-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, k1RGF5ZNkBcGWDtyzN7HS/r+5B47HFxmlZz7nh4N6z/o++iGaQU9VGR1mknDUZAC c9heutK5a8BdlxnNzQ9gaw== 0000711513-94-000054.txt : 19940420 0000711513-94-000054.hdr.sgml : 19940420 ACCESSION NUMBER: 0000711513-94-000054 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDONNELL DOUGLAS FINANCE CORP /DE CENTRAL INDEX KEY: 0000711513 STANDARD INDUSTRIAL CLASSIFICATION: 6172 IRS NUMBER: 952564584 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10795 FILM NUMBER: 94519976 BUSINESS ADDRESS: STREET 1: 340 GOLDEN SHORE CITY: LONG BEACH STATE: CA ZIP: 90802-4296 BUSINESS PHONE: 3104913225 10-K 1 ANNUAL REPORT 1993 1 United States Securities and Exchange Commission Washington, D.C. 20549 ---------- Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 1993 ---------- MCDONNELL DOUGLAS FINANCE CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-2564584 0-10795 (State or other (I.R.S. Employer (Commission jurisdiction of Identification No.) File No.) Incorporation or Organization) 340 Golden Shore, Long Beach, California 90802 (Address of principal executive offices) (310) 491-3225 (Registrant's telephone number, including area code) __________ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $100 per share Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X___ As of March 30, 1994, there were 50,000 shares of the Company's common stock outstanding. Registrant meets the conditions set forth in General Instruction J(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. 2 Table of Contents Page Part I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 24 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 24 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 . . . . . . . . . . . . . . . . 26 Item 6. Selected Financial Data . . . . . . . . . . . . . . . 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 30 Item 8. Financial Statements and Supplementary Data . . . . . 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . 61 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 . . . . . . . . . . . . . . . . 61 Signatures . . . . . . . . . . . . . . . . . . . . . . 64 Exhibits . . . . . . . . . . . . . . . . . . . . . . . 65 *Omitted pursuant to General Instruction J(1)(a) and (b) of Form 10-K. 3 Part I Item 1. Business General McDonnell Douglas Finance Corporation and its subsidiaries (the "Company") is a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation ("MDFS"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("MDC"). The Company was incorporated in Delaware in 1968 and originally financed only MDC manufactured commercial jet transport aircraft. While this continues to represent a significant portion of the Company's business, the Company also provides a diversified range of financing including loans, finance leases and operating leases, primarily involving equipment for commercial and industrial customers. At December 31, 1993, the Company had approximately 110 employees. Beginning in 1990, as a result of the lowering of the Company's credit ratings, capital constraints imposed by MDC, the recession and the failure of most of its non-core businesses to achieve a satisfactory return, the Company significantly scaled back its operations and focused its new business efforts almost entirely within its two core business units, commercial aircraft financing and commercial equipment leasing ("CEL"), businesses in which the Company historically has achieved satisfactory returns. For the five years ended 1993, the core businesses earned $262.0 million or 133% of the total net earnings of the Company, excluding the 1989 cumulative effect of change in accounting principle. In 1991, the Company determined to exit each of its non-core businesses as market conditions permitted. The Company now operates in three segments: commercial aircraft financing, CEL and non-core businesses. Non-core businesses represent market segments in which the Company is no longer active. The non-core businesses consist primarily of the remaining assets of three business units: McDonnell Douglas Bank Limited ("MD Bank"), receivable inventory financing ("RIF") and real estate financing ("RE"). Non-core new business volume in 1993 and 1992 represent previous contractual commitments and extensions of maturing transactions. The Company does not intend to seek new contractual commitments in its non-core businesses. The Company is actively managing the remaining non-core business portfolios with a view toward liquidating those portfolios over time. Information on the Company's new business volume and portfolio balances is included in the following tables. New Business Volume Years ended December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Commercial aircraft $ 411.4 $153.2 $100.9 $ 155.4 $ 121.0 financing Commercial equipment 41.5 50.7 91.8 189.1 305.4 leasing Non-core businesses 0.1 2.6 38.6 416.8 536.2 $ 453.0 $206.5 $231.3 $ 761.3 $ 962.6 4 Portfolio Balances December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Commercial aircraft $ 1,237.5 $1,001.1 $ 907.8 $ 1,048.1 $ 948.1 financing Commercial equipment 422.3 557.4 668.9 965.1 1,001.2 leasing Non-core businesses 173.7 227.9 595.6 1,245.9 1,113.2 $ 1,833.5 $1,786.4 $2,172.3 $ 3,259.2 $ 3,062.5 For financial information about the Company's segments, see Notes to Consolidated Financial Statements included in Item 8. Commercial Aircraft Financing Segment The Company's commercial aircraft financing group, located in Long Beach, California, provides customer financing services to Douglas Aircraft Company, a division of MDC, and finances the acquisition of MDC aircraft by purchasing such aircraft subject to lease to airlines and by providing secured and unsecured notes receivable financing in connection with the acquisition of such aircraft. Beginning in 1986, the Company began providing financing to airlines for aircraft manufactured by manufacturers other than MDC, but a substantial majority of the commercial aircraft portfolio is comprised of aircraft manufactured by MDC. 5 Portfolio balances for the Company's commercial aircraft financing segment are summarized as follows: Commercial Aircraft Portfolio by Product Type December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Aircraft leases: Finance leases Domestic $ 638.8 $601.5 $609.2 $ 798.2 $ 717.4 Foreign 297.3 54.6 70.9 71.5 83.6 Operating leases Domestic 149.8 111.4 81.5 56.9 53.6 Foreign 50.3 39.9 10.9 10.9 - 1,136.2 807.4 772.5 937.5 854.6 Aircraft related notes receivable: Domestic obligors Senior 51.5 88.0 47.1 20.4 25.5 Subordinated - - 14.5 13.5 13.6 Foreign obligors Senior 49.8 105.7 73.7 76.7 54.4 101.3 193.7 135.3 110.6 93.5 $ 1,237.5 1,001.1 $907.8 $1,048.1 $ 948.1 6 Commercial Aircraft Portfolio by Aircraft Type December 31, (Dollars in millions) 1993 1992 1991 1990 1989 MDC aircraft financing: Finance leases $ 813.1 $ 506.2 $465.6 $ 604.7 $ 592.0 Operating leases 144.2 93.7 30.0 15.6 20.2 Notes receivable 77.7 169.4 107.4 66.6 82.6 1,035.0 769.3 603.0 686.9 694.8 Other commercial aircraft financing: Finance leases 123.0 149.9 214.6 265.0 209.0 Operating leases 55.9 57.6 62.3 52.2 33.4 Notes receivable 23.6 24.3 27.9 44.0 10.9 202.5 231.8 304.8 361.2 253.3 $1,237.5 $ 1,001.1 $907.8 $ 1,048.1 $ 948.1 At December 31, 1993, the Company's commercial aircraft portfolio was comprised of finance leases to 23 customers (18 domestic and five foreign) with a carrying amount of $936.1 million (51.1% of total Company portfolio), notes receivable from eight customers (four domestic and four foreign) with a carrying amount of $101.3 million (5.5% of total Company portfolio) and operating leases to nine customers (seven domestic and two foreign) with a carrying amount of $200.1 million (10.9% of total Company portfolio). The five largest commercial aircraft financing customers accounted for $718.5 million (39.2% of total Company portfolio) and $445.1 million (24.9% of total Company portfolio) at December 31, 1993 and 1992. At December 31, 1993, 56.5% of the Company's total portfolio consisted of financings related to MDC aircraft, compared with 43.1% and 27.8% in 1992 and 1991. - - - Factors Affecting the Commercial Aircraft Financing Portfolio A substantial portion of the Company's aircraft financings are to airlines which either have recently emerged from bankruptcy or are in poor financial health. The Company's two largest commercial aircraft financing customers, Trans World Airlines, Inc. ("TWA") and Continental Airlines, Inc. and its affiliated companies ("Continental"), have recently emerged from bankruptcy. Company financings to TWA accounted for $253.2 million (13.8% of total Company portfolio) and $102.9 million (5.8% of total Company portfolio) at December 31, 1993 and 1992. On November 3, 1993, TWA emerged from Chapter 11 bankruptcy. At December 31, 1993, the Company had commitments to provide additional aircraft-related financing to TWA of $22.9 million. Company financings to Continental accounted for $116.4 million (6.4% of 7 total Company portfolio) and $120.9 million (6.8% of total Company portfolio) at December 31, 1993 and 1992. During periods in 1991 and 1992 when Continental was in bankruptcy, the Company agreed to accept the deferral of certain payments due from Continental which totaled $6.1 million at December 31, 1993. On April 27, 1993, Continental emerged from Chapter 11 bankruptcy. Pursuant to the terms of supplemental guaranties recently executed by MDC in favor of the Company, up to an additional $25.0 million of the Company's financings to TWA and up to an additional $15.0 million of the Company's financings to Continental are guaranteed by MDC. These guaranties supplement individual guaranties provided by MDC with respect to certain of the Company's financings to TWA and Continental to the extent that the estimated fair market value of the financings (after applying the individual guaranties) is less than the net asset value of the financings on the Company's books. The supplemental guaranties terminate in March 1996, but may be extended under certain circumstances. In June 1991, America West Airlines, Inc. ("America West") filed for protection under Chapter 11 of the Federal Bankruptcy Code. The Company participated in the financing of six aircraft which were returned by America West in December 1992. Five of the aircraft are on lease to a new customer and the sixth will be sold, subject to partial financing, in early 1994. During 1993, the Company and America West entered into an agreement whereby the Company settled its bankruptcy claims against America West in exchange for America West airline passenger tickets. The Company continues to market these tickets. As part of a reorganization plan, on November 30, 1992, PWA Corporation ("PWA") ceased making payments to all of its creditors. Time Air, Inc. ("Time Air"), a subsidiary of PWA, became delinquent in December 1992 under its financing of a commuter aircraft which as of December 31, 1993, had a net carrying value of $5.7 million. The Company has agreed to a deferral of certain payments with Time Air, which agreement was amended in February 1994 to lengthen the deferral. The Company has not suffered a material adverse effect upon its financial condition as a result of the above-mentioned bankruptcies. In addition, the Company historically has not been materially adversely affected by bankruptcies involving its commercial aircraft customers because of the collateral value of the aircraft and, to a lesser extent, MDC guaranties obtained in connection with certain of the financings. However, should one or more of the Company's major airline customers encounter financial difficulties and liquidate its fleet, the large number of aircraft which would be added to the already saturated market would make it difficult for the Company to realize the carrying value of the aircraft leased to such airline(s). In March 1994, the Company reached an agreement in principle with an airline leasing an aircraft with a December 31, 1993 carrying amount of $23.0 million who had become delinquent on its lease payments. Pursuant to the agreement in principle , the term of the lease was extended and the payment schedule was adjusted. 