters and ordnance. Operations in the
commercial aircraft segment are conducted by Douglas Aircraft Company,
which designs, develops and produces commercial transport aircraft. The
financial services and other segment includes the operations of the
Company (aircraft and commercial equipment leasing), McDonnell Douglas
Realty Company (development and management of commercial real estate) and
McDonnell Douglas Travel Company (travel related services).
MDC is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with
the Commission (File No. 1-3685). Reports, proxy statements and other
information filed by MDC may be inspected and copied at the locations
described under the caption "Available Information" and at the offices of
the Pacific Stock Exchange, 301 Pine Street, San Francisco, California
94104. Prospective investors are encouraged to consult the documents
filed by MDC with the Commission for more detailed information regarding
such matters and for further information regarding MDC.
USE OF PROCEEDS
Net proceeds from the sale of the Notes will be used to fund the
acquisition of receivables, to purchase equipment for lease, for other
corporate purposes, and to reduce, from time to time, other indebtedness.
DESCRIPTION OF NOTES
The Senior Notes are to be issued under an indenture dated as of
April 15, 1987 (as amended or supplemented from time to time, the "Senior
Indenture"), between the Company and Bankers Trust Company, as trustee
("Bankers Trust"). The Senior Notes and all other indebtedness issued
under the Senior Indenture are referred to collectively herein as the
"Senior Securities." The Subordinated Notes are to be issued pursuant to
an indenture dated as of June 15, 1988 (as amended or supplemented from
time to time, the "Subordinated Indenture") between the Company and First
Trust of California, National Association, as trustee ("First Trust").
The Subordinated Notes and all other indebtedness issued under the
Subordinated Indenture are referred to collectively herein as the
"Subordinated Securities." The Senior Securities and the Subordinated
Securities are sometimes collectively referred to herein as the
<PAGE>
<PAGE>21
"Securities". The Senior Indenture and the Subordinated Indenture are
referred to collectively herein as the "Indentures" and Bankers Trust and
First Trust are referred to collectively herein as the "Trustees". A
copy of each of the Indentures has been filed as an exhibit to the
Registration Statement. The Indentures provide that there may be more
than one Trustee, each with respect to one or more series of Securities.
The Notes may be issued from time to time, and will initially be
limited to an aggregate principal amount of up to $109,300,000 or the
equivalent thereof in one or more Specified Currencies (as hereinafter
defined). Such aggregate principal amount may be reduced by the
aggregate principal amount of any other Securities issued by the Company
pursuant to the Senior Indenture or the Subordinated Indenture and may be
increased from time to time as authorized by, or pursuant to authority
delegated by, the Board of Directors of the Company. The Notes offered
pursuant to this Prospectus are in addition to the $640.7 million
aggregate principal amount of the Company's Series IX Medium-Term Notes
previously issued ($439.2 million aggregate principal amount of which are
outstanding as of the date of this Prospectus) and $90.7 million
aggregate principal amount of General Term Notes(R) that are outstanding
as of the date of this Prospectus. The General Term Notes(R) are a
separate series of Senior Securities offered from time to time pursuant
to a separate prospectus. Neither Indenture limits the amount of
additional indebtedness the Company may incur thereunder. For the
purpose of this paragraph, the principal amount of any Note issued in a
Specified Currency means the U.S. dollar equivalent on the date of issue
of the principal amount of such Note.
The following information concerning certain provisions of the
Indentures and the Notes 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, the detailed provisions of the Indentures
including the definitions therein of certain terms, and to the Notes.
Wherever reference is made to defined terms (which are capitalized
herein) of the Indentures, such defined terms are incorporated herein by
reference. The terms and conditions set forth in this section
"Description of Notes" will apply to each Note unless otherwise specified
in the applicable Pricing Supplement or such Note. The particular terms
of the Notes sold pursuant to any pricing supplement (a "Pricing
Supplement") will be described therein.
If any Note is not to be denominated in U.S. dollars, the applicable
Pricing Supplement will specify the currency or currencies, including
composite currencies such as the European Currency Unit (each, a
"Specified Currency"), in which the principal and interest with respect
to such Note are to be paid, along with any other terms relating to the
non-U.S. dollar denomination, including exchange rates for the Specified
Currency as against the U.S. dollar at selected times immediately
preceding the year in which such Note is issued, and any exchange
controls affecting such Specified Currency.
<PAGE>
<PAGE>22
General
The Senior Notes will constitute a single series under the Senior
Indenture and the Subordinated Notes will constitute a single series
under the Subordinated Indenture. The Senior Notes will rank pari passu
with all other Senior Securities of the Company and with all other
unsecured and unsubordinated indebtedness of the Company. The
Subordinated Notes, unless specifically designated as ranking junior to
other subordinated debt securities of the Company, will rank pari passu
with all other subordinated debt securities of the Company which have not
been specifically designated as ranking junior to other subordinated debt
securities of the Company. The Subordinated Notes, together with other
subordinated indebtedness, if any, issued by the Company, will be
subordinated in right of payment to the prior payment in full of the
Senior Securities, including the Senior Notes, and all other Senior
Indebtedness of the Company. See "Description of Notes - Subordination."
The Indentures do not limit the aggregate principal amount of
Securities that may be issued thereunder or of any particular series of
such Securities and provide that securities, in addition to the
Securities, may be issued thereunder from time to time in one or more
series.
Under the Indentures, the Company will have the ability, in addition
to the ability to issue Securities with terms the same as or different
from those of Securities previously issued, to "reopen" a previous issue
of a series of Securities and issue additional Securities of such series.
Unless the applicable Pricing Supplement provides otherwise, the
price at which each Note will be issued will be 100% of the principal
amount of the Note. Notes will not be issued as discounted securities,
at prices below stated principal amounts, or having an original issue
discount for U.S. federal income tax purposes, unless the applicable
Pricing Supplement so provides and, if applicable, describes such U.S.
federal income tax consequences. The Notes are expected to be offered on
a continuing basis and will mature on any day more than nine months from
the date of issue, as selected by the purchaser and agreed to by the
Company. Each interest bearing Note will be either a Fixed Rate Note or
a Floating Rate Note.
Notes offered pursuant to this Prospectus will be issued in
registered form without coupons. Each Note will be issued as a Book-
Entry Note or as a Certificated Note in the denomination of $100,000 or
any amount in excess thereof which is an integral multiple of $1,000.
Notes will be exchangeable for other Notes of any authorized
denominations and of a like aggregate principal amount and tenor. Book-
Entry Notes may be transferred and exchanged only through a participating
member of The Depository Trust Company (or such other depositary as is
identified in an applicable Pricing Supplement) (the "Depositary"). Only
Notes denominated and payable in U.S. dollars will be issued as Book-
Entry Notes. Except as otherwise set forth herein, Book-Entry Notes will
not be issuable as Certificated Notes. See "Description of Notes - Book-
<PAGE>
<PAGE>23
Entry System." Certificated Notes may be presented for exchange or
registration of transfer (duly endorsed, or accompanied by a duly
executed written instrument of transfer) at the office of Bankers Trust
Company (in its capacity as security registrar under the Senior Indenture
or the Subordinated Indenture, as applicable), Four Albany Street, New
York, New York 10015, Attention: Corporate Trust and Agency Group (the
"Security Registrar") or at the office of any transfer agent designated
by the Company for such purpose with respect to any Notes and referred to
in the Pricing Supplement relating thereto. Such transfer or exchange
will be effected upon the Security Registrar or such transfer agent, as
the case may be, being satisfied with the documents of title and identity
of the person making the request. If a Pricing Supplement refers to any
transfer agents (in addition to the Security Registrar) designated by the
Company with respect to any Notes, 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, except that the
Company will be required to maintain a transfer agent in The City of New
York. The Company may at any time designate additional transfer agents
with respect to the Notes. No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may
require payment of a sum sufficient to cover any tax or other
governmental charges that may be imposed in connection therewith.
