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United States
Securities and Exchange Commission
Washington, DC 20549
------------------------------
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 1997
-----------------------------
BOEING CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2564584 0-10795
(State or other jurisdiction of (I.R.S. Employer (Commission File No.)
Incorporation or Organization) dentification 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)
-----------------------------
Securities registered pursuant to Section 12(b)of the Act:
None
Securities registered pursuant to Section 12(g)of the Act:
Common stock, par value $100 per share
Indicate by check mark whether the registrant (1) has filed all reports required
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of March 30, 1998, there were 50,000 shares of the Company's common stock
outstanding.
Registrant meets the conditions set forth in General Instruction J(1)(a) and (b)
of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
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<PAGE>
Table of Contents
Page
Part I
Item 1. Business..................................................3
Item 2. Properties...............................................18
Item 3. Legal Proceedings........................................18
Item 4. Submission of Matters to a Vote of Security Holders *
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................20
Item 6. Selected Financial Data..................................21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................22
Item 8. Financial Statements and Supplementary Data..............25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................45
Part III
Item 10. Directors and Executive Officers of the Registrant *
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and Management *
Item 13. Certain Relationships and Related Transactions *
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.....................................46
Signatures................................................51
Exhibits..................................................52
- ---------------------------------
*Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
<PAGE>
Part I
Item 1. Business
General
Boeing Capital Corporation (formerly McDonnell Douglas Finance Corporation)
(together with its subsidiaries the "Company") is a wholly-owned subsidiary of
Boeing Capital Services Corporation (formerly McDonnell Douglas Financial
Services Corporation) ("BCSC"), a wholly-owned subsidiary of McDonnell Douglas
Corporation ("McDonnell Douglas"), which in turn, as of August 1, 1997, is
wholly-owned by The Boeing Company ("Boeing"). The Company was incorporated in
Delaware in 1968 and provides equipment financing and leasing arrangements to a
diversified range of customers and industries. The Company's primary operations
include two financial reporting segments: commercial aircraft financing and
commercial equipment leasing. The Company's strategy is to generate and
participate in finance transactions in which the Company's structuring and
analysis can provide high returns on its invested equity. Currently, the
commercial aircraft financing group is active in providing lease and debt
financing to domestic and international airlines, and the Company is active in
providing lease and debt financing to a broad range of commercial and industrial
customers. At December 31, 1997, the Company had 68 employees.
On August 1, 1997, the Boeing-McDonnell Douglas merger was consummated pursuant
to an Agreement and Plan of Merger dated as of December 14, 1996, among Boeing,
West Acquisition Corp., a wholly-owned subsidiary of Boeing ("Sub"), and
McDonnell Douglas (the "Merger Agreement"). Under the terms of the Merger
Agreement, Sub was merged into McDonnell Douglas, with McDonnell Douglas
surviving as a wholly-owned subsidiary of Boeing.
The many possible ramifications of the merger on the Company (for example,
decisions regarding the strategic value of the Company to Boeing, the impact of
the merger on residual values of aircraft in the Company's portfolio, the tax
position of Boeing and the effect of decisions relating to the financing of
Boeing aircraft) are currently unknown and, therefore, cannot be quantified at
this time. Boeing is conducting a review of the operations and the strategic
value of the Company, which review could lead to a decision to divest all or
part of the Company's assets or to sell the Company's stock, presently held
indirectly by Boeing.
On November 3, 1997, Boeing announced that it will continue to produce MD-80 and
MD-90 aircraft only until approximately mid-1999. Boeing also stated that MD-80
and MD-90 customers, with 1,200 such aircraft in service overall, can expect the
same level of long-term support that Boeing provides for all of its aircraft,
whether they are in or out of production. Boeing has stated that production of
the MD-11 will continue at a relatively low rate through 1998, and future sales
prospects are principally limited to the freighter version. Boeing has also
noted that the future of the MD-11 jetliner program depends on the success of
current marketing efforts, and Boeing expects to have a clearer picture of the
program's future later in 1998. The Company's commercial aircraft portfolio as
of December 31, 1997 included 33 MD-80s, three MD-90s and seven MD-11s,
representing $425.3 million, $100.5 million and $650.3 million, respectively, in
net asset value or 15.8%, 3.7% and 24.1%, respectively, of the Company's total
portfolio. The Company periodically reviews the carrying and residual values of
all aircraft in its portfolio. Such reviews include the effects, if any, of the
foregoing announcements as they become known or can be reasonably estimated.
While management believes that current booked residual values are conservative,
significant declines in market value could impact the gain or loss on
disposition of these aircraft.
The Company now operates in principally two segments: commercial aircraft
financing and commercial equipment leasing ("CEL"). Prior to 1995, the Company
operated in three segments: commercial aircraft financing, CEL and non-core
businesses. Non-core businesses represented market segments in which the Company
is no longer active, and the Company continues to manage and liquidate the
remaining non-core businesses as market opportunities occur. Based on trends to
date, the Company does not expect to incur significant losses related to the
disposal of its non-core businesses. At December 31, 1997 and 1996, the
portfolio balances for non-core businesses totaled $12.2 million and $44.9
million, respectively.
Information on the Company's continuing businesses is included in the following
tables.
<TABLE>
<CAPTION>
New Business Volume
Years ended December 31,
----------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial aircraft financing $ 176.3 $ 475.3 $ 349.7 $ 117.9 $ 411.4
Commercial equipment leasing 414.8 392.0 241.1 84.1 41.5
----------------------------------------------------------------------------
$ 591.1 $ 867.3 $ 590.8 $ 202.0 $ 452.9
============================================================================
</TABLE>
<TABLE>
<CAPTION>
Portfolio Balances
December 31,
----------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial aircraft financing $ 1,711.5 $ 1,814.9 $ 1,405.7 $ 1,333.0 $ 1,237.5
Commercial equipment leasing 976.6 769.8 502.4 369.4 422.3
----------------------------------------------------------------------------
$ 2,688.1 $ 2,584.7 $ 1,908.1 $ 1,702.4 $ 1,659.8
============================================================================
</TABLE>
For financial information about the Company's segments, see Notes to
Consolidated Financial Statements included in Item 8.
Commercial Aircraft Financing Segment
The Company's commercial aircraft financing group, located in Long Beach,
California, provides financing for customers purchasing aircraft. A substantial
majority of the value of the commercial aircraft portfolio is derived from
aircraft manufactured by McDonnell Douglas. The Company's strategy is to
generate and participate in finance transactions in which the Company's
structuring and analysis can provide high returns on its invested equity.
Currently, the commercial aircraft financing group is active in providing lease
and debt financing to domestic and international airlines.
The Company has not been involved in the financing of any new Boeing/McDonnell
Douglas aircraft subsequent to the Boeing-McDonnell Douglas merger. The Company
does not expect Boeing to provide a material amount of new aircraft financing
opportunities. The Company has, however, financed two used Boeing 737 aircraft,
one used Boeing 757 aircraft and one used Boeing 767 aircraft subsequent to the
Boeing-McDonnell Douglas merger. It is the present intent of the Company's
management to achieve more balance in the commercial aircraft portfolio between
Boeing and McDonnell Douglas aircraft.
Portfolio balances for the Company's commercial aircraft financing segment are
summarized as follows:
Commercial Aircraft Portfolio by Aircraft Type
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Boeing/McDonnell Douglas aircraft
financing:
Finance leases $ 964.9 $ 1,132.6 $ 857.4 $ 748.2 $ 732.3
Operating leases 495.2 402.0 256.8 197.8 176.9
Notes receivable 61.9 82.9 110.9 194.8 125.9
-------------------------------------------------------------------------
1,522.0 1,617.5 1,225.1 1,140.8 1,035.1
-------------------------------------------------------------------------
Other commercial aircraft financing:
Finance leases 133.3 136.9 126.1 125.2 123.0
Operating leases 51.9 56.0 49.6 43.1 55.9
Notes receivable 4.3 4.5 4.9 23.9 23.5
-------------------------------------------------------------------------
189.5 197.4 180.6 192.2 202.4
-------------------------------------------------------------------------
$ 1,711.5 $ 1,814.9 $ 1,405.7 $ 1,333.0 $ 1,237.5
=========================================================================
</TABLE>
Commercial Aircraft Portfolio by Product Type
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Aircraft leases:
Finance leases
Domestic $ 863.1 $ 950.0 $ 776.2 $ 653.3 $ 638.9
Foreign 235.1 319.5 207.3 220.1 216.5
Operating leases
Domestic 319.2 357.2 183.5 161.9 149.7
Foreign 227.9 100.8 122.9 79.0 83.0
-------------------------------------------------------------------------
1,645.3 1,727.5 1,289.9 1,114.3 1,088.1
-------------------------------------------------------------------------
Aircraft related notes receivable:
Domestic obligors 2.2 22.6 31.2 53.4 51.4
Foreign obligors 64.0 64.8 84.6 165.3 98.0
-------------------------------------------------------------------------
66.2 87.4 115.8 218.7 149.4
-------------------------------------------------------------------------
$ 1,711.5 $ 1,814.9 $ 1,405.7 $ 1,333.0 $ 1,237.5
=========================================================================
</TABLE>
At December 31, 1997, the Company's commercial aircraft portfolio was comprised
of finance leases to 29 customers (24 domestic and five foreign) with a carrying
amount of $1,098.2 million (40.7% of total Company portfolio), notes receivable
from four customers (one domestic and three foreign) with a carrying amount of
$66.2 million (2.4% of total Company portfolio) and operating leases to 17
customers (11 domestic and six foreign) with a carrying amount of $547.1 million
(20.3% of total Company portfolio).
At December 31, 1997, 56.4% of the Company's total portfolio consisted of
financings related to Boeing/McDonnell Douglas aircraft, compared with 61.5% and
61.6% in 1996 and 1995, respectively.
- - Factors Affecting the Commercial Aircraft Financing Portfolio
A substantial portion of the Company's total portfolio is concentrated among
the Company's largest commercial aircraft financing customers. The five
largest commercial aircraft financing customers accounted for $994.4 million
(36.8% of total Company portfolio) and $1,172.4 million (44.6% of total
Company portfolio) at December 31, 1997 and 1996, respectively.
The Company's largest customer, Federal Express Corporation, accounted for
$309.7 million (11.5% of total Company portfolio) and $316.1 million (12.0%
of the total Company portfolio) at December 31, 1997 and 1996, respectively.
At December 31, 1997, the Company's second largest customer was Trans World
Airlines, Inc. ("TWA"), which accounted for $196.6 million (7.3% of total
Company portfolio) and $249.5 million (9.5% of total Company portfolio) at
December 31, 1997 and 1996, respectively. In 1997, 1996 and 1995, TWA
accounted for 16.8%, 18.0% and 21.6%, respectively, of the Company's
operating income; no other customer accounted for more than 10% of the
Company's operating income. 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.
McDonnell Douglas provides guaranties to the Company for certain obligations
of TWA under the various lease agreements between the Company and TWA. At
December 31, 1997, the maximum aggregate coverage under such guaranties was
$36.4 million. TWA has reported cash balances of $237.8 million as of
December 31, 1997, compared to $181.6 million at December 31, 1996. As of the
date hereof, TWA is current on its obligations to the Company. If, however,
TWA were to default on its obligations to the Company, this could have a
material adverse effect on the Company's earnings, cash flow or financial
position.
P.T. Garuda Indonesia ("Garuda"), accounted for $171.8 million (6.4% of total
Company portfolio) and $279.4 million (10.6% of total Company portfolio) at
December 31, 1997 and 1996, respectively. Garuda has proposed a restructuring
of the Company's two MD-11 leases. A possible restructuring, providing for
lease extensions and payment deferrals, is being considered by the Company.
Uncertainty for Asia-Pacific airlines increased during the latter half of
1997, as currency devaluations and continuing turmoil in Asia's financial
markets dimmed the region's near-term prospects for growth. For more
discussion on the Asia-Pacific economies, see "Current Commercial Aircraft
Market Conditions."
The $100.0 million used aircraft purchase bridge facility made available by
the Company to AirTran Airlines ("AirTran"), formerly ValuJet Airlines, Inc.,
in 1995, was reduced to a maximum of $50.0 million by mutual agreement during
the third quarter of 1996. This facility expires upon delivery to AirTran of
the first scheduled new Boeing 717-200 (formerly 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 December 31, 1997 or 1996.
- - Current Commercial Aircraft Market Conditions
The Company's financial performance is dependent in part upon general
economic conditions which may affect the profitability of the commercial
airlines with which the Company does business. The Company continues to look
for opportunities to expand its commercial aircraft portfolio while taking
advantage of improving market conditions to reduce concentration and certain
exposure levels.
The Company believes that realizable values for its aircraft at lease
maturity are likely to remain above the values actually booked, but this is
subject to many uncertainties including those referred to in "Factors
Affecting Aircraft Financing Volume." If aircraft values 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 Company's
earnings, cash flow or financial position.
On November 3, 1997, Boeing announced that it will continue to produce MD-80
and MD-90 aircraft only until approximately mid-1999. Boeing also stated that
MD-80 and MD-90 customers, with 1,200 such aircraft in service overall, can
expect the same level of long-term support that Boeing provides for all of
its aircraft, whether they are in or out of production. Boeing has stated
that production of the MD-11 will continue at a relatively low rate through
1998, and future sales prospects are principally limited to the freighter
version. Boeing has also noted that the future of the MD-11 jetliner program
depends on the success of current marketing efforts, and Boeing expects to
have a clearer picture of the program's future later in 1998. The Company's
commercial aircraft portfolio as of December 31, 1997 included 33 MD-80s,
three MD-90s and seven MD-11s, representing $425.3 million, $100.5 million
and $650.3 million, respectively, in net asset value or 15.8%, 3.7% and
24.1%, respectively, of the Company's total portfolio. The Company
periodically reviews the carrying and residual values of all aircraft in its
portfolio. Such reviews include the effects, if any, of the foregoing
announcements as they become known or can be reasonably estimated. While
management believes that current booked residual values are conservative,
significant declines in market value could impact the gain or loss on
disposition of these aircraft.