8 - - - Current Commercial Aircraft Market Conditions The current severe economic downturn within the airline industry has diminished significantly the demand for new and used aircraft, with some airlines defaulting on contracts for firm orders or postponing orders with the manufacturer while also disposing of or grounding a portion of their fleets. This has resulted in an oversupply of aircraft in the market, which has materially adversely affected the values of the Company's aircraft. It is not clear whether this decline in aircraft values will continue. Despite the erosion of aircraft values, the Company believes that the value of realizable sales prices at the end of the lease terms for substantially all the aircraft the Company has leased exceeds the book value projected at the end of the lease terms. If aircraft values remain depressed or continue to 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 financial condition of the Company. In this regard, the Company's financial performance is dependent in part upon general economic conditions which may affect the profitability of commercial airlines. During 1993, the Company held for sale or lease 17 aircraft and successfully remarketed 11 aircraft, reducing its inventory of aircraft to six at December 31, 1993, with a carrying value of $26.3 million. At December 31, 1993, five of the six aircraft in inventory were the subject of lease commitments with TWA and will be delivered during 1994. The remaining aircraft will be sold to TWA, on a partially financed basis, in early 1994. - - - 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, 1993, the Company owned or participated in the ownership of 109 leased commercial aircraft, including 56 jet transports manufactured by MDC. - - - Factors Affecting Aircraft Financing Volume As in the past, the Company anticipates continued fluctuations in the volume of its aircraft financing transactions. Current market conditions may limit many airlines' ability to access financing and present more opportunities to the Company. The Company's decision to exit its non-core businesses and the increased need of certain of MDC's commercial aircraft customers for financing resulted in the Company financing a substantial amount of aircraft manufactured by MDC in 1993. The Company had commitments to provide aircraft related financing of $38.5 million at December 31, 1993 and $1.8 million at December 31, 1992. (See "Competition and Economic Factors.") The following lists information on new business volume for the Company's commercial aircraft financing segment: 9 Years ended December 31, (Dollars in millions) 1993 1992 1991 1990 1989 MDC aircraft financing volume: Finance leases $ 357.3 $ 95.0 $ 19.2 $ 29.7 $ 37.3 Operating leases 33.8 53.5 30.0 - - Notes receivable 19.1 4.7 21.5 - - 410.2 153.2 70.7 29.7 37.3 Other commercial aircraft financing volume: Finance leases - - 23.9 69.3 67.9 Operating leases 0.7 - 6.3 21.0 13.8 Notes receivable 0.5 - - 35.4 2.0 1.2 - 30.2 125.7 83.7 $ 411.4 $ 153.2 $ 100.9 $ 155.4 $ 121.0 - - - Aircraft Financing Guaranties At December 31, 1993, the Company had $318.2 million of guaranties with respect to its commercial aircraft financing portfolio relating to transactions with a carrying value of $1,237.5 million (25.7% of the commercial aircraft financing portfolio). The following table summarizes such guaranties: (Dollars in millions) Domestic Foreign Total Amounts guaranteed by: MDC $127.2 $134.4 $261.6 Foreign governments - 14.5 14.5 Other 28.3 13.8 42.1 Total guaranties $155.5 $162.7 $318.2 The Company has no reason to believe that any such guaranteed amounts will be ultimately unenforceable or uncollectible. See "Relationship With MDC." Commercial Equipment Leasing Segment CEL provides single-investor, tax-oriented lease financing as its primary product. CEL, which maintains its principal operation in Long Beach, California and has marketing offices in Chicago, Illinois and Detroit, Michigan, obtains its business primarily through direct solicitation by its marketing personnel. CEL specializes in leasing equipment such as over-the- road transportation equipment, executive aircraft, machine tools, shipping containers, printing equipment, textile manufacturing equipment and other types of equipment which it believes will maintain strong collateral and 10 residual values. The lease term is generally between three and ten years and transaction sizes usually range between $2.0 million and $10.0 million. In addition to financing transactions for the Company, CEL arranges third party financings of equipment. Portfolio balances for the Company's CEL segment are summarized as follows: December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Finance leases $ 235.2 $325.9 $ 425.9 $ 655.8 $ 705.4 Operating leases 157.5 179.9 198.7 244.8 222.3 Notes receivable 28.8 50.7 41.5 59.4 64.0 Preferred and preference 0.8 0.9 2.8 5.1 9.5 stock $ 422.3 $557.4 $ 668.9 $ 965.1 $ 1,001.2 - - - Factors Affecting CEL Volume The Company's recent CEL volume has been affected by limitations on the availability of capital to commit to new transactions and higher cost of capital. In addition, there has been an increased need of certain of MDC's commercial aircraft customers for financing, resulting in the Company devoting a higher percentage of its available capital to MDC aircraft financing. Based on the Company's current increased availability to lower cost funds, CEL's new business volume in 1994 is expected to exceed its 1993 volume. At December 31, 1993 and 1992, the Company had commitments to provide CEL leasing and financing of $4.6 million and $20.7 million. The following lists information on new business volume for the Company's CEL segment: Years ended December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Finance leases $ 15.3 $ 24.9 $ 55.6 $ 109.4 $ 143.6 Operating leases 22.9 18.2 30.3 73.2 98.3 Notes receivable 3.3 7.6 5.9 6.5 63.5 $ 41.5 $ 50.7 $ 91.8 $ 189.1 $ 305.4 Non-Core Businesses Segment Since 1990, the Company has significantly scaled back its operations and is focusing its new business efforts within its two core businesses, commercial aircraft financing and CEL. The non-core businesses consist primarily of the following three business units: - - - McDonnell Douglas Bank Limited While MD Bank is an indirect wholly-owned subsidiary of MDC, through intercompany arrangements between MDC and the Company, MD Bank is treated as 11 a wholly-owned subsidiary of the Company. MD Bank, located in the United Kingdom, has not written any new business since 1991 and in 1993, surrendered its banking license and returned deposits. The remaining portfolio of MD Bank is being run off and disposed of as conditions permit. - - - Receivable Inventory Financing RIF finances dealers of rent-to-own products such as home appliances, electronics and furniture through note arrangements secured by the products and the rental amounts to be collected. RIF ceased pursuing new business during 1991, but continues to service and finance its existing customers. - - - Real Estate Financing RE previously specialized in fixed-rate, medium-term loans secured by a first deed-of-trust or mortgage on commercial real estate properties such as office buildings and small shopping centers. RE ceased originating new transactions in 1990 but continues to manage its current portfolio. On September 28, 1993, the Company sold, at estimated fair value, six real estate owned properties to McDonnell Douglas Realty Company, a wholly-owned subsidiary of MDC, and financed the sale by taking a $28.9 million note. The Company recorded a pretax loss of $5.7 million (after applying reserves) on the transfer, which is reflected in other expenses in the consolidated statement of income. The note is payable on demand and accrues interest at a rate equal to the average borrowing cost of MDFS. At December 31, 1993, the largest concentration of the Company's real estate assets was in the Western region of the U.S., representing $70.3 million or 54.6% of the Company's real estate holdings. At December 31, 1993, the Company had $33.9 million or 26.3% of its real estate holdings in Southern California, where values continue to remain depressed. Office buildings, which represent the largest Southern California real estate holding, totaled $41.8 million at December 31, 1993. At December 31, 1993 and 1992, real estate owned through foreclosure totaled $12.9 million and $55.2 million. Portfolio balances for the Company's non-core businesses segment are summarized as follows: December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Finance leases $ 2.2 $ 11.8 $ 174.1 $ 587.2 $ 464.8 Operating leases 0.6 1.7 121.1 181.6 192.7 Notes receivable 170.9 214.4 300.4 477.1 455.7 $ 173.7 $ 227.9 $ 595.6 $ 1,245.9 $ 1,113.2 12 Business units comprising the Company's non-core businesses segment portfolio are summarized as follows: (Dollars in millions) December 31, Business Unit 1993 1992 1991 1990 1989 Real estate financing $ 115.8 $ 136.9 $ 181.9 $ 213.9 $ 264.0 Receivable inventory 31.0 43.5 52.8 55.8 40.0 financing McDonnell Douglas Bank 20.7 36.0 216.3 354.9 205.0 Limited Marketable debt securities 3.3 7.4 24.2 130.6 120.6 Business credit group 2.2 2.6 2.9 100.9 65.2 McDonnell Douglas Capital Corporation 0.7 1.5 44.9 66.1 85.9 McDonnell Douglas Auto Leasing Corporation - - - 210.1 211.1 McDonnell Douglas Truck - - 72.6 113.6 121.4 Services Inc. $ 173.7 $ 227.9 $ 595.6 $ 1,245.9 $ 1,113.2 - - - Factors Affecting Non-Core Business Volume As a result of the Company's decision to exit its non-core businesses, there has been almost no new business volume since 1991. Non-core new business volume in 1993 and 1992 represent previous contractual commitments and extensions of maturing transactions. The Company does not intend to seek new contractual commitments in its non-core businesses. The Company is actively managing the remaining non-core business portfolios with a view toward liquidating those portfolios over time. At December 31, 1993 and 1992, unused credit lines available to RIF customers totaled $6.6 million and $14.3 million. The Company had no commitments to provide non-core business financing at December 31, 1993 and had commitments of $0.6 million at December 31, 1992. The following lists information on new business volume for the Company's non-core businesses: Years ended December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Finance leases $ - $ - $ 12.8 $ 240.7 $ 331.0 Operating leases - 0.8 5.5 39.7 95.6 Notes receivable 0.1 1.8 20.1 136.4 109.6 $ 0.1 $ 2.6 $ 38.6 $ 416.8 $ 536.2 13 Non-U.S. Financing A portion of the Company's business, primarily in the commercial aircraft financing segment, is conducted with non-U.S. companies. In evaluating non- U.S. transactions, the Company must take into account certain additional risks not encountered in U.S. transactions. For example, payment obligations of non-U.S. obligors from time to time may be subject to foreign exchange restrictions of their respective countries. Additionally, equipment financing is subject to potential risks related to taxation, national policies, political and economic instability, limitations on legal remedies, and currency fluctuations. The Company has not experienced any material problems related to such risks, but no assurances can be given that such factors will not adversely affect the Company in the future. (See "Competition and Economic Factors" and Notes to Consolidated Financial Statements included in Item 8.) Cross-Border Outstandings The extension of credit to borrowers located outside of the U.S. 