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United States
Securities and Exchange Commission
Washington, DC 20549
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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, 1999
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BOEING CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2564584 0-10795
(State or other (I.R.S. Employer (Commission File No.)
jurisdiction of Identification No.)
Incorporation or
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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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 27, 2000, there were 50,000 shares of the Company's common stock
outstanding.
Registrant meets the conditions set forth in General Instruction I(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...............................................19
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.....................24
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.......................................................50
Exhibits.........................................................52
- ---------------------------------
*Omitted pursuant to General Instruction I(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 ("BCSC"), a wholly owned subsidiary of
McDonnell Douglas Corporation ("McDonnell Douglas"), which in turn 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
at December 31, 1999, included two financial reporting segments: commercial
aircraft financing and commercial equipment leasing and financing. 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, 1999, the Company had 72 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.
On August 1, 1997, the Boeing-McDonnell Douglas merger was consummated and the
Company became an indirect wholly owned subsidiary of Boeing. Boeing then
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. 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."
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. A significant portion of Boeing's portfolio of
commercial aircraft financings having an approximate value of $3,000.0 million
is expected to be transferred to the Company soon after the filing date hereof,
although the definitive transfer documents have not yet been executed. The
ultimate amount and terms of any such transfer are currently under consideration
and will be discussed in a Report on Form 8-K expected to be filed early in the
second quarter of 2000. Such amount transferred is expected to be very
significant in relation to the Company's existing portfolio.
In connection with the implementation of the consolidation of customer financing
activities, the headquarters of the Company has been moved to Seattle,
Washington, from Long Beach, California.
Additionally, it is expected that the Company's existing $240.0 million
revolving credit facility will be replaced with an arrangement giving the
Company access to $1,000.0 million of Boeing's 364-day credit facility soon
after the filing hereof. It is also expected that the Company will enter into an
operating agreement with Boeing, which will be similar to the existing operating
agreement between the Company and McDonnell Douglas. See "Relationship With
Boeing and McDonnell Douglas."
As of December 31, 1999, the Company operated in principally two segments:
commercial aircraft financing and commercial equipment leasing and financing
("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. At December 31, 1999
and 1998, the portfolio balances for non-core businesses totaled $0.6 million
and $1.4 million, respectively.
Information on the Company's principal segments is included in the following
tables.
<TABLE>
<CAPTION>
New Business Volume
Years ended December 31,
----------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Commercial aircraft financing $ 7.0 $ 201.6 $ 176.3 $ 475.3 $ 349.7
Commercial equipment leasing 664.9 491.0 414.8 392.0 241.1
----------------------------------------------------------------------------
$ 671.9 $ 692.6 $ 591.1 $ 867.3 $ 590.8
============================================================================
Portfolio Balances
December 31,
----------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995
Commercial aircraft financing $ 1,410.8 $ 1,573.5 $ 1,711.5 $ 1,814.9 $ 1,405.7
Commercial equipment leasing 1,497.6 1,225.0 976.6 769.8 502.4
----------------------------------------------------------------------------
$ 2,908.4 $ 2,798.5 $ 2,688.1 $ 2,584.7 $ 1,908.1
============================================================================
</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, primarily located at the
Company's new headquarters in Seattle, provides financing for customers
acquiring aircraft. A majority of the value of the commercial aircraft
portfolio, as of December 31, 1999, is derived from aircraft manufactured by
McDonnell Douglas. The Company's strategy is to (1) generate and participate in
finance transactions in which the Company's structuring and analysis can provide
high returns on its invested equity, and (2) to assist in arranging financing
for Boeing's customers and to participate in such financing if the Company's
pricing/credit requirements are met.
In 1999, the commercial aircraft financing group had negligible business volume
largely due to the fact that the Company was awaiting the decision made by
Boeing in the fourth quarter of 1999 that the Company would have responsibility
for Boeing's customer financing efforts. Now that such decision has been made,
the Company is expected to experience a very significant increase in new
commercial aircraft financing volume compared with prior years.
It is expected that a significant portion of Boeing's existing commercial
aircraft financing portfolio will be transferred to the Company soon after the
filing hereof (although the definitive documents have not been signed). Further,
it is expected that a significant portion of Boeing's existing $4,500.0 million
of commercial aircraft financing commitments will be transferred to the Company,
on a transaction by transaction basis, subject to approval of each transaction
by the Company's investment committee (which may condition its approval upon
credit enhancements or other conditions it deems necessary to meet the Company's
pricing and credit requirements).
Portfolio balances for the Company's commercial aircraft financing segment are
summarized as follows:
<TABLE>
<CAPTION>
Commercial Aircraft Portfolio by Aircraft Type
December 31,
-------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995
Boeing/McDonnell Douglas aircraft
financing:
<S> <C> <C> <C> <C> <C>
Finance leases $ 744.7 $ 803.3 $ 964.9 $ 1,132.6 $ 857.4
Operating leases 470.0 513.3 495.2 402.0 256.8
Notes receivable 51.8 82.9 61.9 82.9 110.9
-------------------------------------------------------------------------
1,266.5 1,399.5 1,522.0 1,617.5 1,225.1
-------------------------------------------------------------------------
Other commercial aircraft financing:
Finance leases 119.8 131.6 133.3 136.9 126.1
Operating leases 21.3 30.4 51.9 56.0 49.6
Notes receivable 3.2 12.0 4.3 4.5 4.9
-------------------------------------------------------------------------
144.3 174.0 189.5 197.4 180.6
-------------------------------------------------------------------------
$ 1,410.8 $ 1,573.5 $ 1,711.5 $ 1,814.9 $ 1,405.7
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Commercial Aircraft Portfolio by Product Type
December 31,
-------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995
Aircraft leases:
Finance leases
<S> <C> <C> <C> <C> <C>
Domestic $ 723.2 $ 786.9 $ 863.1 $ 950.0 $ 776.2
Foreign 141.3 148.0 235.1 319.5 207.3
Operating leases
Domestic 297.8 357.9 319.2 357.2 183.5
Foreign 193.5 185.8 227.9 100.8 122.9
-------------------------------------------------------------------------
1,355.8 1,478.6 1,645.3 1,727.5 1,289.9
-------------------------------------------------------------------------
Aircraft related notes receivable:
Domestic obligors 31.4 33.5 2.2 22.6 31.2
Foreign obligors 23.6 61.4 64.0 64.8 84.6
-------------------------------------------------------------------------
55.0 94.9 66.2 87.4 115.8
-------------------------------------------------------------------------
$ 1,410.8 $ 1,573.5 $ 1,711.5 $ 1,814.9 $ 1,405.7
=========================================================================
</TABLE>
At December 31, 1999, the Company's commercial aircraft portfolio was comprised
of finance leases to 25 customers (21 domestic and four foreign) with a carrying
amount of $864.5 million (29.7% of total Company portfolio), notes receivable
from four customers (two domestic and two foreign) with a carrying amount of
$55.0 million (1.9% of total Company portfolio) and operating leases to 15
customers (nine domestic and six foreign) with a carrying amount of $491.3
million (16.9% of total Company portfolio).
At December 31, 1999, 43.6% of the Company's total portfolio consisted of
financings related to Boeing/McDonnell Douglas aircraft, compared with 50.0% and
56.6% in 1998 and 1997, respectively.
o 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 $840.9 million
(28.9% of total Company portfolio) and $895.4 million (32.0% of total
Company portfolio) at December 31, 1999 and 1998, respectively.
The Company's largest customer, Federal Express Corporation ("FedEx"),
accounted for $295.8 million (10.2% of total Company portfolio) and $303.0
million (10.8% of total Company portfolio) at December 31, 1999 and 1998,
respectively.
The Company's second largest customer, World Airways, Inc. ("World"),
accounted for $170.2 million (5.9% of total Company portfolio) and $176.4
million (6.3% of total Company portfolio) at December 31, 1999 and 1998,
respectively. Based on publicly available reports, World experienced losses
in 1999 of $7.6 million and its year end cash balances fell 31.0% below
prior year levels to $11.7 million.
Trans World Airlines, Inc. ("TWA"), the Company's third largest customer,
accounted for $147.3 million (5.1% of total Company portfolio) and $163.3
million (5.8% of total Company portfolio) at December 31, 1999 and 1998,
respectively. In 1999, 1998 and 1997, TWA accounted for 10.5%, 13.6% and
16.8%, 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 U.S. Bankruptcy
Court in 1995, which restructured its indebtedness and leasehold obligations
to its creditors. In addition, TWA continues to face significant financial
and operational challenges. In 1999, based on publicly available reports, TWA
incurred a net loss of $353.4 million and its liquidity worsened as cash
balances fell 29.0% below prior year levels to $180.4 million. 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
December 31, 1999, the maximum aggregate coverage under such guaranties was
$41.7 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.