Generally, Asia-Pacific airlines' load factors declined and some airlines
reported net losses in 1997. Uncertainty increased during the latter half of
1997, as currency devaluations and continuing turmoil in Asia's financial
markets dimmed the region's near-term prospects for growth. With prospects
for air travel growth in the region lower than most forecasts, airlines are
currently evaluating the number and timing of aircraft additions contracted
to deliver during the next several years. Except for the lease of the two
MD-11s to Garuda discussed in "Factors Affecting the Commercial Aircraft
Financing Portfolio" and the two Boeing 737 aircraft leased to Jet Airways
(India) Pvt. Ltd. discussed in "Relationship With Boeing and McDonnell
Douglas," the Company has no commercial aircraft leased to airlines in the
Asia-Pacific region.
For further discussion on the commercial jet aircraft market and the
airline industry, see "Competition and Economic Factors."
- - Aircraft Leasing
The Company normally purchases commercial aircraft for lease to airlines only
when such aircraft are subject to a signed lease contract. At December 31,
1997, the Company owned or participated in the ownership of 132 leased
commercial aircraft, a majority of which were manufactured by McDonnell
Douglas.
- - Factors Affecting Aircraft Financing Volume
The Company's commercial aircraft group has historically derived the
majority of its new business volume by financing new McDonnell Douglas
aircraft. Following the Boeing-McDonnell Douglas merger, this source of new
business has not been available to the Company and, accordingly, the Company
has not financed any new Boeing/McDonnell Douglas aircraft. The Company does
not expect Boeing to provide a material amount of new aircraft financing
opportunities. See "Relationship with Boeing and McDonnell Douglas."
The Company's financial performance is dependent in part upon general
economic conditions which may affect the profitability of the commercial
airlines with which the Company does business.
The Company anticipates continued fluctuations in the volume of its aircraft
financing transactions. At December 31, 1997, commercial aircraft financing's
backlog was $22.5 million. At December 31, 1997, the Company had unused
credit lines available to a customer totaling $50.0 million. The Company had
no other commitments to provide aircraft related financing at December 31,
1997. See "Competition and Economic Factors."
The following table lists information on new business volume for the
Company's commercial aircraft financing segment:
<TABLE>
<CAPTION>
Years ending December 31,
---------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Boeing/McDonnell Douglas aircraft
financing volume:
Finance leases $ 7.1 $ 234.1 $ 220.6 $ 53.0 $ 357.3
Operating leases 146.5 196.9 81.9 15.7 33.8
Notes receivable 18.2 24.2 36.2 41.3 19.1
---------------------------------------------------------------------------
171.8 455.2 338.7 110.0 410.2
---------------------------------------------------------------------------
Other commercial aircraft
financing volume:
Finance leases 4.5 20.1 7.7 7.9 -
Operating leases - - 3.3 - 0.7
Notes receivable - - - - 0.5
---------------------------------------------------------------------------
4.5 20.1 11.0 7.9 1.2
---------------------------------------------------------------------------
$ 176.3 $ 475.3 $ 349.7 $ 117.9 $ 411.4
===========================================================================
</TABLE>
In 1997, $146.5 million of the $171.8 million in Boeing/McDonnell Douglas
aircraft financing volume related to used Boeing aircraft. There are no
Boeing commercial aircraft in the Company's portfolio from transactions
prior to 1997.
- - Aircraft Financing Guaranties
At December 31, 1997, the Company had $374.0 of guaranties in its favor with
respect to its commercial aircraft financing portfolio relating to
transactions with a carrying amount of $1,103.7 million (64.5% of the
commercial aircraft financing portfolio). The following table summarizes such
guaranties:
<TABLE>
<CAPTION>
Domestic Airlines Foreign Airlines Total
(Dollars in millions)
<S> <C> <C> <C>
Amounts guaranteed by:
McDonnell Douglas $ 225.4 $ 109.5 $ 334.9
Other 26.7 12.4 39.1
-----------------------------------------------------------
Total guaranties $ 252.1 $ 121.9 $ 374.0
===========================================================
</TABLE>
The Company has no reason to believe that the amounts guaranteed by McDonnell
Douglas will be ultimately uncollectible. See "Relationship with Boeing and
McDonnell Douglas."
Commercial Equipment Leasing Segment
The CEL group provides single-investor, tax-oriented lease financing and
participates in senior secured bank loans. CEL obtains its business primarily
through direct solicitation by its marketing personnel and maintains its
principal operations in Long Beach, California with marketing offices in
Atlanta, Georgia; Chicago, Illinois; and Detroit, Michigan. CEL specializes in
leasing equipment such as machine tools, executive aircraft, highway vehicles,
containers and chassis, printing 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 $20.0 million.
Portfolio balances for the Company's CEL segment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Finance leases $ 410.9 $ 361.7 $ 266.3 $ 216.8 $ 235.2
Operating leases 375.0 231.5 169.1 133.4 157.5
Notes receivable 190.7 176.6 67.0 18.5 28.8
Preferred and preference stock - - - 0.7 0.8
--------------------------------------------------------------------------
$ 976.6 $ 769.8 $ 502.4 $ 369.4 $ 422.3
=========================================================================
</TABLE>
- - Factors Affecting CEL Volume
As the Company's borrowing costs have declined in recent years, CEL's ability
to compete more effectively has been aided. At the same time, however, more
financial institutions have entered the particular portion of the leasing
market in which the Company has operated, thus intensifying overall
competition. In 1997, CEL booked $414.8 million of new business volume,
representing a $22.8 million increase over 1996 bookings. At December 31,
1997, CEL's backlog of business was $79.7 million, compared to $76.6 million
at December 31, 1996.
The Company is presently attempting to grow its CEL portfolio at a relatively
faster rate than its commercial aircraft portfolio in order to achieve a
better balance of its overall portfolio. Additionally, due to increased
domestic competition, the Company is attempting to increase the amount of its
financings to foreign borrowers and lessees. For a discussion of additional
risks associated with foreign financings, see "Cross-Border Outstandings."
The following lists information on new business volume for the
Company's CEL segment:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Finance leases $ 109.5 $ 160.9 $ 102.0 $ 53.9 $ 15.3
Operating leases 199.7 107.0 70.5 24.3 22.9
Notes receivable 105.6 124.1 68.6 5.9 3.3
----------------------------------------------------------------------------------
$ 414.8 $ 392.0 $ 241.1 $ 84.1 $ 41.5
==================================================================================
</TABLE>
Cross-Border Outstandings
The extension of credit to borrowers located outside of the United States is
called "cross-border" credit. In addition to the credit risk associated with any
borrower, these particular credits are also subject to "country risk" -
economic and political risk factors specific to the country of the borrower
which may make the borrower unable or unwilling to pay principal and interest or
otherwise perform according to contractual terms. Other risks associated with
these credits include the possibility of insufficient foreign exchange and
restrictions on its availability.
Approximately 22.8% of the total Company portfolio consisted of amounts due from
customers outside the United States. Substantially all of these amounts are
payable in U.S. dollars, and, in management's opinion, related risks are
adequately covered by guaranties and allowance for losses. Overall, the Company
has not experienced materially adverse financial consequences as a result of
sales and financing activities outside the United States. The countries in which
the Company's cross-border outstandings exceeded 1% of consolidated assets, net
of domestic guaranties, consisted of the following at December 31, 1997, 1996
and 1995:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
Finance Leases Notes Operating
(Dollars in millions) Receivable Leases Total
<S> <C> <C> <C> <C>
Country
1997
Indonesia $ 110.5 $ - $ - $ 110.5
Mexico 50.1 44.0 - 94.1
Scandinavia - - 55.1 55.1
India - - 50.4 50.4
Italy - 3.5 39.8 43.3
Spain - - 39.4 39.4
United Kingdom 10.9 - 28.0 38.9
-----------------------------------------------------------------
$ 171.5 $ 47.5 $ 212.7 $ 431.7
=================================================================
1996
Indonesia $ 120.8 $ - $ - $ 120.8
Mexico 27.0 31.2 13.2 71.4
Italy - - 44.4 44.4
-----------------------------------------------------------------
$ 147.8 $ 31.2 $ 57.6 $ 236.6
=================================================================
1995
Indonesia $ 132.6 $ - $ - $ 132.6
Italy - - 48.8 48.8
-----------------------------------------------------------------
$ 132.6 $ - $ 48.8 $ 181.4
=================================================================
</TABLE>
At December 31, 1997 and 1996, there were no countries in which customer
outstandings were between 0.75% and 1% of the Company's total assets. At
December 31, 1995, the Company had equipment in Mexico under both a finance
lease and an operating lease agreement with an aggregate net carrying amount of
$15.6 million and equipment in Belgium under an operating lease agreement with a
net carrying amount of $16.0 million, representing outstandings between 0.75%
and 1% of the Company's total assets.
Maturities and Sensitivity to Interest Rate Changes
The following table shows the maturity distribution and sensitivity to changes
in interest rates of the Company's domestic and foreign financing receivables at
December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in millions) Domestic Foreign Total
<S> <C> <C> <C> <C>
Maturity Distribution
1998 $ 251.1 $ 35.0 $ 286.1
1999 237.9 36.6 274.5
2000 191.9 37.1 229.0
2001 178.5 40.9 219.4
2002 158.7 36.4 195.1
2003 and thereafter 835.7 211.9 1,047.6
-------------------------------------------------
$ 1,853.8 $ 397.9 $ 2,251.7
=================================================
Financing Receivables due 1999 and Thereafter
Fixed interest rates $ 1,500.9 $ 126.5 $ 1,627.4
Variable interest rates 101.8 236.4 338.2
-------------------------------------------------
$ 1,602.7 $ 362.9 $ 1,965.6
=================================================
</TABLE>
Allowance for Losses on Financing Receivables and Credit Loss Experience
Analysis of Allowance for Losses on Financing Receivables
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Allowance for losses on financing
receivables at beginning of year $ 48.6 $ 42.3 $ 40.7 $ 35.6 $ 37.4
Provision for losses 11.5 14.2 12.2 9.9 8.6
Write-offs, net of recoveries (2.5) (6.0) (10.6) (4.9) (10.4)
Other (1.7) (1.9) - 0.1 -
=======================================================================
Allowance for losses on financing
receivables at end of year $ 55.9 $ 48.6 $ 42.3 $ 40.7 $ 35.6
=======================================================================
Allowance as percent of total portfolio 2.1 % 1.8 % 2.1 % 2.2 % 1.9 %
Net write-offs as percent of average portfolio 0.1 % 0.3 % 0.6 % 0.3 % 1.6 %
More than 90 days delinquent:
Amount of delinquent installments $ 1.8 $ 2.1 $ 10.0 $ 2.8 $ 3.7
Total receivables due from delinquent
obligors $ 15.5 $ 23.4 $ 12.1 $ 43.2 $ 108.4
Total receivables due from delinquent
obligors as a percentage of total 0.6 % 0.9 % 0.6 % 2.4 % 5.9 %
portfolio
</TABLE>
The portfolio at December 31, 1997 includes one CEL obligor and two airline
obligors to which payment extensions have been granted. At December 31, 1997,
payments so extended amounted to $2.8 million ($1.2 million airline-related),
and the aggregate carrying amount of the related receivables was $38.2 million
($18.0 million airline-related).
Receivable Write-offs, Net of Recoveries by Segment
The Company's primary operations had no net write-offs of receivables for the
year ended December 31, 1997. CEL had $3.0 million in net write-offs (0.5% of
CEL average portfolio), while commercial aircraft financing had no net
write-offs of receivables for the year ended December 31, 1996.
In its analysis of the allowance for losses on financing receivables, the
Company has taken into consideration the current economic and market conditions
and provided $11.5 million and $14.2 million in 1997 and 1996, respectively, for
losses. The Company believes that the allowance for losses on financing
receivables is adequate at December 31, 1997 to cover potential losses in the
Company's total portfolio. If, however, certain major customers defaulted and
the Company were forced to take possession of and dispose of significant amounts
of aircraft or equipment, losses in excess of the allowance could be incurred,
which would be charged directly against earnings.
The Company's receivable write-offs, net of recoveries, decreased in 1997, as
compared to 1996, primarily attributable to certain CEL repossessions which
occurred in 1996.
Nonaccrual and Past Due Financing Receivables
Financing receivables accounted for on a nonaccrual basis consisted of the
following at December 31:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
<S> <C> <C>
(Dollars in millions) 1997 1996
Domestic $ 1.4 $ 1.6
Foreign - 13.8
----------------------------------------
$ 1.4 $ 15.4
========================================
</TABLE>
Interest on receivables which are contractually past due 90 days or more as to
principal and interest payments is being accrued for domestic financings of $4.6
million and $0.9 million at December 31, 1997 and 1996, respectively.
Borrowing Operations
The Company principally relies on funds from operations and borrowings to
operate its business. Borrowings include commercial paper, secured and unsecured
senior and subordinated long-term debt, and bank borrowings. The Company also
utilizes interest rate swap agreements to manage interest costs and risk
associated with changing interest rates. See Note 7 of "Notes to Consolidated
Financial Statements" included as Item 8.
