United States
Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
OR
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________________ to _________________
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MCDONNELL DOUGLAS FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 95-2564584 0-10795
(State or other jurisdiction of (I.R.S. Employer (Commission File No.)
Incorporation or Organization) Identification No.)
4060 Lakewood Boulevard, 6th Floor - Long Beach, California 90808-1700
(Address of principal executive offices)
(562) 627-3000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No |_|
Common shares outstanding at May 14, 1997: 50,000 shares
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b)
to Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE>
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements........................................3
Item 2. Management's Analysis of Results of Operations *............8
Part II Other Information
Item 1. Legal Proceedings...........................................8
Item 2. Changes in Securities **
Item 3. Defaults Upon Senior Securities **
Item 4. Submission of Matters to a Vote of Security Holders **
Item 5. Other Information...........................................9
Item 6. Exhibits and Reports on Form 8-K...........................10
- ----------------
* Management's Analysis of Results of Operations included in lieu of
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which is omitted pursuant to General Instruction H(1)(a) to
Form 10-Q.
** Omitted pursuant to General Instruction H (1)(b) to Form 10-Q.
<PAGE>
Part I
Item 1. Financial Statements
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in millions, except stated value and par value) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Financing receivables:
Investment in finance leases $ 1,614.1 $ 1,631.2
Notes receivable 295.2 308.9
-------------------------------------------
1,909.3 1,940.1
Allowance for losses on financing receivables (52.1) (48.6)
-------------------------------------------
1,857.2 1,891.5
Cash and cash equivalents 11.9 16.9
Equipment under operating leases, net 662.5 689.5
Equipment held for sale or re-lease 27.4 14.0
Accounts with McDonnell Douglas and MDFS 6.2 -
Other assets 41.2 41.7
-------------------------------------------
$ 2,606.4 $ 2,653.6
===========================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 142.4 $ 161.3
Accounts payable and accrued expenses 17.2 47.7
Other liabilities 94.9 90.0
Deferred income taxes 350.5 340.2
Long-term debt:
Senior 1,584.2 1,594.1
Subordinated 79.8 94.8
-------------------------------------------
2,269.0 2,328.1
-------------------------------------------
Commitments and contingencies -- Note 3
Shareholder's equity:
Preferred stock -- no par value; authorized 100,000 shares:
Series A; $5,000 stated value; authorized, issued and
outstanding 10,000 shares 50.0 50.0
Common stock $100 par value; authorized 100,000 shares;
issued and outstanding 50,000 shares 5.0 5.0
Capital in excess of par value 89.5 89.5
Income retained for growth 192.9 181.0
-------------------------------------------
337.4 325.5
===========================================
$ 2,606.4 $ 2,653.6
===========================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
<TABLE>
<CAPTION>
Three months ended
March 31,
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME
Finance lease income $ 35.6 $ 28.2
Interest income on notes receivable 7.0 5.9
Operating lease income, net of depreciation expense 13.7 12.0
Net gain on disposal or re-lease of assets 2.8 8.1
Other 1.6 1.2
------------------------------------------
60.7 55.4
------------------------------------------
EXPENSES
Interest expense 33.2 26.9
Provision for losses 3.5 3.4
Operating expenses 3.1 3.1
Other 1.0 0.5
------------------------------------------
40.8 33.9
------------------------------------------
Income before provision for income taxes 19.9 21.5
Provision for income taxes 7.2 7.7
------------------------------------------
Net income 12.7 13.8
Income retained for growth at beginning of year 181.0 135.7
Dividends (0.8) (0.9)
------------------------------------------
Income retained for growth at end of period $ 192.9 $ 148.6
==========================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Three months ended March 31,
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 12.7 $ 13.8
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation expense - equipment under operating leases 14.7 13.2
Net gain on disposal or re-lease of assets (2.8) (8.1)
Provision for losses 3.5 3.4
Change in assets and liabilities:
Accounts with McDonnell Douglas and MDFS (6.2) (3.5)
Other assets 0.5 (5.4)
Accounts payable and accrued expenses (31.3) (25.9)
Other liabilities 4.9 0.4
Deferred income taxes 10.3 5.5
Other, net (1.3) (1.2)
------------------------------------------
5.0 (7.8)
------------------------------------------
INVESTING ACTIVITIES
Net change in short-term notes and leases receivable (0.2) (29.5)
Purchase of equipment for operating leases (3.7) (224.0)
Proceeds from disposition of equipment, notes and leases receivable 7.3 53.0
Collection of notes and leases receivable 73.2 29.8
Acquisition of notes and leases receivable (42.8) (104.9)
------------------------------------------
33.8 (275.6)
------------------------------------------
FINANCING ACTIVITIES
Net change in short-term borrowings (18.9) 89.4
Debt having maturities more than 90 days:
Proceeds 60.0 262.2
Repayments (84.9) (65.3)
------------------------------------------
(43.8) 286.3
------------------------------------------
Increase (decrease) in cash and cash equivalents (5.0) 2.9
Cash and cash equivalents at beginning of year 16.9 12.6
==========================================
Cash and cash equivalents at end of period $ 11.9 $ 15.5
==========================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
McDonnell Douglas Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 -- Basis of Presentation
McDonnell Douglas Finance Corporation (the "Company") is a wholly-owned
subsidiary of McDonnell Douglas Financial Services Corporation ("MDFS"), a
wholly-owned subsidiary of McDonnell Douglas Corporation ("McDonnell Douglas").
