United States
Securities and Exchange Commission
Washington, D.C. 20549
-----------------------
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, 1999
OR
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to _________________
--------------------
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) Identification No.)
4060 Lakewood Boulevard, 6th Floor
Long Beach, California 90808-1700
(Address of principal executive offices)
(562) 627-3000
(Registrant's telephone number, including area code)
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, 1999: 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
<TABLE>
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
(Dollars in millions, except stated value and par value) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Financing receivables:
<S> <C> <C>
Investment in finance leases $ 1,389.3 $ 1,365.0
Notes receivable 618.3 545.7
------------------------------------
2,007.6 1,910.7
Allowance for losses on financing receivables (60.3) (62.1)
------------------------------------
1,947.3 1,848.6
Cash and cash equivalents 8.3 20.3
Equipment under operating leases, net 746.0 889.2
Equipment held for sale or re-lease 113.0 62.3
Accounts due from Boeing and BCSC 18.3 -
Other assets 70.8 41.0
------------------------------------
$ 2,903.7 $ 2,861.4
====================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 211.4 $ 236.7
Accounts payable and accrued expenses 17.0 35.6
Accounts due to Boeing and BCSC - 6.7
Other liabilities 98.0 84.8
Deferred income taxes 417.7 383.3
Long-term debt:
Senior 1,712.2 1,678.7
Subordinated 44.9 54.9
------------------------------------
2,501.2 2,480.7
------------------------------------
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 258.0 236.2
------------------------------------
402.5 380.7
------------------------------------
$ 2,903.7 $ 2,861.4
====================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Income and Income Retained for Growth
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(Dollars in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
<S> <C> <C> <C> <C>
Finance lease income $ 28.2 $ 29.1 $ 86.2 $ 92.5
Interest income on notes receivable 12.9 10.3 38.2 25.2
Operating lease income, net of depreciation expense 15.4 16.0 48.7 50.8
Net gain on disposal or re-lease of assets 5.5 12.0 19.3 27.2
Other 0.5 1.4 1.5 2.2
------------------------------------------------------
62.5 68.8 193.9 197.9
------------------------------------------------------
EXPENSES
Interest expense 31.2 30.9 95.7 95.6
Provision for losses 1.9 2.6 5.5 7.9
Operating expenses 2.9 2.9 8.0 8.1
Other 1.4 4.1 6.5 7.9
------------------------------------------------------
37.4 40.5 115.7 119.5
------------------------------------------------------
Income before provision for income taxes 25.1 28.3 78.2 78.4
Provision for income taxes 9.6 4.6 29.8 23.1
------------------------------------------------------
Net income 15.5 23.7 48.4 55.3
Income retained for growth at beginning of period 251.3 228.1 236.2 208.6
Dividends (8.8) (0.9) (26.6) (13.0)
======================================================
Income retained for growth at end of period $ 258.0 $ 250.9 $ 258.0 $ 250.9
======================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended
September 30,
(Dollars in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 48.4 $ 55.3
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation expense - equipment under operating leases 55.3 52.9
Net gain on disposal or re-lease of assets (19.3) (27.2)
Provision for losses 5.5 7.9
Change in assets and liabilities:
Accounts with Boeing and BCSC (25.0) (0.8)
Other assets (29.8) (28.3)
Accounts payable and accrued expenses (19.5) (33.7)
Other liabilities 13.2 (21.3)
Deferred income taxes 34.4 (26.3)
Other, net (2.6) (0.9)
------------------------------------
60.6 (22.4)
------------------------------------
INVESTING ACTIVITIES
Net change in short-term notes and leases receivable (15.2) (49.6)
Purchase of equipment for operating leases (19.2) (72.4)
Proceeds from disposition of equipment, notes and
leases receivable 128.2 290.6
Collection of notes and leases receivable 213.1 163.1
Acquisition of notes and leases receivable (352.6) (315.6)
------------------------------------
(45.7) 16.1
------------------------------------
FINANCING ACTIVITIES
Net change in short-term borrowings (25.3) 9.0
Debt having maturities more than 90 days:
Proceeds 267.0 248.0
Repayments (242.9) (258.5)
Payment of cash dividends (25.7) (12.1)
------------------------------------
(26.9) (13.6)
------------------------------------
Net decrease in cash and cash equivalents (12.0) (19.9)
Cash and cash equivalents at beginning of year 20.3 39.1
====================================
Cash and cash equivalents at end of period $ 8.3 $ 19.2
====================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30,1999
(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, 1999,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. 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, 1998.