The Company has a joint revolving credit agreement under which the Company may
borrow up to $240.0 million, reduced by borrowings of up to $16.0 million that
can be made by BCSC under this agreement. At December 31, 1997 and 1996, there
were no amounts outstanding under the revolving credit agreement. At
December 31, 1997 and 1996, borrowings under commercial paper totaling $80.0
million and $96.0 million, respectively, were supported by available unused
commitments under the revolving credit agreement. The Company also
has available approximately $95.0 million in uncommitted, short-term bank
credit facilities.
On October 10, 1997, the Company filed with the Securities and Exchange
Commission ("Commission") a Form S-3 Registration Statement for a public shelf
registration of $1.2 billion of its debt securities (SEC File No. 333-37635). On
October 31, 1997, the Commission declared such Registration Statement to be
effective. The Company has authorized the sale and issuance from time to time at
the Company's discretion of up to $400 million of such debt securities in the
form of the Company's Series X medium-term notes. As of December 31, 1997, the
Company has issued and sold $165.0 million in aggregate principal amount of such
notes.
The following table sets forth the average debt of the Company by borrowing
classification:
<TABLE>
<CAPTION>
(Dollars in millions)
Average Average Average
Years ended Short-Term Long-Term Total
December 31, Debt Debt Debt
<S> <C> <C> <C> <C>
1997 $ 114.0 $ 1,606.2 $ 1,720.2
1996 49.5 1,501.0 1,550.5
1995 71.4 1,183.6 1,255.0
1994 108.0 1,167.3 1,275.3
1993 113.0 1,153.7 1,266.7
</TABLE>
The weighted average interest rates on all outstanding indebtedness computed for
the relevant period were as follows:
<TABLE>
<CAPTION>
Weighted Average Weighted Average Weighted Average
Years ended Short-Term Long-Term Total Debt
December 31, Interest Rate Interest Rate Interest Rate
<S> <C> <C> <C> <C>
1997 5.72% 7.34% 7.25%
1996 5.66 7.60 7.56
1995 6.34 8.19 8.12
1994 5.27 8.76 8.50
1993 5.97 9.53 9.19
</TABLE>
The Company's access to capital at rates that allow for a reasonable return on
new business is affected by credit rating agencies' ratings of the Company's
debt. On July 31, 1997, Standard & Poor's raised its ratings on Boeing,
McDonnell Douglas and the Company. The Company's senior unsecured debt rating
was raised to AA from A- and its subordinated debt rating was raised to AA- from
BBB+. The Company's commercial paper rating was raised to A-1+ from A-2.
Standard & Poor's stated that "The upgrade on McDonnell Douglas Finance
Corporation reflects the benefits of the merger, including the 100% indirect
ownership by Boeing." Standard & Poor's also stated that "the finance unit's
ratings are not equalized with those of Boeing because there is some uncertainty
about the strategic fit of financial services in Boeing's long-term business
mix."
On March 16, 1998, Moody's Investors Service ("Moody's) said that it upgraded
the ratings of the Company. The Company's senior unsecured debt rating was
raised to A3 from Baa2 and its subordinated debt rating was raised to Baa1 from
Baa3. The Company's commercial paper rating was raised to Prime-1 from Prime-2.
Moody's said these ratings increases consider, among other things, "the improved
and steady performance of Boeing Capital's business over the last several
years." Moody's stated that "Further rating considerations include uncertainty
regarding Boeing's long-term commitment to this business unit." Moody's noted
that "the strategic fit of Boeing Capital is unclear in Boeing's overall
strategy." The rating agency went on to say that "Boeing has not maintained a
finance subsidiary of its own in the past, but has preferred to keep its
customer financing exposure on its own balance sheet."
Although security ratings impact the rate at which the Company can borrow funds,
a security rating is not a recommendation to buy, sell or hold securities. In
addition, a security rating is subject to revision or withdrawal at any time by
the assigning rating organization and each rating should be evaluated
independently of any other rating.
Competition and Economic Factors
The Company is subject to competition from other financial institutions,
including commercial banks, finance companies and leasing companies, some of
which are larger than the Company and have greater financial resources, greater
leverage ability and lower effective borrowing costs. These factors permit many
competitors to provide financing at lower rates than the Company. In its
commercial equipment leasing and commercial aircraft financing segments, the
ability of the Company to compete in the marketplace is principally based on
rates which the Company charges its customers, which rates are related to the
Company's access to and cost of funds and to the ability of the Company to
utilize tax benefits attendant to leasing. See "Commercial Equipment Leasing
Segment - Factors Affecting CEL Volume," "Relationship With Boeing and McDonnell
Douglas" and "Borrowing Operations." Competitive factors also include, among
other things, the Company's ability to be relatively flexible in its financing
arrangements with new and existing customers. Although the Company is
particularly subject to risks attendant to the airline and aircraft
manufacturing industries, the ability of the Company to generate new business
also is dependent upon, among other factors, the capital equipment requirements
of United States and foreign businesses and the availability of capital.
The Company has in the past obtained a significant portion of its leasing
business and notes receivable in connection with the lease or sale of McDonnell
Douglas aircraft. The Company's relationship with McDonnell Douglas has in many
cases presented opportunities for such business and has caused McDonnell Douglas
to offer to the Company substantially all of the financing receivables taken by
McDonnell Douglas upon the sale of its aircraft. This relationship has been
materially changed as a result of the Boeing-McDonnell Douglas merger and the
Company does not expect Boeing to provide a material amount of new aircraft
financing opportunities. See "Relationship With Boeing and McDonnell Douglas."
In past years, many customers have obtained their financing for McDonnell
Douglas aircraft through sources other than the Company or McDonnell Douglas,
reflecting a broader range of competitive financing alternatives available to
McDonnell Douglas customers. See "Commercial Aircraft Financing Segment" and
"Allowance for Losses on Financing Receivables and Credit Loss Experience."
Aircraft owned or financed by the Company may become significantly less valuable
because of the discontinuation of existing aircraft models or the introduction
of new aircraft models which may be more economical to operate, the aging of
particular aircraft, technological obsolescence such as that caused by
legislation for noise abatement which will over time prohibit the use of older,
noisier (Stage 2) aircraft in the United States by year end 2000, or an
oversupply of aircraft for sale. In any such event, carrying amounts on the
Company's books may be reduced if, in the judgment of management, such carrying
amounts are greater than market value (including estimated lease values), which
would result in recognition of a loss to the Company. At December 31, 1997, the
Company's carrying amount of Stage 2 aircraft totaled $33.1 million (1.9% of the
Company's total aircraft portfolio); however, all of the Company's Stage 2
aircraft will have book values approximating the aircraft's scrap value by the
year 2000. For a discussion of the effects of the upcoming discontinuance of
MD-80 and MD-90 aircraft, see "Commercial Aircraft Financing Segment - Factors
Affecting Aircraft Financing Volume."
The commercial jet aircraft market and the airline industry remain extremely
competitive. Competitive pressures, as well as increased lower-fare personal
travel, have combined to cause a long-term downward trend in passenger revenue
yields on a worldwide basis (measured in real terms). Over the past two years,
airplane capacity increases in the United States have lagged air travel growth,
resulting in stable or increasing passenger yields. In Asia, slowing economies,
reduced business travel, and currency devaluations are contributing to sharply
lower yields. These factors result in continued price pressure on Boeing's
products, and major productivity gains are essential to ensuring a favorable
market position at acceptable profit margins.
As the world economy has improved in this decade, airline passenger traffic has
been increasing. For the five-year period 1993-1997, the average annual growth
rate for worldwide passenger traffic was approximately 5.7%. Boeing's 20-year
forecast of the average long-term growth rate in passenger traffic is
approximately 5.0% annually for the first half of the 20-year forecast period,
and 4.9% annually for the balance, based on projected average worldwide annual
economic real growth of 3.0% over the period.
Based on global economic growth projections over the long term, and taking into
consideration increasing utilization levels of the worldwide aircraft fleet and
requirements to replace older aircraft, Boeing projects the total commercial jet
aircraft market over the next 20 years at more than $1,000 billion in 1997
dollars.
Relationship With Boeing and McDonnell Douglas
Boeing, together with its subsidiary McDonnell Douglas, is principally engaged
in the design, development and production of government and commercial aerospace
products. For the year ended December 31, 1997, Boeing recorded revenues of
$45.8 billion and net losses of $178.0 million. At December 31, 1997, Boeing had
assets of $38.0 billion and shareholders' equity of $13.0 billion. Boeing is
conducting a review of the operations and the strategic value of the Company,
which review could lead to a decision to divest all or part of the Company's
assets or to sell the Company's stock, presently held indirectly by Boeing.
If the financial well-being of Boeing were to decline significantly, the
Company's ability to enter into significant amounts of new business in the
future could be materially constrained. Two of the principal industry segments
in which Boeing operates, military aircraft and commercial aircraft, are
especially competitive and have a limited number of customers. At December 31,
1997, McDonnell Douglas has provided $334.9 million of guaranties on the
Company's aircraft portfolio, including first loss guaranties. In the event a
substantial portion of the guaranties become payable and in the event that
McDonnell Douglas is unable to honor its obligations under these guaranties,
such event could have a material adverse effect on the Company's earnings, cash
flow or financial position. In addition, McDonnell Douglas is the obligor in a
small number of the Company's commercial aircraft transactions and largely as a
result thereof, at December 31, 1997, McDonnell Douglas was the lessee for $53.6
million of the Company's commercial aircraft portfolio.
In December 1997, the Company acquired from Boeing all of the outstanding shares
of a corporation which had been formed for the exclusive purpose of owning and
leasing two used Boeing 737-400 aircraft for a purchase price of $51.2 million.
The aircraft continue to be owned by the corporation and are presently leased to
Jet Airways (India) Pvt. Ltd. under leases expiring in 1999.
For a further description of significant factors which may affect Boeing, see
Boeing's Form 10-K for the year ended December 31, 1997 (Securities and Exchange
Commission file number 001-00442).
- - Operating Agreement
The relationship between the Company and McDonnell Douglas is governed by an
operating agreement (the "Operating Agreement"), which was intended to
formalize certain aspects of the relationship between the companies,
principally those relating to the purchase and sale of McDonnell Douglas
aircraft receivables, the leasing of McDonnell Douglas aircraft, the resale
of McDonnell Douglas aircraft returned to, or repossessed by, the Company
under leases or secured notes, and the allocation of federal income taxes
between the companies. Now that McDonnell Douglas is a subsidiary of Boeing,
Boeing has entered into a substantially similar agreement with the Company
with respect to the allocation of federal income taxes, but not with respect
to the purchase, sale and financing of any commercial aircraft. Although it
remains in full force and effect, the Operating Agreement, as it relates to
future commercial aircraft financings, now has little if any practical
significance, as Boeing is not a party to it. This is illustrated by the fact
that since the Boeing-McDonnell Douglas merger, the Company has not been
involved in the financing of any new commercial aircraft. Further, it does
not appear that any future financings would be covered by the Operating
Agreement. It is also uncertain whether the Operating Agreement will be
amended or whether Boeing will become a party to it in its current or amended
form.
The Company has the option under the Operating Agreement to tender to
McDonnell Douglas any McDonnell Douglas aircraft returned to or repossessed
by the Company under a lease or security instrument at a price equal to the
fair market value of the aircraft less 10%. This provision does not include
McDonnell Douglas aircraft leased under a partnership arrangement in which
the Company is one of the partners, or McDonnell Douglas aircraft subject to
third party liens or other security interests, unless the Company and
McDonnell Douglas determine that purchase by McDonnell Douglas is desirable.
At December 31, 1997, the carrying amount of McDonnell Douglas aircraft
potentially excluded by this provision amounted to approximately $639.8
million.
- - Federal Income Taxes
The Company and McDonnell Douglas presently file a consolidated federal
income tax return with Boeing, with the consolidated tax payments, if any,
being made by Boeing. The Operating Agreement provides that so long as
consolidated federal tax returns are filed, payments shall be made, directly
or indirectly, by McDonnell Douglas to the Company or by the Company to
McDonnell Douglas, as appropriate, equal to the difference between the
consolidated tax liability and McDonnell Douglas's tax liability computed
without consolidation with the Company. If, subsequent to any such payments
by McDonnell Douglas, it incurs tax losses which may be carried back to the
year for which such payments were made, the Company nevertheless will not be
obligated to repay to McDonnell Douglas any portion of such payments.
The Company and McDonnell Douglas have been operating since 1975 under an
informal arrangement, which has entitled the Company to rely upon the
realization of tax benefits for the portion of projected taxable earnings of
McDonnell Douglas allocated to the Company. This has been important in
planning the volume of and pricing for the Company's leasing activities.
Under the current arrangement, McDonnell Douglas presently charges or credits
the Company for the corresponding increase or decrease in McDonnell Douglas's
taxes (disregarding alternative minimum taxes) resulting from the Company's
inclusion in the consolidated federal income tax return of McDonnell Douglas.
Intercompany payments are made when such taxes are due or tax benefits are
realized by McDonnell Douglas based on the assumption, pursuant to an
informal arrangement, that taxes are due or tax benefits are realized up to
100% of the amounts forecasted by the Company with the amounts in excess of
such forecast due in the year realized by McDonnell Douglas.
The Company, McDonnell Douglas and Boeing intend to file a consolidated
federal income tax return, with the consolidated tax payments, if any, being
made by Boeing. Boeing, BCSC and the Company have entered into agreements
(the "Boeing Operating Agreements") which provide that so long as
consolidated federal tax returns are filed, payments shall be made, directly
or indirectly, by Boeing to the Company or by the Company to Boeing, as
appropriate, equal to the difference between the consolidated tax liability
and Boeing's tax liability computed without consolidation with the Company.