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments (consisting of normal
recurring accruals) which are necessary to present fairly the consolidated
balance sheet and the related consolidated statements of income and income
retained for growth and cash flows for the interim periods presented. Operating
results for the three-month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. The statements should be read in conjunction with the notes to the
consolidated financial statements included in the Company's Form 10-K for the
year ended December 31, 1996.
Certain 1996 amounts have been reclassified to conform to the 1997 presentation.
Note 2 -- Credit Agreements and Long-Term Debt
The provisions of various credit and debt agreements require the Company to
maintain a minimum net worth, restrict indebtedness, and limit cash dividends
and other distributions. Under the most restrictive provision, $69.4 million of
the Company's income retained for growth was available for dividends at March
31, 1997.
Note 3 -- Commitments and Contingencies
On November 1, 1996, The Allen Austin Harris Group, Inc. ("Plaintiff") filed a
complaint in the Superior Court of the State of California, County of Alameda,
against the Company, McDonnell Douglas, McDonnell Douglas Aerospace Middle East
Limited and the Selah Group, Inc. (the "Defendants"). The Plaintiff, which had
hoped to establish a manufacturing plant abroad with various assistance from the
Defendants, seeks more than $57.0 million in alleged damages (primarily
consisting of lost profits) based on various theories. The Company believes it
has meritorious defenses to all of the allegations and that the litigation will
have no material adverse effect on the Company's earnings, cash flow or
financial condition.
A number of legal proceedings and claims are pending or have been asserted
against the Company. A substantial number of such legal proceedings and claims
are covered by third parties, including insurance companies. The Company
believes that the final outcome of such proceedings and claims will not have a
material adverse effect on its earnings, cash flow, or financial position.
Trans World Airlines, Inc. ("TWA") accounted for $245.6 million (9.6% of total
Company portfolio) and $249.5 million (9.5% of total Company portfolio) at March
31, 1997 and December 31, 1996. TWA continues to operate under a reorganization
plan, confirmed by the United States Bankruptcy Court in 1995, that restructured
its indebtedness and leasehold obligations to its creditors. In addition, TWA
continues to face financial and operational challenges due in part to an
airliner crash in July 1996 and turnover of key management, which occurred
during 1996. Additionally, TWA's independent auditors included an explanatory
paragraph in their "Independent Auditors' Report" for TWA's December 31, 1996
financial statements expressing "substantial doubt" about TWA's ability to
continue as a going concern. McDonnell Douglas provides guaranties to the
Company under the various lease agreements between the Company and TWA. At March
31, 1997, the maximum aggregate coverage under such guaranties was $44.6
million. In addition, McDonnell Douglas provides supplemental guaranties in
favor of the Company for up to an additional $10.0 million of the Company's
financings to TWA. These guaranties supplement individual guaranties provided by
McDonnell Douglas with respect to certain of the Company's financings to TWA to
the extent that the estimated fair market value of the financings (after
applying the individual guaranties) is less than the net asset value of the
financings on the Company's books. The supplemental guaranties terminate in
March 1998, but may be extended under certain limited circumstances. TWA has
reported relatively low cash reserves as of March 31, 1997. The reorganization
plan and TWA's current financial condition have not had and, assuming TWA's
financial condition does not further deteriorate such that TWA ceases to make
timely payments on its obligations to the Company, are not expected to have a
material adverse effect on the Company's earnings, cash flow, or financial
position.
A United States-based operator of commuter aircraft is in arrears in the payment
of rent under the lease of two Embraer Brasilia commuter aircraft. The airline
is discussing with the Company a proposal for repayment of the delinquent sums.
The net asset value of the aircraft leased to this airline at March 31, 1997
totaled $14.7 million. Taking into account the available allowance for losses,
the Company does not expect to suffer a material adverse impact on its earnings,
cash flow, or financial condition on the account of this transaction.