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 according to contractual terms. Other risks associated with these credits include the possibility of insufficient foreign exchange and restrictions on its availability. To minimize country risk, the Company monitors its foreign credits in each country with specific consideration given to maturity, currency, industry and geographic concentration of the credits. The Company has minimal local currency outstandings to the individual countries listed in the following table that are not hedged or are not funded by local currency borrowings. The countries in which the Company's cross border outstandings exceeded 1% of consolidated assets consist of the following at December 31: (Dollars in millions) December 31, Country Finance Notes Operating 1993 Leases Receivable Leases Guaranties Total Indonesia $154.8 $ - $ - $ - $154.8 Mexico 23.0 - 23.6 - 46.6 United Kingdom 14.3 23.0 - - 37.3 $192.1 $ 23.0 $ 23.6 $ - $238.7 1992 Canada $ 12.7 $ 5.7 $ 0.3 $ 3.5 $ 22.2 Mexico 24.3 - 26.5 - 50.8 United Kingdom 23.9 42.7 0.4 - 67.0 14 $ 60.9 $ 48.4 $ 27.2 $ 3.5 $ 140.0 1991 Mexico $ 39.9 $ 4.0 $ - $ - 43.9 United Kingdom 184.4 34.8 10.0 - 229.2 $ 224.3 $ 38.8 $ 10.0 $ - $ 273.1 As of December 31, 1993, the Company had equipment in the Netherlands under an operating lease agreement with a net carrying amount of $18.0 million, representing outstandings between 0.75% and 1% of the Company's total assets. As of December 31, 1992 and 1991, there were no countries whose 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, 1993: (Dollars in millions) Maturity Distribution Domestic Foreign Total 1994 $ 259.1 $ 64.0 $ 323.1 1995 203.3 40.3 243.6 1996 166.0 37.7 203.7 1997 137.7 34.7 172.4 1998 131.8 37.2 169.0 1999 and thereafter 547.7 308.5 856.2 $ 1,445.6 $ 522.4 $ 1,968.0 Financing Receivables Due 1995 and Thereafter Fixed interest rates $ 1,127.6 $ 269.0 $ 1,396.6 Variable interest rates 57.7 189.4 247.1 $ 1,185.3 $ 458.4 $ 1,643.7 15 Allowance for Losses on Financing Receivables and Credit Loss Experience Analysis of Allowance for Losses on Financing Receivables December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Allowance for losses on financing $ 37.4 $ 46.7 $ 61.6 $ 46.9 $ 44.1 receivables at beginning of year Provision for losses 8.6 19.1 47.2 57.3 13.2 Write-offs, net of (10.4) (27.4) (56.7) (44.1) (11.4) recoveries Other - (1.0) (5.4) 1.5 1.0 Allowance for losses on financing receivables at $ 35.6 $ 37.4 $ 46.7 $ 61.6 $ 46.9 end of year Allowance as percent of 1.9% 2.1% 2.2% 1.9% 1.5% total portfolio Net write-offs as percent of average portfolio 0.6% 1.4% 2.0% 1.4% 0.4% More than 90 days delinquent: Amount of delinquent $ 3.7 $ 4.6 $ 19.0 $ 5.2 $ 6.5 instalments Total receivables due from delinquent obligors $ 108.4 $ 10.5 $ 42.8 $ 42.1 $ 52.8 Total receivables due from delinquent obligors as a percentage of total 5.9% 0.6% 2.0% 1.3% 1.7% portfolio The 1993 increase of total receivables from delinquent obligors is primarily attributable to rent not paid by a single airline customer who has agreed to repay the past due rents in 1994. The portfolio at December 31, 1993 includes 13 CEL obligors, two airline obligors and four non-core obligors to which payment extensions have been granted. At December 31, 1993, payments so extended amounted to $14.8 million ($5.4 million airline-related), and the aggregate carrying amount of the related receivables was $167.8 million ($122.2 million airline-related). 16 Receivable Write-offs, Net of Recoveries by Business Unit The following table summarizes the loss experience for each of the business units: Years ended % of Respective December 31, Average Portfolio (Dollars in millions) 1993 1992 1993 1992 Commercial aircraft financing $ (1.5) $ 6.6 (0.15)% 0.68% Commercial equipment leasing 3.9 5.3 0.80 0.89 Core businesses 2.4 11.9 Non-Core Businesses: Real estate financing 6.4 7.7 5.15 4.67 Receivable inventory financing - 3.2 - 6.77 Marketable debt securities 0.8 1.2 12.75 6.77 McDonnell Douglas Bank Limited 0.3 2.8 1.26 1.81 McDonnell Douglas Truck Services - 0.5 - 2.88 Inc. McDonnell Douglas Capital 0.1 0.1 5.53 0.47 Corporation Business credit group 0.4 - 20.90 - 8.0 15.5 $ 10.4 $ 27.4 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 $8.6 million and $19.1 million in 1993 and 1992 for losses. The Company believes that the allowance for losses on financing receivables is adequate at December 31, 1993 to cover potential losses in the Company's total portfolio. If, however, certain major customers defaulted and the Company were forced to take possession of and dispose of significant amounts of real estate, 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, have decreased in 1993 as compared to 1992. The decrease is largely due to the substantial liquidation during 1992 and 1991 of the asset portfolios in the non-core businesses segment. - - - The commercial aircraft financing segment experienced recoveries of $1.5 million and write-offs of $6.6 million in 1993 and 1992 related to aircraft returned by America West. - - - The asset portfolios in the non-core businesses segment have declined from $1,245.9 million at December 31, 1990 to $173.7 million at December 31, 1993 and, therefore, net write-offs also have declined. 17 Nonaccrual and Past Due Financing Receivables Financing receivables accounted for on a nonaccrual basis consisted of the following at December 31: (Dollars in millions) 1993 1992 Domestic $ 17.1 $ 25.0 Foreign 23.7 0.9 $ 40.8 $ 25.9 Financing receivables being accrued which are contractually past due 90 days or more as to principal and interest payments consisted of domestic financings of $76.6 million and $2.7 million at December 31, 1993 and 1992. Borrowing Operations The following table sets forth the average debt of the Company by borrowing classification: (Dollars in millions) Average Average Years ended Short-Term Long-Term Average December 31, Debt Debt Total Debt 1993 $ 113.0 1,153.7$ $1,266.7 1992 118.2 1,513.1 1,631.3 1991 341.1 1,750.4 2,091.5 1990 393.2 1,888.0 2,281.2 1989 263.6 1,656.3 1,919.9 The weighted average interest rates on all outstanding indebtedness computed for the relevant period were as follows: Weighted Average Weighted Average Weighted Average Years ended Short-Term Long-Term Total Debt December 31, Interest Rate Interest Rate Interest Rate 1993 5.97% 9.53% 9.19% 1992 12.38 8.75 9.00 1991 10.28 9.73 9.82 1990 10.86 9.62 9.83 1989 10.56 9.85 9.95 (See Schedule IX - "Short Term Borrowings" and Notes to Consolidated Financial Statements included in Item 8.) In February 1993, Moody's Investor Service ("Moody's") announced the downgrade of MDC's debt credit ratings. Concurrent with this downgrade of the parent, Moody's reduced the Company's senior debt, subordinated debt and commercial paper to Ba1, Ba3 and Not Prime, respectively. In March 1994, Moody's announced the upgrade to Baa3, Ba2 and P3 for MDC's and the Company's senior debt, subordinated debt and commercial paper credit ratings. 18 In June 1993, Duff and Phelps, Inc. rated the Company's senior and subordinated debt as BBB and BBB-, and Standard and Poor's Corporation affirmed the Company's senior and subordinated debt ratings of BBB and BBB-. 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 "Relationship With MDC.") Competitive factors also include, among other things, the Company's ability to be flexible in its financing arrangements with new and existing customers. The Company has in the past obtained a significant portion of its leasing business and notes receivable in connection with the lease or sale of MDC aircraft. The Company's relationship with MDC has in many cases presented opportunities for such business and has caused MDC to offer to the Company substantially all of the notes receivable taken by MDC upon the sale of its aircraft. (See "Relationship With MDC".) In past years many customers have obtained their financing for MDC aircraft through sources other than the Company or MDC, reflecting a broader range of competitive financing alternatives available to MDC customers. However, the worldwide downturn in the airline business, together with the general tightening of credit has presented and may continue to present increased opportunities for aircraft financing business for the Company. The Company's ability to take advantage of these opportunities depends in substantial part on its ability to obtain the necessary capital. The consolidation in the U.S. airline industry as a result of bankruptcies and mergers has resulted in an increase in the concentration of the Company's MDC aircraft financings in a smaller number of larger airlines at the same time that the Company's decision to exit its non- core businesses has resulted in a greater concentration of the Company's portfolio in commercial aircraft financing. With a larger portion of the portfolio concentrated in MDC aircraft financings, the risk to the Company resulting from the declining creditworthiness of many airlines has increased. (See "Commercial Aircraft Financing Segment" and "Analysis of Allowance for Losses on Financing Receivables and Credit Loss Experience.") Aircraft owned or financed by the Company may become significantly less valuable because of the introduction of new aircraft models, which may be more economical to operate, the aging of particular aircraft, technological obsolescence such as that caused by legislation for noise abatement which will over time prohibit the use of older, noisier (Stage 2) aircraft in the U.S., or an oversupply of aircraft for sale (such as presently exists). In any such event, carrying amounts on the Company's books may be reduced if, in the 19 judgment of management, such carrying amounts are greater than market value, which would result in recognition of a loss to the Company. At December 31, 1993, the Company's carrying amount of Stage 2 aircraft totaled $68.4 million (5.4% of the Company's total aircraft portfolio, including held for sale or re-lease), which includes $26.3 million of aircraft held for sale or re-lease. Although the Company is particularly subject to risks attendant to the airline and aircraft manufacturing industries, the ability of the Company to generate new business also is dependent upon, among other factors, the capital equipment requirements of U.S. businesses and the availability of capital. Relationship With MDC MDC is principally engaged in the design, development and production of defense and commercial aerospace products. For the year ended December 31, 1993, MDC recorded revenues of $14.5 billion and net earnings of $396.0 million. At December 31, 1993, MDC had assets of $12.0 billion and shareholders' equity of $3.4 billion. One of the five directors of the Company is a director of MDC and four of the Company's directors are officers of MDC. The financial well-being of MDC is vital to the Company's ability to enter into