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, $61.4 million of
the Company's income retained for growth was available for dividends at
September 30, 1999.
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. (collectively referred to as 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
Plaintiff's 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 relating to the Company's foreclosure
based on various tort and contractual theories.
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. Aviaco has
appealed 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, many of which 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 October 4, 1999, the Company, together with its new United Kingdom
subsidiary, BCC (Aircraft Acquisitions) Limited, entered into an agreement to
purchase from British Airways an aggregate of 34 used Boeing 757 aircraft for
aggregate consideration of approximately $500 million. These aircraft will be
purchased from time to time over approximately a three-year time period
commencing in July 2000.
The Company, together with Boeing Aircraft Services, a division of Boeing, has
entered into a binding letter of intent (which is subject to, among other
things, the negotiation and execution of definitive documentation) with DHL
International Limited ("DHL") pursuant to which the 34 used 757s purchased from
British Airways will be modified from a passenger to a freighter configuration
and then delivered (sold and/or leased) to DHL from time to time over
approximately a two-year period commencing approximately the second quarter of
2001. Pursuant to the letter of intent, eighteen of the 34 aircraft are subject
to a firm commitment from DHL and the other 16 aircraft are subject to an option
on DHL's part.
Trans World Airlines, Inc. ("TWA") accounted for $149.9 million (5.4% of total
Company portfolio) and $163.3 million (5.8% of total Company portfolio) at
September 30, 1999 and December 31, 1998, respectively. In April 1999, Moody's
rating agency lowered TWA's Outlook from Stable to Negative. 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, 1999, the
maximum aggregate coverage under such guaranties was $32.1 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 earnings, cash flow or financial position.
World Airways, Inc. ("World") accounted for $171.2 million (6.2% of total
Company portfolio) and $176.4 million (6.3% of total Company portfolio) at
September 30, 1999 and December 31, 1998, respectively. World experienced losses
in 1998 and its cash balances fell to relatively low levels. Also, Worldcorp
Inc., the majority owner of World, has made a "prepackaged" filing under Chapter
11 of the U.S. bankruptcy code. With respect to the existing lease agreements
between World and the Company, the Company has agreed to reduce maintenance
reserve payments. The Company has concluded that the restructuring of these
lease transactions, taking into account an indemnification from McDonnell
Douglas covering such reduction of maintenance reserves, will not have a
material adverse effect on the Company's 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 freighter aircraft which FedEx leases from the Company. Based on
an executed letter agreement, the Company does not expect the leases to
terminate in 1999. The Company has agreed to give FedEx the right to terminate
the leases early, approximately three years from the date hereof.
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 has been remarketing these aircraft (along with other
used EMB-120s it holds for sale or lease). During the second quarter of 1999,
the Company adjusted the carrying value of the ex-Westair aircraft to
approximate their fair value, resulting in a pre-tax loss of approximately $3.4
million. The Company does not expect the disposition of these aircraft to have a
material adverse effect on the Company's earnings, cash flow or financial
position.
In July 1998, the Company terminated early a lease agreement covering one used
DC-10-30 aircraft. The Company has repossessed such aircraft and has been
remarketing it in a currently weak market for this type of aircraft. Taking into
account a guaranty from McDonnell Douglas, the disposition of such aircraft is
not expected to have a material adverse effect on the Company's earnings, cash
flow or financial position.
At September 30, 1999, the Company had commitments to provide leasing and other
financing totaling $276.1 million, excluding the commitments to DHL previously
mentioned.
In conjunction with prior asset dispositions and certain guaranties, at
September 30, 1999, the Company was subject to a maximum recourse of $43.8
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, 1999, the Company had guaranteed the repayment of $4.2
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
strategic decisions of Boeing 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 strategic decisions relating to the Company 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.
================================================================================
Interest on notes receivable increased $13.0 million (51.6%) from the first nine
months of 1998, primarily attributable to a comparable increase in notes
receivable between September 30, 1998 and 1999.