A Canadian airline to which the Company has made a secured loan has deferred
payment of approximately $0.2 million in interest payments. The outstanding
balance of the loan, which is secured by a DHC-8-100 aircraft, was $4.5 million
at March 31, 1997. Taking into account the collateral value of the aircraft
securing the loan, the Company does not expect this loan to have a material
adverse effect on the Company's earnings, cash flow or financial position.
At March 31, 1997, the Company had commitments to provide leasing and other
financing totaling $104.2 million.
The $50.0 million aircraft purchase bridge facility made available by the
Company to ValuJet Airlines, Inc. ("ValuJet") expires upon delivery to ValuJet
of the first scheduled new McDonnell Douglas MD-95 aircraft, presently expected
to occur in 1999. Borrowings under this agreement must be repaid within 180 days
and the interest rate is based on the London Interbank Offering Rate ("LIBOR").
There were no amounts outstanding under this agreement at March 31, 1997 or
December 31, 1996.
In conjunction with prior asset dispositions and certain guarantees, at March
31, 1997, the Company was subject to a maximum recourse of $71.6 million. Based
on trends to date, the Company's loss related to such exposure is not expected
to be significant.
The Company leases aircraft under capital leases which have been subleased to
others. At March 31, 1997, the Company had guaranteed the repayment of $7.0
million in capital lease obligations associated with a 50% partner.
Item 2. Management's Analysis of Results of Operations
From time to time, the Company may make certain statements that contain
projections or "forward- looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) and involve risk and uncertainty.
Certain statements in this Form 10-Q, and particularly in Note 3 to the
financial statements set forth in Item 1 of Part I, and in Item 1 of Part II,
may contain forward-looking information. The subject matter of such statements
may include, but not be limited to, the consummation of the Boeing-McDonnell
Douglas merger and its possible effects, future earnings, costs, expenditures,
losses, residual values, and various business environment trends. In addition to
those contained herein, forward-looking statements and projections may be made
by management orally or in writing including, but not limited to, various
sections of the Company's filings with the Securities and Exchange Commission
under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Actual results and trends in the future may differ materially from projections
depending on a variety of factors including, but not limited to, the timing and
consummation of the Boeing-McDonnell Douglas merger and the Company's
relationship with McDonnell Douglas as well as its new ultimate shareholder, the
capital equipment requirements of U.S. and foreign businesses, capital
availability and cost, changes in law and tax benefits, competition from other
financial institutions, the Company's successful execution of internal operating
plans, defaults by customers, regulatory uncertainties, and legal proceedings.
Finance lease income increased $7.4 million (26.2%) from the first quarter of
1996, primarily attributable to the financings of two MD-11 aircraft funded in
late December 1996 and the March 1996 financing of two MD-90 aircraft under
finance lease agreements.
Interest on notes receivable increased $1.1 million (18.6%) from the first
quarter of 1996, primarily attributable to increased volume in 1996 within the
commercial equipment leasing portfolio.
Operating lease income increased $1.7 million (14.2%) from the first quarter of
1996, primarily attributable to the March 1996 financing of two MD-11 aircraft
under operating lease agreements.
Net gain on disposal or re-lease of assets decreased $5.3 million (65.4%) from
the first quarter of 1996, attributable primarily to decreased equipment sales
within the commercial equipment leasing portfolio.
Interest expense increased $6.3 million (23.4%) from the first quarter of 1996,
attributable to a higher level of debt borrowings in 1997, resulting from
increased financing activity in 1996.
Part II
Item 1. Legal Proceedings
On November 1, 1996, The Allen Austin Harris Group, Inc. ("Plaintiff") filed a
complaint in the Superior Court of the State of California, County of Alameda,
against the Company, McDonnell Douglas, McDonnell Douglas Aerospace - Middle
East Limited and the Selah Group, Inc. (the "Defendants"). The Plaintiff, which
had hoped to establish a manufacturing plant abroad with various assistance from
the Defendants, seeks more than $57.0 million in alleged damages (primarily
consisting of lost profits) based on various theories. The Company believes it
has meritorious defenses to all of the allegations and that the litigation will
have no material adverse effect on the Company's earnings, cash flow or
financial condition.
A number of legal proceedings and claims are pending or have been asserted
against the Company. A substantial number of such legal proceedings and claims
are covered by third parties, including insurance companies. The Company
believes that the final outcome of such proceedings and claims will not have a
material adverse effect on its earnings, cash flow, or financial position.
Item 5. Other Information
Information on the Company's portfolio balances; new business volume; analysis
of allowance for losses on financing receivables and credit loss experience; and
receivable write-offs, net of recoveries by business unit are summarized below.