significant amounts of new business in the future. Primarily as a result of certain downgrades in the credit ratings of MDC in 1991 and in early 1993, the Company's credit ratings were downgraded at the same time. Beginning in the early 1990's and continuing through mid-1993, the Company's access to new capital was severely limited due to a lowering of the Company's credit ratings, the recession and constraints imposed by MDC. However, as 1993 progressed, all of these factors had a much smaller impact on the Company and consequently, the Company's access to new capital improved. Approximately 25% of the receivables from the Company's total aircraft portfolio are supported by guaranties from MDC. In the event a substantial portion of the guaranties become payable and in the unlikely event that MDC is unable to honor its obligations under these guaranties, such event could have a material adverse effect on the financial condition of the Company. In addition, MDC participates as an intermediary in financings to a small number of the Company's commercial aircraft customers and largely as a result thereof, MDC is the fourth largest commercial aircraft financing customer of the Company. Two of the principal industry segments in which MDC operates, military aircraft and commercial aircraft, are especially competitive and have a limited number of customers. As the Company focuses on its core businesses, and primarily aircraft financing, its future business prospects become more closely tied to the success of MDC, and especially the ability of MDC's commercial aircraft business to generate additional sales. The commercial aircraft business is market sensitive, which causes disruptions in production and procurement and attendant costs, and requires large investments to develop new derivatives of existing aircraft or new aircraft. The depressed conditions in the airline industry have resulted and may continue to result in airlines not taking deliveries of commercial transport aircraft, defaulting on contracts for firm orders, requests for changes in delivery schedules of existing orders, not exercising options or reserves and a dramatic decline in new orders. MDC expects the weakness of the commercial aircraft market to continue during 1994 and MDC does not expect a strong industry-wide resumption in orders for new aircraft until 1995, at the earliest. MDC's market share of firm order backlog for new commercial aircraft has declined significantly in 20 the past several years and operating revenues for MDC's commercial aircraft segment decreased 28% in 1993. MDC also has made guaranties to non-affiliate third parties in connection with the marketing of commercial aircraft. MDC does not anticipate that the existence of such guaranties will have a material adverse effect upon its financial condition. In addition, some existing commercial aircraft contracts contain provisions requiring MDC to repurchase used aircraft at the option of the commercial customers. In view of the current market conditions for used aircraft, MDC's earnings and cash flows could be adversely impacted by the exercise of such options. However, it is not anticipated that the existence of such repurchase obligations will have a material adverse effect on MDC's cash flow or financial position. The trend of reduced commercial aircraft orders and reduced defense spending has resulted in a significant downsizing of MDC over the last several years. MDC's most significant customer in its military aircraft and missiles, space, and electronic systems segments is the U.S. Government. In addition to the risks found in any business, companies engaged in supplying military and space equipment to the U.S. Government are subject to a number of other risks, including dependence on Congressional appropriations and annual administrative allotment of funds, general reductions in the U.S. defense budget, and changes in Government policies. Defense spending by the U.S. Government has declined and is likely to continue to decline. Further significant reductions in defense spending and a decision made by the U.S. Government to emphasize weapons research over production may have a material impact on MDC. The loss of a major program or a major reduction or stretch-out in one or more programs could have a material adverse impact on MDC's future revenues, earnings and cash flow. MDC also incurs risk if it enters into firm fixed-price contracts with the U.S. Government pursuant to which work is performed and paid for at a fixed amount without adjustment for actual costs experienced in connection with the contract. While this arrangement offers MDC opportunities for increased profits if costs are lower than expected, risk of loss due to increased cost is also borne by MDC. MDC, as a large defense contractor, is subject to many audits, reviews and investigations by the U.S. Government of its negotiation and performance of, accounting for, and general practices relating to U.S. Government contracts. An indictment of a contractor may result in suspension from eligibility for award of any new government contract, and a guilty plea or conviction may result in debarment from eligibility for awards. The U.S. Government may, in certain cases, also terminate existing contracts, recover damages, and impose other sanctions and penalties. Contracts may be terminated by the U.S. Government either for default, if the contractor materially breaches the contract, or "for the convenience" of the Government. Under contracts terminated for the convenience of the Government, a contractor is generally entitled to receive payments for its contract cost and the proportionate share of its fee or earnings for work done, subject to availability of funding. One of MDC's largest programs for the U.S. Government is the C-17 Globemaster III. The C-17 program is completing development and moving into full production. However, MDC has incurred significant C-17 related losses as a result of its cost estimate at completion exceeding the fixed-price ceiling set for development and initial production. In addition, as of December 31, 1993, the U.S.Air Force had withheld approximately $312 million from MDC's progress payment requests principally as a result of the higher cost estimates and the reclassification of certain costs. In May 1993, a Defense Acquisition Board initiated by the Under Secretary of Defense for Acquisition began a review of the C-17 program in an effort to resolve outstanding issues and to make recommendations regarding the C-17's future. In connection with the 21 review, MDC provided data and participated in numerous discussions. In January 1994, MDC and the Department of Defense agreed to a business settlement of a variety of issues concerning the C-17. MDC and the U.S. Air Force will be developing plans and contractual modifications and agreements to implement the business settlement, which is subject to Congressional authorization and appropriations. This process is expected to be completed during 1994. The settlement covered issues open as of the date of the settlement, including the allocation of sustaining engineering costs to the development and production contracts, the sharing of flight test costs over a previous level, and the resolution of claims and of performance/specification issues. The settlement also stipulated that MDC will expend additional funds in an effort to achieve product and systems improvements. MDC estimated the financial impact of the settlement in conjunction with a review of the estimated remaining costs on the C-17 development and initial production contracts. As a result, MDC recorded a loss provision of $450 million (excluding general and administrative and other period expenses) in the fourth quarter of 1993. On June 7, 1991, the U.S. Navy notified MDC and General Dynamics Corporation ("GD") that it was terminating for default the contract for development and initial production of the A-12 aircraft. The Navy has agreed to continue to defer repayment of $1.335 billion alleged to be due, with interest, from MDC and GD as a result of the termination for default of the A-12 program. The agreement provides that it will remain in force until the dispute as to the type of termination is resolved by pending litigation in the U.S. Court of Federal Claims or negotiated settlement, subject to review by the U.S. Government annually on December 1, to determine if there has been a substantial change in the financial condition of either MDC or GD such that deferment is no longer in the best interest of the Government. The Government, which extended the December 1, 1993 review beyond the time to which MDC and GD agreed, has not advised the contractors of the results of that review. However, the United States Court of Federal Claims has issued an order deferring rulings on the merits of the A-12 termination case until July 21, 1994. The court's order is based upon an undertaking by the Government that it would not seek to terminate the A-12 deferment agreement between MDC, GD and the Navy in the interim. MDC firmly believes it is entitled to continuation of the deferment agreement in accordance with its terms. However, if the agreement is not continued, MDC intends to contest collection efforts. If payment of the deferred amounts were required, such payment would have a material adverse effect on MDC's cash flows. Although MDC has established a provision of $350 million for loss on the contract, if, contrary to MDC's belief, the termination of the contract is not determined to be for the convenience of the U.S. Government, it is estimated that an additional loss would be incurred which could amount to approximately $1.2 billion. Also, a 1991 Securities and Exchange Commission investigation looking into whether MDC violated certain federal securities laws in connection with disclosures about, and accounting for, the A-12 aircraft has been broadened to include the C-17 and possibly other programs. For a further description of these and other factors which may affect MDC's financial condition, see MDC's Form 10-K for the year ended December 31, 1993 (Securities and Exchange Commission file number 1-3685.) 