If, subsequent to any such payments by Boeing (or the Company), the payer
incurs tax losses which may be carried back to the year for which such
payments were made, the payee nevertheless will not be obligated to repay any
portion of such payments.
The Operating Agreement among the Company, BCSC and McDonnell Douglas remains
in effect and amounts payable under the Boeing Operating Agreements take into
account payments made under the Operating Agreement, provided that in no
event will the Company receive an amount which is materially less, or be
obligated to pay an amount which is materially greater, than it would have
received, or been obligated to pay, under the Operating Agreement. Likewise,
the informal arrangement which generally entitles the Company to rely upon
the realization of tax benefits for the portion of projected taxable earnings
allocated to the Company remains in effect.
The Company's ability to price its business competitively and obtain new
business volume is significantly dependent on its ability to realize the tax
benefits generated by its leasing business. In some cases, the yields on
receivables, without regard to tax benefits, may be less than the Company's
related financing costs. To the extent that Boeing would be unable on a
long-term basis to utilize such tax benefits, or if the informal 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 Boeing'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 restructuring its financing
activities. See "Competition and Economic Factors."
There can likewise be no assurance that these (and other) intercompany
arrangements will not change as time permits the Company's new Board members
and shareholder to study and become more familiar with these working
arrangements. While it is difficult to predict the applicability of the
alternative minimum tax to Boeing and the effect thereof under such informal
arrangement, if Boeing were subject to alternative minimum tax liability for
an extended period, it could have a material adverse impact on the
competitiveness of the Company's pricing of new business and on the earnings
of the Company.
- - Intercompany Services
McDonnell Douglas provides to the Company certain payroll, employee benefit,
facilities and other services, for which the Company generally pays McDonnell
Douglas the actual cost. See of "Notes to Consolidated Financial
Statements" included as Item 8.
- - Intercompany Credit Arrangements
The Company maintains separate borrowing facilities and there are no
arrangements for joint use of such credit lines by Boeing or McDonnell
Douglas. Bank credit and other borrowing facilities are negotiated by the
Company on its own behalf. There are no provisions in the Company's debt
instruments that provide that a default by Boeing or McDonnell Douglas on
their respective debt constitutes a default on Company debt. There are no
guaranties, direct or indirect, by Boeing or McDonnell Douglas of the payment
of any debt of the Company.
The Company had arrangements with McDonnell Douglas, terminable at the
discretion of either of the parties, pursuant to which the Company may borrow
from McDonnell Douglas and McDonnell Douglas may borrow from the Company,
funds for periods up to 30 days at a market rate of interest. Under these
arrangements, there were no outstanding balances at December 31, 1997 and
1996. Such arrangements have been terminated as a result of the
Boeing-McDonnell Douglas merger.
Under a similar arrangement, the Company may borrow from BCSC, and BCSC and
its subsidiaries may borrow from the Company, funds for periods up to 30 days
at the Company's cost of funds for short-term borrowings. Under this
arrangement, borrowings of $51.0 million and $20.3 million were outstanding
at December 31, 1997 and 1996, respectively. During 1997, the Company's
highest level of borrowings from BCSC was $51.0 million. The Company had no
loans to BCSC during 1997.
Under another arrangement, Boeing Realty Corporation, a wholly-owned
subsidiary of McDonnell Douglas, owed the Company $1.7 million at December
31, 1996. The outstanding balance was paid in full in November 1997 and there
were no subsequent borrowings in 1997.
Item 2. Properties
The Company leases all of its office space and other facilities. The Company's
principal office is subleased from McDonnell Douglas, at a rate that was
considered fair market value at the inception of the lease. The Company believes
that its properties, including the equipment located therein, are suitable and
adequate to meet the requirements of its business.
Item 3. Legal Proceedings
On November 1, 1996, The Allen Austin Harris Group, Inc. (the "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, but is unable to determine
at this stage of discovery if the litigation will have any future material
adverse effect on its earnings, cash flow or financial position.
The Company is a party to litigation in the United States District Court,
Southern District of Florida, entitled McDonnell Douglas Finance Corporation
adv. Aviaco International Leasing, Inc., Aviaco Traders International, Inc. and
Craig L. Dobbin with Related Counter-Claims (collectively referred to as
"Aviaco"). The foregoing litigation arose out of an action brought by the
Company in July 1991 seeking remedies on account of defaults by the other
parties to the litigation under loan and related documents involving a $17.9
million loan made by the Company. In January 1994, in response to the Company's
foreclosure of two aircraft and a related aircraft lease agreement which had
been collateral for the loan, Aviaco filed a counter-claim against the Company,
asserting nine claims for alleged damages based on various tort and contractual
theories relating to the Company's foreclosure.
The case proceeded to jury trial on three of the nine claims which survived the
Company's Motion for Summary Judgment. The case was submitted to the jury on
October 16, 1997. On October 17, 1997, the jury returned a verdict in favor of
Aviaco awarding aggregate damages of approximately $12.2 million, including
damages of approximately $10.0 million for the failure to exercise reasonable
care with regard to the related lease agreement.
In December of 1997, the Company filed a Motion for Judgment as a Matter of Law,
arguing, inter alia, to set aside the $10.0 million award as not being supported
by the record evidence or by applicable law. On February 13, 1998, the Judge
ruled in favor of the Company and set aside the $10.0 million award.
On March 2, 1998, the Judge entered a Final Judgment against the Company in the
aggregate amount, including prejudgment interest, of approximately $2.8 million
with post judgment interest thereon at the rate of 5.42% per annum. Both Aviaco
and the Company have appealed from the Final Judgment to the United States Court
of Appeals for the Eleventh Circuit. Taking into account amounts reserved for
this litigation, the Company does not expect such litigation to have any future
material adverse effect on its earnings, cash flow or financial position.
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.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
All of the Company's preferred and common stock is owned by BCSC. In 1997, the
Company declared and paid dividends of $25.0 million on its common stock to
BCSC. In 1996, the Company did not declare or pay any dividends to BCSC on its
common stock. The Company paid $3.5 million in dividends on its preferred stock
in 1997 and 1996. Preferred stock dividends of $0.6 million payable to BCSC were
accrued at December 31, 1997.
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, $77.4 million of
the Company's income retained for growth was available for dividends at December
31, 1997.
Item 6. Selected Financial Data
The selected consolidated financial data should be read in conjunction with the
Company's consolidated financial statements at December 31, 1997 and for the
year then ended and with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." The following table sets forth
selected consolidated financial data for the Company:
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in millions) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Financing volume $ 591.1 $ 867.3 $ 590.8 $ 202.0 $ 453.0
============================================================================
Operating income:
Finance lease income $ 136.9 $ 118.6 $ 104.3 $ 100.7 $ 90.1
Interest on notes receivable 26.3 24.4 27.2 29.4 38.9
Operating lease income, net 56.7 55.1 41.1 38.5 35.9
Net gain on disposal or re-lease
of assets 21.0 19.6 8.7 11.1 23.7
Other 5.5 3.8 9.3 7.1 8.3
----------------------------------------------------------------------------
246.4 221.5 190.6 186.8 196.9
----------------------------------------------------------------------------
Expenses:
Interest expense 124.7 117.3 101.9 108.3 116.4
Provision for losses 11.5 14.2 12.2 9.9 8.6
Operating expenses 13.1 11.7 11.3 15.2 20.3
Other 9.3 3.4 4.9 12.3 12.4
----------------------------------------------------------------------------
158.6 146.6 130.3 145.7 157.7
----------------------------------------------------------------------------
Income before provision for income
taxes 87.8 74.9 60.3 41.1 39.2
Provision for income taxes 31.7 26.1 21.0 12.8 22.4
----------------------------------------------------------------------------
Net income $ 56.1 $ 48.8 $ 39.3 $ 28.3 $ 16.8
============================================================================
Dividends declared $ 28.5 $ 3.5 $ 31.0 $ 30.5 $ 3.6
Ratio of income to fixed charges (1) 1.68 1.62 1.57 1.37 1.33
Balance sheet data:
Total assets $ 2,722.8 $ 2,653.6 $ 2,049.6 $ 1,929.6 $ 2,055.5
Total debt 1,797.9 1,850.2 1,339.7 1,215.1 1,361.2
Shareholder's equity 353.1 325.5 280.2 271.9 269.4
Dividends accrued on preferred
stock at year end $ 0.6 $ 0.6 $ 0.6 $ 0.6 $ 0.6
</TABLE>
(1) For the purpose of computing the ratio of income to fixed charges, income
consists of income before provision for income taxes and fixed charges; and
fixed charges consist of interest expense and preferred stock dividends.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with the consolidated financial
statements included in Item 8.
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) that involve risk and uncertainty.
Certain statements in this Form 10-K, and particularly in Items 1, 3 and 7, may
contain forward-looking information. The subject matter of such statements may
include, but are not limited to, the effects on the Company of the
Boeing-McDonnell Douglas merger, future earnings, costs, expenditures, losses,
residual values, and various business environment trends. In addition to those
contained herein, forward-looking statements and properties 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 effects on
the Company of the Boeing-McDonnell Douglas merger and the Company's
relationship with Boeing, as well as strategic decisions relating to the Company
to be made by such shareholder, the capital equipment requirements of United
States and foreign businesses, capital availability and cost, changes in laws
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.
Capital Resources and Liquidity
The Company has significant liquidity requirements. The Company attempts to fund
its business such that scheduled receipts from its portfolio will cover its
expenses and debt payments as they become due. The Company believes that, absent
a severe or prolonged economic downturn which results in defaults materially in
excess of those provided for, receipts from the portfolio will cover the payment
of expenses and debt payments when due. If cash provided by operations, issuance
of commercial paper, borrowings under bank credit lines and term borrowings 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 a $240.0 million revolving credit agreement which is reduced by borrowings
of up to $16.0 million made by BCSC. At December 31, 1997 and 1996, borrowings
under commercial paper totaling $80.0 million and $96.0 million, respectively,
were supported by available unused commitments under the revolving credit
agreement. The Company has available approximately $95.0 million in uncommitted,
short-term bank credit facilities whereby the Company may borrow, at interest
rates which are negotiated at the time of the borrowings, upon such terms as the
Company and the banks may mutually agree. At December 31, 1997 and 1996,
borrowings under these credit facilities totaled $18.0 million and $45.0
million, respectively. The Company also accesses the public debt market and
anticipates using proceeds from the issuance of additional public debt to fund
future growth. On October 10, 1997, the Company filed with the Securities and
Exchange Commission ("Commission") a Form S-3 Registration Statement for a
public shelf registration of $1.2 billion of its debt securities (SEC File No.
333-37635). On October 31, 1997, the Commission declared such Registration
Statement to be effective. The Company has authorized the sale and issuance from
time to time at the Company's discretion of up to $400 million of such debt
securities in the form of the Company's Series X medium-term notes. As of
December 31, 1997, the Company has issued $165.0 million in aggregate principal
of medium-term notes. See "Item 1. Business - Borrowing Operations."
1997 vs. 1996
Finance lease income increased $18.3 million (15.4%) in 1997 compared to 1996,
primarily attributable to the financings of two MD-11 aircraft funded in late
1996 under finance lease agreements.
Interest expense increased $7.4 million (6.3%) in 1997 compared to 1996,
attributable to a higher level of borrowings in 1997, resulting from increased
financing activity in late 1996.
Provision for losses decreased $2.7 million (19.0%) in 1997 compared to 1996,
primarily attributable to the Company's determination that additional provisions
for losses relating to the commercial aircraft portfolio in excess of those
previously provided were not necessary or appropriate during the current period
and to a decrease in new aircraft lease volume, which aggregated $176.3 million
in 1997, compared to aircraft lease volume of $475.3 million in 1996.
Other expenses increased $5.9 million (173.5%) in 1997 compared to 1996,
primarily attributable to maintenance expenses of approximately $5.3 million on
an airplane that was repossessed in March 1997.
1996 vs. 1995
Finance lease income increased $14.3 million (13.7%) in 1996 compared to 1995,
primarily attributable to increased volume for 1996 and the 1995 fourth quarter
financings of two MD-11 aircraft.
Interest on notes receivable in 1996 was $2.8 million (10.3%) lower than 1995,
primarily attributable to aircraft repossessed under defaulted loans and leased
in 1995 and notes that matured in 1995.
Operating lease income, net of depreciation expense, increased $14.0 million
(34.1%) in 1996 compared to 1995, primarily attributable to the March 1996
financing of two MD-11s and the March 1995 financing of two MD-82 aircraft under
operating lease agreements.
Net gain on disposal or re-lease of assets increased $10.9 million (greater than
125%) in 1996 compared to 1995, attributable primarily to equipment sales within
the commercial equipment leasing portfolio and sales within the commercial
aircraft financing portfolio.
Interest expense increased $15.4 million (15.1%) in 1996 compared to 1995,
primarily attributable to a higher level of debt borrowings in 1996, resulting
from increased financing activity.
Provision for losses increased $2.0 million (16.4%) during 1996 compared to
1995, primarily attributable to increased financing activity.
Year 2000 Date Conversion
The Company has assessed and continues to assess the impact of the Year 2000
issue on its reporting systems and operations. The Year 2000 issue exists
because many computer systems and applications use two-digit date fields to
designate a year. As the century date change occurs, date-sensitive systems may
recognize the year 2000 as 1900, or not at all. This inability to recognize or
properly treat the year 2000 may cause systems to process financial and
operational information incorrectly. In 1996, the Company initiated a conversion
from its existing lease administrative system to programs that are Year 2000
compliant. Management has determined that the Year 2000 issue will not pose
significant operational problems for its computer systems.