Gain on disposal or re-lease of assets decreased $7.9 million (29.0%) from the
first nine months of 1998, primarily attributable to $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. The remaining decrease
is attributable to other sales within the commercial aircraft and commercial
equipment leasing portfolios in the first nine months of 1998.
Provision for losses decreased $2.4 million (30.4%) from the first nine months
of 1998, primarily attributable to the Company's determination that additional
provisions for losses were not necessary or appropriate during the current
period given the valuation and assessment of the portfolio.
Other expenses decreased $1.4 million (17.7%) from the first nine months of
1998, primarily attributable to maintenance expenses of approximately $2.5
million incurred in the first nine months of 1998 on an aircraft that was
re-leased prior to 1999.
The Company has not entered into new commercial aircraft business in 1999,
primarily because of strategic decisions which were being made by Boeing during
the year relative to the Company's commercial aircraft business. The decrease in
commercial aircraft volume was offset by a $82.3 million increase in commercial
equipment leasing and financing.
Year 2000 Date Conversion
The Year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. When the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize and properly treat the Year 2000 may cause systems to
process financial and operational information incorrectly. In July of 1999 we
decided to replace our independent advisory firm for Year 2000 matters with the
independent advisory firm which installed our new lease administration system
(discussed below). As further discussed below, the new advisory firm is
assisting us in converting our systems which are not Year 2000 compliant to
systems which are Year 2000 compliant and to test our systems for Year 2000
compliance. We do not expect this change of firms to have a material adverse
effect on the cost or timing of the Company's Year 2000 compliance efforts.
We have assessed and continue to re-assess the impact of the Year 2000 issue on
our information technology ("IT") systems. One of our principal IT systems is
our lease administration system, by which we keep track of our leases, loans and
certain other financial information. In 1996, we initiated a conversion from our
existing lease administration system to programs that we have been advised are
Year 2000 compliant. While the conversion of this lease administration system
has been substantially completed, some significant remaining inadequacies in the
new system have been identified which we are continuing to address. For this
reason we are continuing to run the old system parallel to the new system while
necessary improvements are being made to the new system. We may need to continue
to run the old system until the end of 1999 or beyond. We are currently studying
as a possible contingency plan whether the old system can be successfully
remediated for Year 2000 compliance. We previously successfully tested our new
lease administration system for Year 2000 compliance and our new advisory firm
plans to assist us with testing the new lease administration system during the
fourth quarter of 1999 to confirm that it remains compliant notwithstanding
intervening modifications. In the event that such testing proves the new system
not to be Year 2000 compliant, the new system cannot be made compliant prior to
the end of 1999 or its inadequacies cannot be fixed so as to make it
sufficiently reliable prior to the end of 1999, and our existing system cannot
be made compliant prior to the end of 1999, our operations could be materially
adversely affected.
Our second principal IT system is our general ledger accounting system. We use
our general ledger accounting system to keep track of our financial results. We
have selected a general ledger accounting system which is certified by its
manufacturer to be Year 2000 compliant. We expect to finish converting our
general ledger accounting system to a Year 2000 compliant system in the fourth
quarter of 1999. The accounting system conversion project is on schedule for a
December 1, 1999 transition to the new system. No material issues have been
identified to date. A parallel test remains to be completed and is on schedule
to support the conversion date. While we expect the conversion to be completed
as planned, in the event unforseen issues arise, we will continue throughout
December to complete the conversion. If a successful conversion is not completed
by the end of 1999, a contingency plan has been developed involving manual
workarounds.
With respect to our IT systems other than our lease administration system and
general ledger accounting system, we intend to develop contingency plans
relating to possible Year 2000 problems to the extent we deem necessary and
appropriate, taking into account the advice of the advisory firm which is
examining our IT systems and which we expect will complete its analysis before
the end of the fourth quarter of 1999.
Although we do not consider it likely that Year 2000 problems inherent within
our IT systems will result in material and adverse operational problems, the
possibility of such problems cannot be discounted at this time.
With respect to our non-IT systems such as our telephone and elevator systems,
we have assessed and continue to re-assess the impact of Year 2000 issues on
these systems. We believe that our non-IT systems are Year 2000 compliant.
However, no assurance can be given that our operations will not be materially
and adversely affected by problems with the non-IT systems related to the Year
2000.