22 - - - Operating Agreement The relationship between the Company and MDC is governed by an operating agreement (the "Operating Agreement"), which formalizes certain aspects of the relationship between the companies, principally those relating to the purchase and sale of MDC aircraft receivables, the leasing of MDC aircraft, the resale of MDC aircraft returned to, or repossessed by, the Company under leases or secured notes, and the allocation of federal income taxes between the companies. Under the Operating Agreement, MDC is required to offer to the Company all promissory notes, conditional sales contracts and certain other receivables obtained by MDC in connection with the sale of its commercial transport aircraft, except for any receivable that MDC acquires in a transaction which, in its opinion, involves unusual or exceptional circumstances or which it acquires with the expressed intention of selling to a purchaser other than the Company. The Company is obligated under the Operating Agreement to purchase all aircraft receivables offered to it, unless (a) it is unable or deems it inappropriate to obtain or allocate funds for the acquisition, (b) the receivables do not meet the Company's customary standards as to terms and conditions or creditworthiness, or (c) the amount of the receivable offered, when added to the amount of receivables of the same obligor then held by the Company, would exceed the amount that the Company deems prudent to hold. The prices to be paid for notes receivable purchased from MDC are intended to produce reasonable returns to the Company, taking into account the rates of return realized by independent finance companies, the Company's assessment of the credit risk and the Company's projected borrowing costs and expenses. In cases where credit risks associated with a note receivable are not acceptable to the Company, the Company will refuse to accept the note receivable or will condition its acceptance upon receipt of a guaranty from MDC with a negotiated fee to be paid by the Company for the guaranty. (See "Commercial Aircraft Financing Segment - Aircraft Financing Guaranties.") With respect to aircraft leasing activities, unlike the purchase of other aircraft receivables which are acquired by MDC and sold to the Company, the Company may make lease proposals directly to the prospective customers. If a lease proposal is accepted, the Company enters into a lease with the customer and purchases the aircraft from MDC on the terms negotiated between MDC and the customer. Under the Operating Agreement the Company may make a lease proposal to any customer desiring to lease an aircraft for two years or more, but the Company may decline to make a proposal or may condition its proposal upon a full or partial guaranty from MDC, with a negotiated fee to be paid by the Company for the guaranty. The Company has the option under the Operating Agreement to tender to MDC any MDC 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 MDC aircraft leased under a partnership arrangement in which the Company is one of the partners, or MDC aircraft subject to third party liens or other security interests, unless the Company and MDC determine that purchase by MDC is desirable. At December 31, 1993, the carrying amount of MDC aircraft and MDC aircraft held 23 for sale or lease excluded by this provision amounts to approximately $127.4 million and $1.3 million, respectively. - - - Federal Income Taxes The Company and MDC presently file consolidated federal income tax returns, with the consolidated tax payments, if any, being made by MDC. The Operating Agreement provides that so long as consolidated federal tax returns are filed, payments shall be made, directly or indirectly, by MDC to the Company or by the Company to MDC, as appropriate, equal to the difference between the consolidated tax liability and MDC's tax liability computed without consolidation with the Company. If, subsequent to any such payments by MDC, 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 MDC any portion of such payments. The Company and MDC 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 MDC allocated to the Company. This has been important in planning the volume of and pricing for the Company's leasing activities. Under this arrangement, the Company is entitled to receive on a current basis not less than 50% of the potential tax savings generated by the Company's leasing activities with the remaining portion of such tax benefits to be deferred for a one-year period. 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 MDC 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 MDC'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.") - - - Intercompany Services MDC provides to the Company certain payroll, employee benefit, facilities and other services, for which the Company generally pays MDC the actual cost. (See Notes to Consolidated Financial Statements included in Item 8.) Commencing in the second quarter of 1994, the Company will move to new facilities to be leased by the Company from MDC. The Company formerly provided substantial financial services to MDC in connection with MDC's marketing of its aircraft, particularly in assisting its customers in obtaining financing for their aircraft acquisitions. The Company's function in this area included assistance with respect to the form and terms of MDC's participation in such financing where necessary, and negotiation of these terms with the customer on behalf of MDC. In January 1994, the 10 Company employees who were primarily responsible for providing these services were transferred to Douglas Aircraft Company, a division of MDC, to more closely align them with the primary focus of their efforts. 24 - - - Intercompany Credit Arrangements The Company and MDC maintain separate borrowing facilities and there are no arrangements for joint use of credit lines by the companies. Bank credit and other borrowing facilities are negotiated by the Company on its own behalf. There are no provisions in the Company's debt instruments that provide that a default by MDC on MDC debt constitutes a default on Company debt. There are no guaranties, direct or indirect, by MDC of the payment of any debt of the Company. The Company has an arrangement with MDC, terminable at the discretion of either of the parties, pursuant to which the Company may borrow from MDC and MDC may borrow from the Company, funds for 30-day periods at a market rate of interest or at MDFS's average borrowing rate. Under these arrangements, there were no outstanding balances at December 31, 1993 and at December 31, 1992, $49.0 million was receivable from MDC. During 1992, the Company made no borrowings under this agreement and the maximum receivable from MDC under this arrangement was $49.0 million. Under a similar borrowing arrangement, McDonnell Douglas Realty Company owed the Company $29.6 million at December 31, 1993. As of that date, the Company was also owed $18.3 million by MDFS under a borrowing based on short-term borrowing costs of the Company, supporting a bridge financing which was repaid in March 1994. Item 2. Properties The Company leases all of its office space and other facilities. Commencing in the second quarter of 1994, the Company will sublease from MDC, at fair market value, approximately 40,000 square feet of office space to be used as the Company's principal offices. 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 In 1990, the Company was named as a defendant in three class action suits (the Carpi, Edelman, and Waldman "Actions") for alleged violations of securities laws in connection with the public offering of limited partnership interests in certain equipment leasing limited partnerships, the sponsor of which was McDonnell Douglas Capital Corporation ("MDCC"), a wholly-owned subsidiary of the Company. A court-approved settlement of the Carpi, Edelman, and Waldman Actions became effective as of December 1, 1993, pursuant to which the defendants will pay plaintiffs approximately $14.8 million, approximately $13.4 million of which will be paid by MDCC, its corporate affiliates and the individual defendants (a portion of which will be paid from the officers and directors liability insurance covering the individual defendants). As part of the settlement, MDCC purchased the equipment portfolios of the limited partnerships for 121% of the $1.0 million net book value. The Company adequately reserved for the settlement of the Actions and the settlement will not have a significant adverse impact on its financial condition or results of operations. In March 1993, Wilmington Trust Company, CoreStates Bank, N.A., Midlantic National Bank and Continental Bank (collectively the "Banks") filed suit 25 against the Company's wholly-owned subsidiary, MDFC Equipment Leasing Corporation ("ELC"), in the Superior Court of the State of Delaware seeking to recover payments made under letters of credit issued by the Banks in an aggregate amount of $2.8 million plus interest on such payments. In March 1994, ELC reached an agreement in principle to settle the suit by agreeing to pay the Banks a de minimus amount. 26 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 MDFS. In 1993, the Company declared and paid no dividends to MDFS on its common stock compared to $102.3 million declared and paid in 1992. The 1992 common stock dividends declared and paid were unusually high due to the downsizing of the Company. The Company paid $3.6 million and $3.5 million in dividends on its preferred stock in 1993 and 1992. Preferred stock dividends of $0.5 million payable to MDFS were accrued at December 31, 1993. The Company currently expects to pay common stock dividends of at least $13.0 million to MDFS in 1994. 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, $49.4 million of the Company's income retained for growth was available for dividends at December 31, 1993. 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, 1993 and for the year then ended and with Item 7. The following table sets forth selected consolidated financial data for the Company: 27 Years Ended December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Financing volume $ 453.0 $ 206.5 $ 231.3 $ 761.3 $ 962.6 Operating income: Finance lease income $ 94.7 $ 113.0 $ 179.3 $ 210.0 $ 174.2 Interest on notes 35.8 47.9 61.5 80.8 65.8 receivable Operating lease 34.3 33.3 34.1 36.9 32.7 income, net Net gain on disposal or re-lease 23.7 37.1 45.8 90.0 34.8 of assets Postretirement - 2.8 - - - benefit curtailment Other 9.9 20.6 21.6 13.1 13.2 198.5 254.7 342.3 430.8 320.7 Expenses: Interest expense 116.4 145.9 198.5 216.4 184.0 Provision for losses 8.6 19.1 47.2 57.3 13.2 Operating expenses 20.3 27.4 35.6 55.1 41.5 Other 12.4 14.3 3.8 3.1 6.4 157.7 206.7 285.1 331.9 245.1 Income from continuing operations before income taxes 40.8 48.0 57.2 98.9 75.6 and cumula- tive effect of accounting change Provision for taxes 24.0 15.9 19.1 34.6 24.9 on income Income from continuing operations before cumulative 16.8 32.1 38.1 64.3 50.7 effect of accounting change Discontinued - (2.5) (1.4) 1.2 (1.0) operations, net Cumulative effect of - (1.9) - - 100.0 accounting change Net income $ 16.8 $ 27.7 $ 36.7 $ 65.5 $ 149.7 Cash dividends paid $ 3.6 $ 105.8 $ 59.0 $ 23.5 $ 142.2 Ratio of income to 1.34 1.32 1.28 1.45 1.41 fixed charges Balance sheet data: Total assets $2,063.1 $1,999.0 $2,582.3 $3,443.7 $ 3,133.7 Total debt 1,361.2 1,330.4 1,730.7 2,443.2 2,222.3 28 Shareholder's equity 269.4 256.4 340.5 364.9 317.0 Dividends accrued on preferred stock at $ 0.6 $ 0.5 $ 0.5 $ 0.5 $ 0.5 year end 29 (1) For the purpose of computing the ratio of income to fixed charges, income consists of income from continuing operations before income taxes, cumulative effect of accounting change and fixed charges; and fixed charges consist of interest expense and preferred stock dividends. 