United States
Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to _________________
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BOEING CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 95-2564584 0-10795
(State or other jurisdiction (I.R.S. Employer (Commission File No.)
of Incorporation or Identification No.)
Organization)
4060 Lakewood Boulevard, 6th Floor - Long Beach, California 90808-1700
(Address of principal executive offices)
(562) 627-3000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No |_|
Common shares outstanding at November 12, 1998: 50,000 shares
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b)
to Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE>
Part I
Item 1. Financial Statements
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in millions, except stated value and par value) 1998 1997
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Financing receivables:
Investment in finance leases $ 1,311.7 $ 1,509.1
Notes receivable 451.5 269.0
-------------------------------------
1,763.2 1,778.1
Allowance for losses on financing receivables (62.1) (55.9)
-------------------------------------
1,701.1 1,722.2
Cash and cash equivalents 19.2 39.1
Equipment under operating leases, net 825.9 922.2
Equipment held for sale or re-lease 70.0 0.7
Other assets 66.9 38.6
-------------------------------------
$ 2,683.1 $ 2,722.8
=====================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 158.0 $ 149.0
Accounts payable and accrued expenses 16.3 49.1
Accounts with Boeing, McDonnell Douglas and BCSC 36.4 37.2
Other liabilities 75.9 97.2
Deferred income taxes 362.0 388.3
Long-term debt:
Senior 1,569.2 1,579.0
Subordinated 69.9 69.9
-------------------------------------
2,287.7 2,369.7
-------------------------------------
Commitments and contingencies - Note 3
Shareholder's equity:
Preferred stock - no par value; authorized 100,000 shares:
Series A; $5,000 stated value; authorized, issued and
outstanding 10,000 shares 50.0 50.0
Common stock - $100 par value; authorized 100,000 shares;
issued and outstanding 50,000 shares 5.0 5.0
Capital in excess of par value 89.5 89.5
Income retained for growth 250.9 208.6
-------------------------------------
395.4 353.1
-------------------------------------
$ 2,683.1 $ 2,722.8
=====================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Income and Income Retained for Growth
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(Dollars in millions) 1998 1997 1998 1997
===========================================================================================================================
OPERATING INCOME
<S> <C> <C> <C> <C>
Finance lease income $ 29.1 $ 34.0 $ 92.5 $ 104.6
Interest income on notes receivable 10.3 6.3 25.2 19.9
Operating lease income, net of depreciation expense 16.0 14.0 50.8 41.7
Net gain on disposal or re-lease of assets 12.0 6.5 27.2 10.6
Other 1.4 2.2 2.2 5.1
---------------------------------------------------------------
68.8 63.0 197.9 181.9
---------------------------------------------------------------
EXPENSES
Interest expense 30.9 30.8 95.6 95.0
Provision for losses 2.6 2.9 7.9 8.7
Operating expenses 2.9 2.8 8.1 8.5
Other 4.1 0.7 7.9 4.0
---------------------------------------------------------------
40.5 37.2 119.5 116.2
---------------------------------------------------------------
Income before provision for income taxes 28.3 25.8 78.4 65.7
Provision for income taxes 4.6 9.2 23.1 23.7
---------------------------------------------------------------
Net income 23.7 16.6 55.3 42.0
Income retained for growth at beginning of period 228.1 204.7 208.6 181.0
Dividends (0.9) (0.9) (13.0) (2.6)
---------------------------------------------------------------
Income retained for growth at end of period $ 250.9 $ 220.4 $ 250.9 $ 220.4
===============================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
(Dollars in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 55.3 $ 42.0
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation expense - equipment under operating leases 52.9 44.0
Net gain on disposal or re-lease of assets (27.2) (10.6)
Provision for losses 7.9 8.7
Change in assets and liabilities:
Accounts with Boeing, McDonnell Douglas and BCSC (0.8) 20.0
Other assets (28.3) 7.6
Accounts payable and accrued expenses (33.7) (31.2)
Other liabilities (21.3) 10.0
Deferred income taxes (26.3) 33.8
Other, net (0.9) (0.6)
-----------------------------------------
(22.4) 123.7
-----------------------------------------
INVESTING ACTIVITIES
Net change in short-term notes and leases receivable (49.6) 101.7
Purchase of equipment for operating leases (72.4) (128.7)
Proceeds from disposition of equipment, notes and leases receivable 290.6 87.6
Collection of notes and leases receivable 163.1 183.6
Acquisition of notes and leases receivable (315.6) (153.5)
-----------------------------------------
16.1 90.7
-----------------------------------------
FINANCING ACTIVITIES
Net change in short-term borrowings 9.0 (56.2)
Debt having maturities more than 90 days:
Proceeds 248.0 60.0