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. On
February 8, 2000, the Company entered into a modification agreement pursuant
to which Boeing will convert the aircraft from passenger to freighter
configuration for purposes of increased marketability. 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 were terminated and the aircraft were 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, which is included in Other Expenses in the
Consolidated Statements of Income and Income Retained for Growth. 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.
o 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 worldwide market for
commercial jet aircraft is predominantly driven by long-term trends in
airline passenger traffic. The principal factors underlying long-term,
traffic growth are sustained economic growth, both in developed and emerging
countries, and political stability. The Company continues to look for
opportunities to expand its commercial aircraft portfolio while continually
managing its portfolio with respect to 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 recorded, but this
is subject to many uncertainties including those referred to in "Factors
Affecting Commercial 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.
Boeing has announced that it will not produce MD-80 and MD-90 aircraft after
early 2000. Boeing has also stated that it plans to phase out production of
the MD-11 aircraft with final deliveries now scheduled for 2001. The
Company's commercial aircraft portfolio as of December 31, 1999 included 28
MD-80s, three MD-90s and five MD-11s, representing an aggregate of $897.6
million in net asset value (30.9% of total Company portfolio). The Company's
commercial aircraft portfolio as of December 31, 1998 included 32 MD-80s,
three MD-90s and five MD-11s, representing an aggregate of $963.8 million in
net asset value (34.4% of total Company 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.
For further discussion on the commercial jet aircraft market and the airline
industry, see "Competition and Economic Factors."
o Commercial 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, 1999, the Company owned or participated in the ownership of 122 leased
commercial aircraft, a majority of which were manufactured by McDonnell
Douglas.
o Factors Affecting Commercial 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
was not available to the Company since Boeing historically conducted new
commercial aircraft financing through its Treasury Group. In the fourth
quarter of 1999, Boeing decided that the Company would assist and
participate, as appropriate, in Boeing's customer financing. In view of
Boeing's decision to consolidate its customer financing activities in the
Company, the Company is expected to receive a large volume of new business
opportunities, although such decision could always be altered in the future.
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) 1999 1998 1997 1996 1995
Boeing/McDonnell Douglas aircraft
financing volume:
<S> <C> <C> <C> <C> <C>
Finance leases $ - $ 78.3 $ 7.1 $ 234.1 $ 220.6
Operating leases - 75.3 146.5 196.9 81.9
Notes receivable 7.0 25.5 18.2 24.2 36.2
---------------------------------------------------------------------------
7.0 179.1 171.8 455.2 338.7
---------------------------------------------------------------------------
Other commercial aircraft
financing volume:
Finance leases - 22.5 4.5 20.1 7.7
Operating leases - - - - 3.3
---------------------------------------------------------------------------
- 22.5 4.5 20.1 11.0
---------------------------------------------------------------------------
$ 7.0 $ 201.6 $ 176.3 $ 475.3 $ 349.7
===========================================================================
</TABLE>
There are no Boeing commercial aircraft in the Company's portfolio from
transactions in 1999. In 1998, $143.1 million of the $179.1 million in
Boeing/McDonnell Douglas used aircraft financing volume related to Boeing
aircraft. There are no Boeing commercial aircraft in the Company's portfolio
from transactions prior to 1997. There are no Airbus aircraft in the
Company's portfolio.
o Commercial Aircraft Financing Guaranties
At December 31, 1999, the Company had $267.1 million of guaranties in its
favor with respect to its commercial aircraft financing portfolio relating to
transactions with a carrying amount of $781.0 million (55.4% of the
commercial aircraft financing portfolio). The following table summarizes such
guaranties:
<TABLE>
<CAPTION>
Domestic Foreign
(Dollars in millions) Airlines Airlines Total
Amounts guaranteed by:
<S> <C> <C> <C>
McDonnell Douglas $ 210.7 $ 31.1 $ 241.8
Other 13.8 11.5 25.3
-----------------------------------------------------------
$ 224.5 $ 42.6 $ 267.1
===========================================================
</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 and Financing Segment
The CEL group provides single-investor, tax-oriented lease financing, as well as
loans secured by personal property and real estate. In addition, the CEL group
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 and financing of commercial equipment such as executive aircraft,
production equipment, transportation equipment, printing equipment and other
types of equipment which it believes will maintain strong collateral and
residual values. The term is generally between three and ten years and
transaction sizes usually range between $5.0 million and $50.0 million.
Portfolio balances for the Company's CEL segment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Finance leases $ 508.3 $ 430.1 $ 410.9 $ 361.7 $ 266.3
Operating leases 336.9 345.5 375.1 231.5 169.1
Notes receivable 652.4 449.4 190.6 176.6 67.0
-------------------------------------------------------------------------
$ 1,497.6 $ 1,225.0 $ 976.6 $ 769.8 $ 502.4
=========================================================================
</TABLE>
o Factors Affecting CEL Volume
The particular portion of the commercial equipment leasing and financing
market in which the Company generally operates is highly competitive.
However, in 1999, CEL booked $664.9 million of new business volume,
representing a $173.9 million increase (35.4%) over 1998 bookings. As shown
in the table below, a significant portion of the new CEL business volume in
recent years has consisted of secured loans rather than lease financings. Of
the $664.9 million in new business volume for CEL in 1999, $374.0 million
(56.2%) represented loans rather than true leases.
In 1999, of the $664.9 million in new business volume for CEL, $104.0 million
(15.6%) represented business with foreign lessees or borrowers. In 1998, of
the $491.0 million in new business volume for CEL, $36.7 million (7.5%)
represented business with foreign lessees or borrowers. For a discussion of
additional risks associated with foreign financing, see "Cross-Border
Outstandings." At December 31, 1999, CEL's backlog of business was $212.4
million, compared to $163.3 million at December 31, 1998. The Company's
ability to compete in the commercial equipment leasing and financing market
is dependent to a significant extent upon its comparative borrowing costs
relative to competitors. See "Borrowing Operations."
The following lists information on new business volume for the Company's CEL
segment:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Finance leases $ 194.1 $ 91.8 $ 109.5 $ 160.9 $ 102.0
Operating leases 96.8 81.9 199.7 107.0 70.5
Notes receivable 374.0 317.3 105.6 124.1 68.6
------------------------------------------------------------------------
$ 664.9 $ 491.0 $ 414.8 $ 392.0 $ 241.1
========================================================================
</TABLE>
o Factors Affecting the CEL Portfolio
The Company's CEL portfolio is diversified among executive aircraft,
production equipment, transportation equipment, printing equipment, and
other equipment types. Executive aircraft represent the highest
concentration, accounting for $286.3 million (9.8% of total Company
portfolio) and $326.2 million (11.7% of total Company portfolio) at December
31, 1999 and 1998, respectively. At December 31, 1999 and 1998, no single
CEL customer represented a significant portion of the Company's total
portfolio. Executive aircraft financing, as well as the rest of the CEL
portfolio, is dependent in part upon general economic conditions which may
affect the profitability of the Company's customers and residual value of
the equipment financed by the CEL group. The Company believes that
realizable values at lease maturity for its commercial equipment are
generally likely to remain above the values actually recorded, but this is
subject to many uncertainties including economic conditions.