30 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. Capital Resources and Liquidity The Company has significant liquidity requirements. If cash provided by operations, borrowings under bank credit lines, unsecured term borrowings and the normal run-off of the Company's portfolio 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 been accessing the public debt market since mid-1993 and anticipates using proceeds from the issuance of additional public debt to fund future growth. The Company has traditionally attempted to match-fund its business such that scheduled receipts from its portfolio will at least 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. In funding its operations, the Company had traditionally obtained cash from operating activities, placements of term debt, issuance of commercial paper and the normal run-off of its portfolio. However, beginning in the early 1990's and continuing through mid-1993, the Company's access to new capital was severely limited due to a lowering of the Company's credit ratings, the recession, and capital constraints imposed by MDC (see "Relationship With MDC") and, as a result, the Company used asset sales and secured borrowings as a source of funding at various times during this period. However, as 1993 progressed, all of these conditions had a much smaller impact on the Company and the Company's access to new capital improved. Beginning late in the second quarter of 1993, the Company resumed issuing public debt. In June 1993 the Company commenced offering securities as part of a $250 million retail medium term note program. As of December 31, 1993, the Company had issued $81.1 million of retail medium term notes. Beginning in the fourth quarter of 1993, the Company returned to the institutional medium term note market, issuing $90.0 million in debt as of December 31, 1993. During the years ended 1993, 1992 and 1991, the Company reduced the portfolio amount in its non-core businesses segment by a total of $1,117.4 million. The majority of the proceeds received from this reduction has been used to repay outstanding debt. At December 31, 1993, the Company had committed revolving credit agreements under which it could borrow a maximum of $170.0 million through January 31, 1994. The maximum amount which the Company can borrow will be reduced by $25.0 million each quarter through January 1995. At December 31, 1993, the Company had borrowed $53.0 million under these facilities, leaving $117.0 million unused. 31 1993 vs. 1992 Finance lease income decreased $18.3 million (16.2%) in 1993 compared to 1992 primarily due to the 1992 disposition of a significant portion of the assets of MD Bank and the normal run-off of the portfolio. Interest on notes receivable in 1993 was $12.1 million (25.3%) lower than 1992, reflecting an overall smaller portfolio. Net gain on disposal or re-lease of assets decreased $13.4 million (36.1%) in 1993, primarily attributable to 1992 non-recurring gains aggregating $9.4 million recorded in connection with the disposition of a significant portion of the assets of MD Bank. A lower level of short-term investments largely contributed to the 1993 decrease of $10.7 million (51.9%) in other income. The higher level of short- term investments during 1992 resulted from excess cash generated from the 1992 sales of selected assets and the sale of the Company's full-service leasing segment, operating as McDonnell Douglas Truck Services, Inc. Interest expense decreased $29.5 million (20.2%) in 1993 compared to 1992, resulting from decreased bank borrowings, retirement of debt with call options due to increased liquidity of the Company, offset by issuances of debt with favorable interest rates. The provision for losses decreased $10.5 million (55.0%) during 1993 compared to 1992, primarily as a result of the 1992 disposition of MD Bank assets, decreased write-offs within the real estate portfolio and an overall smaller portfolio. Operating expenses decreased $7.1 million (25.9%) during 1993 compared to 1992, attributable primarily to reductions in the Company's personnel and lower costs associated with administering a smaller asset portfolio. During the third quarter of 1993, the Company's effective tax rate was affected by an additional tax provision of $8.4 million associated with the tax rate increase included in the Omnibus Budget Reconciliation Act of 1993. 1992 vs. 1991 Finance lease income decreased $66.3 million (37.0%) in 1992 compared to 1991 due to the 1991 sale of substantially all the assets of McDonnell Douglas Auto Leasing Corporation ("MDAL") and the business credit group ("BCG"), the 1992 disposition of a significant portion of the assets of MD Bank, the sale of selected assets and the normal run-off of the portfolio. Interest on notes receivable in 1992 was $13.6 million (22.1%) lower than 1991 reflecting the sale of high-yield corporate bonds, delinquent real estate loans on nonaccrual status and an overall smaller portfolio. Interest expense decreased $52.6 million (26.5%) in 1992 compared to 1991, resulting from decreased short-term bank borrowings by MD Bank, the repurchase of debt securities, scheduled debt maturities and retirement of debt with call options. Total debt decreased to $1.3 billion at December 31, 1992 from $1.7 billion at December 31, 1991. 32 The provision for losses decreased $28.1 million (59.5%) during 1992 compared to 1991, primarily as result of a change in the classification to other expenses of foreclosure expenses and writedowns of real estate owned totaling $7.9 million in 1992, which were previously charged to the allowance, the 1991 sale of substantially all of the assets of MDAL and BCG and decreased write- offs in 1992. Operating expenses decreased $8.2 million (23.0%) during 1992 compared to 1991 due primarily to major reductions in the Company's personnel and lower costs attendant to administering a smaller portfolio. At December 31, 1992, the Company had approximately 175 employees, reduced from 600 employees at December 31, 1991. Other expenses increased $10.5 million in 1992 compared to 1991 attributable to foreclosure expenses and writedowns in 1992 of real estate owned. These expenses were charged to the allowance in 1991. New Accounting Standards In December 1992, the Financial Accounting Standards Board issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The Statement is effective in 1994 and requires using an accrual approach for accounting for benefits other than retiree health care to former or inactive employees. The impact of the Company's adoption of this Statement is not expected to be material. In May 1993, the Financial Accounting Standards Board issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan." This Statement requires that impaired loans be measured on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Adoption of this Statement is required no later than 1995, although earlier application is permitted. The Company presently intends to adopt this pronouncement in 1995. The effect of applying this Statement is not expected to have a material impact on the financial statements of the Company. 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 2. herein. 33 Report of Independent Auditors Shareholder and Board of Directors McDonnell Douglas Finance Corporation We have audited the accompanying consolidated balance sheet of McDonnell Douglas Finance Corporation (a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation) and subsidiaries as of December 31, 1993 and 1992, 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, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDonnell Douglas Finance Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets as of December 31, 1991, 1990 and 1989, and the related consolidated statements of income and income retained for growth, and cash flows for the years ended December 31, 1990 and 1989 (none of which are presented separately herein); and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the selected financial data for each of the five years in the period ended December 31, 1993, appearing on pages 26 - 28, is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived. As discussed in the notes to the consolidated financial statements, in 1992 the Company changed its method of accounting for retiree health care benefits. /s/ Ernst & Young Orange County, California January 18, 1994 34 McDonnell Douglas Finance Corporation and Subsidiaries Consolidated Balance Sheet December 31, (Dollars in millions, except per share amounts) 1993 1992 ASSETS Financing receivables: Investment in finance leases $1,173.5 $ 993.8 Notes receivable 301.8 459.7 1,475.3 1,453.5 Allowance for losses on financing (35.6) (37.4) receivables Financing receivables, net 1,439.7 1,416.1 Cash and cash equivalents 65.5 11.6 Equipment under operating leases, net 358.2 332.9 Equipment held for sale or re-lease 32.0 56.6 Real estate owned 12.9 55.2 Accounts with MDC and MDFS 70.4 40.9 Other assets 84.5 85.7 $2,063.2 $ 1,999.0 LIABILITIES AND SHAREHOLDER'S EQUITY Short-term notes payable $ 202.6 $ 133.5 Accounts payable and accrued expenses 59.2 41.2 Other liabilities 74.5 73.9 Deferred income taxes 298.9 297.1 Long-term debt: Senior 1,080.8 1,104.2 Subordinated 77.8 92.7 1,793.8 1,742.6 Commitments and contingencies - Note 8 Shareholder's equity: Preferred stock - no par value; authorized 100,000 shares: Series A; $5,000 stated value; authorized, issued and outstanding 50.0 50.0 10,000 shares 35 Common stock $100 par value; authorized 100,000 shares; issued 5.0 5.0 and outstanding 50,000 shares Capital in excess of par value 89.5 89.5 Income retained for growth 129.6 116.4 Cumulative foreign currency (4.7) (4.5) translation adjustment 269.4 256.4 $2,063.2 $ 1,999.0 See notes to consolidated financial statements. 36 McDonnell Douglas Finance Corporation and Subsidiaries Consolidated Statement of Income and Income Retained for Growth Years ended December 31, (Dollars in millions) 1993 1992 1991 OPERATING INCOME Finance lease income $ 94.7 $ 113.0 $ 179.3 Interest income on notes receivable 35.8 47.9 61.5 Operating lease income, net of depreciation expense of $39.0, $48.8 34.4 33.3 34.1 and $60.0 in 1993, 1992 and 1991, respectively Net gain on disposal or re-lease of 23.7 37.1 45.8 assets Postretirement benefit curtailment - 2.8 - gain Other 9.9 20.6 21.6 198.5 254.7 342.3 EXPENSES Interest expense 116.4 145.9 198.5 Provision for losses 8.6 19.1 47.2 Operating expenses 20.3 27.4 35.6 Other 12.4 14.3 3.8 157.7 206.7 285.1 Income from continuing operations before income taxes and cumulative 40.8 48.0 57.2 effect of accounting change Provision for income taxes 24.0 15.9 19.1 Income from continuing operations before cumulative effect 16.8 32.1 38.1 of accounting change Discontinued operations, net - (2.5) (1.4) Cumulative effect of new accounting standard for postretirement benefits - (1.9) - Net income 16.8 27.7 36.7 37 Income retained for growth at beginning 116.4 194.5 216.8 of year Dividends (3.6) (105.8) (59.0) Income retained for growth at end of $ 129.6 $ 116.4 $ 194.5 year See notes to consolidated financial statements. 38 McDonnell Douglas Finance Corporation and Subsidiaries Consolidated Statement of Cash Flows Years Ended December 31, (Dollars in millions) 1993 1992 1991 OPERATING ACTIVITIES Income from continuing operations before cumulative effect of $ 16.8 $ 32.1 $ 38.1 accounting change Adjustments to reconcile income from continuing operations before cumulative effect of accounting change to net cash provided by (used in) operating activities: Depreciation expense - 39.0 48.8 60.0 equipment under operating leases Net gain on disposal or re- (23.7) (37.1) (45.8) lease of assets Provision for losses 8.6 19.1 47.2 Change in assets and liabilities: Accounts with MDC and MDFS (29.5) 18.4 (58.1) Other assets 1.2 (8.2) (9.9) Accounts payable 18.0 (16.1) (32.5) Other liabilities 0.6 (6.2) 5.3 Deferred income taxes 1.8 (76.6) (97.3) Other, net 4.2 (16.2) 1.7 Discontinued operations - 0.4 18.5 37.0 (41.6) (72.8) INVESTING ACTIVITIES Net change in short-term notes and 91.3 (77.9) (21.2) leases receivable Purchase of equipment for operating (57.4) (71.8) (66.7) leases Proceeds from disposition of 139.5 323.2 790.6 equipment, notes and leases receivable Collection of notes and leases 202.7 278.7 354.5 receivable Acquisition of notes and leases (385.7) (153.2) (168.9) receivable Discontinued operations - 69.4 19.8 39 (9.6) 368.4 908.1 FINANCING ACTIVITIES Net change in short-term borrowings 69.1 16.5 (444.4) Debt having maturities more than 90 days: Proceeds 183.0 34.9 585.6 Repayments (222.0) (440.8) (840.9) Payment of cash dividends (3.6) (105.8) (59.0) Discontinued operations - (6.9) (2.7) 26.5 (502.1) (761.4) Increase (decrease) in cash and cash 53.9 (175.3) 73.9 equivalents Cash and cash equivalents at 11.6 186.9 113.0 beginning of year Cash and cash equivalents $ 65.5 $ 11.6 $ 186.9 at end of year See notes to consolidated financial statements. 