Repayments (258.5) (217.9)
Payment of cash dividends (12.1) (1.7)
-----------------------------------------
(13.6) (215.8)
-----------------------------------------
Net decrease in cash and cash equivalents (19.9) (1.4)
Cash and cash equivalents at beginning of year 39.1 16.9
=========================================
Cash and cash equivalents at end of period $ 19.2 $ 15.5
=========================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
Note 1 -- Basis of Presentation
Boeing Capital Corporation (formerly McDonnell Douglas Finance Corporation) (the
"Company") is a wholly-owned subsidiary of Boeing Capital Services Corporation
("BCSC"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("McDonnell
Douglas"), which in turn is wholly-owned by The Boeing Company ("Boeing"). The
accompanying unaudited consolidated financial statements have been prepared by
the Company in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of the Company, the
accompanying consolidated financial statements reflect all adjustments
(consisting of normal recurring accruals) which are necessary to present fairly
the consolidated balance sheets and the related consolidated statements of
income and income retained for growth and cash flows for the interim periods
presented. Operating results for the nine-month period ended September 30, 1998,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. The statements should be read in conjunction with the
notes to the consolidated financial statements included in the Company's Form
10-K for the year ended December 31, 1997.
Note 2 -- Credit Agreements and Long-Term Debt
The provisions of various credit and debt agreements require the Company to
maintain a minimum net worth, restrict indebtedness, and limit cash dividends
and other distributions. Under the most restrictive provision, $108.2 million of
the Company's income retained for growth was available for dividends at
September 30, 1998.
Note 3 -- Commitments and Contingencies
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 the Company's 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 the three of 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 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.
On June 26, 1998, Federal Express Corporation ("Fedex") gave notice to the
Company of its intention to terminate early (in late 1999) two lease agreements
covering MD-11 aircraft which Fedex leases from the Company. Even if the leases
are in fact terminated early, the Company does not anticipate any material
adverse effect on its earnings, cash flow or financial position taking into
account current demand for the aircraft, a guaranty from McDonnell Douglas and
certain other contractual rights including payments due to the Company upon
early termination, as well as a commitment from another airline to lease the
aircraft for a pre-determined rental amount.
Trans World Airlines, Inc. ("TWA") accounted for $166.6 million (6.4% of total
Company portfolio) and $196.6 million (7.3% of total Company portfolio) at
September 30, 1998, and December 31, 1997, 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 September 30, 1998, the maximum aggregate coverage under such guaranties
was $33.3 million. 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 future earnings and
cash flow.
The Company's lease agreements with P.T. Garuda Indonesia ("Garuda") relating to
two MD-11 aircraft have been terminated and the aircraft, which were returned by
Garuda in July 1998, have been sold to Boeing for an aggregate sales price of
$162.8 million, which resulted in a gain to the Company of $3.3 million.
In July 1998, the Company terminated early a lease agreement covering one used
DC-10-30 aircraft. The Company has repossessed such aircraft and is remarketing
it. Taking into account a guaranty from McDonnell Douglas, this transaction is
not expected to have a material adverse effect on the Company's earnings, cash
flow or financial position.
The Company had leased six Embraer EMB-120 aircraft to Westair. As a result of
Westair's cessation of operations at the end of May 1998, the lease agreements
for such aircraft have been terminated and the aircraft have been returned to
the Company. The Company is preparing to remarket the aircraft and this
transaction is not expected to have a material adverse effect on the company's
earnings, cash flow or financial position.
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 September 30, 1998 or
December 31, 1997.
At September 30, 1998, the Company had commitments to provide leasing and other
financing totaling $195.8 million.
In conjunction with prior asset dispositions and certain guaranties, at
September 30, 1998, the Company was subject to a maximum recourse of $55.1
million. Based on trends to date, any losses related to such exposure are not
expected by the Company to be significant.
The Company leases aircraft under capital leases which have been subleased to
others. At September 30, 1998, the Company had guaranteed the repayment of $5.4
million in capital lease obligations associated with a 50% partner.