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 18.8% of the total Company portfolio at December 31, 1999,
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
Finance Notes Operating
(Dollars in millions) Leases Receivable Leases Total
Country
1999
<S> <C> <C> <C> <C>
Mexico $ 126.5 $ 34.2 $ - $ 160.7
Brazil 52.6 3.8 - 56.4
India - 18.1 46.2 64.3
Italy - 1.7 30.1 31.8
Sweden - - 46.5 46.5
Spain - - 34.0 34.0
-----------------------------------------------------------------
$ 179.1 $ 57.8 $ 156.8 $ 393.7
=================================================================
1998
Mexico $ 132.8 $ 48.0 $ - $ 180.8
India - - 48.6 48.6
Italy - 2.6 34.9 37.5
Sweden - - 50.1 50.1
Spain - - 36.4 36.4
-----------------------------------------------------------------
$ 132.8 $ 50.6 $ 170.0 $ 353.4
==================================================================
1997
Indonesia $ 110.5 $ - $ - $ 110.5
Mexico 50.1 54.1 - 104.2
Sweden - - 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 - 28.2 39.1
-----------------------------------------------------------------
$ 171.5 $ 57.6 $ 212.9 $ 442.0
=================================================================
</TABLE>
At December 31, 1999, the Company had customer outstandings between 0.75% and 1%
of the Company's total assets in Canada and the British West Indies, with net
carrying amounts of $23.6 million and $25.6 million, respectively. At December
31, 1998, the Company had customer outstandings between 0.75% and 1% of the
Company's total assets in Canada and the United Kingdom, with net carrying value
amounts of $25.6 million and $25.1 million, respectively. At December 31, 1997,
there were no countries in which customer outstandings were 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, 1999:
<TABLE>
<CAPTION>
(Dollars in millions) Domestic Foreign Total
Maturity Distribution
<S> <C> <C> <C> <C>
2000 $ 264.3 $ 46.6 $ 310.9
2001 242.8 48.0 290.8
2002 199.3 42.7 242.0
2003 183.0 43.1 226.1
2004 208.7 47.5 256.2
2005 and thereafter 918.4 137.2 1,055.6
-------------------------------------------------
$ 2,016.5 $ 365.1 $ 2,381.6
=================================================
Financing Receivables due 2001 and Thereafter
Fixed interest rates $ 1,419.4 $ 282.2 $ 1,701.6
Variable interest rates 332.8 36.3 369.1
-------------------------------------------------
$ 1,752.2 $ 318.5 $ 2,070.7
=================================================
</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) 1999 1998 1997 1996 1995
Allowance for losses on financing
<S> <C> <C> <C> <C> <C>
Receivables at beginning of year $ 62.1 $ 55.9 $ 48.6 $ 42.3 $ 40.7
Provision for losses 7.4 7.4 11.5 14.2 12.2
Write-offs, net of recoveries (8.8) (2.5) (2.5) (6.0) (10.6)
Other - 1.3 (1.7) (1.9) -
===========================================================================
Allowance for losses on financing
Receivables at end of year $ 60.7 $ 62.1 $ 55.9 $ 48.6 $ 42.3
===========================================================================
Allowance as percent of total receivables 2.9 % 3.3% 3.1 % 2.5 % 2.8 %
Net write-offs as percent of average
Receivables 0.4 % 0.1% 0.1 % 0.3 % 0.7 %
More than 90 days delinquent:
Amount of delinquent installments $ 0.1 $ 0.5 $ 1.8 $ 2.1 $ 10.0
Total receivables due from delinquent
Obligors $ 0.8 $ 6.7 $ 15.5 $ 23.4 $ 12.1
Total receivables due from delinquent
Obligors as a percentage of total
receivables 0.1 % 0.4% 0.9 % 1.2 % 0.8 %
</TABLE>
The portfolio at December 31, 1999 includes two airline obligors to which
payment extensions have been granted. At December 31, 1999, payments so extended
amounted to $1.1 million, and the aggregate carrying amount of the related
receivables was $13.4 million.
Receivable Write-offs, Net of Recoveries by Segment
CEL had $8.2 and $2.3 million in net write-offs (0.8% and 0.3% of CEL average
receivables), while commercial aircraft financing had no net write-offs of
receivables for the years ended December 31, 1999 and 1998. The Company's
principal segments had no net write-offs of receivables for the year ended
December 31, 1997.
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 $7.4 million in each of the years ended December 31, 1999 and
1998 for losses. The Company believes that the allowance for losses on
financing receivables is adequate at December 31, 1999 to cover potential losses
in the Company's total receivables. 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, increased in 1999, as
compared to 1998, primarily attributable to certain CEL customer defaults which
occurred in 1999.
Nonaccrual and Past Due Financing Receivables
Financing receivables accounted for on a nonaccrual basis consisted of domestic
financings of $26.1 million and $13.0 million at December 31, 1999 and 1998,
respectively. There were no foreign financing receivables on nonaccrual at
December 31, 1999 or December 31, 1998.
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 $0.2
million at December 31, 1999 and 1998.
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 9 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, 1999 and 1998, there
were no amounts outstanding under the revolving credit agreement. The Company
plans to terminate the revolving credit agreement shortly after the filing
hereof and to replace it with a new arrangement permitting the Company to borrow
up to $1,000.0 million under Boeing's existing 364-day credit agreement. At
December 31, 1999 and 1998, borrowings under commercial paper totaling $138.0
million and $122.0 million, respectively, were supported by available unused
commitments under the Company's revolving credit agreement. The Company also
expects to replace its commercial paper program with a new program permitting
borrowings of up to $1,000.0 million. At December 31, 1999, the Company also had
available approximately $90.0 million in uncommitted, short-term bank credit
facilities.
On October 10, 1997, the Company filed with the Securities and Exchange
Commission ("SEC") 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 SEC 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 such debt securities in the form of the Company's
Series X medium-term notes for the registered amount of $1.2 billion. As of
December 31, 1999, the Company had issued and sold $1,008.4 million in aggregate
principal amount of such notes, with $437.0 million of the notes being issued
during 1999 at interest rates ranging from 5.56% to 7.64% and with maturities
ranging from nine months to 14 years.
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 at the time of sale of the
remaining $191.6 million of notes under its currently effective shelf
registration.
The following table sets forth the average debt of the Company by borrowing
classification:
<TABLE>
<CAPTION>
(Dollars in millions)
Average Average
Years ended Short-Term Long-Term Average
December 31, Debt Debt Total Debt
<S> <C> <C> <C> <C>
1999 $ 193.9 $ 1,760.4 $ 1,954.3
1998 134.6 1,646.2 1,780.8
1997 114.0 1,606.2 1,720.2
1996 49.5 1,501.0 1,550.5
1995 71.4 1,183.6 1,225.0
</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>
1999 5.24% 6.81% 6.65%
1998 5.83 7.21 7.12
1997 5.72 7.34 7.25
1996 5.66 7.60 7.56
1995 6.34 8.19 8.12
</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 October 5, 1999, Moody's Investors Service ("Moody's") placed the Company's
long term debt ratings on review for possible upgrade. Moody's said "this rating
action follows the Boeing Company's announcement regarding the reorganization
and consolidation of its product financing capabilities within the Company, and
its statement that the Company will continue as a wholly owned subsidiary of
Boeing." The current Moody's ratings for the Company's senior unsecured debt and
subordinated debt are A3 and Baa1, respectively.
On October 5, 1999, Standard and Poor's Corporation ("Standard & Poor's")
announced that it placed the ratings of the Company on creditwatch with positive
implications. On November 23, 1999, Standard and Poor's announced that it
raised its credit ratings on the Company. The ratings of the Company's senior
unsecured debt, subordinated debt and commercial paper were raised from A+ to
AA-, A to A+ and A-1+ from A-1, respectively. Standard and Poor's said, "the
upgrade to the level of the parent, Boeing Co. is based on a reorganization
and consolidation of Boeing's product financing activities into a newly
restructured, wholly owned subsidiary, Boeing Capital."
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 is
also dependent upon, among other factors, the capital equipment requirements of
United States and foreign businesses and the availability of capital.
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 and regulations 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. Additionally, legislation and
regulations may in the future prohibit use in certain parts of the world (e.g.,
Europe) of certain types of aircraft which have been upgraded by hushkits to
meet the more stringent Stage 3 requirements. 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, 1999, the Company's carrying amount of Stage 2 aircraft totaled $13.0
million (0.9% of the Company's total aircraft portfolio, including any aircraft
held for sale or re-lease); however, all of the Company's Stage 2 aircraft will
have book values approximating the aircraft's scrap value by year end 2000. For
a discussion of the effects of the upcoming discontinuance of MD-80, MD-90 and
MD-11 aircraft, see "Commercial Aircraft Financing Segment - Factors Affecting
Current Commercial Aircraft Market Conditions."
For the five-year period 1995-1999, the average annual growth rate for worldwide
passenger traffic was approximately 5.5%. Boeing's 20-year forecast of the
average long-term growth rate in passenger traffic is approximately 4.7%
annually, based on projected average worldwide annual economic real growth of
2.9% over the 20-year 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 $1,000.0 billion in 1999
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, 1999, Boeing recorded revenues of
$58.0 billion and net earnings of $2.3 billion. At December 31, 1999, Boeing had
assets of $36.1 billion and shareholders' equity of $11.5 billion.