The Company has and will continue to utilize both internal and external
resources to replace and test the software for Year 2000 compliance. The Company
anticipates completing the Year 2000 project by the third quarter of 1999, which
is prior to any anticipated impact on its operating systems.
The total cost of the Year 2000 project is being funded through operating cash
flows and will have no material adverse effect on the Company's earnings, cash
flow or financial position.
No assurance can be given, however, that Year 2000 problems of unrelated third
parties (such as other financial institutions with which the Company does
business) will not materially impact operations or operating results.
Market Risk Exposure
The Company has financial instruments that are subject to interest rate risk,
principally short-term investments, fixed-rate notes receivable attributable to
customer financing, and debt obligations issued at a fixed rate. Historically,
the Company has not experienced material gains or losses due to interest rate
changes when selling fixed-rate notes receivable. Additionally, the Company uses
interest rate swaps to manage exposure to interest rate changes. Based on the
current holdings of short-term investments, fixed-rate notes, as well as
underlying swaps, the exposure to interest rate risk is not considered to be
material. Fixed-rate debt obligations currently issued by the Company are
generally not callable until maturity.
Item 8. Financial Statements and Supplementary Data
The following pages include the consolidated financial statements of the Company
as described in Item 14 (a) 1 and (a) 2 of Part IV herein.
<PAGE>
Independent Auditors' Report
Shareholder and Board of Directors
Boeing Capital Corporation
We have audited the accompanying consolidated balance sheet of Boeing Capital
Corporation (a wholly-owned subsidiary of Boeing Capital Services Corporation)
and subsidiaries as of December 31, 1997, and the related consolidated
statements of income and income retained for growth, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Boeing
Capital Corporation and subsidiaries at December 31, 1997, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
January 23, 1998
<PAGE>
Independent Auditors' Report
Shareholder and Board of Directors
McDonnell Douglas Finance Corporation
We have audited the accompanying consolidated balance sheet of McDonnell Douglas
Finance Corporation (a wholly-owned subsidiary of McDonnell Douglas Financial
Services Corporation) and subsidiaries as of December 31, 1996, and the related
consolidated statements of income and income retained for growth, and cash flows
for each of the two years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
McDonnell Douglas Finance Corporation and subsidiaries at December 31, 1996, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets as of December 31, 1995, 1994 and
1993, and the related consolidated statements of income and income retained for
growth, and cash flows for the years ended December 31, 1994 and 1993 (none of
which are presented separately herein); and we expressed unqualified opinions on
those consolidated financial statements. In our opinion, the information set
forth in the selected financial data for each of the four years in the period
ended December 31, 1996, appearing on page 21 is fairly stated in all material
respects in relation to the consolidated financial statements from which it has
been derived.
/s/ ERNST & YOUNG LLP
January 22, 1997
<PAGE>
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(Dollars in millions, except stated value and par value) 1997 1996
- ------------------------------------------------------------------------------------------------------------
ASSETS
Financing receivables:
<S> <C> <C>
Investment in finance leases $ 1,509.1 $ 1,631.2
Notes receivable 269.0 308.9
--------------------------------------
1,778.1 1,940.1
Allowance for losses on financing receivables (55.9) (48.6)
--------------------------------------
1,722.2 1,891.5
Cash and cash equivalents 39.1 16.9
Equipment under operating leases, net 922.2 689.5
Equipment held for sale or re-lease 0.7 14.0
Other assets 38.6 41.7
--------------------------------------
$ 2,722.8 $ 2,653.6
======================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 149.0 $ 161.3
Accounts payable and accrued expenses 49.1 47.7
Accounts with Boeing, McDonnell Douglas and BCSC 37.2 -
Other liabilities 97.2 90.0
Deferred income taxes 388.3 340.2
Long-term debt:
Senior 1,579.0 1,594.1
Subordinated 69.9 94.8
--------------------------------------
2,369.7 2,328.1
--------------------------------------
Commitments and contingencies - Note 8
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 208.6 181.0
--------------------------------------
353.1 325.5
--------------------------------------
$ 2,722.8 $ 2,653.6
======================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Income and Income Retained for Growth
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME
Finance lease income $ 136.9 $ 118.6 $ 104.3
Interest income on notes receivable 26.3 24.4 27.2
Operating lease income, net of depreciation expense of
$61.1, $57.6 and $48.2 in 1997, 1996 and 1995,
respectively 56.7 55.1 41.1
Net gain on disposal or re-lease of assets 21.0 19.6 8.7
Other 5.5 3.8 9.3
-----------------------------------------------------
246.4 221.5 190.6
-----------------------------------------------------
EXPENSES
Interest expense 124.7 117.3 101.9
Provision for losses 11.5 14.2 12.2
Operating expenses 13.1 11.7 11.3
Other 9.3 3.4 4.9
-----------------------------------------------------
158.6 146.6 130.3
-----------------------------------------------------
Income before provision for income taxes 87.8 74.9 60.3
Provision for income taxes 31.7 26.1 21.0
-----------------------------------------------------
Net income 56.1 48.8 39.3
Income retained for growth at beginning of year 181.0 135.7 127.4
Dividends (28.5) (3.5) (31.0)
-----------------------------------------------------
Income retained for growth at end of year $ 208.6 $ 181.0 $ 135.7
=====================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 56.1 $ 48.8 $ 39.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense - equipment under operating
leases 61.1 57.6 48.2
Net gain on disposal or re-lease of assets (21.0) (19.6) (8.7)
Provision for losses 11.5 14.2 12.2
Change in assets and liabilities:
Accounts with Boeing, McDonnell Douglas and
BCSC 37.2 18.5 26.4
Other assets 3.1 1.8 40.4
Accounts payable and accrued expenses 1.4 5.9 8.8
Other liabilities 7.2 7.5 (10.0)
Deferred income taxes 48.1 34.8 (0.7)
Other, net (0.7) (1.7) 0.4
---------------------------------------------------
204.0 167.8 156.3
---------------------------------------------------
INVESTING ACTIVITIES
Net change in short-term notes and leases receivable 101.7 (91.2) 60.6
Purchase of equipment for operating leases (346.2) (303.9) (155.7)
Proceeds from disposition of equipment, notes and leases
receivable 177.4 115.0 109.6
Collection of notes and leases receivable 209.6 167.0 181.6
Acquisition of notes and leases receivable (243.0) (557.2) (435.6)
---------------------------------------------------
(100.5) (670.3) (239.5)
---------------------------------------------------
FINANCING ACTIVITIES
Net change in short-term borrowings (12.3) 147.6 (90.1)
Debt having maturities more than 90 days:
Proceeds 226.8 608.7 572.8
Repayments (267.3) (246.0) (358.0)
Payment of cash dividends (28.5) (3.5) (42.0)
---------------------------------------------------
(81.3) 506.8 82.7
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents 22.2 4.3 (0.5)
Cash and cash equivalents at beginning of year 16.9 12.6 13.1
---------------------------------------------------
Cash and cash equivalents at end of year $ 39.1 $ 16.9 $ 12.6
===================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
Note 1 -- Organization and Summary of Significant Accounting Policies
ORGANIZATION Boeing Capital Corporation (formerly McDonnell Douglas Finance
Corporation) (the "Company") is a wholly-owned subsidiary of Boeing Capital
Services Corporation (formerly McDonnell Douglas Financial Services Corporation)
("BCSC"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("McDonnell
Douglas"), which in turn, as of August 1, 1997, is wholly-owned by The Boeing
Company ("Boeing"). The Company was incorporated in Delaware in 1968 and
provides equipment financing and leasing arrangements to a diversified range of
customers and industries. The Company's primary operations include two financial
reporting segments: commercial aircraft financing and commercial equipment
leasing. The Company's strategy is to generate and participate in finance
transactions in which the Company's structuring and analysis can provide high
returns on its invested equity. Currently, the commercial aircraft financing
group is active in providing lease and debt financing to domestic and
international airlines, and the Company as a whole is active in providing lease
and debt financing to a broad range of commercial and industrial customers.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain 1996
amounts have been reclassified to conform to the 1997 presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make assumptions
and estimates that directly affect the amounts reported in the consolidated
financial statements. Significant estimates for which changes in the near term
are considered reasonably possible and that may have a material impact on the
financial statements are addressed in these notes to the consolidated financial
statements.
FINANCE LEASES At lease commencement, the Company records the lease receivable,
estimated residual value of the leased equipment and unearned lease income.
Income from leases is recognized over the terms of the leases so as to
approximate a level rate of return on the net investment. Residual values, which
are reviewed periodically, represent the estimated amount to be received at
lease termination from the disposition of leased equipment.
INITIAL DIRECT COSTS Initial direct costs are deferred and amortized over the
related financing terms.
CASH EQUIVALENTS The Company considers all cash investments with original
maturities of three months or less to be cash equivalents. Cash equivalents at
December 31, 1997 and 1996 were $37.9 million and $15.3 million, respectively.
At December 31, 1997 and 1996, the Company has classified as other assets
restricted cash deposited with banks in interest bearing accounts of $27.6
million and $29.5 million, respectively, for specific lease rents and
contractual purchase options related to certain aircraft leased by the Company
under capital lease obligations.
ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES The allowance for losses on
financing receivables includes consideration of such factors as the risk rating
of individual credits, economic and political conditions, guaranties, prior loss
experience, collateral value of the underlying equipment and results of periodic
credit reviews.
Collateral that is repossessed in satisfaction of a receivable is transferred to
equipment held for sale or re-lease at the lower of the former receivable amount
or estimated net realizable value.
EQUIPMENT UNDER OPERATING LEASES Rental equipment subject to operating leases is
recorded at cost and depreciated over its useful life or lease term to an
estimated salvage value, primarily on a straight-line basis.
INCOME TAXES The operations of the Company are included in the consolidated
federal income tax return of Boeing. McDonnell Douglas or Boeing presently
charges or credits the Company for the corresponding increase or decrease in
taxes resulting from such inclusion. Intercompany payments are made when such
taxes are due or tax benefits are realized by Boeing based on the assumption,
pursuant to an informal arrangement, that taxes are due or tax benefits are
realized up to 100% of the amounts forecasted by the Company, with the amounts
in excess of such forecast due in the year realized by Boeing.
Federal, state and foreign income taxes are computed at current tax rates, less
tax credits. Taxes are adjusted both for items that do not have tax consequences
and for the cumulative effect of any changes in tax rates from those previously
used to determine deferred tax assets or liabilities. Tax provisions include
amounts that are currently payable, plus changes in deferred tax assets and
liabilities that arise because of temporary differences between the time when
items of income and expense are recognized for financial reporting and income
tax purposes. Under an informal arrangement, the current provision for state
income taxes based on an agreed upon rate is paid to Boeing and the state income
tax deferred asset or liability is carried on Boeing's books.
SEGMENT INFORMATION The Company has adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The adoption thereof had no material effect on the Company's
financial position or operating results. For segment information, see Note 11.
Note 2 -- The Effects of the Boeing-McDonnell Douglas Merger
On August 1, 1997, the Boeing-McDonnell Douglas merger was consummated pursuant
to an Agreement and Plan of Merger dated as of December 14, 1996, among Boeing,
West Acquisition Corp., a wholly-owned subsidiary of Boeing ("Sub"), and
McDonnell Douglas (the "Merger Agreement"). Under the terms of the Merger
Agreement, Sub was merged into McDonnell Douglas, with McDonnell Douglas
surviving as a wholly-owned subsidiary of Boeing.
The many possible ramifications of the merger on the Company (for example,
decisions regarding the strategic value of the Company to Boeing, the impact of
the merger on residual values of aircraft in the Company's portfolio, the tax
position of Boeing and the effect of decisions relating to the financing of
Boeing aircraft) are currently unknown and, therefore, cannot be quantified at
this time. Boeing is conducting a review of the operations and the strategic
value of the Company, which review could lead to a decision to divest all or
part of the Company's assets or to sell the Company's stock, presently held
indirectly by Boeing.
The Company and McDonnell Douglas presently file a consolidated federal income
tax return with Boeing, with the consolidated tax payments, if any, being made
by Boeing. The operating agreement between the Company, BCSC and McDonnell
Douglas ("the Operating Agreement") provides that so long as consolidated
federal tax returns are filed, payments shall be made, directly or indirectly,
by McDonnell Douglas to the Company or by the Company to McDonnell Douglas, as
appropriate, equal to the difference between the consolidated tax liability and
McDonnell Douglas's tax liability computed without consolidation with the
Company. If, subsequent to any such payments by McDonnell Douglas, it incurs tax
losses which may be carried back to the year for which such payments were made,
the Company nevertheless will not be obligated to repay to McDonnell Douglas any
portion of such payments.
The Company and McDonnell Douglas have been operating since 1975 under an
informal arrangement, which has entitled the Company to rely upon the
realization of tax benefits for the portion of projected taxable earnings of
McDonnell Douglas allocated to the Company. This has been important in planning
the volume of and pricing for the Company's leasing activities. Under the
current arrangement, McDonnell Douglas presently charges or credits the Company
for the corresponding increase or decrease in McDonnell Douglas's taxes
(disregarding alternative minimum taxes) resulting from the Company's inclusion
in the consolidated federal income tax return of McDonnell Douglas. Intercompany
payments are made when such taxes are due or tax benefits are realized by
McDonnell Douglas based on the assumption, pursuant to an informal arrangement,
that taxes are due or tax benefits are realized up to 100% of the amounts
forecasted by the Company, with the amounts in excess of such forecast due in
the year realized by McDonnell Douglas.