Payments of principal, premium, if any, and interest at the Stated
Maturity on Book-Entry Notes or on the date of redemption, if such Notes
are redeemed prior to their Stated Maturity, or on a date fixed for
payment following a declaration of acceleration (each such date, a
"Maturity"), will be made by the Company through Bankers Trust Company,
in its capacity as paying agent under the Senior Indenture or the
Subordinated Indenture (the "Paying Agent"), as applicable, to the
Depositary. In the case of Certificated Notes, principal, premium, if
any, and interest on each such Note will be payable at Maturity in
immediately available funds by wire transfer against presentation and
surrender of the Note at the Corporate Trust Office of the Paying Agent
in New York City or at such other place as the Company may designate,
except for a payment to a holder for which appropriate instructions for
payment as provided above have not been received by the Paying Agent by
the close of business at least ten Business Days prior to the related
Maturity, in which case such payment will be made by federal funds check
to the person entitled thereto. Interest payable at Maturity will be
paid to the person to whom principal of the Note shall be paid. Interest
due other than at Maturity will be payable by check mailed to the address
of the person in whose name the applicable Note is registered at the
close of business on the Regular Record Date (as defined herein) next
preceding the related Interest Payment Date (as defined herein) as shown
on the security register maintained pursuant to the appropriate
Indenture. Notwithstanding the foregoing, a holder of $10,000,000 or
more in aggregate principal amount of Notes which pay interest on the
same Interest Payment Date shall be entitled to receive payments of
interest (other than at Maturity) by wire transfer of immediately
available funds if appropriate wire transfer instructions have been
received by the Paying Agent on or before the Regular Record Date
immediately preceding such Interest Payment Date. The Company may at any
time designate additional paying agents or rescind the designation of any
<PAGE>
<PAGE>24
paying agent or approve a change in the office through which any paying
agent acts, except that, with respect to the Notes offered pursuant to
this Prospectus, the Company will be required to maintain a paying agent
in The City of New York. All moneys paid by the Company to the Paying
Agent for the payment of principal of or interest, if any, on any Note
which remain unclaimed at the end of one year after such principal or
interest shall have become due and payable will be repaid to the Company
and the Holder of such Note will thereafter look only to the Company for
payment thereof.
A Pricing Supplement with respect to each offering of Notes by the
Company will set forth, among other things, the name of each Agent
participating in the distribution of such Notes, the price to public of
such Notes and the proceeds to the Company from such sale, any
underwriting discounts or commissions and other items constituting
Agent's compensation, the date on which such Notes will be issued, the
interest rate or interest rate formula applicable to such Notes, whether
such Notes are Senior or Subordinated Notes, the Stated Maturity,
currency and principal amount of such Notes, whether such Notes will be
subject to redemption by the Company prior to Stated Maturity, whether
such Notes will be issued in the form of Book-Entry Notes or Certificated
Notes and any other terms on which each such Note will be issued.
As used herein, "Business Day" means any day that is not a Saturday
or Sunday and that is neither a legal holiday nor a day on which banking
institutions are authorized or required by law or regulation to close in
New York, New York, Los Angeles, California or (i) with respect to Notes
denominated in a Specified Currency other than U.S. dollars or ECUs, in
the capital city of the country of the Specified Currency, (ii) with
respect to Notes denominated in ECUs, in Brussels, Belgium or (iii) with
respect to LIBOR Notes (as defined herein), in the City of London.
As used herein, "London Business Day" means any day on which
dealings in deposits in U.S. dollars are transacted in the London
interbank market.
Redemption
The Notes will not be subject to any sinking fund. If provided in
the applicable Pricing Supplement, the Notes may be subject to
redemption, in whole or in part, prior to their Stated Maturity at the
option of the Company or through operation of a sinking fund or analogous
provisions. Such Pricing Supplement will set forth the terms of such
redemption, including, but not limited to, the dates on which redemption
may be effected, the price (including premium, if any) at which such
Notes may be redeemed, and required notice provisions.
In the event of any partial redemption of Notes, the Company will
not be required to (i) issue, register the transfer of or exchange Notes
during a period beginning at the opening of business 15 days before any
selection of Notes to be redeemed 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 Note, or portion thereof, called for
<PAGE>
<PAGE>25
redemption, except the unredeemed portion of any Note being redeemed in
part.
Interest
General
Unless otherwise specified in the 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 until the principal thereof is paid or made
available for payment. Interest payments shall be the amount of interest
accrued from and including the next preceding Interest Payment Date (as
defined herein) 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 Note), to but excluding the applicable Interest Payment Date (an
"Interest Accrual Period"). However, in the case of Floating Rate Notes
for which the interest rate is reset daily or weekly, as more fully
described below, the interest payments shall include interest accrued
only from but excluding the Regular Record Date to which interest has
been paid (or from and including the date of issue if no interest has
been paid with respect to such Note) to and including the Regular Record
Date next preceding the applicable Interest Payment Date, except that the
interest payment at Maturity will include interest accrued to but
excluding such date.
Interest will be payable on each date specified in the Note on which
an installment of interest is due and payable (an "Interest Payment
Date") and at Maturity. Interest will be payable by check mailed to the
address of the person in whose name the applicable Note is registered at
the close of business on the Regular Record Date next preceding each
Interest Payment Date; provided, however, that interest payable at
Maturity will be payable to the person to whom principal shall be
payable. If the original issue date of a Note is between a Regular
Record Date and the related Interest Payment Date, the initial interest
payment will be made on the Interest Payment Date following the next
succeeding Regular Record Date to the registered holder on such next
succeeding Regular Record Date. Unless otherwise specified in the
applicable Pricing Supplement, the "Regular Record Date" will be the date
15 calendar days (whether or not a Business Day) prior to each Interest
Payment Date.
U.S. dollar payments of interest, other than interest payable at
Maturity, will be made by check mailed to the address of the person
entitled thereto as shown on the security register. U.S. dollar payments
of principal and interest at Maturity will be made in immediately
available funds against presentation and surrender of the Note.
Notwithstanding the foregoing, (a) the Depositary, as holder of Book-
Entry Notes, shall be entitled to receive payments of interest by wire
transfer of immediately available funds and (b) a holder of $10,000,000
or more in aggregate principal amount of Certificated Notes which pay
interest on the same Interest Payment Date shall be entitled to receive
payments of interest (other than at Maturity) by wire transfer of
immediately available funds if appropriate wire transfer instructions
<PAGE>
<PAGE>26
have been received by the Paying Agent on or before the Regular Record
Date immediately preceding such Interest Payment Date.
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.
Fixed Rate Notes
Interest with respect to Senior Notes that are Fixed Rate Notes will
be payable semiannually on each March 15 and September 15 and interest
with respect to Subordinated Notes that are Fixed Rate Notes will be
payable semiannually on each January 15 and July 15 and in each case at
Maturity. If any Interest Payment Date or Maturity of a Fixed Rate Note
falls on a day that is not a Business Day, the related payment of
principal, premium, if any, and interest will be made on the next
succeeding Business Day as if it were made on the date such payment was
due and no interest shall accrue on the amount so payable for the period
from and after such Interest Payment Date or Maturity, as the case may
be. Interest on each Fixed Rate Note will be calculated on the basis of
a 360-day year of twelve 30-day months.
Floating Rate Notes
Unless otherwise specified in the applicable Pricing Supplement,
Floating Rate Notes will be issued as described below. Interest on
Floating Rate Notes will be determined by reference to a "Base Rate",
which may be (a) the Commercial Paper Rate, in which case such Note will
be a "Commercial Paper Rate Note"; (b) the 11th District Cost of Funds
Rate, in which case such Note will be an "11th District Cost of Funds
Rate Note"; (c) LIBOR, in which case such Note will be a "LIBOR Note";
(d) the Prime Rate, in which case such Note will be a "Prime Rate Note";
(e) the Treasury Rate, in which case such Note will be a "Treasury Rate
Note"; or (f) such other interest rate formula as may be set forth in the
applicable Pricing Supplement. In addition, a Floating Rate Note may
bear interest at the lowest of two or more Base Rates determined in the
same manner as the Base Rates are determined for the types of Notes
described above (except the interest rate for such Notes will not be
determined with reference to the 11th District Cost of Funds Rate or the
Treasury Rate).
The applicable Pricing Supplement will specify the Base Rate or
Rates and the Spread or Spread Multiplier, if any, and the maximum or
minimum interest rate limitation, if any, applicable to each Floating
Rate Note. In addition, such Pricing Supplement will define or
particularize for each Floating Rate Note the following terms, if
applicable: Initial Interest Rate, Index Maturity, Interest Payment
Dates, Interest Rate Reset Period, Calculation Agent and Interest Reset
Dates and Alternate Rate Event Spread, if applicable. A Floating Rate
Note may also have either or both of the following which will be
specified in such Pricing Supplement if applicable: (a) a maximum limit,
or ceiling, on the rate of interest which may accrue during any Interest
<PAGE>
<PAGE>27
Accrual Period, and (b) a minimum limit, or floor, on the rate of
interest which may accrue during any Interest Accrual Period.