At December 31, 1999, McDonnell Douglas has provided $241.8 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 one of the Company's commercial aircraft transactions and as a result
thereof, at December 31, 1999, McDonnell Douglas was the lessee for $22.4
million of the Company's commercial aircraft portfolio. 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.
For a further description of significant factors which may affect Boeing, see
Boeing's Form 10-K for the year ended December 31, 1999 (SEC File No.
001-00442).
o 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
is expected that such an agreement will be entered into in the future.
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, 1999, the carrying amount of McDonnell Douglas aircraft
potentially excluded by this provision amounted to approximately $539.6
million.
o 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.
In addition, Boeing, BCSC and the Company have entered into agreements (the
"Boeing Operating Agreements"). The Boeing Operating Agreements have
provisions relating to income taxes that are substantially similar to the
Operating Agreement which, as discussed in the preceding paragraph, remains
in effect. Amounts payable under the Boeing Operating Agreements take into
account payments made under the Operating Agreement, to avoid duplication.
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.
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, Boeing presently charges or credits the
Company for the corresponding increase or decrease in Boeing's taxes
(disregarding alternative minimum taxes) resulting from the Company's
inclusion in the consolidated federal income tax return of Boeing.
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.
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 from time to time. 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.
o Intercompany Services
Boeing provides to the Company certain payroll, employee benefit, facilities
and other services, for which the Company generally pays the actual cost.
See Note 11 of "Notes to Consolidated Financial Statements" included in Item
8.
o Intercompany Credit Arrangements
The Company has historically maintained separate borrowing facilities and
there have been no arrangements for joint use of such credit lines by Boeing
or McDonnell Douglas. However, it is expected that soon after the filing
hereof, the Company's existing revolving credit agreement will be terminated
and replaced by an arrangement permitting the Company access of up to
$1,000.0 million under Boeing's existing 364-day revolving credit agreement.
A default by Boeing would constitute a default by the Company under such
agreement. It is expected that the Company's borrowings, if any, under the
contemplated new arrangement would be supported by Boeing.
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, the Company had
borrowings of $43.0 million and $64.7 million were outstanding at December
31, 1999 and 1998, respectively. During 1999, the Company's highest level of
borrowings from BCSC was $68.2 million. The Company had no loans to BCSC
during 1999 or 1998.
Item 2. Properties
The Company leases all of its office space and other facilities. In connection
with the implementation of the consolidation within the Company of Boeing's
customer financing activities, the headquarters of the Company has been moved to
Seattle, Washington, from Long Beach, California, with a principal office
remaining in Long Beach, California. The Company's principal office in Long
Beach has been leased from McDonnell Douglas since 1994, 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 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 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 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. Aviaco has
appealed the Final Judgment to the United States Court of Appeals for the
Eleventh Circuit. Taking into account amounts reserved for litigation, the
Company does not expect this litigation to have any 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 1999 and
1998, the Company declared and paid dividends of $32.0 million and $40.0
million, respectively, on its common stock to BCSC. The Company paid $3.5
million and $3.9 million in dividends on its preferred stock in 1999 and 1998,
respectively. Preferred stock dividends of $0.6 million payable to BCSC were
accrued at December 31, 1999.
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, $150.1 million of
the Company's income retained for growth was available for dividends at December
31, 1999. At December 31, 1999, the Company was in compliance with all its debt
covenants.
<PAGE>
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, 1999 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) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Financing volume $ 671.9 $ 692.6 $ 591.1 $ 867.3 $ 590.8
============================================================================
Operating income:
Finance lease income $ 114.9 $ 119.5 $ 136.9 $ 118.6 $ 104.3
Interest income on notes receivable 52.3 36.6 26.3 24.4 27.2
Operating lease income, net 64.2 67.7 56.7 55.1 41.1
Net gain on disposal or re-lease
of assets 51.7 33.4 21.0 19.6 8.7
Other 2.1 2.9 5.5 3.8 9.3
----------------------------------------------------------------------------
285.2 260.1 246.4 221.5 190.6
----------------------------------------------------------------------------
Expenses:
Interest expense 130.0 126.7 124.7 117.3 101.9
Provision for losses 7.4 7.4 11.5 14.2 12.2
Operating expenses 13.8 12.6 13.1 11.7 11.3
Other 7.3 8.8 9.3 3.4 4.9
----------------------------------------------------------------------------
158.5 155.5 158.6 146.6 130.3
----------------------------------------------------------------------------
Income before provision for income
taxes 126.7 104.6 87.8 74.9 60.3
Provision for income taxes 48.5 33.1 31.7 26.1 21.0
----------------------------------------------------------------------------
Net income $ 78.2 $ 71.5 $ 56.1 $ 48.8 $ 39.3
============================================================================
Dividends declared $ 35.5 $ 43.9 $ 28.5 $ 3.5 $ 31.0
Ratio of income to fixed charges (1) 1.95 1.80 1.68 1.62 1.57
Balance sheet data:
Total assets $ 3,043.6 $ 2,861.4 $ 2,722.8 $ 2,653.6 $ 2,049.6
Total debt 2,057.7 1,970.3 1,797.9 1,850.2 1,339.7
Shareholder's equity 423.4 380.7 353.1 325.5 280.2
Dividends accrued on preferred
stock at year end $ 0.6 $ 0.6 $ 0.6 $ 0.6 $ 0.6
(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.
</TABLE>
<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 not be limited to, the impact on the Company of
strategic decisions of Boeing, the level of new financing business made
available to the Company by Boeing, 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 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 laws 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 particularly
including implementation of the Company's directive from Boeing to lead the
Boeing-wide customer financing efforts, defaults by customers, regulatory
uncertainties and legal proceedings.
Impact of Boeing's Customer Financing Consolidation
In 1999, the commercial aircraft financing group had negligible new business
volume largely due to the fact that the Company was awaiting the decision made
by Boeing in the fourth quarter of 1999 that the Company would have
responsibility for Boeing's customer financing efforts. Now that such decision
has been made, the Company is expected to experience a very significant increase
in new commercial aircraft financing volume compared with prior years.
It is expected that a significant portion of Boeing's existing commercial
aircraft financing portfolio will be transferred to the Company soon after the
filing hereof (although the definitive documents have not been signed). Further,
it is expected that a significant portion of Boeing's existing $4,500.0 million
of commercial aircraft financing commitments will be transferred to the Company,
on a transaction by transaction basis, subject to approval of each transaction
by the Company's investment committee (which may condition its approval upon
credit enhancements or other conditions it deems necessary to meet the Company's
pricing and credit requirements).
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. There were no amounts outstanding under
this revolving credit agreement at December 31, 1999. The Company plans to
terminate the revolving credit agreement shortly after the filing hereof and to
replace it with a new arrangement permitting the Company to borrow up to
$1,000.0 million under Boeing's existing 364-day credit agreement. At December
31, 1999 and 1998, borrowings under commercial paper totaling $138.0 million and
$122.0 million, respectively, were supported by available unused commitments
under the Company's revolving credit agreement. The Company also expects to
replace its commercial paper program with a new program permitting borrowings of
up to $1,000.0 million. At December 31, 1999, the Company had available
approximately $90.0 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, 1999 and 1998, borrowings under such credit
facilities totaled $90.0 million and $50.0 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
("SEC") 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 such debt securities in the form of the Company's Series X
medium-term notes for the registered amount of $1.2 billion. As of December 31,
1999, the Company had issued and sold $1,008.4 million in aggregate principal
amount of such notes, with $437.0 million of the notes being issued during 1999
at interest rates ranging from 5.56% to 7.64% and with maturities ranging from
nine months to 14 years.
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 at the time of sale of the
remaining $191.6 million of notes under its currently effective shelf
registration.
1999 vs. 1998
Interest on notes receivable increased $15.7 million (42.9%) from 1998,
primarily attributable to new volume of CEL notes receivable of $374.0 million
during 1999.
Gain on disposal or re-lease of assets increased $18.3 million (54.8%) from
1998, primarily attributable to $28.9 million of income from the early
termination of leases and buyout of four MD-82 aircraft in December 1999. The
remaining offset is attributable to other sales within the commercial aircraft
and commercial equipment leasing portfolios.
1998 vs. 1997
Finance lease income decreased $17.4 million (12.7%) in 1998 compared to 1997,
primarily attributable to a decrease in finance leases as a result of aircraft
sales.