Item 2. Management's Analysis of Results of Operations
- -------------------------------------------------------------------------------
Forward-Looking Information Is Subject to Risk and Uncertainty
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-Q, particularly those in Note 3 of the Notes
to Consolidated Financial Statements, Item 2 of Part I and Items 1 and 5 of Part
II, may contain forward-looking information. The subject matter of such
statements may include, but not be limited to, the effects on the Company of the
Boeing-McDonnell Douglas merger and the Year 2000 date conversion, as well as
future earnings, costs, expenditures, losses, residual values and various
business environment trends. In addition to those contained herein,
forward-looking statements and projections may be made by management of the
Company 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 Boeing, the capital equipment requirements of United
States and foreign businesses, capital availability and cost, changes in law
and tax benefits, the tax position of Boeing (including the applicability of
the alternative minimum tax), competition from other financial institutions,
the Company's successful execution of internal operating plans and Year 2000
date conversion plans, the impact of Year 2000 issues on the Company's
customers, vendors and service providers, defaults by customers, regulatory
uncertainties and legal proceedings.
- -------------------------------------------------------------------------------
Finance lease income decreased $12.1 million (11.6%) compared to the first nine
months of 1997, primarily attributable to the sale of an MD-11 aircraft in
September of 1997, the sale of three MD-82 aircraft in December of 1997, the
sale of two MD-82 aircraft in June 1998 and the sale of two MD-11 aircraft in
August 1998.
Operating lease income increased $9.1 million (21.8%) compared to the first nine
months of 1997, primarily attributable to the operating lease financing of four
used Boeing aircraft during the last four months of 1997.
Interest on notes receivable increased $5.3 million (26.6%) from the first nine
months of 1997, primarily attributable to an increase in volume in the notes
receivable portfolio of $212.8 million in the first nine months of 1998.
Gain on disposal or re-lease of assets increased $16.6 million (156.6%) from the
first nine months of 1997, primarily attributable to $4.9 million of income from
the sale of two TWA aircraft in June of 1998, $3.3 million of income from the
sale of two Garuda aircraft to Boeing in August 1998 and $3.1 million of income
from the sale of an executive jet in August 1998, with the remaining increase
attributable to other sales within the commercial aircraft and commercial
equipment leasing portfolios.
Other income decreased $2.9 million (56.9%) from the first nine months of 1997,
primarily attributable to prepayment fees of $1.9 million received in the third
quarter of 1997 and commercial equipment leasing residual value guarantee fees
of $1.2 million received in the first nine months of 1997.
Other expenses increased $3.9 million (97.5%) compared to the first nine months
of 1997, primarily attributable to maintenance expenses of approximately $2.5
million incurred in 1998 on an aircraft that was repossessed in March of 1997.
Year 2000 Date Conversion
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.
The Company has assessed (and continues to re-assess) the impact of the Year
2000 issue on its information technology systems. In 1996, the Company initiated
a conversion from its existing lease administration system to programs that the
Company has been advised are Year 2000 compliant. This conversion project has
not yet been completed although the majority of the tasks involved in such
project have been accomplished and it is expected that the project will be
completed before the end of the first quarter of 1999. If the conversion project
is not completed before the end of 1999, the Company's operations could be
adversely and materially affected. The Company has begun to develop a
contingency plan for the possible unavailability of its lease administration
system, but has not commenced creating a contingency plan for any other possible
Year 2000 problems. The Company intends to develop contingency plans relating to
possible Year 2000 problems beginning in the first half of 1999.
Although the Company does not consider it likely that Year 2000 problems
inherent within its information technology systems will result in significant
operational problems, the possibility of such problems cannot be discounted at
this time. The Company is retaining an outside consultant to assist in its
ongoing assessment of its computer system's vulnerability to Year 2000 problems.
Also, the Company's preliminary estimate that it will complete its overall Year
2000 project by the third quarter of 1999 is subject to the findings of the
Company's ongoing assessment.
With respect to non-information technology systems, the Company has not
undertaken an assessment of possible Year 2000 problems. The Company intends to
assess possible Year 2000 problems relating to non-information technology
systems in the first quarter of 1999.
The total cost of the Year 2000 project is being funded through operating cash
flows, and based on the Company's assessment to date, is not expected to have a
material adverse effect on the Company's earnings, cash flow or financial
position.