Portfolio Balances
Portfolio balances for the Company's two business segments are summarized as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in millions) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aircraft Financing
McDonnell Douglas aircraft financing
Finance leases $ 1,122.2 $ 1,132.6
Operating leases 380.6 402.0
Notes receivable 78.0 82.9
---------------------------------------
1,580.8 1,617.5
---------------------------------------
Other commercial aircraft financing
Finance leases 136.1 136.9
Operating leases 54.8 56.0
Notes receivable 4.5 4.5
---------------------------------------
195.4 197.4
---------------------------------------
Commercial equipment leasing
Finance leases 355.7 361.7
Operating leases 227.0 231.5
Notes receivable 170.4 176.6
---------------------------------------
753.1 769.8
---------------------------------------
Other 42.5 44.9
---------------------------------------
$ 2,571.8 $ 2,629.6
=======================================
</TABLE>
New Business Volume
New business volume for the Company's two business segments is summarized as
follows:
<TABLE>
<CAPTION>
Three months Year ended
ended March 31, December 31,
--------------------------------------
(Dollars in millions 1997 1996
<S> <C> <C>
McDonnell Douglas aircraft financing $ 1.6 $ 475.3
Commercial equipment leasing 31.3 392.0
--------------------------------------
$ 32.9 $ 867.3
======================================
</TABLE>
Analysis of Allowance for Losses on Financing Receivables and Credit Loss
Experience
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------------------
(Dollars in millions) 1997 1996
<S> <C> <C>
Allowance for losses on financing receivables at beginning
of year $ 48.6 $ 42.3
Provision for losses 3.5 14.2
Write-offs, net of recoveries 0.2 (6.0)
Other (0.2) (1.9)
---------------------------------------
Allowance for losses on financing receivables at end of
period $ 52.1 $ 48.6
=======================================
Allowance as percent of total portfolio 2.0% 1.8%
Net write-offs (recoveries) as percent of average portfolio (0.4)% 0.3%
More than 90 days delinquent:
Amount of delinquent installments $ 1.9 $ 2.1
Total receivables due from delinquent obligors 3.4 23.4
Total receivables due from delinquent obligors
as a percentage of total portfolio 0.1% 0.9%
</TABLE>
Receivable Write-offs, Net of Recoveries by Business Unit
The following table summarizes the loss experience of each of the Company's
continuing businesses:
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, December 31,
(Dollars in millions) 1997 1996
------------------------------------------
<S> <C> <C>
Commercial aircraft financing $ - $ -
Commercial equipment leasing (0.2) 0.3
------------------------------------------
$ (0.2) $ 0.3
==========================================
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 12 Computation of ratio of income to fixed charges.
Exhibit 27 Financial Data Schedule.
B. Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its principal financial officer and by its principal accounting
officer, thereunto duly authorized.
McDonnell Douglas Finance Corporation
May 14, 1997 /s/ STEVEN W. VOGEDING
----------------------------------
Steven W. Vogeding
Vice President and Chief Financial
Officer (Principal Financial Officer) and
Registrant's Authorized Officer
/s/ MAURA R. MIZUGUCHI
----------------------------------
Maura R. Mizuguchi
Controller (Principal Accounting Officer)
EXHIBIT 12
McDonnell Douglas Finance Corporation and Subsidiaries
Computation of Ratio of Income to Fixed Charges
<TABLE>
<CAPTION>
Three months ended March 31,
Dollars in millions) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Income before provision for income taxes $ 19.9 $ 21.5
Fixed charges 34.0 27.8
-------------------------------------
Income before provision for income taxes and fixed charges $ 53.9 $ 49.3
=====================================
Fixed charges:
Interest expense $ 33.2 $ 26.9
Preferred stock dividends 0.8 0.9
-------------------------------------
$ 34.0 $ 27.8
=====================================
Ratio of income before provision for income taxes and fixed
charges to fixed charges 1.59 1.77
=====================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,900
<SECURITIES> 0
<RECEIVABLES> 295,200
<ALLOWANCES> (52,100)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,606,400
<CURRENT-LIABILITIES> 0
<BONDS> 1,664,000
<COMMON> 5,000
0
50,000
<OTHER-SE> 192,900
<TOTAL-LIABILITY-AND-EQUITY> 2,606,400
<SALES> 0
<TOTAL-REVENUES> 60,700
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,000
<LOSS-PROVISION> 3,500
<INTEREST-EXPENSE> 33,200
<INCOME-PRETAX> 19,900
<INCOME-TAX> 7,200
<INCOME-CONTINUING> 12,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,700
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