Interest on notes receivable increased $10.3 million (39.2%) from 1997,
primarily attributable to new volume of CEL notes receivable of $317.3 million
during 1998.
Operating lease income increased $11.0 million (19.4%) in 1998 compared to 1997,
primarily attributable to the operating lease financing of four used Boeing
aircraft during the last four months of 1997.
Gain on disposal or re-lease of assets increased $12.4 million (59.0%) from
1997, primarily attributable to sales within the commercial aircraft and
commercial equipment leasing portfolios.
Other income decreased $2.6 million (47.3%) from 1997, primarily attributable to
prepayment fees of $2.0 million received in 1997.
Provision for losses on receivables decreased $4.1 million (35.7%) in 1998
compared to 1997, primarily attributable to the Company's determination that
additional provisions for losses were not necessary or appropriate during the
current year, as the Company's core business segments did not experience net
write-offs during the year ended December 31, 1997.
Year 2000 Readiness Disclosure
During the first week of calendar 2000, the Company completed the transition
from calendar 1999 to calendar 2000 with no material adverse impact on its
operations. During the first quarter of 2000, the Company has continued to
monitor its products, business systems and infrastructure to ensure that latent
defects do not manifest themselves. The Company has not experienced a material
adverse impact on its operations during this period.
The Company implemented its contingency plan of remediating its historical lease
administration system for Year 2000 compliance and is now considering whether to
continue using it (rather than its new lease administration system) in the
future.
The total cost of the Year 2000 project to date (not including the new lease
administration system, a project initiated in 1996 without regard to Year 2000
issues), has been funded through operating cash flows and has not had a material
adverse effect on the Company's earnings, cash flow or financial position.
Monitoring costs or other Year 2000 project costs incurred after January 1,
2000, are not expected to be significant.
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 sheets of Boeing Capital
Corporation (a wholly owned subsidiary of Boeing Capital Services Corporation)
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income and income retained for growth, and cash flows for each of
the three years in the period ended December 31, 1999. Our audits also included
the financial statement schedule listed in Part IV Item 14 (a)2. These financial
statements and financial statement schedule are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of Boeing Capital
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
aforementioned financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
January 28, 2000
(March 23, 2000 as to Note 10)
<PAGE>
Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(Dollars in millions, except stated value and par value) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Financing receivables:
<S> <C> <C>
Investment in finance leases $ 1,372.8 $ 1,365.0
Notes receivable 708.0 545.7
--------------------------------------
2,080.8 1,910.7
Allowance for losses on financing receivables (60.7) (62.1)
--------------------------------------
2,020.1 1,848.6
Cash and cash equivalents 26.9 20.3
Equipment under operating leases, net 828.2 889.2
Equipment held for sale or re-lease 66.0 62.3
Accounts due from Boeing and BCSC 2.6 -
Other assets 99.8 41.0
--------------------------------------
$ 3,043.6 $ 2,861.4
======================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 271.0 $ 236.7
Accounts payable and accrued expenses 38.5 35.6
Accounts due to Boeing and BCSC - 6.7
Other liabilities 96.5 84.8
Deferred income taxes 427.5 383.3
Long-term debt:
Senior 1,741.8 1,678.7
Subordinated 44.9 54.9
--------------------------------------
2,620.2 2,480.7
--------------------------------------
Commitments and contingencies - Note 10
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 278.9 236.2
--------------------------------------
423.4 380.7
--------------------------------------
$ 3,043.6 $ 2,861.4
======================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Income and Income Retained for Growth
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
<S> <C> <C> <C>
Finance lease income $ 114.9 $ 119.5 $ 136.9
Interest income on notes receivable 52.3 36.6 26.3
Operating lease income, net of depreciation expense of
$72.0, $70.6 and $61.1 in 1999, 1998 and 1997,
respectively 64.2 67.7 56.7
Net gain on disposal or re-lease of assets 51.7 33.4 21.0
Other 2.1 2.9 5.5
-----------------------------------------------------
285.2 260.1 246.4
-----------------------------------------------------
EXPENSES
Interest expense 130.0 126.7 124.7
Provision for losses 7.4 7.4 11.5
Operating expenses 13.8 12.6 13.1
Other 7.3 8.8 9.3
-----------------------------------------------------
158.5 155.5 158.6
-----------------------------------------------------
Income before provision for income taxes 126.7 104.6 87.8
Provision for income taxes 48.5 33.1 31.7
-----------------------------------------------------
Net income 78.2 71.5 56.1
Income retained for growth at beginning of year 236.2 208.6 181.0
Dividends (35.5) (43.9) (28.5)
-----------------------------------------------------
Income retained for growth at end of year $ 278.9 $ 236.2 $ 208.6
=====================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 78.2 $ 71.5 $ 56.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense - equipment under operating
leases 72.0 70.6 61.1
Net gain on disposal or re-lease of assets (51.7) (33.4) (21.0)
Provision for losses 7.4 7.4 11.5
Change in assets and liabilities:
Accounts with Boeing and BCSC (9.3) (30.5) 37.2
Other assets (58.8) (2.4) 3.1
Accounts payable and accrued expenses 2.9 (13.5) 1.4
Other liabilities 11.7 (12.4) 7.2
Deferred income taxes 44.2 (5.0) 48.1
Other, net (3.5) (1.0) (0.7)
---------------------------------------------------
93.1 51.3 204.0
---------------------------------------------------
INVESTING ACTIVITIES
Net change in short-term notes and leases receivable (20.6) (51.9) 101.7
Purchase of equipment for operating leases (96.8) (157.2) (346.2)
Proceeds from disposition of equipment, notes and leases
receivable 211.5 323.7 177.4
Collection of notes and leases receivable 343.1 235.9 209.6
Acquisition of notes and leases receivable (576.5) (548.9) (243.0)
---------------------------------------------------
(139.3) (198.4) (100.5)
---------------------------------------------------
FINANCING ACTIVITIES
Net change in short-term notes payable 34.3 87.7 (12.3)
Long-term debt:
Proceeds 437.0 436.8 226.8
Repayments (383.0) (352.3) (267.3)
Payment of cash dividends (35.5) (43.9) (28.5)
---------------------------------------------------
52.8 128.3 (81.3)
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6.6 (18.8) 22.2
Cash and cash equivalents at beginning of year 20.3 39.1 16.9
---------------------------------------------------
Cash and cash equivalents at end of year $ 26.9 $ 20.3 $ 39.1
===================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
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 ("BCSC"), a wholly owned subsidiary of McDonnell Douglas
Corporation ("McDonnell Douglas"), which in turn 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 and financing. The Company's strategy is to (1) generate and participate
in finance transactions in which the Company's structuring and analysis can
provide high returns on its invested equity and (2) to assist in arranging
financing for Boeing's customers and to participate in such financing if the
Company's minimum pricing/credit requirements are met.
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.
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, 1999 and 1998 were $25.8 million and $19.7 million, respectively.
At December 31, 1999 and 1998, the Company has classified as other assets
restricted cash deposited with banks in interest bearing accounts of $37.2
million and $34.1 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 of
individual credits, economic and political conditions, guaranties, prior loss
experience, past-due amounts, collateral value of the underlying equipment and
results of periodic credit reviews.
Equipment Held for Sale or Re-lease 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. The Company reviews these assets for impairment when events or
circumstances indicate that the carrying amount of these assets may not be
recoverable. These assets are reviewed for impairment by comparing undiscounted
cash flows over remaining useful lives to net book value. When impairment is
indicated for an asset, the amount of impairment loss is the excess of net book
value over fair 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. The Company reviews
these assets for impairment when events or circumstances indicate that the
carrying amount of these assets may not be recoverable. These assets are
reviewed for impairment by comparing undiscounted cash flows over remaining
useful lives to net book value. When impairment is indicated for an asset, the
amount of impairment loss is the excess of net book value over fair value.
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 (disregarding alternative minimum 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.
Impact of Recently Issued Accounting Standards The Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," issued in June 1998, was amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133," issued in June 1999. SFAS No. 133, as amended
by SFAS No. 137, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The standard will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in fair value of
derivatives will either offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or be recognized in
other comprehensive income until the hedged item is recognized in earnings. The
change in a derivative's fair value related to the ineffective portion of a
hedge, if any, will generally be immediately recognized in earnings. The
standard is required to be adopted by the Company as of the beginning of fiscal
year 2001. Management is currently in the process of determining the effect of
the new standard on the financial statements.
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.
On October 4, 1999, Boeing announced its decision to consolidate its customer
financing under one group. 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."