The total cost of the Year 2000 conversion efforts to date has been funded
through operating cash flows and has not had a material adverse effect on our
earnings, cash flow or financial position. This total cost amount does not,
however, include the cost of converting to a new lease administrative system, a
major project initiated in 1996 to accomplish our goal of increasing
productivity irrespective of the Year 2000 issue. Based on information available
to date, the estimated cost of the remaining Year 2000 conversion efforts,
including any remediation of our IT and non-IT systems as well as testing of all
our systems, is approximately $1.5 million.
We can give no assurance that Year 2000 problems of third parties (such as
vendors, customers and other financial institutions with which we do business)
will not materially and adversely affect our operations or operating results. We
are in the process of assessing the Year 2000 readiness of those third parties
whose lack of Year 2000 readiness could have a material adverse effect on our
operations. In early 1999, we identified and sent inquiries to certain
significant customers and third parties regarding their Year 2000 readiness. We
have received a response from the majority of such third parties and their
responses to date do not indicate a likelihood that their lack of readiness will
have a material adverse effect on our operations.
Liquidity Risks
We have significant liquidity requirements. We attempt to fund our business such
that scheduled receipts from our portfolio will cover our expenses and debt
payments as they become due. We believe 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 as they become due. If cash provided by operations, issuances of
commercial paper, borrowings under bank credit lines and term borrowings does
not provide the necessary liquidity, we would be required to restrict our new
business volume, unless we obtained access to other sources of capital at rates
that would allow for a reasonable return on new business.
Our ability to make scheduled payments of the principal of, or to pay interest
on, or to refinance our indebtedness, depends on the future performance of our
investment portfolio. The performance of such portfolio, in turn, is subject to
economic, financial, competitive and other factors that are beyond our control.
While we believe that future cash flows from the portfolio, together with
available borrowings under our revolving credit line, will be adequate to meet
our anticipated requirements for working capital, interest payments and
scheduled principal payments, we cannot assure that we will be able to generate
sufficient cash flows in the future to service our debt obligations. If we are
unable to do so, we may be required to refinance all or a portion of our
existing debt, sell assets or obtain additional financing. We cannot assure that
any such refinancing will be possible or that any such sale of assets or
additional financing could be achieved.
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. (collectively referred to as 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
Plaintiff's 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 relating to the Company's foreclosure
based on various tort and contractual theories.
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. Aviaco has
appealed 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, many of which 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 strategic decisions of Boeing,
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 Strategic Decisions of Boeing
On August 1, 1997, the Boeing-McDonnell Douglas merger was consummated and the
Company became an indirect wholly-owned subsidiary of Boeing. Since that time,
Boeing has conducted a review of the operations of the Company to determine,
among other things, the strategic value of the Company to Boeing.
On October 4, 1999, Boeing announced its decision to consolidate its customer
financing under one group, to be led by the Company. Boeing's press release
explained that "Boeing Capital Corporation will continue as a wholly-owned
subsidiary of The Boeing Company, but will now integrate the existing financial
services activities supporting commercial aircraft, military aircraft and
missiles, and space and communication markets." Boeing's press release is
contained in the Company's Report on Form 8-K filed with the Securities and
Exchange Commission ("SEC") on October 4, 1999.
The Company and Boeing are presently working to implement the consolidation of
financing activities and additional strategic decisions are being made as part
of the implementation process. Boeing currently has a portfolio of commercial
aircraft financings in excess of $2,500 million. A portion of this portfolio
could be transferred to the Company. The ultimate amount and terms of any such
transfers are currently under consideration. Such amount transferred could be
very significant in relation to the Company's existing portfolio.
Implementation of the consolidation of Boeing's customer financing operations
under the Company's leadership is in its preliminary stages and accordingly, no
assurances can be given that its implementation will be achieved in the manner
or within the timelines presently contemplated.
Borrowing Operations
On June 22, 1999, the Company authorized an additional $300.0 million (resulting
in an aggregate of $1.2 billion authorized) 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). As of September 30,
1999, the Company issued $838.4 million of the $1.2 billion medium-term notes
authorized, at interest rates ranging from 5.35% to 7.64% and with maturities
ranging from 10 months to 11 years, leaving an unused balance of $361.6 million
on September 30, 1999.