The interest rate on each Floating Rate Note will be calculated by
reference to the specified Base Rate or the lowest of two or more
specified Base Rates, in either case, plus or minus the Spread, if any,
or multiplied by the Spread Multiplier, if any, and in the case of 11th
District Cost of Funds Rate Notes, plus or minus, the Alternate Rate
Event Spread, if applicable. The "Spread" and the "Alternate Rate Event
Spread" are the number of basis points (each basis point being equal to
one one-hundredth of a percentage point) to be added to or subtracted
from the related Base Rate or Rates applicable to such Floating Rate Note
to determine the interest rate on such Note for the related Interest
Reset Period (as defined below). The "Spread Multiplier" is the
percentage by which the related Base Rate or Rates applicable to such
Floating Rate Note are multiplied to determine the interest rate on such
Note for the related Interest Reset Period. The "Index Maturity" is the
period to maturity of the instrument or obligation with respect to which
the related Base Rate or Rates is calculated.
Each Floating Rate Note and the applicable Pricing Supplement will
specify whether the rate of interest on such Floating Rate Note will be
reset daily, weekly, monthly, quarterly, semiannually or annually (each,
an "Interest Reset Period") and the date on which such interest rate will
be reset (each, an "Interest Reset Date"). Except as otherwise
specifically set forth herein or in the applicable Pricing Supplement,
the Interest Reset Date will be, in the case of Floating Rate Notes which
reset (a) daily, each Business Day; (b) weekly, Wednesday of each week
(with the exception of weekly reset Treasury Rate Notes which reset the
Tuesday of each week); (c) monthly, the third Wednesday of each month
(with the exception of 11th District Cost of Funds Rate Notes which reset
the first Business Day of each month); (d) quarterly, with respect to
Floating Rate Notes which are Senior Notes the third Wednesday of March,
June, September and December of each year, and with respect to Floating
Rate Notes which are Subordinated Notes, the third Wednesday of January,
April, July and October of each year; (e) semiannually, the third
Wednesday of each of the two months specified in such Pricing Supplement;
and (f) annually, the third Wednesday of the month specified in such
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 LIBOR Note (or a Note for
which the interest rate is determined with reference to LIBOR), if such
business Day is in the next succeeding calendar month, such Interest
Reset Date shall be the next preceding London Business Day.
The interest rate applicable to each Interest Reset Period
commencing on an Interest Reset Date will be the rate determined on the
"Interest Determination Date". The Interest Determination Date with
respect to the Commercial Paper Rate and the Prime Rate will be the
second Business Day preceding each Interest Reset Date. The Interest
Determination Date with respect to LIBOR will be the second London
Business Day preceding each Interest Reset Date. With respect to the
Treasury Rate, the Interest Determination Date will be the day of the
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<PAGE>28
week in which the Interest Reset Date falls on which Treasury Bills are
actually 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
as a result of a legal holiday an auction is held on the Friday of the
week preceding an Interest Reset Date, the related Interest Determination
Date shall be such preceding Friday; and provided, further, that if an
auction shall fall on any Interest Reset Date, then the Interest Reset
Date shall instead be the first Business Day following such auction. The
Interest Determination Date with respect to an Interest Reset Date for
the 11th District Cost of Funds Rate will be the last working day of the
month immediately preceding such Interest Reset Date on which the Federal
Home Loan Bank of San Francisco (the "FHLB of San Francisco") publishes
the monthly 11th District Cost of Funds Index (as defined herein). The
Interest Determination Date pertaining to a Note the interest rate of
which is determined with reference to two or more Base Rates will be the
first Business Day which is at least two Business Days prior to the
Interest Reset Date for such a Note on which each Base Rate shall be
determinable. Each Base Rate shall be determined and compared on such
date, and the applicable interest rate shall take effect on the related
Interest Reset Date.
Except as otherwise provided below or in the applicable Pricing
Supplement, interest will be due and payable, in the case of Floating
Rate Notes which reset (a) daily, weekly or monthly, on the third
Wednesday of each month or with respect to Floating Rate Notes which are
Senior Notes, on the third Wednesday of March, June, September and
December of each year and with respect to Floating Rate Notes which are
Subordinated Notes, the third Wednesday of January, April, July and
October of each year, as specified in the applicable Pricing Supplement
or, in the case of 11th District Cost of Funds Rate Notes, on the first
Business Day of each month or the first Business Day of each March, June,
September and December, as specified in the applicable Pricing
Supplement; (b) quarterly, with respect to Floating Rate Notes which are
Senior Notes, on the third Wednesday of March, June, September and
December of each year and with respect to Floating Rate Notes which are
Subordinated Notes, on the third Wednesday of January, April, July and
October of each year; (c) semiannually, on the third Wednesday of each of
the two months of each year specified in the applicable Pricing
Supplement; and (d) annually, on the third Wednesday of the month
specified in the applicable Pricing Supplement and, in each case, at
Maturity.
If any Interest Payment Date for a Floating Rate Note falls on a day
that is not a Business Day with respect to such Note, such Interest
Payment Date will be the following day that is a Business Day with
respect to such Note, except that, in the case of a LIBOR Note (or a Note
for which the interest rate is determined with reference to LIBOR), if
such Business Day is in the next succeeding calendar month, such Interest
Payment Date shall be the immediately preceding day that is a Business
Day with respect to such Note. 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 may be made on the next succeeding Business
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<PAGE>29
Day, and no interest on such payment shall accrue for the period from and
after the Maturity.
The interest rate in effect with respect to a Floating Rate Note on
each day that is not an Interest Reset Date will be the interest rate
determined as of the Interest Determination Date pertaining to the
immediately preceding Interest Reset Date and the interest rate in effect
on any day that is an Interest Reset Date will be the interest rate
determined as of the Interest Determination Date pertaining to such
Interest Reset Date, subject in either case to any maximum or minimum
interest rate limitation referred to above; provided, however, that the
interest rate in effect with respect to a Floating Rate Note for the
period from the date of issue to the first Interest Reset Date will be
the Initial Interest Rate (as defined herein) specified in the applicable
Pricing Supplement and the related Note and the interest rate in effect
for the ten calendar days immediately prior to Maturity will be the
interest rate in effect on the tenth calendar day preceding such
Maturity.
With respect to each Floating Rate Note, accrued interest for each
Interest Accrual Period shall be calculated by multiplying the principal
amount of such Floating Rate Note by an accrued interest factor. Such
accrued interest factor will be computed by adding the interest factor
calculated for each day from the date of issue, or from the last date to
which interest has been paid, to the date for which accrued interest is
being calculated. The interest factor for each such day is computed by
dividing the interest rate applicable to such day by 360, in the case of
Commercial Paper Rate Notes, 11th District Cost of Funds Rate Notes,
LIBOR Notes and Prime Rate Notes, or by the actual number of days in the
year in the case of Treasury Rate Notes. Unless otherwise specified in
the applicable Pricing Supplement, the interest factor for Floating Rate
Notes for which the interest rate is calculated with reference to the
lowest of two or more Base Rates will be calculated in each period in the
same manner as if only the lowest of the applicable Base Rates applied.
All percentages resulting from any calculation of the applicable
Base Rate or Rates on Floating Rate Notes will be rounded, if necessary,
to the nearest one hundred-thousandth of a percentage point, with five
one-millionths of a percentage point rounded upward (e.g. 9.876545% (or
.09876545) will be rounded upward 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).
The applicable Pricing Supplement will specify the "Calculation
Agent" for each related Floating Rate Note. Upon the request of the
holder of any Floating Rate Note, the Calculation Agent 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. The Company
will notify the Trustee of each determination of the interest rate
applicable to any such Floating Rate Note promptly after such
determination is made. The "Calculation Date", where applicable,
pertaining to any Interest Determination Date will be the earlier of the
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<PAGE>30
tenth calendar day after such Interest Determination Date or the next
succeeding Record Date after such Interest Determination Date, or, if
either such day is not a Business Day, the next succeeding Business Day.