40 McDonnell Douglas Finance Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1993 Note 1 - Organization and Summary of Significant Accounting Policies Organization McDonnell Douglas Finance Corporation (the "Company") is a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation ("MDFS"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("MDC"). The Company was incorporated in Delaware in 1968 and provides a diversified range of equipment financing and leasing arrangements to commercial and industrial markets. Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts have been reclassified to conform to the 1993 presentation. 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, 1993 were $58.8 million. There were no cash equivalents at December 31, 1992. At December 31, 1993 and 1992, the Company has classified as other assets restricted cash deposited with banks in interest bearing accounts of $44.3 million and $39.7 million for compensating balances, specific lease rents and contractual purchase price related to certain aircraft leased by the Company under capital lease obligations, and security against recourse provisions related to certain note and lease receivable sales. Allowance for Losses on Financing Receivables The allowance for losses on financing receivables includes consideration of such factors as the risk rating of individual credits, economic and political conditions, prior loss experience and results of periodic credit reviews. Collateral that is formally or substantively repossessed in satisfaction of a receivable is written down to estimated fair value and is transferred to equipment held for sale or re-lease or real estate owned. Subsequent to such transfer, these assets are carried at the lower of cost or estimated net realizable value. In May 1993, the Financial Accounting Standards Board issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan." This Statement requires that impaired loans be measured on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Adoption of this Statement is required no later 41 than 1995, although earlier application is permitted. The Company presently intends to adopt this pronouncement in 1995. The effect of applying this Statement is not expected to have a material impact on the financial condition or results of operations of the Company. Equipment Under Operating Leases Rental equipment subject to operating leases is recorded at cost and depreciated over its useful life or lease term to an estimated salvage value, primarily on a straight-line basis. Income Taxes The operations of the Company and its subsidiaries are included in the consolidated federal income tax return of MDC. MDC presently charges or credits the Company for the corresponding increase or decrease in MDC's taxes resulting from such inclusion. Intercompany payments are made when such taxes are due or tax credits are realized by MDC. Investment tax credits (which were repealed by the Tax Reform Act of 1986) related to property subject to financing transactions are deferred and amortized over the terms of the financing transactions. The provision for taxes on income is computed at current tax rates and adjusted for items that do not have tax consequences, temporary differences and the cumulative effect of any changes in tax rates from those previously used to determine deferred income taxes. In 1992, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The impact of the adoption of SFAS No. 109 had no material effect on the Company's accounting for income taxes. SFAS No. 109 requires financial statements reflect deferred income taxes for future tax consequences of events recognized in different years for financial and tax reporting purposes. Foreign Currency Translation McDonnell Douglas Bank Limited ("MD Bank"), a United Kingdom company, is an indirect wholly-owned subsidiary of MDC. Through intercompany arrangements between MDC and the Company, MD Bank is consolidated as if it were a wholly-owned subsidiary of the Company. Adjustments from translating the assets and liabilities of MD Bank from the functional currency of the pound sterling into U.S. dollars at the year-end exchange rate are accumulated and reported as a separate component of equity. Operating results are translated at average monthly exchange rates. Note 2 - Dispositions During the second quarter of 1992, the Company completed the sale of the remaining assets of its full-service leasing segment, operating as McDonnell Douglas Truck Services Inc. ("MDTS"). These assets were sold to various parties for approximately $58.6 million. This segment has been reported as a discontinued operation. Accordingly, the consolidated financial statements for 1992 and 1991 have been reclassified to report separately the operating results of this discontinued operation. Included in 1992 discontinued operations is the MDTS loss on sale of $1.6 million, net of income tax benefits of $0.9 million and the MDTS loss from operations of $0.9 million, net of income tax benefits of $0.5 million. Included in 1991 discontinued operations is the MDTS loss from operations of $1.4 million, net of income tax benefits of $0.8 million. Operating income of MDTS was $3.4 million and $22.9 million for 1992 and 1991. 42 During 1992, in three separate transactions, MD Bank sold a significant portion of its portfolio and received cash proceeds of approximately $70.8 million and an amortizing note receivable of $29.7 million. These sales resulted in pretax gains aggregating $9.4 million. The cash proceeds were applied to reduce MD Bank's bank borrowings, resulting in losses totaling $2.3 million on the termination of interest rate swaps. The note, which was concurrently sold to the Company at par, bears an interest rate of LIBOR plus 1.5%. At December 31, 1993 and 1992, $4.5 million and $18.7 million was outstanding under this note. At December 31, 1993, the Company had an outstanding foreign currency swap agreement to hedge this note. Foreign currency transaction losses incurred in conjunction with this note amounted to $0.4 million and $1.2 million in 1993 and 1992. During the fourth quarter 1992, the Company sold substantially all of the assets of McDonnell Douglas Capital Corporation ("MDCC"), a wholly-owned subsidiary of the Company, for $13.5 million, resulting in a pretax gain of $1.3 million. The assets consisted primarily of equipment subject to operating leases. Operating income of MDCC was $5.9 million and $4.7 million in 1992 and 1991. On October 18, 1991, the Company completed the sale of substantially all of the assets of McDonnell Douglas Auto Leasing Corporation ("MDAL"), a wholly- owned subsidiary of the Company, for $154.7 million. The Company recorded a pretax loss of $2.5 million on the disposition. Operating income of MDAL was $17.2 million in 1991. In two separate transactions, the Company sold substantially all of the assets of the business credit group ("BCG"). The first transaction, occurring in May 1991, resulted in proceeds of $19.9 million and a pretax loss of $1.2 million. On July 1, 1991, the second transaction was consummated and provided the Company with proceeds of $58.7 million and a pretax gain of $0.6 million. Note 3 - Investment in Finance Leases The following lists the components of the investment in finance leases at December 31: (Dollars in millions) 1993 1992 Minimum lease payments receivable $ 1,668.9 $ 1,326.7 Estimated residual value of leased assets 273.2 221.7 Unearned income (772.3) (558.8) Deferred initial direct costs 3.7 4.2 $ 1,173.5 $ 993.8 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 leased to others: (Dollars in millions) 1993 1992 Minimum lease payments receivable $ 81.2 $ 88.5 43 Estimated residual value of leased 15.1 15.1 assets Unearned income (41.1) (45.9) Deferred initial direct costs 0.2 0.2 $ 55.4 $ 57.9 At December 31, 1993, finance lease receivables of $267.9 million serve as collateral to senior long-term debt. At December 31, 1993, finance lease receivables are due in installments as follows: 1994, $216.6 million; 1995, $187.4 million; 1996, $166.8 million; 1997, $150.1 million; 1998, $141.0 million; 1999 and thereafter, $807.0 million. During 1993, the Company leased, under a finance lease agreement, a DC-10-30 aircraft to MDC with a carrying amount of $32.9 million at December 31, 1993. The lease requires monthly rent payments of $0.4 million through April 14, 2004. Note 4 - Notes Receivable The following lists the components of notes receivable at December 31: (Dollars in millions) 1993 1992 Principal $ 299.1 $ 454.2 Accrued interest 2.8 5.6 Unamortized discount (1.3) (1.7) Deferred initial direct costs 1.2 1.6 $ 301.8 $ 459.7 At December 31, 1993, notes receivables are due in installments as follows: 1994, $106.5 million; 1995, $56.2 million; 1996, $36.9 million; 1997, $22.3 million; 1998, $28.0 million; 1999 and thereafter, $49.2 million. 44 Note 5 - Equipment Under Operating Leases Equipment under operating leases consists of the following at December 31: (Dollars in millions) 1993 1992 Commercial aircraft $ 216.4 $ 160.1 Executive aircraft 88.7 91.9 Highway vehicles 76.7 108.2 Printing equipment 32.0 17.2 Medical equipment 21.9 26.8 Machine tools and production equipment 21.1 27.1 Computers and related equipment 9.3 4.1 Other 3.1 2.6 469.2 438.0 Accumulated depreciation and (106.6) (103.4) amortization Rentals receivable 5.0 7.8 Deferred lease income (10.8) (11.1) Deferred initial direct costs 1.4 1.6 $ 358.2 $ 332.9 At December 31, 1993, future minimum rentals scheduled to be received under the noncancelable portion of operating leases are as follows: 1994, $60.3 million; 1995, $45.6 million; 1996, $38.6 million; 1997, $34.1 million; 1998, $27.4 million; 1999 and thereafter, $41.1 million. At December 31, 1993, equipment under operating leases of $30.4 million are assigned as collateral to senior long-term debt. Equipment under operating leases of $15.3 million at December 31, 1993, relate to commercial aircraft leased by the Company under capital lease obligations. Under an operating lease agreement, the Company leases four MD-82 aircraft to MDC. The leases require quarterly rent payments of $2.1 million through May 31, 2002. At December 31, 1993 and 1992, the carrying amount of these aircraft was $60.4 million and $64.6 million. 