No assurance can be given, however, that Year 2000 problems of third parties
(such as vendors, customers and other financial institutions with which the
Company does business) will not materially impact operations or operating
results. The Company is only in the preliminary stage of attempting to assess
the Year 2000 readiness of such third parties whose lack of Year 2000 readiness
could result in a material adverse impact on the Company. The Company presently
expects to have completed this assessment (subject to cooperation where
necessary from such third parties) by the end of the first quarter of 1999.
This entire discussion of Year 2000 issues contains forward-looking information
which is subject to uncertainty and risk. See "Forward-Looking Information is
Subject to Risk and Uncertainty" at the outset of this Item 2.
Part II
Item 1. 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 the Company's 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 the three of 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 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.
Item 2. Changes in Securities and Use of Proceeds
Omitted pursuant to instruction H(2).
Item 3. Defaults Upon Senior Securities
Omitted pursuant to instruction H(2).
Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to instruction H(2).
Item 5. Other Information
Summarized below is information on the effects of the Boeing-McDonnell Douglas
merger, borrowing operations, portfolio balances, new business volume, analysis
of allowance for losses on financing receivables and credit loss experience, and
receivable write-offs, net of recoveries by segment.
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 strategic decisions to be made by Boeing with
respect to the Company 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.
Borrowing Operations
Prior to the third quarter of 1998, the Company issued $300.0 million of the
$400.0 million aggregate principal amount of medium-term notes which were
authorized for issuance in October 1997 at interest rates ranging from 5.73% to
6.58% and with maturities ranging from 10 months to 11 years. On July 31, 1998,
the Company authorized an additional $500.0 million (resulting in an aggregate
of $600.0 million authorized, but unissued) of medium-term notes to be offered
and sold from time to time in the Company's discretion pursuant to the Company's
public shelf registration (SEC Registration No. 333-37635). During the third
quarter of 1998, the Company issued $163.0 million of such $600.0 million
medium-term notes, at interest rates ranging from 5.73% to 6.22% and with
maturities ranging from 10 months to 7 years. During the third quarter, the
Company's borrowing rates were increased by virtue of a significant increase in
the spreads required to be paid by the Company over rates for comparable U.S.
Treasury Notes. Such higher rates can reasonably be expected to have a negative
impact on the Company's competitiveness as a financier on transactions where the
Company is unable to pass through to customers such increased rates. These
increased borrowing spreads and consequent higher interest rates were caused by
a variety of factors, including without limitation the Company's credit rating
downgrade and outlook change discussed below, the uncertainty of the Company's
strategic fit at Boeing, as well as general financial market conditions.
The Company, as of September 30, 1998, has $96.2 million in aggregate deposits
in Japanese banks for the purpose of defeasing certain obligations of the
Company under Japanese leveraged leases of aircraft. Currently, these deposits
cannot be moved to other financial institutions without significant cost.
However, as of the date hereof, all such banks holding such deposits held an
investment grade rating from either Standard & Poor's Corporation or Moody's
Investors Services.
On June 8, 1998, Standard & Poor's Corporation announced that it lowered its
credit ratings on Boeing and the Company. The ratings of the Company's senior
unsecured debt and subordinated debt were lowered from AA to AA- and AA- to A+,
respectively. The outlook for the Company was deemed to be "developing."
Standard & Poor's stated that ratings "could be raised if [the Company] is
retained as a continuing operation of Boeing Co. Ratings could be lowered if
[the Company] is divested to a weaker entity."
On September 15, 1998, Moody's Investors Services placed Boeing and the
Company's debt ratings on review for possible downgrade. The current Moody's
ratings for the Company's senior unsecured debt, subordinated debt and
commercial paper are A3, Baa1 and Prime-1, respectively.