The Company, McDonnell Douglas and Boeing intend to file a consolidated federal
income tax return, with the consolidated tax payments, if any, being made by
Boeing. Boeing, BCSC and the Company have entered into agreements (the "Boeing
Operating Agreements") which provide that so long as consolidated federal tax
returns are filed, payments shall be made, directly or indirectly, by Boeing to
the Company or by the Company to Boeing, as appropriate, equal to the difference
between the consolidated tax liability and Boeing's tax liability computed
without consolidation with the Company. If, subsequent to any such payments by
Boeing (or the Company), the payer incurs tax losses which may be carried back
to the year for which such payments were made, the payee nevertheless will not
be obligated to repay any portion of such payments.
The Operating Agreement among the Company, BCSC and McDonnell Douglas remains in
effect and amounts payable under the Boeing Operating Agreements take into
account payments made under the Operating Agreement, provided that in no event
will the Company receive an amount which is materially less, or be obligated to
pay an amount which is materially greater, than it would have received, or been
obligated to pay, under the Operating Agreement. Likewise, the informal
arrangement which generally entitles the Company to rely upon the realization of
tax benefits for the portion of projected taxable earnings allocated to the
Company remains in effect.
There can be no assurance, however, that these (and other) intercompany
arrangements will not change as time permits the Company's new Board members and
shareholder to study and become more familiar with these working arrangements.
While it is difficult to predict the applicability of the alternative minimum
tax to Boeing and the effect thereof under such informal arrangement, if Boeing
were subject to alternative minimum tax liability for an extended period, it
could have a material adverse impact on the competitiveness of the Company's
pricing of new business and on the earnings of the Company.
On November 3, 1997, Boeing announced that it will continue to produce MD-80 and
MD-90 aircraft only until approximately mid-1999. Boeing also stated that MD-80
and MD-90 customers, with 1,200 such aircraft in service overall, can expect the
same level of long-term support that Boeing provides for all of its aircraft,
whether they are in or out of production. Boeing has stated that production of
the MD-11 will continue at a relatively low rate through 1998, and future sales
prospects are principally limited to the freighter version. Boeing has also
noted that the future of the MD-11 jetliner program depends on the success of
current marketing efforts, and Boeing expects to have a clearer picture of the
program's future later in 1998. The Company's commercial aircraft portfolio as
of December 31, 1997 included 33 MD-80s, three MD-90s and seven MD-11s,
representing $425.3 million, $100.5 million and $650.3 million, respectively, in
net asset value or 15.8%, 3.7% and 24.1%, respectively, of the Company's total
portfolio. The Company periodically reviews the carrying and residual values of
all aircraft in its portfolio. Such reviews include the effects, if any, of the
foregoing announcements as they become known or can be reasonably estimated.
While management believes that current booked residual values are conservative,
significant declines in market value could impact the gain or loss on
disposition of these aircraft.
Note 3 -- Investment in Finance Leases
The following lists the components of the investment in finance leases at
December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996
<S> <C> <C>
Minimum lease payments receivable $ 1,985.8 $ 2,252.1
Estimated residual value of leased assets 405.6 423.6
Unearned income (885.9) (1,047.7)
Deferred initial direct costs 3.6 3.2
------------------------------------
$ 1,509.1 $ 1,631.2
====================================
</TABLE>
The following lists the components of the investment in finance leases at
December 31 that relate to aircraft leased by the Company under capital leases
that have been subleased to others under finance leases:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996
<S> <C> <C>
Minimum lease payments receivable $ 534.3 $ 568.1
Estimated residual value of leased assets 83.3 83.3
Unearned income (276.2) (300.8)
Deferred initial direct costs 0.8 0.7
-----------------------------------
$ 342.2 $ 351.3
===================================
</TABLE>
At December 31, 1997, finance lease receivables of $50.9 million serve as
collateral to senior long-term debt.
At December 31, 1997, finance lease receivables are due in installments as
follows: 1998, $258.4 million; 1999, $245.1 million; 2000, $200.1 million; 2001,
$190.6 million; 2002, $160.9 million; 2003 and thereafter, $930.7 million.
Under a finance lease agreement, the Company leases a DC-10-30 aircraft to
McDonnell Douglas. The lease requires monthly rent payments of $0.4 million
through April 14, 2004. At December 31, 1997 and 1996, the carrying amount of
this aircraft was $26.7 million and $28.5 million, respectively.
Note 4 -- Notes Receivable
The following lists the components of notes receivable at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996
<S> <C> <C>
Principal $ 265.9 $ 306.3
Accrued interest 2.8 2.8
Unamortized discount (0.5) (0.8)
Deferred initial direct costs 0.8 0.6
------------------------------------
$ 269.0 $ 308.9
====================================
</TABLE>
At December 31, 1997, notes receivables are due in installments as follows:
1998, $27.7 million; 1999, $29.4 million; 2000, $28.9 million; 2001, $28.8
million; 2002, $34.2 million; 2003 and thereafter, $116.9 million.
Note 5 -- Equipment Under Operating Leases
Equipment under operating leases consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996
<S> <C> <C>
Commercial aircraft $ 651.1 $ 543.7
Executive aircraft 313.1 153.9
Highway vehicles 51.4 61.7
Machine tools and production equipment 52.6 50.7
Printing equipment 32.2 34.1
Other 15.3 16.4
-----------------------------------
1,115.7 860.5
Accumulated depreciation (185.3) (158.9)
Rentals receivable 15.1 11.6
Deferred lease income (24.0) (25.0)
Deferred initial direct costs 1.7 1.3
Allowance for uncollectible rents (1.0) -
-----------------------------------
$ 922.2 $ 689.5
===================================
</TABLE>
At December 31, 1997, future minimum rentals scheduled to be received under the
noncancelable portion of operating leases are as follows: 1998, $150.1 million;
1999, $113.8 million; 2000, $79.6 million; 2001, $63.0 million; 2002, $52.7
million; 2003 and thereafter, $383.4 million.
At December 31, 1997, equipment under operating leases of $7.1 million are
assigned as collateral to senior long-term debt. Equipment under operating
leases of $195.2 million at December 31, 1997, relate to commercial aircraft
leased by the Company under capital lease obligations.
Under an operating lease agreement, the Company leased two MD-82 aircraft to
McDonnell Douglas. At December 31, 1996, the carrying amount of these aircraft
was $26.5 million. These aircraft were sold to an unrelated party in 1997.
During 1996, the Company entered into an operating lease agreement, to lease a
DC-10-30 aircraft to McDonnell Douglas. The lease requires monthly rent payment
of $0.4 million through 2004. At December 31, 1997 and 1996, the carrying amount
of this aircraft was $26.9 million and $28.9 million, respectively.
Under a separate operating lease agreement, the Company leased an executive
aircraft to McDonnell Douglas. At December 31, 1996, the carrying amount of this
aircraft was $15.6 million. The executive aircraft was sold to Boeing in
November 1997 (See Note 9).
Note 6 -- Income Taxes
The components of the provision (benefit) for taxes on income for the years
ended December 31 were as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
Current:
<S> <C> <C> <C>
Federal $ (21.3) $ (12.8) $ 18.5
State 4.9 4.1 3.2
--------------------------------------------------------
(16.4) (8.7) 21.7
Deferred:
Federal 48.1 34.8 (0.7)
--------------------------------------------------------
$ 31.7 $ 26.1 $ 21.0
========================================================
</TABLE>
Temporary differences represent the cumulative taxable or deductible amounts
recorded in the financial statements in different years than recognized in the
tax returns. The components of the net deferred income tax liability consisted
of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996
Deferred tax assets:
<S> <C> <C>
Allowance for losses $ 19.6 $ 17.0
Other 5.7 6.0
-------------------------------------
25.3 23.0
-------------------------------------
Deferred tax liabilities:
Leased assets (410.9) (358.5)
Other (2.7) (4.7)
-------------------------------------
(413.6) (363.2)
-------------------------------------
Net deferred tax liability $ (388.3) $ (340.2)
=====================================
</TABLE>
Income taxes computed at the United States federal income tax rate and the
provision (benefit) for taxes on income differ as follows for the years ended
December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
<S> <C> <C> <C>
Tax computed at federal statutory rate $ 30.7 $ 26.2 $ 21.1
State income taxes, net of federal tax benefit 3.2 2.6 2.1
Foreign sales corporation benefit (1.2) (1.5) (2.1)
Effect of investment tax credits (0.9) (0.7) (0.9)
Other (0.1) (0.5) 0.8
-----------------------------------------------------
$ 31.7 $ 26.1 $ 21.0
=====================================================
</TABLE>
The Company is currently under examination by the Internal Revenue Service
("IRS") for the tax years 1986 through 1995. The outcome of the IRS audit is not
expected to have a material effect on the Company's financial condition or
results of operations.
The Company received income tax payments from Boeing/McDonnell Douglas of $30.7
million, $15.4 million and $2.1 million in 1997, 1996 and 1995, respectively.
Note 7 -- Indebtedness
Short-term notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
Weighted Average Interest
(Dollars in millions) Balance at End of Year Rate at End of Year
---------------------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Commercial paper $ 80.0 $ 96.0 7.00 % 6.43 %
Uncommitted credit facilities 18.0 45.0 5.93 6.02
BCSC 51.0 20.3 5.96 5.75
------------------------------
$ 149.0 $ 161.3
==============================
</TABLE>
During 1996, BCSC and the Company amended their joint revolving credit agreement
to provide, among other things, for increased borrowing capacity and to extend
the maturity date to August 2001. Under the amended agreement, the Company may
borrow a maximum of $240.0 million, reduced by BCSC borrowings under this same
agreement, which are limited to $16.0 million. The interest rate, at the option
of BCSC or the Company, is either a fixed rate, generally based on a defined
prime rate, or floating rate related to LIBOR. There were no amounts outstanding
under this agreement at December 31, 1997 and 1996. At December 31, 1997 and
1996, borrowings under commercial paper totaling $80.0 million and $96.0
million, respectively, were supported by available unused commitments under the
revolving credit agreement.
The Company has available approximately $95.0 million in uncommitted, short-term
bank credit facilities whereby the Company may borrow, at interest rates which
are negotiated at the time of the borrowings, upon such terms as the Company and
the banks may mutually agree. At December 31, 1997 and 1996, borrowings under
these credit facilities totaled $18.0 million and $45.0 million, respectively.
On October 10, 1997, the Company filed with the Securities and Exchange
Commission ("Commission") a Form S-3 Registration Statement for a public shelf
registration of $1.2 billion of its debt securities (SEC File No. 333-37635). On
October 31, 1997, the Commission declared such Registration Statement to be
effective. The Company has authorized the sale and issuance from time to time at
the Company's discretion of up to $400 million of such debt securities in the
form of the Company's Series X medium-term notes. As of December 31, 1997, the
Company has issued and sold $165.0 million in aggregate principal amount of
medium-term notes.
Senior long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996
<S> <C> <C>
7.0% Notes due through 1998, net of discount based on imputed
interest rate of 10.88% $ 0.2 $ 1.0
Variable rate note due 1998 15.0 15.0
3.9% Notes due through 1999, net of discount based on imputed
interest rates of 9.15% - 10.6% 2.9 4.7
5.75% - 6.875% notes due through 2000, net of discount based on
imputed interest rates of 9.75% - 11.4% 5.0 6.7
6.9% - 9.43% notes due through 2001 44.2 54.1
6.0% - 8.375% Retail medium-term notes due through 2011 76.6 76.5
5.9% - 13.55% Medium-term notes due through 2017 990.5 960.2
Capital lease obligations due through 2008 444.6 475.9
------------------------------------------
$ 1,579.0 $ 1,594.1
==========================================
</TABLE>
At December 31, 1997 and 1996, subordinated long-term debt consisted of $69.9
million and $94.8 million, respectively, in medium-term notes due through 2004
with interest rates ranging from 5.48% to 8.31%.
The derivative financial instruments held by the Company at December 31, 1997,
consisted of specifically tailored interest rate swaps. The Company does not
trade in derivatives for speculative purposes.
The Company uses interest rate swap agreements to manage interest costs and
risks associated with changing interest rates. The differential to be paid or
received is accrued as interest rates change and is recognized in interest
expense over the life of the agreements. The Company believes it has no market
rate risk, as the interest rate swaps are matched with specific debt.
Counterparties to the interest rate swap contracts are major financial
institutions and credit loss from counterparty non-performance is not
anticipated. At December 31, 1997, the Company had interest rate swap agreements
outstanding as follows:
<TABLE>
<CAPTION>
(Dollars in millions) Contract Maturity Notional Principal Receive Rate Pay Rate
<S> <C> <C> <C> <C> <C> <C>
Capital lease obligations 2006 - 2008 $ 376.1 Floating(1) 6.65% - 7.599%
Medium-term notes 2000 - 2001 50.0 6.83% - 8.61% Floating(1)
</TABLE>
- -------------
(1) Floating rates are based on LIBOR.
As of December 31, 1997, $44.4 million of senior long-term debt was
collateralized by equipment. This debt is comprised of the 7.0% Notes due
through 1998 and the 6.9% - 9.43% Notes due through 2001.
Payments required on long-term debt and capital lease obligations during the
years ending December 31 are as follows:
<TABLE>
<CAPTION>
Long-Term Capital
(Dollars in millions) Debt Leases
<C> <C> <C>
1998 $ 218.3 $ 72.6
1999 209.8 70.8
2000 130.9 87.8
2001 182.4 67.5
2002 111.1 58.1
2003 and thereafter 356.5 289.1
------------------------------------------
1,209.0 645.9
Deferred debt expenses (4.7) (0.4)
Imputed interest - (200.9)
------------------------------------------
$ 1,204.3 $ 444.6
==========================================
</TABLE>
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, $77.4 million of
the Company's income retained for growth was available for dividends at December
31, 1997.