The interest rate in effect with respect to a Floating Rate Note
from the date of issue to the first Interest Reset Date (the "Initial
Interest Rate") will be specified in the applicable Pricing Supplement.
The interest rate for each subsequent Interest Reset Date will be
determined by the Calculation Agent as follows:
Commercial Paper Rate. Commercial Paper Rate Notes will bear
interest at the interest rates (calculated with reference to the
Commercial Paper Rate and the Spread or Spread Multiplier, if any)
specified in such Commercial Paper Rate Notes and 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
Interest Determination Date for a 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 such
rate shall be published in the "Federal Reserve Statistical Release
H.15(519), Selected Interest Rates" or any successor publication
("H.15(519)") under the heading "Commercial Paper". In the event that
such rate is not published prior to 9:00 A.M., New York City time, on the
Calculation Date pertaining to such Commercial Paper Rate Interest
Determination Date, then the Commercial Paper Rate shall be the Money
Market Yield on such Commercial Paper Rate Interest Determination Date of
the rate for commercial paper of the specified Index Maturity 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 "Commercial Paper". If by 3:00 P.M., New York City time, on
such Calculation Date, such rate is not yet available in either H.15(519)
or Composite Quotations, then the Commercial Paper Rate shall be
calculated by the Calculation Agent and will be the Money Market Yield of
the arithmetic mean of the offered rates, as of 11:00 A.M., New York City
time, on such Commercial Paper Rate Interest Determination Date, of three
leading dealers of commercial paper in New York, New York selected by the
Calculation Agent (after consultation with the Company) for commercial
paper of the specified Index Maturity, placed for an industrial issuer
whose bond rating is "AA", or the equivalent, from a nationally
recognized rating agency; provided, however, that if the dealers selected
as aforesaid by the Calculation Agent are not quoting offered rates as
mentioned in this sentence, the Commercial Paper Rate determined on such
Commercial Paper Rate Interest Determination Date will be the rate
determined on the immediately preceding Commercial Paper Rate Interest
Determination Date or, in the case of the first Commercial Paper Rate
Interest Determination Date, the Initial Interest Rate.
"Money Market Yield" shall be a yield calculated in accordance with
the following formula:
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<PAGE>31
Money Market Yield = D x 360 x 100
360 - (D x M)
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 Index Maturity.
11th District Cost of Funds Rate. 11th District Cost of Funds Rate
Notes will bear interest at the interest rates (calculated with reference
to the 11th District Cost of Funds Rate as adjusted by the Spread or
Spread Multiplier, if any, or Alternate Rate Event Spread, if applicable)
specified in such 11th District Cost of Funds Rate Notes and the
applicable Pricing Supplement.
"11th District Cost of Funds Rate" means, with respect to any
Interest Determination Date relating to an 11th District Cost of Funds
Rate Note (an "11th District Cost of Funds Interest Determination Date"),
the rate equal to the monthly 11th District Cost of Funds Index (the
"Index") published by the FHLB of San Francisco during the month
immediately preceding the Interest Reset Date to which such 11th District
Cost of Funds Interest Determination Date applies.
The Index is normally published by the FHLB of San Francisco on the
last day on which the FHLB of San Francisco is open for business in each
month and represents the monthly weighted average cost of funds for
savings institutions in the 11th District of the Federal Home Loan Bank
System for the month preceding the month in which the Index is published.
Currently, the Index is computed by the FHLB of San Francisco for each
month by dividing the cost of funds (interest paid during the month by
11th District savings institutions on savings, advances and other
borrowings) by the average of the total amount of those funds outstanding
at the end of that month and the prior month and annualizing and
adjusting the result to reflect the actual number of days in the
particular month. If necessary, before these calculations are made, the
component figures are adjusted by the FHLB of San Francisco to neutralize
the effect of events such as member institutions leaving the 11th
District or acquiring institutions outside the 11th District. Receipt by
mail of bulletins announcing Index changes may be arranged by contacting
the FHLB of San Francisco.
If the FHLB of San Francisco shall fail in any month to publish the
Index (each such failure being referred to herein as an "Alternate Rate
Event"), then the 11th District Cost of Funds Rate for the first 11th
District Cost of Funds Interest Determination Date after the Alternate
Rate Event shall be calculated on the basis of the Index most recently
published prior to such 11th District Cost of Funds Interest
Determination Date. If any Alternate Rate Event occurs in the month
immediately following a month in which a prior Alternate Rate Event
occurred, then the 11th District Cost of Funds Rate for the 11th District
Cost of Funds Interest Determination Date immediately following such
second Alternate Rate Event shall be calculated on the basis of the Index
most recently published prior to such 11th District Cost of Funds
Interest Determination Date and, thereafter, the 11th District Cost of
Funds Rate for each succeeding 11th District Cost of Funds Interest
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<PAGE>32
Determination Date until Maturity of such 11th District Cost of Funds
Rate Notes shall be LIBOR, determined as if such 11th District Cost of
Funds Rate Notes were LIBOR Notes, and the Spread shall be plus or minus
the number of basis points specified in the applicable Pricing Supplement
as the "Alternate Rate Event Spread", if any.
In determining that the FHLB of San Francisco has failed to publish
the Index, the Calculation Agent may rely conclusively on any written
advice from the FHLB of San Francisco to such effect.
LIBOR. LIBOR Notes will bear interest at the interest rates
(calculated with reference to LIBOR and the Spread or Spread Multiplier,
if any) specified in such LIBOR Notes and in the applicable Pricing
Supplement.
"LIBOR" for each Interest Reset Date will be determined by the
Calculation Agent as follows:
(a) With respect to an Interest Determination Date relating to
a LIBOR Note or any Interest Determination Date for a note for which
the interest rate is determined with reference to LIBOR (a "LIBOR
Interest Determination Date"), the Calculation Agent will determine
the arithmetic mean of all available offered rates 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, which appear on the Reuters Screen LIBO Page as of
approximately 11:00 A.M., London time, on such LIBOR Interest
Determination Date. "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 LIBO page on the service for
the purpose of displaying London interbank offered rates of major
banks).
(b) If fewer than two offered rates appear on the Reuters
Screen LIBO Page, 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 the Company), to provide the Calculation Agent with its offered
quotations for deposits in United States dollars for the period of
the specified Index Maturity to prime banks in the London interbank
market as of approximately 11:00 A.M., London time, on such LIBOR
Interest Determination Date and in a principal amount equal to an
amount of not less than U.S. $1 million that is representative of a
single transaction in such market at such time. If at least two
such quotations are provided, LIBOR for such LIBOR Interest
Determination Date will be the arithmetic mean of such quotations.
If fewer than two quotations are provided, LIBOR for such LIBOR
Interest Determination Date will be the arithmetic mean of the rates
quoted by three major banks in New York, New York selected by the
Calculation Agent (after consultation with the Company) as of
approximately 11:00 A.M., New York City time, on such LIBOR Interest
Determination Date for loans in U.S. dollars to leading European
banks, for the period of the specified Index Maturity and in a
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<PAGE>33
principal amount equal to an amount of not less than U.S. $1 million
that is representative of a single transaction in such market at
such time; provided, however, that if fewer than three banks
selected as aforesaid by the Calculation Agent (after consultation
with the Company) are quoting rates as mentioned in this sentence,
LIBOR determined on such LIBOR Interest Determination Date will be
LIBOR determined on the immediately preceding LIBOR Interest
Determination Date, or in the case of the first LIBOR Interest
Determination Date, the Initial Interest Rate.
Prime Rate. Prime Rate Notes will bear interest at the interest
rates (calculated with reference to the Prime Rate and the Spread or
Spread Multiplier, if any) specified in such Prime Rate Notes and in the
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 Interest Determination Date for a
Note for which the interest rate is determined with reference to the
Prime Rate (a "Prime Rate Interest Determination Date"), the rate set
forth in H.15(519) for such date opposite the caption "Bank Prime Loan".