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. A significant portion of Boeing's portfolio of
commercial aircraft financings having an approximate value of $3,000.0 million
is expected to be transferred to the Company, although the definitive transfer
documents have not yet been executed. The ultimate amount and terms of any such
transfer are currently under consideration. However, such amount transferred is
expected to be very significant in relation to the Company's existing portfolio.
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.
In addition, Boeing, BCSC and the Company have entered into agreements (the
"Boeing Operating Agreements"). The Boeing Operating Agreements have provisions
relating to income taxes that are substantially similar to the Operating
Agreement which, as discussed in the preceding paragraph, remains in effect.
Amounts payable under the Boeing Operating Agreements take into account payments
made under the Operating Agreement to avoid duplication. 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.
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, Boeing presently charges or credits the Company for the
corresponding increase or decrease in Boeing's taxes (disregarding alternative
minimum taxes) resulting from the Company's inclusion in the consolidated
federal income tax return of Boeing. 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.
There can be no assurance, however, that these (and other) intercompany
arrangements will not change from time to time. 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.
Boeing has announced that it will not produce MD-80 and MD-90 aircraft after
early 2000. Boeing has also stated that it plans to phase out production of the
MD-11, with final deliveries now scheduled for 2001. The Company's commercial
aircraft portfolio as of December 31, 1999 included 28 MD-80s, three MD-90s and
five MD-11s, representing an aggregate of $897.6 million in net asset value
(30.9% of total Company portfolio). The Company's commercial aircraft portfolio
as of December 31, 1998 included 32 MD-80s, three MD-90s and five MD-11s,
representing an aggregate of $963.8 million in net asset value (34.4% of total
Company 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) 1999 1998
<S> <C> <C>
Minimum lease payments receivable $ 1,678.3 $ 1,760.7
Estimated residual value of leased assets 420.2 378.9
Unearned income (730.2) (778.6)
Deferred initial direct costs 4.5 4.0
------------------------------------
$ 1,372.8 $ 1,365.0
====================================
</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) 1999 1998
<S> <C> <C>
Minimum lease payments receivable $ 468.2 $ 501.1
Estimated residual value of leased assets 83.3 83.3
Unearned income (229.5) (252.4)
Deferred initial direct costs 1.0 1.0
------------------------------------
$ 323.0 $ 333.0
====================================
</TABLE>
At December 31, 1999, finance lease receivables of $9.5 million serve as
collateral to senior long-term debt.
At December 31, 1999, finance lease receivables are due in installments as
follows: 2000, $239.8 million; 2001, $204.8 million; 2002, $184.2 million; 2003,
$168.5 million; 2004, $151.2 million; 2005 and thereafter, $729.8 million.
Under a finance lease agreement, the Company leases a DC-10-30 aircraft to
McDonnell Douglas. This lease requires monthly rent payments of $0.4 million
through April 14, 2004. At December 31, 1999 and 1998, the carrying amount of
this aircraft was $22.4 million and $24.7 million, respectively.
Note 4 -- Notes Receivable
The following lists the components of notes receivable at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
<S> <C> <C>
Principal $ 703.3 $ 542.7
Accrued interest 5.2 3.6
Unamortized discount (2.0) (1.6)
Deferred initial direct costs 1.5 1.0
------------------------------------
$ 708.0 $ 545.7
====================================
</TABLE>
At December 31, 1999, notes receivables are due in installments as follows:
2000, $71.1 million; 2001, $86.0 million; 2002, $57.8 million; 2003, $57.6
million; 2004, $105.0 million; 2005 and thereafter, $325.8 million.
Note 5 -- Allowance for Losses on Financing Receivables
Changes in the allowance for losses on financing receivables were as follows
for the years ended December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
<S> <C> <C>
Allowance for losses on financing receivables at beginning of year $ 62.1 $ 55.9
Provision for losses 7.4 7.4
Write-offs, net of recoveries (8.8) (2.5)
Other - 1.3
-----------------------------------
Allowance for losses on financing receivables at end of year $ 60.7 $ 62.1
===================================
</TABLE>
Note 6 -- Equipment Under Operating Leases
Equipment under operating leases consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
<S> <C> <C>
Commercial aircraft $ 622.8 $ 668.0
Executive aircraft 286.3 289.3
Machine tools and production equipment 60.3 56.2
Highway vehicles 32.0 33.7
Printing equipment 10.3 27.2
Other 29.0 25.3
-----------------------------------
1,040.7 1,099.7
Accumulated depreciation (215.1) (208.5)
Rentals receivable 15.8 15.3
Deferred lease income (15.8) (19.5)
Deferred initial direct costs 2.6 2.2
-----------------------------------
$ 828.2 $ 889.2
===================================
</TABLE>
At December 31, 1999, future minimum rentals scheduled to be received under the
noncancelable portion of operating leases are as follows: 2000, $120.3 million;
2001, $97.4 million; 2002, $83.3 million; 2003, $73.6 million; 2004, $53.1
million; 2005 and thereafter, $312.8 million.
At December 31, 1999, equipment under operating leases of $68.9 million are
assigned as collateral to senior long-term debt. Equipment under operating
leases of $180.4 million at December 31, 1999, relate to commercial aircraft
leased by the Company under capital lease obligations.
Note 7 -- Equipment Held for Sale or Re-Lease
Equipment held for sale or re-lease consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
<S> <C> <C>
Commercial aircraft $ 43.5 $ 51.6
Executive aircraft 22.2 -
Food processing equipment - 8.0
Printing equipment - 2.3
Other 0.3 0.4
------------------------------------
$ 66.0 $ 62.3
====================================
</TABLE>
Note 8 -- 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) 1999 1998 1997
Current:
<S> <C> <C> <C>
Federal $ (3.2) $ 32.1 $ (21.3)
State 7.5 6.0 4.9
--------------------------------------------------------
4.3 38.1 (16.4)
Deferred:
Federal 44.2 (5.0) 48.1
--------------------------------------------------------
$ 48.5 $ 33.1 $ 31.7
========================================================
</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) 1999 1998
Deferred tax assets:
<S> <C> <C>
Allowance for losses $ 21.3 $ 21.7
Other 7.3 8.0
-------------------------------------
28.6 29.7
-------------------------------------
Deferred tax liabilities:
Leased assets (446.8) (412.9)
Other (9.3) (0.1)
-------------------------------------
(456.1) (413.0)
-------------------------------------
Net deferred tax liability $ (427.5) $ (383.3)
=====================================
</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) 1999 1998 1997
<S> <C> <C> <C>
Tax computed at federal statutory rate $ 44.3 $ 36.6 $ 30.7
State income taxes, net of federal tax benefit 4.9 3.9 3.2
Foreign sales corporation benefit (0.3) (6.9) (1.2)
Effect of investment tax credits (0.4) (0.5) (0.9)
Other - - (0.1)
------------------------------------------------------
$ 48.5 $ 33.1 $ 31.7
======================================================
</TABLE>
The Company is currently under examination by the Internal Revenue Service
("IRS") for the tax years 1993 through 1995. The results of the examination for
the years 1986 through 1992 are in Appeals. 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 paid income tax payments to Boeing/McDonnell Douglas of $8.9 million
and $46.6 million in 1999 and 1998, respectively. The Company received income
tax payments from Boeing/McDonnell Douglas of $32.4 million in 1997. The Company
paid income tax payments to other federal and state tax agencies of $1.3
million, $1.4 million and $1.7 million in 1999, 1998 and 1997, respectively.
Note 9 -- 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
---------------------------------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Commercial paper $ 138.0 $ 122.0 5.58 % 5.46 %
Uncommitted credit facilities 90.0 50.0 6.06 5.47
BCSC 43.0 64.7 6.57 5.20
------------------------------
$ 271.0 $ 236.7
==============================
</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 floating rate, generally based on a defined
prime rate, or fixed rate related to LIBOR. There were no amounts outstanding
under this agreement at December 31, 1999 and 1998. At December 31, 1999 and
1998, borrowings under commercial paper totaling $138.0 million and $122.0
million, respectively, were supported by available unused commitments under the
revolving credit agreement.
At December 31, 1999, the Company, had available approximately $90.0 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, 1999 and
1998, borrowings under these credit facilities totaled $90.0 million and $50.0
million, respectively.