Interest payments totaled $124.4 million in 1997, $113.9 million in 1996 and
$99.2 million in 1995.
Note 8 -- 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, but is unable to determine
at this stage of discovery if the litigation will have any future material
adverse effect on its earnings, cash flow or financial position.
The Company is a party to litigation in the United States District Court,
Southern District of Florida, entitled McDonnell Douglas Finance Corporation
adv. Aviaco International Leasing, Inc., Aviaco Traders International, Inc. and
Craig L. Dobbin with Related Counter-Claims (collectively referred to as
"Aviaco"). The foregoing litigation arose out of an action brought by the
Company in July 1991 seeking remedies on account of defaults by the other
parties to the litigation under loan and related documents involving a $17.9
million loan made by the Company. In January 1994, in response to the Company's
foreclosure of two aircraft and a related aircraft lease agreement which had
been collateral for the loan, Aviaco filed a counter-claim against the Company,
asserting nine claims for alleged damages based on various tort and contractual
theories relating to the Company's foreclosure.
The case proceeded to jury trial on three of the nine claims which survived the
Company's Motion for Summary Judgment. The case was submitted to the jury on
October 16, 1997. On October 17, 1997, the jury returned a verdict in favor of
Aviaco awarding aggregate damages of approximately $12.2 million, including
damages of approximately $10.0 million for the failure to exercise reasonable
care with regard to the related lease agreement.
In December of 1997, the Company filed a Motion for Judgment as a Matter of Law,
arguing, inter alia, to set aside the $10.0 million award as not being supported
by the record evidence or by applicable law. On February 13, 1998, the Judge
ruled in favor of the Company and set aside the $10.0 million award.
On March 2, 1998, the Judge entered a Final Judgment against the Company in the
aggregate amount, including prejudgment interest of approximately $2.8 million
with post judgment interest thereon at the rate of 5.42% per annum. Both Aviaco
and the Company have appealed from the Final Judgment to the United States Court
of Appeals for the Eleventh Circuit. Taking into account amounts reserved for
this litigation, the Company does not expect such litigation to have any future
material adverse effect on its earnings, cash flow or financial position.
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 $196.6 million (7.3% of total
Company portfolio) and $249.5 million (9.5% of total Company portfolio) at
December 31, 1997 and 1996, respectively. 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.
McDonnell Douglas provides guaranties to the Company for certain obligations of
TWA under the various lease agreements between the Company and TWA. At December
31, 1997, the maximum aggregate coverage under such guaranties was $36.4
million. TWA has reported cash balances of $237.8 million as of December 31,
1997, compared to $181.6 million at December 31, 1996. As of the date hereof,
TWA is current on its obligations to the Company. If, however, TWA were to
default on its obligations to the Company, this could have a material adverse
effect on the Company's earnings, cash flow or financial position.
P.T. Garuda Indonesia ("Garuda"), accounted for $171.8 million (6.4% of total
Company portfolio) and $279.4 million (10.6% of total Company portfolio) at
December 31, 1997 and 1996, respectively. Garuda has proposed a restructuring of
the Company's two MD-11 leases. A possible restructuring, providing for lease
extensions and payment deferrals, is being considered by the Company.
Uncertainty for Asia-Pacific airlines increased during the latter half of 1997,
as currency devaluations and continuing turmoil in Asia's financial markets
dimmed the region's near-term prospects for growth.
The $100.0 million used aircraft purchase bridge facility made available by the
Company to AirTran Airlines ("AirTran"), formerly ValuJet Airlines, Inc., in
1995, was reduced in maximum scope to $50.0 million by mutual agreement during
the third quarter of 1996. This facility expires upon delivery to AirTran of the
first scheduled new Boeing 717-200 (formerly 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 December 31, 1997 or
1996.
At December 31, 1997 and 1996, the Company had commitments to provide leasing
and other financing totaling $102.2 million and $76.6 million, respectively.
In conjunction with prior asset dispositions, at December 31, 1997, the Company
is subject to a maximum recourse of $64.4 million. Based on trends to date, the
Company's exposure to such loss is not expected to be significant.
The Company leases aircraft under capital leases which have been subleased to
others. At December 31, 1997, the Company had guaranteed the repayment of $5.9
million in capital lease obligations associated with a 50% partner.
The Company's principal office is leased from McDonnell Douglas under an
operating lease agreement, expiring in 1999. Rent expense for all office leases
under operating lease agreements in 1997, 1996 and 1995 totaled $0.8 million,
$0.4 million and $0.9 million, respectively. At December 31, 1997, the minimum
future rental commitments under these noncancelable leases payable over the
remaining lives of the leases aggregate $0.9 million.
Note 9 -- Transactions with Boeing, McDonnell Douglas and BCSC
Accounts with Boeing, McDonnell Douglas and BCSC consisted of the following at
December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996
<S> <C> <C>
Note receivable $ - $ 1.7
Federal income tax receivable (payable) (11.6) 6.7
State income tax payable (4.1) (3.5)
Other payables (21.5) (4.9)
--------------------------------------------
$ (37.2) $ -
============================================
</TABLE>
The Company had arrangements with McDonnell Douglas, terminable at the
discretion of either of the parties, pursuant to which the Company may borrow
from McDonnell Douglas and McDonnell Douglas may borrow from the Company, funds
for periods up to 30 days at a market rate of interest. Under these
arrangements, there were no outstanding balances at December 31, 1997 and 1996.
Such arrangements have been terminated as a result of the Boeing-McDonnell
Douglas merger.
Under a similar arrangement, the Company may borrow from BCSC, and BCSC and its
subsidiaries may borrow from the Company, funds for periods up to 30 days at the
Company's cost of funds for short-term borrowings. Under this arrangement,
borrowings of $51.0 million and $20.3 million were outstanding at December 31,
1997 and 1996, respectively.
At December 31, 1996, the Company had a note receivable from Boeing Realty
Corporation, a wholly owned subsidiary of McDonnell Douglas, of $1.7 million.
The note was paid in full in November 1997.
In December 1997, the Company acquired from Boeing all of the outstanding shares
of a corporation which had been formed for the exclusive purpose of owning and
leasing two used Boeing 737-400 aircraft for a purchase price of $51.2 million.
The aircraft continue to be owned by the corporation and are presently leased to
Jet Airways (India) Pvt. Ltd. under leases expiring in 1999.
During 1997, 1996 and 1995, the Company purchased aircraft subject to leases
from Boeing and McDonnell Douglas in the amount of $51.9 million, $501.9 million
and $276.8 million, respectively. During 1997, 1996 and 1995, the Company
recorded operating income from Boeing and McDonnell Douglas relating to
financings aggregating $12.1 million, $14.9 million and $16.2 million,
respectively.
In November 1997, the Company sold, at estimated fair value, an executive
aircraft formerly leased to McDonnell Douglas to Boeing for $16.8 million. The
Company recorded a pretax gain of $1.8 million, which is included in net gain on
disposal or re-lease of assets.
At December 31, 1997 and 1996, $334.9 million and $470.2 million, respectively,
was guaranteed by McDonnell Douglas for commercial aircraft financing. Fees
related to these guaranties that were paid to McDonnell Douglas totaled $1.1
million, $1.6 million and $1.9 million in 1997, 1996 and 1995, respectively.
During 1997, 1996 and 1995, the Company collected $6.9 million, $2.1 million and
$0.5 million, respectively, under these guaranties.
The Company's Series A Preferred Stock, owned entirely by BCSC, is redeemable at
the Company's option at $5,000 per share, has no voting privileges and is
entitled to cumulative semi-annual dividends of $175 per share. Such dividends
have priority over cash dividends on the Company's common stock. Accrued
dividends on preferred stock amounted to $0.6 million at December 31, 1997 and
1996.
Substantially all employees of McDonnell Douglas and its subsidiaries are
members of defined benefit pension plans and insurance plans. McDonnell Douglas
also provides eligible employees the opportunity to participate in savings plans
that permit both pretax and after-tax contributions. McDonnell Douglas generally
charges the Company with the actual cost of these plans attributable to the
Company's employees which are included with other McDonnell Douglas charges for
support services and reflected in operating expenses. McDonnell Douglas charges
for services provided during 1997, 1996 and 1995 totaled $1.3 million, $1.3
million and $1.1 million, respectively. Additionally, the Company was
compensated by certain affiliates for a number of support services, which are
netted against operating expenses, amounting to $1.1 million, $0.9 million and
$1.2 million in 1997, 1996 and 1995, respectively.
Note 10 -- Fair Value of Financial Instruments
The estimated fair value amounts of the Company's financial instruments have
been determined by the Company, using appropriate market information and
valuation methodologies. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments:
CASH AND CASH EQUIVALENTS The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
NOTES RECEIVABLE Fair values for variable rate notes that reprice frequently and
with no significant change in credit risk are based on carrying values. The fair
values of fixed rate notes are estimated in discounted cash flow analyses, with
the use of interest rates currently offered on loans with similar terms to
borrowers of similar credit quality.
SHORT AND LONG-TERM DEBT Carrying amounts of borrowings include deferred debt
costs. Carrying amounts of borrowings under the short-term revolving credit
agreements approximate their fair value. The fair values of long-term debt,
excluding capital lease obligations, are estimated according to public
quotations or discounted cash flow analyses, which are based on current
incremental borrowing rates for similar types of borrowing arrangements.
INTEREST RATE HEDGES The fair values of the Company's interest rate swaps are
based on quoted market prices of comparable instruments.
FINANCING COMMITMENTS Risks associated with changes in interest rates are
minimized during the commitment term because the rates are set at the date of
funding based on current market conditions, the fair value of the underlying
collateral and the credit worthiness of the customers. As a result, the fair
value of these financings is expected to equal the amounts funded.
The notional amounts, carrying amounts and estimated fair values of the
Company's financial instruments at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------------
Assets (Liabilities) Assets (Liabilities)
------------------------- -------------------------
Notional Carrying Fair Notional Carrying Fair
(Dollars in millions) Amount Amount Value Amount Amount Value
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ - $ 39.1 $ 39.1 $ - $ 16.9 $ 16.9
Notes receivable - 269.0 298.8 - 308.9 317.0
LIABILITIES
Short-term notes payable to banks - (149.0) (149.0) - (161.3) (161.3)
Long-term debt:
Senior, excluding capital lease
obligations - (1,139.0) (1,191.0) - (1,123.1) (1,154.3)
Subordinated - (70.0) (74.8) - (95.0) (99.2)
OFF BALANCE SHEET INSTRUMENTS
Commitments to extend credit (102.2) - (102.2) (76.6) - (76.6)
Interest rate swaps 426.1 - (4.7) 469.9 - 3.1
</TABLE>
Note 11 -- Segment Information and Concentration of Credit Risk
A substantial portion of the Company's total portfolio is concentrated among a
small number of the Company's largest commercial aircraft financing customers.
The single largest commercial aircraft financing customer accounted for $309.7
million (11.5% of total Company portfolio) and $316.1 million (12.0% of total
Company portfolio) at December 31, 1997 and 1996, respectively. The second
largest commercial aircraft financing customer accounted for $196.6 million
(7.3% of total Company portfolio) and $249.5 million (9.5% of total portfolio),
at December 31, 1997 and 1996, respectively. The five largest commercial
aircraft financing customers accounted for $994.4 million (36.8% of total
Company portfolio) and $1,172.4 million (44.6% of total Company portfolio) at
December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, there
were no significant concentrations by customer within the commercial equipment
leasing portfolio.
In 1997, 1996 and 1995, a single aircraft financing customer accounted for
16.8%, 18.0% and 21.6%, respectively, of the Company's operating income. No
other customer accounted for more than 10% of the Company's operating income.
The Company generally holds title to all leased equipment and generally has a
perfected security interest in the assets financed through note and loan
arrangements.
Information about the Company's operations in its different financial reporting
segments for the past three years ending December 31 is as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
Operating income:
<S> <C> <C> <C>
Commercial aircraft financing $ 155.5 $ 145.2 $ 123.5
Commercial equipment leasing 88.0 68.1 52.7
Other 2.6 7.5 12.4
Corporate 0.3 0.7 2.0
=====================================================
$ 246.4 $ 221.5 $ 190.6
=====================================================
Income (loss) before provision for income taxes:
Commercial aircraft financing $ 58.7 $ 55.2 $ 36.2
Commercial equipment leasing 37.7 25.4 27.2
Other (0.2) 0.7 1.4
Corporate (8.4) (6.4) (4.5)
=====================================================
$ 87.8 $ 74.9 $ 60.3
=====================================================
Identifiable assets at December 31:
Commercial aircraft financing $ 1,728.8 $ 1,831.6 $ 1,443.6
Commercial equipment leasing 973.3 767.0 507.3
Other 17.9 53.2 97.3
Corporate 2.8 1.8 1.4
=====================================================
$ 2,722.8 $ 2,653.6 $ 2,049.6
=====================================================
Portfolio at December 31:
Commercial aircraft financing $ 1,711.5 $ 1,814.9 $ 1,405.7
Commercial equipment leasing 976.6 769.8 502.4
Other 12.2 44.9 80.6
=====================================================
$ 2,700.3 $ 2,629.6 $ 1,988.7
=====================================================
Depreciation expense - equipment under operating leases:
Commercial aircraft financing $ 26.9 $ 35.1 $ 26.2
Commercial equipment leasing 34.2 22.5 22.0
=====================================================
$ 61.1 $ 57.6 $ 48.2
=====================================================
Equipment acquired for operating leases, at cost:
Commercial aircraft financing $ 146.5 $ 196.9 $ 85.2
Commercial equipment leasing 199.7 107.0 70.5
=====================================================
$ 346.2 $ 303.9 $ 155.7
=====================================================
</TABLE>
Operating income from financing of assets located outside the United States
totaled $54.2 million, $45.5 million and $45.7 million in 1997, 1996 and 1995,
respectively.