If such rate is not yet published by 9:00 A.M., New York City time, on
the Calculation Date, the Prime Rate for such Prime Rate Interest
Determination Date will be the arithmetic mean of the rates of interest
publicly announced by each bank named on the Reuters Screen NYMF Page as
such bank's prime rate or base lending rate as in effect for such Prime
Rate Interest Determination Date as quoted on the Reuters Screen NYMF
Page on such Prime Rate Interest Determination Date. "Reuters Screen
NYMF Page" means the display designated as page "NYMF" on the Reuters
Monitor Money Rate Service (or such other page as may replace the NYMF
page on the service for the purpose of displaying the prime rate or base
lending rate of major banks). If fewer than four such rates appear on
the Reuters Screen NYMF Page for such Prime Rate Interest Determination
Date, the rate shall be the arithmetic mean of the prime rates quoted on
the basis of the actual number of days in the year divided by 360 as of
the close of business on such Prime Rate Interest Determination Date by
at least two of the three major money center banks in New York, New York
selected by the Calculation Agent (after consultation with the Company)
from which quotations are requested. If fewer than two quotations are
provided, the Prime Rate shall be calculated by the Calculation Agent and
shall be determined as the arithmetic mean on the basis of the prime
rates in New York, New York by the appropriate number of substitute banks
or trust companies organized and doing business under the laws of the
United States, or any State thereof, in each case having total equity
capital of at least U.S. $500 million and being subject to supervision or
examination by federal or state authority, selected by the Calculation
Agent (after consultation with the Company) to quote such rate or rates.
If in any month the Prime Rate is not published in H.15(519) and the
banks or trust companies selected as aforesaid are not quoting as
mentioned in the preceding paragraph, the Prime Rate determined on such
Prime Rate Interest Determination Date will be the Prime Rate determined
on the immediately preceding Prime Rate Interest Determination Date, or
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<PAGE>34
in the case of the first Prime Rate Interest Determination Date, the
Initial Interest Rate.
Treasury Rate. Treasury Rate Notes will bear interest at the
interest rate (calculated with reference to the Treasury Rate and the
Spread or Spread Multiplier, if any) specified in the Treasury Rate Notes
and in the 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 (a "Treasury Rate Interest Determination
Date"), the rate for the auction held on such date of direct obligations
of the United States ("Treasury Bills") having the Index Maturity
designated in the applicable Pricing Supplement, as published in
H.15(519) under the heading "Treasury Bills - auction average
(investment)" or, if not so published by 9:00 A.M., New York City time,
on the Calculation Date pertaining to such Treasury Rate Interest
Determination Date, the auction average rate on such Treasury Rate
Interest Determination Date (expressed as a bond 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 the
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 published or reported as provided above by 3:00 P.M., New York
City time, on such Calculation Date, or if no such auction is held on
such Treasury Rate Interest Determination Date, then the Treasury Rate
shall be calculated by the Calculation Agent and shall 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
selected by the Calculation Agent (after consultation with 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 the dealers selected as aforesaid by the Calculation
Agent are not quoting bid rates as mentioned in this sentence, the
Treasury Rate with respect to such Treasury Rate Interest Determination
Date will be the Treasury Rate determined on the immediately preceding
Treasury Rate Interest Determination Date or, in the case of the first
Treasury Rate Interest Determination Date, the Initial Interest Rate.
Global Notes
The Notes may be issued in whole or in part in global form. Notes
in global form (a "Global Note") will be deposited with, or on behalf of,
the Depositary.
Book-Entry System
Upon issuance, all Fixed Rate Book-Entry Notes having the same Issue
Date, interest rate, amortization schedule, if any, redemption
provisions, if any, ranking and Stated Maturity will be represented by a
single Global Note, and all Floating Rate Book-Entry Notes having the
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<PAGE>35
same Issue Date, Initial Interest Rate, Base Rate, Interest Reset Period,
Interest Payment Dates, Index Maturity, Spread or Spread Multiplier, if
any, Minimum Interest Rate, if any, Maximum Interest Rate, if any,
redemption provisions, if any, ranking and Stated Maturity will be
represented by a single Global Note; provided, however, that if by reason
of the foregoing a single Global Note would exceed $150,000,000 in
aggregate principal amount, one Global Note will be issued to represent
each $150,000,000 of aggregate principal amount and an additional Global
Note will be issued to represent any remaining principal amount. Each
Global Note representing Book-Entry Notes will be deposited with, or on
behalf of, the Depositary. Except as set forth below, a Global Note may
not be transferred except as a whole by the Depositary to a nominee of
the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary or any nominee to
a successor of the Depositary or a nominee of such successor.
The Depository Trust Company, New York, New York ("DTC") will be the
initial Depositary with respect to the Book-Entry Notes. DTC is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act.
DTC holds securities that its participants ("Participants") deposit with
DTC. DTC also facilitates the settlement among Participants of
securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants ("Direct
Participants") include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations. DTC
is owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to DTC's system is also
available to others such as securities brokers and dealers, banks and
trust companies that clear through or maintain a custodial relationship
with a Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on
file with the Commission.
Purchases of Book-Entry Notes under the DTC's system must be made by
or through Direct Participants, which will receive a credit for the Book-
Entry Notes on DTC's records. The ownership interest of each actual
purchaser of each Book-Entry Note ("Beneficial Owner") is in turn to be
recorded on the Direct and Indirect Participants' records. Beneficial
Owners will not receive written confirmation from DTC of their purchase,
but Beneficial Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of
their holdings, from the Direct or Indirect Participant through which the
Beneficial Owner entered into the transaction. Transfers of ownership
interests in the Book-Entry Notes are to be accomplished by entries made
on the books of Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their
<PAGE>
<PAGE>36
ownership interests in Book-Entry Notes, except in the event that use of
the book-entry system for one or more Book-Entry Notes is discontinued.
To facilitate subsequent transfers, all Global Notes deposited by
Participants with DTC are registered in the name of the DTC's partnership
nominee, Cede & Co. The deposit of Global Notes with DTC and their
registration in the name of Cede & Co. effect no change in beneficial
ownership. DTC has no knowledge of the actual Beneficial Owners of the
Book-Entry Notes; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Book-Entry Notes are credited, which
may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by
Direct Participants and Indirect Participants to Beneficial Owners will
be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of
the Notes are being redeemed, and unless otherwise notified by either the
Company or the Trustee, DTC's practice is to determine by lot the amount
of the interest of each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to
Notes. Under its usual procedures, DTC will mail an Omnibus Proxy to the
Company as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Book-Entry Notes are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the Book-Entry Notes will be made
to DTC. DTC's practice is to credit Direct Participants' accounts on the
payable date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment
on the payable date. Payments by Participants to Beneficial Owners will
be governed by standing instructions and customary practices, as in 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
Participant and not of DTC, any Agents, or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to
time. Payment of principal and interest to DTC is the responsibility of
the Company, disbursement of such payments to Direct Participants shall
be the responsibility of DTC, and disbursement of such payments to the
Beneficial Owners shall be the responsibility of Direct and Indirect
Participants.
If the Depositary with respect to any Global Note or Notes is at any
time unwilling or unable to continue as Depositary and a successor
Depositary is not appointed by the Company within 90 days, the Company
will issue Certificated Notes in exchange for the Book-Entry Notes
represented by such Global Note or Notes. In addition, the Company may
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<PAGE>37
at any time and in its sole discretion determine not to have Global
Notes, and, in such event, will issue Certificated Notes in exchange for
the Book-Entry Notes represented by such Global Notes.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Company believes to be
reliable, but the Company takes no responsibility for the accuracy
thereof.
Neither the Company, the Trustees, any paying agent nor the
registrar for the Book-Entry Notes will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in a Global Note or for
maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Certain Defined Terms
Unless otherwise noted herein all defined terms are applicable to
both the Senior and the Subordinated Indentures.
"Consolidated Assets" is defined as the amount of all assets which
under generally accepted accounting principles would appear on a
consolidated balance sheet of the Company and its Subsidiaries (after
deducting related depreciation, amortization, unearned finance charges,
allowance for credit losses, and other valuation reserves), but shall not
include goodwill, unamortized debt discount and expenses, corporate
organization expense, patents and trademarks.
"Consolidated Liabilities" is defined as the amount of all
liabilities which under generally accepted accounting principles (as in
effect as of the date of the related consolidated balance sheet) would
appear on the consolidated balance sheet of the Company and its
Subsidiaries including, without limitation, the par value or involuntary
liquidation value, whichever is greater, of minority interests, if any,
in preference stock of all Subsidiaries, but not including any of the
following: redeemable preferred or preference stock, minority interests,
if any, in common stock of Subsidiaries, valuation reserves (including
unearned finance charges and allowances for credit losses deducted from
assets), Capital Stock and surplus and surplus reserves of the Company,
deferred taxes, deferred investment tax credit and any Senior
Indebtedness of the Company.