On October 10, 1997, the Company filed with the SEC 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 SEC 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 such debt securities
in the form of the Company's Series X medium-term notes for the registered
amount of $1.2 billion. As of December 31, 1999, the Company had issued and sold
$1,008.4 million in aggregate principal amount of such notes, with $437.0
million of the notes being issued during 1999 at interest rates ranging from
5.56% to 7.64% and with maturities ranging from nine months to 14 years.
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 at the time of sale of the
remaining $191.6 million of notes under its currently effective shelf
registration.
Senior long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
<C> <C> <C>
3.9% Notes due through 1999, net of discount based on imputed $ $
interest rates of 9.15% - 10.6% - 1.1
5.75% - 6.875% Notes due through 2000, net of discount based on
imputed interest rates of 9.75% - 11.4% - 3.2
6.9% - 9.43% Notes due through 2001 10.0 33.5
13.84% - 14.28% Notes due through 2003, including a premium
based on an imputed interest rate of 6.10% 24.7 30.0
6.0% - 8.25% Retail medium-term notes due through 2011 11.0 11.3
5.56% - 10.05% Medium-term notes due through 2017 1,325.5 1,191.3
Capital lease obligations due through 2008 370.6 408.3
------------------------------------------
$ 1,741.8 $ 1,678.7
==========================================
</TABLE>
At December 31, 1999 and 1998, subordinated long-term debt consisted of $44.9
million and $54.9 million, respectively, in medium-term notes due through 2004
with interest rates ranging from 6.41% to 8.31%.
As of December 31, 1999, $34.7 million of senior long-term debt was
collateralized by equipment. This debt is comprised of the 13.84% - 14.28% notes
due through 2003 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>
2000 $ 189.1 $ 83.6
2001 263.3 64.2
2002 173.9 55.0
2003 172.2 60.0
2004 128.6 54.2
2005 and thereafter 494.7 164.2
------------------------------------------
1,421.8 481.2
Deferred debt expenses (5.7) (0.1)
Imputed interest - (110.5)
------------------------------------------
$ 1,416.1 $ 370.6
==========================================
</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, $150.1 million of
the Company's income retained for growth was available for dividends at December
31, 1999. At December 31, 1999, the Company was in compliance with all its debt
covenants.
Interest payments totaled $129.8 million in 1999, $123.0 million in 1998 and
$124.4 million in 1997.
The derivative financial instruments held by the Company at December 31, 1999,
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 that the
derivative instruments it holds present 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, 1999, the
Company had interest rate swap agreements outstanding as follows:
<TABLE>
<CAPTION>
Contract Maturity Notional Principal Receive Rate Pay Rate
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Capital lease obligations 2006 - 2008 $ 322.6 Floating(1) 6.65% - 7.60%
Medium-term notes 2000 - 2001 50.0 6.83% - 8.61% Floating(1)
Medium-term notes 2003 30.0 Floating(1) 5.99%
(1) Floating rates are based on LIBOR.
</TABLE>
Note 10 -- 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 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 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 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. Aviaco has
appealed the Final Judgment to the United States Court of Appeals for the
Eleventh Circuit. Taking into account amounts reserved for litigation, the
Company does not expect this litigation to have any 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 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 rights and obligations under this agreement were
assigned to BCSC on March 23, 2000.
In October 1999, the Company, together with Boeing Aircraft Services, a division
of Boeing, 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. At December 31, 1999, the Company had commitments of
approximately $800.0 million to DHL. The rights and obligations under this
agreement were assigned to BCSC on March 23, 2000.
Trans World Airlines, Inc. ("TWA") accounted for $147.3 million (5.1% of total
Company portfolio) and $163.3 million (5.8% of total Company portfolio) at
December 31, 1999 and 1998, respectively. TWA continues to operate under a
reorganization plan, confirmed by the U.S. Bankruptcy Court in 1995, which
restructured its indebtedness and leasehold obligations to its creditors. In
addition, TWA continues to face significant financial and operational
challenges. In 1999, based on publicly available reports, TWA incurred a net
loss of $353.4 million and its liquidity worsened as cash balances fell 29.0%
below prior year levels to $180.4 million. 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 December 31, 1999, the maximum
aggregate coverage under such guaranties was $41.7 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 $170.2 million (5.9% of total
Company portfolio) and $176.4 million (6.3% of total Company portfolio) at
December 31, 1999 and 1998, respectively. Based on publicly available reports,
World experienced losses in 1999 of $7.6 million and its year end cash balances
fell 31.0% below prior year levels to $11.7 million.
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 were terminated and the aircraft were 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, which is
included in Other Expenses in the Consolidated Statements of Income and Income
Retained for Growth. 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. On February
8, 2000, the Company entered into a modification agreement pursuant to which
Boeing will convert the aircraft from passenger to freighter configuration for
purposes of increased marketability. 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 December 31, 1999 and 1998, the Company had commitments to provide leasing
and other financing totaling $218.9 million and $163.3 million, respectively,
excluding the commitments to DHL previously mentioned.
In conjunction with prior asset dispositions and certain guaranties, at December
31, 1999, the Company is subject to a maximum recourse of $44.9 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 December 31, 1999, the Company had guaranteed the repayment of $3.9
million in capital lease obligations associated with a 50% partner.
In connection with the implementation of the consolidation within the Company of
Boeing's customer financing activities, the headquarters of the Company has been
moved to Seattle, Washington, from Long Beach, California, with a principal
office remaining in Long Beach, California. The Company's headquarters in
Seattle, Washington, is being leased under a month-to-month lease agreement. The
Company's principal office in Long Beach was leased from McDonnell Douglas under
an operating lease agreement which expired in 1999. As of April 1999, the
Company has been on a month-to-month lease with McDonnell Douglas. Rent expense
for all office leases under operating lease agreements was $0.8 million during
each of the years ended December 31, 1999, 1998 and 1997. At December 31, 1999,
the minimum future rental commitments under these noncancelable leases payable
over the remaining lives of the leases aggregated less than $0.1 million.
Note 11 -- Transactions with Boeing, McDonnell Douglas and BCSC
Accounts with Boeing and BCSC consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
<S> <C> <C>
Federal income tax payable $ 2.7 $ 0.7
State income tax (receivable) payable (11.7) 5.8
Other payables 6.4 0.2
--------------------------------------------
Accounts (due from) due to Boeing and BCSC $ (2.6) $ 6.7
============================================
</TABLE>
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, the Company had borrowings of
$43.0 million and $64.7 million were outstanding at December 31, 1999 and 1998,
respectively.
In August 1998, the Company's lease agreements with P.T. Garuda ("Garuda")
relating to two MD-11 aircraft were terminated and the aircraft, which were
returned by Garuda in July 1998, were sold, at estimated fair value, to Boeing
for an aggregate sales price of $162.8 million. The Company recorded a pretax
gain of $3.3 million, which is included in net gain on disposal or re-lease of
assets.
In March 1998, the Company entered into a lease agreement with Caledonian
Airways Limited (Caledonian) covering a DC-10-30 aircraft which requires monthly
rent payments of $0.4 million through 2004. Pursuant to a guaranty from
McDonnell Douglas to the Company, McDonnell Douglas is to make supplemental
rental payments to the Company of approximately $0.2 of the $0.4 million in
monthly rental payments. At December 31, 1999 and 1998, the carrying amount of
this aircraft was $20.1 million and $23.7 million, respectively.
During 1997, the Company purchased aircraft subject to leases from Boeing
and McDonnell Douglas in the amount of $51.9 million. There were no such
aircraft purchases from Boeing or McDonnell Douglas in 1998 or 1999. During
1999, 1998 and 1997, the Company recorded operating income from Boeing and
McDonnell Douglas relating to financings aggregating $4.2 million, $7.1
million and $12.1 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 in 1997, which was included in
net gain on disposal or re-lease of assets.
At December 31, 1999 and 1998, $241.8 million and $284.5 million, respectively,
was guaranteed by McDonnell Douglas for commercial aircraft financing. Fees
related to these guaranties that were paid to McDonnell Douglas totaled $0.6
million, $1.0 million and $1.1 million in 1999, 1998 and 1997, respectively.
During 1999, 1998 and 1997, the Company collected $10.9 million, $12.3 million
and $6.9 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, 1999 and
1998.
Substantially all employees of Boeing and its subsidiaries are members of
defined benefit pension plans and insurance plans. Boeing also provides eligible
employees the opportunity to participate in savings plans that permit both
pretax and after-tax contributions. Boeing generally charges the Company with
the actual cost of these plans attributable to the Company's employees which are
included with other Boeing charges for support services and reflected in
operating expenses. Boeing charges for services provided during 1999, 1998 and
1997 totaled $0.8 million, $1.6 million and $1.3 million, respectively.