On July 7, 1999, the Company filed with the SEC a Form S-3 Registration
Statement for a public shelf registration of $2.5 billion of its debt securities
(SEC File No. 333-82391). The Company has not requested the SEC to declare such
Registration Statement to be effective. The Company presently expects to
commence utilizing the new shelf registration upon completion of its currently
effective shelf registration.
Portfolio Balances
<TABLE>
Portfolio balances for the Company's financial reporting segments are summarized
as follows:
<CAPTION>
September 30, December 31,
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Aircraft Financing
Boeing/McDonnell Douglas aircraft financing
<S> <C> <C>
Finance leases $ 772.8 $ 803.3
Operating leases 456.4 513.3
Notes receivable 52.8 82.9
-----------------------------------
1,282.0 1,399.5
-----------------------------------
Other commercial aircraft financing
Finance leases 123.5 131.6
Operating leases 20.7 30.4
Notes receivable 3.3 12.0
-----------------------------------
147.5 174.0
-----------------------------------
Commercial Equipment Leasing and Financing
Finance leases 493.0 430.1
Operating leases 268.9 345.5
Notes receivable 561.6 449.4
-----------------------------------
1,323.5 1,225.0
-----------------------------------
Other 0.6 1.4
===================================
$ 2,753.6 $ 2,799.9
===================================
</TABLE>
New Business Volume
<TABLE>
New business volume is summarized as follows:
<CAPTION>
Nine months ended
September 30,
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Boeing/McDonnell Douglas aircraft financing $ 7.0 $ 69.8
Other commercial aircraft financing 0.1 22.5
Commercial equipment leasing and financing 363.3 281.0
-----------------------------------
$ 370.4 $ 373.3
===================================
</TABLE>
<TABLE>
Analysis of Allowance for Losses on Financing Receivables and Credit Loss
Experience
<CAPTION>
September 30, December 31,
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Allowance for losses on financing receivables at beginning
<S> <C> <C>
of year $ 62.1 $ 55.9
Provision for losses 5.5 7.4
Write-offs, net of recoveries (7.3) (2.5)
Other - 1.3
====================================
Allowance for losses on financing receivables at end of
period $ 60.3 $ 62.1
====================================
Allowance as a percentage of total receivables 3.0% 3.3%
Net write-offs as percent of average receivables 0.4% 0.1%
More than 90 days delinquent:
Amount of delinquent installments $ 0.1 $ 0.5
Total receivables due from delinquent obligors 3.9 6.7
Total receivables due from delinquent obligors
as a percentage of total receivables 0.2% 0.4%
</TABLE>
Receivable Write-offs, Net of Recoveries by Segment
Commercial aircraft financing had no net write-offs of receivables for the nine
months ended September 30, 1999 or 1998. Commercial equipment leasing and
financing had net write-offs of $6.7 million for the nine months ended September
30, 1999 and net recoveries of $0.1 million for the nine months ended September
30, 1998.
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
Form 8-K dated October 4, 1999 to report under Item 5, a press release
entitled "Boeing Reorganizes Product Financing Services"
<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, 1999 /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) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Income:
<S> <C> <C>
Income before provision for income taxes $ 78.2 $ 78.4
Fixed charges 98.3 98.6
------------------------------------
Income before provision for income taxes and fixed charges $ 176.5 $ 177.0
====================================
Fixed charges:
Interest expense $ 95.7 $ 95.6
Preferred stock dividends 2.6 3.0
------------------------------------
$ 98.3 $ 98.6
====================================
Ratio of income before provision for income taxes and fixed
charges to fixed charges 1.80 1.80
====================================
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,300
<SECURITIES> 0
<RECEIVABLES> 618,300
<ALLOWANCES> (60,300)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,903,700
<CURRENT-LIABILITIES> 0
<BONDS> 1,757,100
<COMMON> 5,000
0
50,000
<OTHER-SE> 258,000
<TOTAL-LIABILITY-AND-EQUITY> 2,903,700
<SALES> 0
<TOTAL-REVENUES> 193,900
<CGS> 0
<TOTAL-COSTS> 115,700
<OTHER-EXPENSES> 6,500
<LOSS-PROVISION> 5,500
<INTEREST-EXPENSE> 95,700
<INCOME-PRETAX> 78,200
<INCOME-TAX> 29,800
<INCOME-CONTINUING> 48,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,400
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