"Debt" is defined as, with respect to any Person, all obligations
for borrowed money of such Person which in accordance with generally
accepted accounting principles shall be classified upon a balance sheet
of such Person as liabilities of such Person, including all (a) direct
Debt and other similar monetary obligations of such Person,
(b) obligations secured by any lien upon Property owned by such Person or
obligations created or arising under any conditional sale, capital lease,
or other title retention agreement with respect to Property acquired by
such Person; provided, however, that Debt does not include any
indebtedness, including purchase money indebtedness, with respect to
which a creditor has no recourse against the obligor except recourse to
<PAGE>
<PAGE>38
specific Property the acquisition of which was financed by or otherwise
secures such indebtedness, or to the proceeds of any sale or lease of
such Property or both, (c) obligations under agreements to pay
installments of purchase price or other like payments with respect to
fixed assets not utilized by such Person or its subsidiaries in the
ordinary course of its business, including obligations ostensibly to pay
rent under which an equity interest is to be acquired in the rented
Property. In addition, Debt includes all Guarantees of such Person to
the extent the amount of such Guarantees is in excess of 50% of the
Shareholder's Equity of such Person.
"Lien" is defined as any interest in Property securing an obligation
owed to, or a claim by, a Person other than the owner of the Property,
whether such interest is based on the common law, statute or contract
(but excluding a landlord's statutory lien for rent not yet due), and
including, but not limited to, the security interest lien arising from a
mortgage, encumbrance, pledge, conditional sale or trust receipt or a
lease, consignment or bailment for security purposes. The term "Lien"
includes reservations, exceptions, encroachments, easements, rights-of-
way, covenants, conditions, restrictions, leases and other title
exceptions and encumbrances affecting Property. Under the Indentures,
the Company or a Subsidiary will be deemed to be the owner of any
Property which it has acquired or holds subject to a conditional sales
agreement, capital lease or other arrangement pursuant to which title to
the Property has been retained by or vested in some other Person for
security purposes.
"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 applicable Indenture.
"Property" is defined as any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Senior Indebtedness" as defined in the Subordinated Indenture shall
mean all of the indebtedness of, or guaranteed by, the Company for
borrowed money (including the principal of, premium, if any, or interest
on any such borrowed money and any commitment fees for unborrowed amounts
which, if borrowed, would constitute Senior Indebtedness), whether
currently outstanding or hereafter incurred, unless, under the instrument
evidencing the same or under which the same is outstanding, it is
expressly provided that such indebtedness is subordinate to other
indebtedness and obligations of the Company.
"Shareholder's Equity" of any Person shall mean the shareholder's
equity appearing on the balance sheet of such Person as determined under
generally accepted accounting principles.
"Subordinated Indebtedness" as defined in the Subordinated Indenture
shall mean the Subordinated Securities and all other indebtedness of, or
guaranteed by, the Company whether or not outstanding on the date of the
Subordinated Indenture, which is by the terms thereof made subordinate
and junior in right of payment to all Senior Indebtedness.
<PAGE>
<PAGE>39
Certain Covenants
Limitation on Dividends. The Indentures provide that no dividend
shall be paid or declared or other distribution made on any Capital Stock
of the Company (except in shares of Capital Stock of the Company), and
neither the Company nor any Subsidiary of the Company shall acquire any
shares of such stock unless, after giving effect thereto, Consolidated
Assets would be at least equal to 115% of Consolidated Liabilities. For
purposes of this limitation, the definition of Capital Stock shall not
include any preferred stock issued by the Company or its subsidiaries.
The foregoing restrictions, however, shall not prevent any acquisition of
shares of Capital Stock of the Company solely in exchange for other
shares of Capital Stock of the Company, or any acquisition of such shares
of Capital Stock through the application of the net proceeds of a
substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of other shares of such Capital Stock of the Company, or the
payment of any dividend within 60 days after the date of declaration
thereof, if at such date such declaration complied with the restrictions
of such limitation.
Limitation upon Liens. The Indentures provide that the Company will
not, and will not permit any Subsidiary to, create or permit to continue
in existence any Lien or charge of any kind upon any Property or assets
of the Company or of any Subsidiary unless the Securities then
outstanding shall be equally and ratably secured (subject, in the case of
the Subordinated Securities, to subordination as to rights of payment as
provided in the Subordinated Indenture), with any other obligation or
indebtedness so secured, subject to certain exceptions including
(a) leases or subleases of Property in the ordinary course of business of
the Company or any Subsidiary, or if such Property is not needed in the
operation of the business; (b) Liens created within 12 months after the
acquisition or construction of Property to secure or to provide for the
Payment of the purchase or construction price of such Property and Liens
existing on any Property at the time of acquisition or certain pre-
existing Liens and conditional sales agreements and/or title retention
agreements with respect to any subsequently acquired Property, provided
that the aggregate principal amount of the indebtedness secured by all
such Liens on any particular Property may not exceed the cost (including
improvements thereon) of such Property to the Company or any Subsidiary,
and that such Lien(s) do not extend to other Property owned prior to such
acquisition or construction or to Property thereafter acquired or
constructed; (c) Liens securing indebtedness incurred to finance or
refinance the acquisition of the Property subject to the Lien and in
respect of which the creditor has no recourse against the Company or any
Subsidiary except recourse to such Property, or to the proceeds of any
sale or lease of such Property or both; (d) Liens on Property of the
Company or a Subsidiary in favor of the United States or any State
thereof, or any department, governmental body, agency or instrumentality
or political subdivision of any such jurisdiction, to secure partial,
progress, advance or other payments pursuant to any contract or statute
relating thereto; (e) deposits with or security interest given to a
governmental agency as a condition to the transaction of business or the
exercise of a privilege, or made to enable the Company or such Subsidiary
to maintain self-insurance or participate in any fund, or in connection
<PAGE>
<PAGE>40
with workmen's compensation, unemployment insurance, old age pensions, or
other social security, or to share in any privileges or other benefits
available to corporations participating in any such arrangements, or for
any other purpose required by law or regulation promulgated by said
governmental agency as a condition to the transaction of any business or
the exercise of any privilege or license, or deposit assets of the
Company or such Subsidiary with any surety company or clerk of any court
or in escrow, as collateral in connection with, or in lieu of, any bond
on appeal by the Company or such Subsidiary from any judgment or in
connection with any other judicial proceedings by or against the Company
or such Subsidiary; (f)(i) Liens for taxes, assessments or other
governmental charges or levies which are not yet due or are payable
without penalty or are being contested in good faith and against which
reserves deemed adequate by the Company or such Subsidiary have been
established, provided that foreclosure or similar proceedings have not
been commenced (unless cured by payment), (ii) Liens of any judgment and
other similar Liens arising in connection with court proceedings,
providing such Lien is discharged or the execution or other enforcement
of such Lien is effectively stayed within six months of the creation of
such Lien, (iii) undetermined Liens or charges incident to construction,
(iv) mechanics' or other like Liens arising in the ordinary course of
business in respect of obligations which are not overdue or which are
being contested by the Company or such Subsidiary in good faith, or
deposits to obtain the release of such Liens, (v) immaterial encumbrances
consisting of zoning restrictions, licenses, easements and restrictions
on the use of real property and minor defects and irregularities in the
title thereto; (g) banker's liens and rights of off-set in the holders of
indebtedness such as commercial paper or monies of the Company or a
Subsidiary deposited with such Lender in the ordinary course of business;
(h) Liens related solely to the purchase of, or the investment in or with
respect to, a specific item or items of tangible personal property and
securing indebtedness evidenced by participation certificates, trust
certificates, indentures or the like, however denominated, provided that
no such Lien shall constitute a general lien or mortgage on substantially
all the tangible assets of the Company; (i) refundings, replacements or
extensions of any permitted Liens not exceeding the principal amount of
indebtedness so refunded or extended at the time of such refunding or
extension and covering the same Property theretofore securing the same;
(j) deposits or pledges as security for the performance of any contract
or undertaking in the ordinary course of business but unrelated to the
borrowing of money or to the securing of indebtedness; (k) Liens existing
on April 15, 1987 on its Property (with respect to the Senior Indenture)
and Liens existing on June 15, 1988 on its Property (with respect to the
Subordinated Indenture); (l) liens on aircraft or equipment held by the
Company or a Subsidiary or leased to third parties, if such obligation is
without recourse to the Company or such Subsidiary; and (m) in addition
to Liens permitted under clauses (a) through (l) above, Liens with
respect to an aggregate amount of indebtedness of the Company (including
its Subsidiaries) not in excess of an amount equal to 15% of Consolidated
Assets.