Portfolio Balances
Portfolio balances for the Company's financial reporting segments are summarized
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in millions) 1998 1997
---------------------------------------
Aircraft Financing
Boeing/McDonnell Douglas aircraft financing
<S> <C> <C>
Finance leases $ 781.0 $ 964.9
Operating leases 451.5 495.2
Notes receivable 83.6 61.9
--------------------------------------
1,316.1 1,522.0
--------------------------------------
Other commercial aircraft financing
Finance leases 134.6 133.3
Operating leases 32.6 51.9
Notes receivable 3.9 4.3
--------------------------------------
171.1 189.5
--------------------------------------
Commercial Equipment Leasing
Finance leases 396.1 410.9
Operating leases 341.8 375.0
Notes receivable 362.1 190.7
--------------------------------------
1,100.0 976.6
--------------------------------------
Other 1.9 12.2
--------------------------------------
$ 2,589.1 $ 2,700.3
======================================
</TABLE>
New Business Volume
New business volume is summarized as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
(Dollars in millions) 1998 1997
--------------------------------------
<S> <C> <C>
Boeing/McDonnell Douglas aircraft financing $ 69.8 $ 81.2
Other commercial aircraft financing 22.5 -
Commercial equipment leasing 281.0 188.1
--------------------------------------
$ 373.3 $ 269.3
======================================
</TABLE>
Analysis of Allowance for Losses on Financing Receivables and Credit Loss
Experience
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in millions) 1998 1997
<S> <C> <C>
of year $ 55.9 $ 48.6
Provision for losses 7.9 11.5
Write-offs, net of recoveries (0.1) (2.5)
Other (1.6) (1.7)
----------------------------------
Allowance for losses on financing receivables at end of
period $ 62.1 $ 55.9
==================================
Allowance as percent of total portfolio 2.4% 2.1%
Net write-offs as percent of average portfolio - % 0.1%
More than 90 days delinquent:
Amount of delinquent installments $ 0.6 $ 1.8
Total receivables due from delinquent obligors 11.4 15.5
Total receivables due from delinquent obligors
as a percentage of total portfolio 0.4% 0.6%
</TABLE>
Receivable Write-offs, Net of Recoveries by Segment
<TABLE>
The following table summarizes the write-offs (recoveries) of each of the
Company's continuing businesses:
<CAPTION>
Nine months ended
September 30,
(Dollars in millions) 1998 1997
---------------------------------------------
<S> <C> <C>
Commercial aircraft financing $ - $ -
Commercial equipment leasing (0.1) (0.3)
---------------------------------------------
$ (0.1) $ (0.3)
=============================================
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 12 Computation of Ratio of Income to Fixed Charges.
Exhibit 27 Financial Data Schedule.
B. Reports on Form 8-K
A report on Form 8-K was filed on August 3, 1998, to report under Item 5,
exhibits in connection with the Registration Statement on Form S-3 (File
No. 333-37635) filed by the Company with the Securities & Exchange
Commission.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its principal financial officer and by its principal accounting
officer, thereunto duly authorized.
Boeing Capital Corporation
November 12, 1998 /s/ STEVEN W. VOGEDING
__________________________________
Steven W. Vogeding
Vice President and Chief Financial
Officer (Principal Financial Officer) and
Registrant's Authorized Officer
/s/ MAURA R. MIZUGUCHI
__________________________________
Maura R. Mizuguchi
Controller (Principal Accounting Officer)
EXHIBIT 12
Boeing Capital Corporation and Subsidiaries
Computation of Ratio of Income to Fixed Charges
<TABLE>
<CAPTION>
Nine months ended
September 30,
(Dollars in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Income:
<S> <C> <C>
Income before provision for income taxes $ 78.4 $ 65.7
Fixed charges 98.6 97.6
------------------------------------
Income before provision for income taxes and fixed charges $ 177.0 $ 163.3
====================================
Fixed charges:
Interest expense $ 95.6 $ 95.0
Preferred stock dividends 3.0 2.6
------------------------------------
$ 98.6 $ 97.6
====================================
Ratio of income before provision for income taxes and fixed
charges to fixed charges 1.80 1.67
====================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,200
<SECURITIES> 0
<RECEIVABLES> 451,500
<ALLOWANCES> (62,100)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,683,100
<CURRENT-LIABILITIES> 0
<BONDS> 1,639,100
<COMMON> 5,000
0
50,000
<OTHER-SE> 250,900
<TOTAL-LIABILITY-AND-EQUITY> 2,683,100
<SALES> 0
<TOTAL-REVENUES> 197,900
<CGS> 0
<TOTAL-COSTS> 119,500
<OTHER-EXPENSES> 7,900
<LOSS-PROVISION> 7,900
<INTEREST-EXPENSE> 95,600
<INCOME-PRETAX> 78,400
<INCOME-TAX> 23,100
<INCOME-CONTINUING> 55,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,300
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