<PAGE>
Boeing Capital Corporation and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
(Dollars in millions)
Allowance for
Losses on Balance at Charged to
Financing Beginning Costs and Balance at End
Receivables of Year Expenses Other Deductions (1) of Year
<S> <C> <C> <C> <C> <C> <C>
1997 $ 48.6 $ 11.5 $ (1.7) $ (2.5) $ 55.9
1996 $ 42.3 $ 14.2 $ (1.9) $ (6.0) $ 48.6
1995 $ 40.7 $ 12.2 $ - $ (10.6) $ 42.3
</TABLE>
- --------------------------
(1) Write-offs, net of recoveries
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page Number
in Form 10-K
(a) 1. Financial Statements:
Independent Auditors' Reports ..................................26
Consolidated Balance Sheets at December 31, 1997 and 1996.......28
Consolidated Statements of Income and Income Retained for
Growth for the Years Ended December 31, 1997,
1996 and 1995................................................29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.............................30
Notes to Consolidated Financial Statements......................31
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts..................45
Schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission (the
"SEC"), except Schedule II, which is included herein, have been
omitted because they are not required, or the information is set
forth in the financial statements or notes thereto.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company dated June
29, 1989, incorporated herein by reference to Exhibit 3.1 to the
Company's Form 10-K for the year ended December 31, 1993.
3.2 Amendment to Certificate of Incorporation of the Company dated
August 11, 1997, incorporated herein by reference to Exhibit
3(i) to the Company's Form 10-Q, for the period ended June 30,
1997.
3.3 By-Laws of the Company, as amended to date, incorporated herein
by reference to Exhibit 3.2 to the Company's Form 10-K for the
year ended December 31, 1993.
4.1 Indenture, dated as of April 1, 1983, between the Company and
Bankers Trust Company, incorporated herein by reference to
Exhibit 4(a) to the Company's Form S-3 Registration Statement
(File No. 2-83007).
4.2 First Supplemental Indenture, dated as of June 12, 1995, between
the Company and Bankers Trust Company, incorporated herein by
reference to Exhibit 4(b) to the Company's Form S-3 Registration
Statement (File No. 33-58989).
4.3 Subordinated Indenture, dated as of June 15, 1988, by and
between the Company and Bankers Trust Company of California,
N.A., as Subordinated Indenture Trustee, incorporated by
reference to Exhibit 4(b) to the Company's Form S-3 Registration
Statement (File No.
33-26674).
4.4 First Supplemental Subordinated Indenture, dated as of June 12,
1995, between the Company and Bankers Trust Company, as
successor Trustee to Bankers Trust Company of California, N.A.,
incorporated herein by reference to Exhibit 4(d) to the
Company's Form S-3 Registration Statement (File No. 33-58989).
4.5 Indenture, dated as of April 15, 1987, incorporated herein by
reference to Exhibit 4 to the Company's Form S-3 Registration
Statement (File No. 33-26674).
4.6 Form of Series II Medium Term Note, incorporated by reference to
Exhibit 4(c) to the Form 8-K of the Company dated as of August
22, 1983.
4.7 Form of Series III Medium Term Note, incorporated herein by
reference to Exhibit 4(b) to the Company's Form S-3 Registration
Statement (File No. 2-98001).
4.8 Form of Series V Medium Term Note, incorporated herein by
reference to Exhibit 4(b) to the Company's Form S-3 Registration
(File No. 33-13735).
4.9 Form of Series VI Medium Term Note, incorporated by reference to
Exhibit 4 to the Form S-3 Registration Statement of the Company,
as filed with the SEC on April 24, 1987.
4.10 Form of Series VII Medium Term Note, incorporated by reference
to Exhibit 4 to the Form S-3 Registration Statement of the
Company, as filed with the SEC on April 24, 1987.
4.11 Form of Series VIII Senior Medium Term Note, incorporated herein
by reference to Exhibit 4(c) to the Company's Form S-3
Registration Statement (File No. 33-26674).
4.12 Form of Series VIII Subordinated Medium Term Note, incorporated
herein by reference to Exhibit 4(d) to the Company's Form S-3
Registration Statement (File No. 33-26674).
4.13 Form of Series IX Senior Medium Term Note, incorporated herein
by reference to Exhibit 4(c) to the Company's Form S-3
Registration Statement (File No. 33-31419).
4.14 Form of Series IX Senior Federal Funds Medium Term Note,
incorporated herein by reference to Exhibit 4(d) of the
Company's Form 8-K dated May 16, 1995.
4.15 Form of Series IX Subordinated Medium Term Note, incorporated
herein by reference to Exhibit 4(d) to the Company's Form S-3
Registration (File No. 33-31419).
4.16 Form of General Term Note(R), incorporated herein by reference
to Exhibit 4(c) to the Company's Form 8-K dated May 26, 1993.
4.17 Form of Series X Senior Fixed Rate Medium Term Note,
incorporated herein by reference to Exhibit 4(e) to the
Company's Form S-3 Registration Statement (File No. 33-58989).
4.18 Form of Series X Senior Floating Rate Medium Term Note,
incorporated herein by reference to Exhibit 4(h) to the
Company's Form S-3 Registration Statement (File No. 33-58989.)
4.19 Form of series X Subordinated Fixed Rate Medium Term Note,
incorporated herein by reference to Exhibit 4(f) to the
Company's Form S-3 Registration Statement (File No.
33-58989).
4.20 Form of Series X Subordinated Floating Rate Medium Term Note,
incorporated herein by reference to Exhibit 4(g) to the
Company's Form S-3 Registration Statement (File No.
33-5898
4.21 Form of Series X Senior Fixed Rate Medium-Term Note,
incorporated by reference to Exhibit 4(e) to the Company's Form
S-3 Registration Statement (File No. 333-37635).
4.22 Form of Series X Subordinated Fixed Rate Medium-Term Note,
incorporated by reference to Exhibit 4(f) to the Company's Form
S-3 Registration Statement (File No. 333-37635).
4.23 Form of Series X Senior Floating Rate Medium-Term Note,
incorporated by reference to Exhibit 4(g) to the Company's Form
S-3 Registration Statement (File No. 333-37635).
4.24 Form of Series X Subordinated Floating Rate Medium-Term Note,
incorporated by reference to Exhibit 4(h) to the Company's Form
S-3 Registration Statement (File No. 333-37635).
Pursuant to Item 601 (b)(4)(iii) of Regulation S-K, the Company is not filing
certain instruments with respect to its long-term debt because the total amount
of securities currently provided for under each of such instruments does not
exceed 10 percent of the total assets of the Company and its subsidiaries on a
consolidated basis. The Company hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
10.1 Amended and Restated Operating Agreement, dated as of April 12,
1993, among McDonnell Douglas, the Company and MDFS,
incorporated herein by reference to Exhibit 10.1 to the
Company's Form 10-K for the year ended December 31, 1993.
10.2 Amended and Restated Operating Agreement, dated as of August 1,
1997, incorporated herein by reference to Exhibit 10 to the
Company's Form 10-Q for the quarter ended September 30, 1997.
10.3 Operating Agreement, effective as of February 8, 1989, by and
between the Company and MDFS, incorporated herein by reference
to Exhibit 10.3 to the Company's Form 10-K for the year ended
December 31, 1989.
10.4 By-Laws of McDonnell Douglas, as amended March 6, 1996,
incorporated by reference from McDonnell Douglas's Exhibit 3.2
to its Form 10-K Report for the year ended December 31, 1995
(file No. 1-3685).
10.5 Supplemental Guaranty Agreement, dated as of December 30, 1993,
by and between the Company and McDonnell Douglas, incorporated
herein by reference to Exhibit 10.4 to the Company's Form 10-K
for the year ended December 31, 1993.
10.6 Amendment No. 1 to Supplemental Guaranty Agreement, dated as of
March 28, 1996.
10.7 Guaranty Amendment Agreement, dated as of June 28, 1996, by and
between the Company and McDonnell Douglas.
10.8 Supplemental Guaranty Agreement, dated as of December 30, 1993,
by and between the Company and McDonnell Douglas, incorporated
herein by reference to Exhibit 10.5 to the Company's Form 10-K
for the year ended December 31, 1994.
10.9 Amendment No. 1 to Supplemental Guaranty Agreement, dated as of
March 28, 1996, between the Company and McDonnell Douglas.
10.10 Agreement, dated as of December 30, 1994, by and between the
Company and McDonnell Douglas incorporated herein by reference
to Exhibit 10.6 to the Company's Form 10-K for the year ended
December 31, 1994.
10.11 Credit Agreement, dated as of September 29, 1994, among the
Company, MDFS and the banks listed therein incorporated herein
by reference to Exhibit 10.7 to the Company's Form 10-K for the
year ended December 31, 1994.
10.12 Amendment No. 1, dated as of August 31, 1995, to Credit
Agreement, dated as of September 29, 1994, among the Company,
MDFS and the banks listed therein, incorporated herein by
reference to Exhibit 10 to the Company's Form 10-Q for the
quarterly period ended September 30, 1995.
10.13 Amendment No. 2, dated as of August 16, 1996, to Credit
Agreement, dated as of September 29, 1994, among the Company,
MDFS and the banks listed therein, incorporated by reference to
Exhibit 10 to the Company's Form 10-Q for the quarterly period
ended September 30, 1996.
12 Statement regarding computation of ratio of earnings to fixed
charges.
23.1 Independent Auditors' Consent and Report on Financial Statement
Schedule.
23.2 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Boeing Capital Corporation
By /s/ STEVEN W. VOGEDING
--------------------------
Steven W. Vogeding
March 30, 1998 Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ DAVID A. JAEGER March 30, 1998
- ------------------------------------------ ----------------------
David A. Jaeger Chairman and Director
/s/ THOMAS J. MOTHERWAY
- ------------------------------------------
Thomas J. Motherway President and Director March 30, 1998
----------------------
(Principal Executive Officer)
/s/ STEVEN W. VOGEDING
- ------------------------------------------
Steven W. Vogeding Vice President and Chief Financial Officer March 30, 1998
----------------------
(Principal Financial Officer)
- ------------------------------------------ ----------------------
Theodore J. Collins Director
/s/ BOYD E. GIVAN March 30, 1998
- ------------------------------------------ ----------------------
Boyd E. Givan Director
/s/ MAURA R. MIZUGUCHI March 30, 1998
- ------------------------------------------ ----------------------
Maura R. Mizuguchi Controller
(Principal Accounting Officer)
/s/ DANIEL O. ANDERSON March 30, 1998
- ------------------------------------------ ----------------------
Daniel O. Anderson Vice President - Operations and Director
</TABLE>
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the inclusion herein of our report dated January 22, 1997, with
respect to the consolidated balance sheet of McDonnell Douglas Finance
Corporation ("MDFC") as of December 31, 1996, and the related consolidated
statements of income and income retained for growth, and cash flows for the
years ended December 31, 1996 and 1995 in the Form 10-K for the year ended
December 31, 1997 of Boeing Capital Corporation (formerly McDonnell Douglas
Finance Corporation) and to the incorporation by reference in the Registration
Statement of Boeing Capital Corporation on Form S-3 (No. 33-58989) and the
related Prospectus of our report dated January 22, 1997.
We also consent to the inclusion herein of our report dated January 22, 1997,
with respect to the financial statement schedule of MDFC for the years ended
December 31, 1996 and 1995 in the Form 10-K for the year ended December 31,
1997, of Boeing Capital Corporation (formerly McDonnell Douglas Finance
Corporation) and to the incorporation by reference in the Registration Statement
of Boeing Capital Corporation on Form S-3 (No. 33-58989) and related Prospectus
of our report dated January 22, 1997.
/s/ ERNST & YOUNG LLP
March 27, 1998
EXHIBIT 23.1
Independent Auditors' Consent
and Report on Financial Statement Schedule
To the Board of Directors
Boeing Capital Corporation
We consent to the incorporation by reference in the Registration Statement No.
333-37635 on Form S-3 of Boeing Capital Corporation of our report dated January
23, 1998, appearing in the Annual Report on Form 10-K of Boeing Capital
Corporation for the year ended December 31, 1997.
Our audit of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Boeing Capital Corporation
listed in item 14(a)2. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audit. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 27, 1998
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the inclusion herein of our report dated January 22, 1997, with
respect to the consolidated balance sheet of McDonnell Douglas Finance
Corporation ("MDFC") as of December 31, 1996, and the related consolidated
statements of income and income retained for growth, and cash flows for the
years ended December 31, 1996 and 1995 in the Form 10-K for the year ended
December 31, 1997 of Boeing Capital Corporation (formerly McDonnell Douglas
Finance Corporation) and to the incorporation by reference in the Registration
Statement of Boeing Capital Corporation on Form S-3 (No. 33-58989) and the
related Prospectus of our report dated January 22, 1997.
We also consent to the inclusion herein of our report dated January 22, 1997,
with respect to the financial statement schedule of MDFC for the years ended
December 31, 1996 and 1995 in the Form 10-K for the year ended December 31,
1997, of Boeing Capital Corporation (formerly McDonnell Douglas Finance
Corporation) and to the incorporation by reference in the Registration Statement
of Boeing Capital Corporation on Form S-3 (No. 33-58989) and related Prospectus
of our report dated January 22, 1997.
/s/ ERNST & YOUNG LLP
March 27, 1998
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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0
50,000
<OTHER-SE> 208,600
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