<PAGE>
<PAGE>41
Mergers and Sales of Assets by the Company
The Company may consolidate or merge with or into any other
corporation, and the Company may convey, transfer or lease all or
substantially all of its Properties or assets to another Person provided
that (a) the corporation (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have
received the transfer of such assets shall be a corporation organized and
existing under the laws of the United States of America, any State
thereof or the District of Columbia and shall expressly assume payment of
the principal of (and premium, if any) and interest (including all
Additional Amounts) on the Securities and the performance and observance
of the respective Indenture, and (b) the Company or such successor
corporation shall not immediately thereafter be in default under the
respective Indenture and certain other conditions are met.
Events of Default, Notice and Waiver
If an Event of Default with respect to the Securities of any series
then outstanding shall have occurred and be continuing, the Trustee under
such Indenture or the Holders of at least 25% in principal amount of the
Securities of such series then outstanding may declare the principal (or,
if the Securities of that series are Original Issue Discount Securities,
such portion of the principal amount as may be specified in the terms of
that series) and accrued interest of all the Securities of such series to
be due and payable immediately; provided, that, in certain cases, if all
Events of Default with respect to such series shall have been remedied,
the Holders of a majority in aggregate principal amount of the Securities
of such series then outstanding may rescind and annul such declaration
and its consequences. Reference is made to the Pricing Supplement
relating to any series of Securities which is issued at a substantial
discount from the principal amount thereof for the particular provisions
relating to acceleration of the maturity of a portion of the principal
amount of such Securities upon the occurrence of an Event of Default and
the continuation thereof.
An Event of Default with respect to the Securities of any series
then outstanding is defined in the Indenture as being: default for a
period of 30 days or more in the payment of any interest on the
Securities of such series whether or not, in the case of the Subordinated
Securities, such payment is prohibited by the subordination provisions
referred to below under "Subordination"; default in payment of any
principal of (or premium, if any, on) the Securities of such series
whether or not, in the case of the Subordinated Securities, such payment
is prohibited by the subordination provisions referred to below under
"Subordination"; default in the deposit of any sinking fund payment, when
and as due by the terms of a Security of that series whether or not, in
the case of the Subordinated Securities, such payment is prohibited by
the subordination provisions referred to below under "Subordination";
default for a period of 60 days after notice by the Holders of at least
25% in principal amount of the Outstanding Securities of that series or
by the respective trustee in the performance of any other covenant or
warranty of the Company in the respective Indenture with respect to a
series of the Securities; an event of default, as defined in any
<PAGE>
<PAGE>42
mortgage, indenture or instrument evidencing any indebtedness of the
Company for money borrowed (including other series of the Securities) in
excess of $10,000,000 aggregate principal amount then outstanding (except
that such dollar amount shall not apply with respect to a default with
respect to Securities of any series outstanding), as a result of which
such indebtedness of the Company shall have been accelerated and such
acceleration shall not have been annulled or rescinded within a period of
20 days after written notice thereof; or certain events of bankruptcy,
insolvency or reorganization.
The Trustees are required, within 90 days after the occurrence of
any default which is known to such Trustee and is continuing, to give to
the Holders of the applicable series of Securities with respect to which
such default has occurred notice of such default; provided that, except
in the case of default in the payment of principal (including any sinking
fund payment) or interest on a series of Securities with respect to which
such default has occurred, the Trustees shall be protected in withholding
such notice if they determine in good faith that the withholding of such
notice is in the interest of the Holders of the Securities of such
series.
The Trustees, subject to their duties during default to act with the
required standard of care, may require indemnification by the Holders of
a series of Securities with respect to which a default has occurred
before proceeding to exercise any right or power under the respective
Indentures at the request of the Holders of Securities of such series.
The Holders of a majority in principal amount of the Outstanding
Securities of such series may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustees, or
exercising any trust or power conferred on the Trustees.
In certain cases, the Holders of a majority in principal amount of
an outstanding series of Securities may, on behalf of the Holders of all
Securities of such series, and any coupons appertaining thereto, waive
any past default with respect to such series except a default in the
payment of the principal or interest (except to the extent that such
interest has been paid) on such series of Securities with respect to
which such default has occurred.
The Company is required to file annually with each Trustee a
certificate as to the absence of defaults under each respective
Indenture.
Notices
Notices to Holders of the Notes will be given by mail to the
addresses of such Holders as they appear in the Security Registers.
Modification of the Indentures
Modification and amendment of the Indentures may be made by the
Company and the respective Trustee with the consent of the Holders of not
less than 66- % in aggregate principal amount of the Outstanding
Securities of an affected series, provided that no such modification or
<PAGE>
<PAGE>43
amendment may, without the consent of the Holder of each Outstanding
Security affected thereby, (a) change the Stated Maturity of, or any
installment of principal or interest of, any Outstanding Security, or
reduce the principal amount or rate of interest thereon, or change the
Redemption Price; (b) change the place or currency of payment of
principal of or premium, if any, or interest on any Security; (c) impair
the right to institute suit for the enforcement of any such payment on or
after the Stated Maturity thereof; (d) reduce the above-stated percentage
of Outstanding Securities necessary to modify or amend the respective
Indentures; (e) modify the foregoing requirements or reduce the
percentage of Outstanding Securities necessary to waive any past default
or compliance with certain restrictive provisions to less than a
majority; (f) with respect to the Senior Securities, reduce the amount of
principal of an Original Issue Discount Security payable upon
acceleration of the Maturity thereof; or (g) with respect to the
Subordinated Securities, reduce the amount of principal of or the rate of
interest on a Security payable upon acceleration of the Maturity thereof.
The Holders of at least a majority in aggregate principal amount of the
Outstanding Securities may waive past defaults and compliance by the
Company with certain restrictive provisions.
Modification and amendment of the Indentures may be made by the
Company and the respective Trustee without the consent of any Holder, for
any of these purposes: (a) to evidence the succession of another
corporation to the Company; (b) to add to the covenants of the Company
for the benefit of the Holders of all or any series of Securities; (c) to
add additional Events of Default; (d) to change any provision of the
Indentures or either of them to facilitate the issuance of Securities in
bearer form; (e) to change or eliminate any provision of any Indenture,
provided no Security Outstanding of any series is entitled to the benefit
of such provision; (f) to secure the Securities; (g) to establish the
form or terms of Securities; (h) to provide for the acceptance of
appointment by a successor Trustee; or (i) to cure any ambiguity, defect
or inconsistency in either Indenture or both of them provided such action
does not adversely affect the interests of Holders of Securities.
Subordination
The indebtedness evidenced by the Subordinated Securities and the
payment of the principal of (and premium, if any) and interest on each
and all of the Subordinated Securities are subordinated in right of
payment to the prior payment in full of Senior Indebtedness and, unless
specifically designated as ranking junior to other subordinated debt
securities of the Company, are pari passu with all other subordinated
debt securities of the Company which have not been specifically
designated as ranking junior to other subordinated debt securities of the
Company. The Company has not issued any subordinated debt ranking junior
to the Subordinated Securities but the Company may issue such junior
subordinated debt.
If the Company defaults in the payment of any Senior Indebtedness,
unless and until such default shall have been cured or waived, no direct
or indirect payment shall be made on the account of the principal of,
premium, if any or interest or any Additional Amounts on the Subordinated
<PAGE>
<PAGE>44
Securities, or in respect of any sinking fund for, or redemption,
retirement or purchase or other acquisition of any of the Subordinated
Securities.