Additionally, the Company was compensated by certain affiliates for a number of
support services, which are netted against operating expenses, amounting to $0.2
million, $0.6 million and $1.1 million in 1999, 1998 and 1997, respectively.
Note 12 -- 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-Term and Long-Term Debt Carrying amounts of borrowings include accrued
interest and exclude netting of 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.
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.
Interest Rate Hedges The fair values of the Company's interest rate swaps are
based on quoted market prices of comparable instruments.
The notional amounts, carrying amounts and estimated fair values of the
Company's financial instruments at December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------------
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 $ - $ 26.9 $ 26.9 $ - $ 20.3 $ 20.3
Notes receivable - 708.0 728.4 - 545.7 567.3
LIABILITIES
Short-term notes payable to banks - (271.6) (271.6) - (237.0) (237.0)
Long-term debt:
Senior, excluding capital lease
obligations - (1,399.6) (1,394.8) - (1,295.8) (1,329.6)
Subordinated - (46.5) (48.7) - (56.8) (60.5)
OFF-BALANCE SHEET INSTRUMENTS
Commitments to extend credit (218.9) - (218.9) (163.3) - (163.3)
Interest rate swaps 402.6 - 8.0 430.4 - (16.1)
</TABLE>
Note 13 -- 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 $295.8
million (10.2% of total Company portfolio) and $303.0 million (10.8% of total
Company portfolio) at December 31, 1999 and 1998, respectively. The second
largest commercial aircraft financing customer accounted for $170.2 million
(5.9% of total Company portfolio) and $176.4 million (6.3% of total portfolio),
at December 31, 1999 and 1998, respectively. The five largest commercial
aircraft financing customers accounted for $840.9 million (28.9% of total
Company portfolio) and $895.4 million (32.0% of total Company portfolio) at
December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, there
were no significant concentrations by customer within the commercial equipment
leasing portfolio.
In 1999, 1998 and 1997, a single aircraft financing customer accounted for
10.5%, 13.6% and 16.8%, 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) 1999 1998 1997
Operating income:
<S> <C> <C> <C>
Commercial aircraft financing $ 156.1 $ 145.8 $ 155.5
Commercial equipment leasing 128.5 113.5 88.0
Other 0.1 0.3 2.6
Corporate 0.5 0.5 0.3
-----------------------------------------------------
$ 285.2 $ 260.1 $ 246.4
=====================================================
Income (loss) before provision for income taxes:
Commercial aircraft financing $ 77.7 $ 58.9 $ 58.7
Commercial equipment leasing 57.7 51.5 37.7
Other (0.1) 2.2 (0.2)
Corporate (8.6) (8.0) (8.4)
-----------------------------------------------------
$ 126.7 $ 104.6 $ 87.8
=====================================================
Identifiable assets at December 31:
Commercial aircraft financing $ 1,502.5 $ 1,632.5 $ 1,728.8
Commercial equipment leasing 1,529.8 1,223.1 973.3
Other 2.4 1.1 17.9
Corporate 8.9 4.7 2.8
-----------------------------------------------------
$ 3,043.6 $ 2,861.4 $ 2,722.8
=====================================================
Portfolio at December 31:
Commercial aircraft financing $ 1,410.8 $ 1,573.5 $ 1,711.5
Commercial equipment leasing 1,497.6 1,225.0 976.6
Other 0.6 1.4 12.2
-----------------------------------------------------
$ 2,909.0 $ 2,799.9 $ 2,700.3
=====================================================
Depreciation expense - equipment under operating leases:
Commercial aircraft financing $ 42.8 $ 40.2 $ 26.9
Commercial equipment leasing 29.2 30.4 34.2
-----------------------------------------------------
$ 72.0 $ 70.6 $ 61.1
=====================================================
Equipment acquired for operating leases, at cost:
Commercial aircraft financing $ - $ 75.3 $ 146.5
Commercial equipment leasing 96.8 81.9 199.7
-----------------------------------------------------
$ 96.8 $ 157.2 $ 346.2
=====================================================
</TABLE>
Operating income from financing of assets located outside the United States
totaled $62.2 million, $64.5 million and $54.2 million in 1999, 1998 and 1997,
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>
1999 $ 62.1 $ 7.4 $ - $ (8.8) $ 60.7
1998 $ 55.9 $ 7.4 $ 1.3 $ (2.5) $ 62.1
1997 $ 48.6 $ 11.5 $ (1.7) $ (2.5) $ 55.9
(1) Write-offs, net of recoveries
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
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' Report...................................25
Consolidated Balance Sheets at December 31, 1999 and 1998......26
Consolidated Statements of Income and Income Retained for
Growth for the Years Ended December 31, 1999,
1998 and 1997..................................................27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997...............................28
Notes to Consolidated Financial Statements.....................29
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. 33-58989).
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, 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 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).
10.4 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.
10.5 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.
10.6 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.
10.7 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. Computation of Ratio of Earnings to Fixed Charges.
23.1 Independent Auditors' Consent.
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 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 27, 2000 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> <C>
/s/ DEBORAH C. HOPKINS
- ------------------------------------------
Deborah C. Hopkins Chairman and Director March 27, 2000
----------------------
/s/ THOMAS J. MOTHERWAY
- ------------------------------------------
Thomas J. Motherway President and Director March 27, 2000
----------------------
(Principal Executive Officer)
/s/ THEODORE J. COLLINS
- ------------------------------------------
Theodore J. Collins Director March 27, 2000
----------------------
/s/ ALAN R. MULALLY Director March 27, 2000
- ------------------------------------------ ----------------------
Alan R. Mulally
/s/ JAMES F. PALMER
- ------------------------------------------
James F. Palmer Director March 27, 2000
----------------------
/s/ WALTER E. SKOWRONSKI
- ------------------------------------------
Walter E. Skowronski Director March 27, 2000
----------------------
/s/ STEVEN W. VOGEDING
- ------------------------------------------
Steven W. Vogeding Vice President and Chief Financial Officer March 27, 2000
----------------------
(Principal Financial Officer)
/s/ MAURA R. MIZUGUCHI
- ------------------------------------------
Maura R. Mizuguchi Controller March 27, 2000
----------------------
(Principal Accounting Officer)
</TABLE>
EXHIBIT 12
Boeing Capital Corporation and Subsidiaries
Computation of Ratio of Income to Fixed Charges
<TABLE>
<CAPTION>
Years ending December 31,
---------------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995
Income:
Income before provision for
<S> <C> <C> <C> <C> <C>
income taxes $ 126.7 $ 104.6 $ 87.8 $ 74.9 $ 60.3
Fixed charges 133.9 130.6 128.2 120.8 105.4
---------------------------------------------------------------------------------
Income before provision for
income taxes and fixed $ 260.6 $ 235.2 $ 216.0 $ 195.7 $ 165.7
charges
=================================================================================
Fixed charges:
Interest expense $ 130.0 $ 126.7 $ 124.7 $ 117.3 $ 101.9
Preferred stock cash dividends 3.9 3.9 3.5 3.5 3.5
---------------------------------------------------------------------------------
$ 133.9 $ 130.6 $ 128.2 $ 120.8 $ 105.4
=================================================================================
Ratio of income before provision
for income taxes and fixed
charges to fixed charges 1.95 1.80 1.68 1.62 1.57
=================================================================================
</TABLE>
EXHIBIT 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statement No.
333-37635 and 333-82391 of Boeing Capital Corporation on Form S-3 of our report
dated January 28, 2000 (March 23, 2000 as to Note 10), appearing in this Annual
Report on Form 10-K of Boeing Capital Corporation for the year ended December
31, 1999.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 27, 2000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,900
<SECURITIES> 0
<RECEIVABLES> 708,000
<ALLOWANCES> (60,700)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,043,600
<CURRENT-LIABILITIES> 0
<BONDS> 1,786,700
<COMMON> 5,000
0
50,000
<OTHER-SE> 278,900
<TOTAL-LIABILITY-AND-EQUITY> 3,043,600
<SALES> 0
<TOTAL-REVENUES> 285,200
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,300
<LOSS-PROVISION> 7,400
<INTEREST-EXPENSE> 130,000
<INCOME-PRETAX> 126,700
<INCOME-TAX> 48,500
<INCOME-CONTINUING> 78,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,200
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