If any other event of default occurs with respect to any Senior
Indebtedness, permitting the holders thereof to accelerate the maturity
thereof, then, unless and until such event of default shall have been
cured or waived, no direct or indirect payment shall be made on account
of the principal of, or premium, if, any, or interest (including
Additional Amounts) on any Subordinated Securities or in respect of any
sinking fund for, or redemption, retirement or purchase or other
acquisition of the Subordinated Securities, during any period of 90 days
after written notice of such default shall have been given to the Company
by any holder of Senior Indebtedness or during any period in which any
judicial proceeding is pending in respect of such default and a notice of
acceleration of the maturity of such Senior Indebtedness has been
transmitted to the Company in respect of such default.
In the event of: (i) any insolvency, bankruptcy, receivership,
liquidation, reorganization, readjustment or other similar proceeding of
or relating to the Company, its creditors or its property; (ii) any
proceeding for the liquidation, dissolution or other winding up of the
Company, whether voluntary or involuntary, whether or not involving
bankruptcy proceeding; (iii) or any assignment by the Company for the
benefit of creditors, or (iv) any other marshalling of the assets of the
Company, all Senior Indebtedness shall first be paid in full before any
payment or distribution shall be made to any Holder of Subordinated
Securities.
If any such payment or distribution to be paid to the holders of
Senior Indebtedness shall be made to any Holder of Subordinated
Securities in contravention of the foregoing and before all the Senior
Indebtedness shall have been paid in full, such payment or distribution
shall be received in trust for the benefit of, and shall be paid over or
delivered and transferred to, the holders of Senior Indebtedness at the
time outstanding in accordance with the priorities then existing among
such holders for applications to the payment of all Senior Indebtedness
remaining unpaid.
Senior Indebtedness shall not be deemed to have been paid in full
unless the holders thereof shall have received cash equal to the amount
of Senior Indebtedness then outstanding. Upon payment in full of all
Senior Indebtedness, the Holders of Subordinated Securities shall be
subrogated to all rights of any holders of Senior Indebtedness to receive
any further payments or distributions applicable to the Senior
Indebtedness until all amounts owing on the Subordinated Securities shall
have been paid in full, and such payments or distributions which
otherwise would be paid or distributed to the holders of Senior
Indebtedness, shall, as between the Company and its creditors (other than
the holders of Senior Indebtedness), on the one hand, and the Holders of
the Subordinated Securities, on the other hand, be deemed to be a payment
by the Company on account of Senior Indebtedness and on account of the
Subordinated Securities.
<PAGE>
<PAGE>45
As of June 30, 1994, the Company had issued $1,375.1 million of its
Senior Securities pursuant to the Senior Indenture and $62.9 million of
its Subordinated Securities pursuant to the Subordinated Indenture. As
of June 30, 1994, there was $1,228.1 million of Senior Indebtedness of
the Company outstanding and $77.8 million of Subordinated Indebtedness of
the Company outstanding. Pursuant to certain indebtedness of the Company
not covered by the Indentures, the Company's most restrictive covenants
regarding the incurrence of Senior Indebtedness allow the Company to
incur Senior Indebtedness to the extent of 450% of the sum of Net Worth
plus Subordinated Indebtedness, less certain adjustments. For the
purposes of such covenants, Subordinated Indebtedness in excess of 50% of
Net Worth constitutes Senior Indebtedness. The maximum amount of
additional Senior Indebtedness which could have been incurred as of
June 30, 1994 was $270.5 million. In addition, certain of the Company's
other indebtedness not covered by the Indentures contains covenants
restricting the incurrence of Senior Indebtedness. However, such
covenants are not as restrictive as the covenants described in this
paragraph.
The holders of the Securities should not rely on the continued
existence of the covenants described above because they will expire
(1) as the indebtedness related thereto matures and is paid (the Company
currently has no indebtedness outstanding under the revolving credit
facility), (2) if the Company prepays such related indebtedness and
(3) if the Company amends or deletes such restrictions through the
process of negotiation or (4) with respect to the most restrictive
covenants, if the Company terminates its revolving credit facility.
The Trustees Under the Indentures
Bankers Trust is the Trustee under the Senior Indenture. Bankers
Trust is also the Trustee for certain other series of the Company's
medium term notes. The Company maintains banking and borrowing relations
with Bankers Trust.
First Trust is Trustee under the Subordinated Indenture.
PLAN OF DISTRIBUTION
The Company expects to sell the Notes to investors through one or
more agents (each an "Agent" and collectively the "Agents"). Notes may
be sold to the Agents for resale to investors at varying prices related
to prevailing market prices at the time of resale, to be determined by
such Agents. The Company will pay each Agent a commission, in the form
of a discount, of from .125% to .750%, depending upon maturity, of the
principal amount of Notes sold through such firm, as agent, and may also
sell Notes to each Agent, as principal, at a discount.
A Pricing Supplement with respect to each offering of Notes by the
Company will set forth, among other things, the name of each Agent
participating in the distribution of such Notes, the price to public of
such Notes and the proceeds to the Company from such sale, any
<PAGE>
<PAGE>46
underwriting discounts or commissions and other items constituting
Agent's compensation.
The Company has reserved the right to sell Notes on its own behalf
to the public. In such circumstances, the Company will have the sole
right to accept offers to purchase Notes and may reject any proposed
purchase of Notes in whole or part. In the case of sales made directly
by the Company, no underwriting discount or commission will be payable.
The agreement governing the purchase and sale of the Notes will
provide that the obligations of any Agent to purchase Notes will be
subject to certain conditions precedent.
Each Agent may be deemed to be an "underwriter" within the meaning
of the Act. The Company will agree to indemnify each Agent against
certain liabilities, including liabilities under the Act, or to
contribute to payments that the Agents may be required to make in respect
thereof.
The Notes will not be listed on any securities exchange and will not
be traded, when issued, on any other established trading market. There
can thus be no assurance that a secondary market for the Notes will exist
or as to the liquidity or continuation of any such market. Moreover, the
Company reserves the right to withdraw, cancel or modify the offer made
hereby at any time without notice, and any such withdrawal, cancellation
or modification also may adversely affect the liquidity of the Notes.
LEGAL OPINIONS
If the Company renders a legal opinion in connection with the
distribution of the Notes, the validity of the Notes may be passed upon
for the Company by H. David Heumann, Vice President, General Counsel and
Secretary of McDonnell Douglas Finance Corporation, and for the Agents by
Brown & Wood. Mr. Heumann may rely, as to all matters governed by New
York law, on the opinion of Brown & Wood.
<PAGE>
<PAGE>47
EXPERTS
The consolidated financial statements and schedules of McDonnell
Douglas Finance Corporation and subsidiaries incorporated by reference in
this Prospectus have been audited by Ernst & Young, independent auditors,
for the periods indicated in their report thereon. The information under
the caption "Selected Consolidated Financial Data" for each of the five
years ended December 31, 1993, included herein have been derived from the
consolidated financial statements audited by Ernst & Young. Ernst &
Young's report on the consolidated financial statements, schedules and
selected consolidated financial data is included in the Annual Report on
Form 10-K for the year ended December 31, 1993. Such consolidated
financial statements, schedules and selected consolidated financial data
have been incorporated herein by reference or included in reliance upon
the report of Ernst & Young, given upon the authority of such firm as
experts in accounting and auditing.
________________________________________________________________________
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this
Prospectus or any Pricing Supplement and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company or any underwriter or agent. Neither this
Prospectus nor any Pricing Supplement constitutes an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby in
any jurisdiction to any person to whom it is unlawful to make such offer
in such jurisdiction. Neither the delivery of this Prospectus nor any
Pricing Supplement at any time shall imply that the information herein or
therein is correct as of any time subsequent to its date.
<PAGE>
<PAGE>48
______________________________________________
TABLE OF CONTENTS
Page
Prospectus
Available Information . . . . . . . . . . . . . . . . . . . . . . . 5
Incorporation of Certain Documents by Reference . . . . . . . . . . 5
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . 7
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
McDonnell Douglas Finance Corporation . . . . . . . . . . . . . . . 14
Selected Consolidated Financial Data . . . . . . . . . . . . . . . 17
Information Concerning McDonnell Douglas Corporation . . . . . . . 20
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Description of Notes . . . . . . . . . . . . . . . . . . . . . . . 20
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . 45
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
___________________________________________
___________________________________________
<PAGE>
<PAGE>49
___________________________________________
___________________________________________
$109,300,000
McDonnell Douglas
Finance Corporation
Series IX
Medium-Term Notes
____________________
P R O S P E C T U S
____________________
____________________
August 19, 1994
____________________________________________
____________________________________________