45 Note 6 - Income Taxes The components of the provision (benefit) for taxes on income from continuing operations before cumulative effect of accounting change are as follows: (Dollars in millions) 1993 1992 1991 Current: Federal $ 19.8 $ 48.1 $ 100.2 State 2.4 3.4 2.7 22.2 51.5 102.9 Deferred: Federal 1.0 (36.6) (82.7) Foreign 0.8 1.0 (1.1) 1.8 (35.6) (83.8) $ 24.0 $ 15.9 $ 19.1 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 consist of the following at December 31: (Dollars in millions) 1993 1992 Deferred tax assets: Allowance for losses $ 11.9 $ 12.8 Other 20.0 2.6 31.9 15.4 Deferred tax liabilities: Leased assets (311.6) (291.9) Deferred installment sales (2.8) (3.4) MD Bank - (3.7) Other (16.4) (13.5) (330.8) (312.5) Net deferred tax liability $ (298.9) $ (297.1) 46 Income taxes computed at the United States federal income tax rate and the provision for taxes on income from continuing operations before cumulative effect of accounting change differ as follows: (Dollars in millions) 1993 1992 1991 Tax computed at federal $ 14.3 $ 16.3 $ 19.4 statutory rate State income taxes, net of 1.5 1.3 1.8 federal tax benefit Effect of foreign tax rates 0.1 0.8 - U.S. tax effect on foreign 0.8 (2.1) - income Effect of investment tax (0.6) (1.1) (1.7) credits Effect of tax rate change 8.4 - - Other (0.5) 0.7 (0.4) $ 24.0 $ 15.9 $ 19.1 During the third quarter of 1993, the Company's effective tax rate was affected by an additional tax provision of $8.4 million associated with the tax rate increase included in the Omnibus Budget Reconciliation Act of 1993. MDFS is currently under examination by the Internal Revenue Service ("IRS") for the tax years 1986 through 1989. The IRS audit is not expected to have a material effect on the Company's financial condition or results of operations. Provisions have been made for estimated United States and foreign income taxes which may be incurred upon the repatriation of MD Bank's undistributed earnings. Income taxes paid by the Company totaled $54.0 million in 1993, $86.1 million in 1992 and $76.2 million in 1991. Note 7 - Indebtedness Short-term notes payable consist of the following at December 31: (Dollars in millions) 1993 1992 Short-term bank borrowings $ 149.6 $ - Lines of credit 53.0 124.0 MDFS - 9.5 $ 202.6 $ 133.5 At December 31, 1993, the Company had a revolving credit agreement under which it could borrow a maximum of $125.0 million to be reduced by $25.0 million each quarter through January 1995. The interest rate, at the option of the Company, is either a floating rate generally based on a defined prime rate, a fixed rate related to either LIBOR or a certificate of deposit rate, or a rate as quoted under a competitive bid. Borrowings of $53.0 million and $108.0 million were outstanding under this agreement at December 31, 1993 and 1992. 47 At December 31, 1993, MDFS and the Company had a joint revolving credit agreement under which MDFS could borrow a maximum of $6.0 million and the Company could borrow a maximum of $45.0 million, reduced by any MDFS borrowings under this agreement. The interest rate, at the option of the Company, is either a floating rate generally based on a defined prime rate or fixed rate related to LIBOR. There were no outstanding borrowings under this agreement at December 31, 1993. At December 31, 1993, the Company had non-recourse short-term bank borrowings totaling $149.6 million, at LIBOR based interest rates, due and payable on November 4, 1994. MD Bank borrowings of $16.0 million were outstanding at December 31, 1992 under a committed credit agreement which subsequently expired. Senior long-term debt consists of the following at December 31: (Dollars in millions) 1993 1992 9.0% Note due through 1993 $ - $ 9.7 7.75% - 7.91% Notes due through 1993 - 3.3 5.0% Note due through 1994, net of discount based on imputed interest rate 0.5 1.1 of 7.95% 13.0% Notes due through 1995 0.6 1.1 9.15% Note due 1994 19.4 17.4 8.46% Note due 1995 8.0 8.0 10.52% Note due 1995 52.0 52.0 7.0% Notes due through 1996 2.1 3.0 7.0% Notes due through 1998, net of discount based on imputed interest rate 3.4 4.1 of 10.8% 3.9% Notes due through 1999, net of discount based on imputed interest 9.4 10.9 rates of 9.15% - 10.6% 5.75% - 6.875% Notes due through 2000, net of discount based on imputed 11.8 13.3 interest rates of 9.75% - 11.4% 6.65% - 10.18% Notes due through 2001 93.2 94.9 5.25% - 8.375% Retail medium term notes 79.1 - due through 2008 4.625% - 13.55% Medium term notes due 713.4 792.0 through 2005 Capital lease obligations due through 87.9 93.4 2003 $ 1,080.8 $ 1,104.2 The 9.15% Note due 1994, related to a borrowing denominated in Japanese yen, and the 10.52% Note due 1995, related to a borrowing denominated in Swiss francs, have been adjusted by $20.9 million at December 31, 1993 ($19.0 million at December 31, 1992) to reflect the dollar value of each liability at the current exchange rate. To hedge against the risk of future currency exchange rate fluctuations on such debt, the Company entered into foreign 48 currency swap agreements at the time of borrowing whereby it may purchase foreign currency sufficient to retire such debt at exchange rates in effect at the initial dates of the agreements. Changes in the market value of the swap agreements due to changes in exchange rates are included in other assets and effectively offset changes in the value of the foreign denominated obligations. As of December 31, 1993, $98.6 million of senior long-term debt was collateralized by equipment. This debt is composed of the 7.0% Notes due through 1996, 7.0% Notes due through 1998, and the 6.65% - 10.18% Notes due through 2001. The Company leases aircraft under capital leases which have been sub-leased to others. The Company has guaranteed the repayment of $9.7 million in capital lease obligations associated with a 50% partner. Subordinated long-term debt consists of the following at December 31: (Dollars in millions) 1993 1992 12.63% Note due 1993 $ - $ 5.0 8.25% - 9.26% Notes due through 1996 5.0 10.0 10.25% Notes due through 1997 20.0 25.0 12.35% Note due 1997 20.0 20.0 8.93% - 9.92% Medium term notes due through 32.8 32.7 1999 $ 77.8 $ 92.7 Payments required on long-term debt and capital lease obligations during the years ending December 31 are as follows: Long-Term Capital (Dollars in millions) Debt Leases 1994 $ 185.7 $ 15.1 1995 202.2 15.1 1996 98.5 15.1 1997 106.4 15.1 1998 135.8 15.1 1999 and thereafter 347.4 62.1 1,076.0 137.6 Deferred debt expenses (5.4) (0.9) Imputed interest - (48.8) $ 1,070.6 $ 87.9 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, $49.4 million of the Company's income retained for growth was available for dividends at December 31, 1993. 49 Interest payments totaled $116.3 million in 1993, $154.0 million in 1992 and $205.2 million in 1991. Note 8 - Commitments and Contingencies At December 31, 1993 and 1992, the Company had unused credit lines available to customers totaling $6.6 million and $14.3 million; and commitments to provide leasing and other financing totaling $43.6 million and $23.1 million. In 1990, the Company was named as a defendant in three class action suits (the "Actions") for alleged violations of securities laws in connection with the public offering of limited partnership interests in certain equipment leasing limited partnerships, the sponsor of which was MDCC. In 1993, the Company settled the Actions for approximately $14.8 million. As part of the settlement, MDCC purchased the equipment portfolios of the limited partnerships for 121% of the $1.0 million net book value, which approximated fair value. The Company adequately reserved for the settlement of the Actions. At December 31, 1993, in conjunction with prior asset dispositions, at December 31, 1993, the Company is subject to a maximum recourse of $42.0 million. Based on trends to date, the Company's exposure to such loss is not expected to be significant. Note 9 - Transactions with MDC and MDFS Accounts with MDC and MDFS consist of the following at December 31: (Dollars in millions) 1993 1992 Notes receivable $ 47.9 $ 49.0 Federal income tax payable 25.8 (15.4) State income tax receivable - 8.3 Other payables (3.3) (1.0) $ 70.4 $ 40.9 The Company has arrangements with MDC, terminable at the discretion of either of the parties, pursuant to which the Company may borrow from MDC and MDC may borrow from the Company, funds for 30-day periods at a market rate of interest or at MDFS's average borrowing rate. Under these arrangements, there were no outstanding balances at December 31, 1993 and at December 31, 1992, $49.0 million was receivable from MDC. Under a similar arrangement, the Company may borrow from MDFS and MDFS may borrow from the Company, funds for 30-day periods at the Company's cost of funds for short-term borrowings. Under these arrangements, receivables of $18.3 million and borrowings of $9.5 million were outstanding at December 31, 1993 and 1992. On September 28, 1993, the Company sold, at estimated fair value, real estate owned properties to McDonnell Douglas Realty Company, a wholly-owned subsidiary of MDC, and financed the sale by taking a $28.9 million note. The Company recorded a pretax loss of $5.7 million on the transfer, which is included in other expenses in the consolidated statement of income. The note is payable on demand and accrues interest at a rate equal to the average 50 borrowing cost of MDFS. At December 31, 1993, $29.6 million was outstanding under this note. During 1993, 1992 and 1991, the Company purchased aircraft and aircraft related notes from MDC in the amount of $400.2 million, $160.5 million and $119.1 million, respectively. At December 31, 1993 and 1992, $270.0 million and $152.2 million of the commercial aircraft financing portfolio was guaranteed by MDC. During 1993, 1992 and 1991, the Company collected $0.2 million, $0.6 million and $0.8 million, respectively, under these guaranties. On September 29, 1992, the Company purchased a bridge note issued by Irish Aerospace Leasing Limited, a wholly-owned subsidiary of Irish Aerospace Limited, which previously was 25% owned by MDC, for $22.0 million with an effective interest rate of 9.4%. This note was repaid in 1993. On December 31, 1991, MDC sold an MD-11 flight simulator to the Company for $30.0 million and simultaneously leased it back under an operating lease agreement. On March 5, 1992, the Company sold the MD-11 flight simulator to a third party for approximately book value. During 1992, the $9.9 million long-term debt issued by MDFS to MD Bank in 1990 was prepaid. This note was payable in ten equal semi-annual instalments beginning on May 20, 1996, at LIBOR based interest rates. The Series A Preferred Stock 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 and $0.5 million at December 31, 1993 and 1992. Substantially all employees of MDC and its subsidiaries are members of defined benefit pension plans and insurance plans. MDC also provides eligible employees the opportunity to participate in savings plans that permit both pretax and after-tax contributions. MDC generally charges the Company with the actual cost of these plans which are included with other MDC charges for support services and reflected in operating expenses. MDC charges for services provided during 1993, 1992 and 1991 totaled $1.1 million, $2.1 million and $2.9 million, respectively. Additionally, the Company was compensated by certain affiliates for a number of support services, which are net against operating expenses, amounting to $1.8 million, $2.5 million and $2.7 million in 1993, 1992 and 1991, respectively. Prior to 1992, Company-paid retiree health care benefits were included in costs as covered expenses were actually incurred. In December 1990, the Financial Accounting Standards Board issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Statement required companies to change, by 1993, their method of accounting for the costs of these benefits to one that accelerates the recognition of costs by causing their full accrual over the employees' years of service up to their date of full eligibility. MDC, and therefore the Company, elected to implement this Statement for 1992 by immediately recognizing the January 1, 1992 accumulated postretirement benefit obligation of $3.1 million ($1.9 million after-tax). 51 On October 8, 1992, effective January 1, 1993, MDC terminated Company-paid retiree health care for both current and future non-union retirees and their survivors and replaced it with a new arrangement that will be funded entirely by participant contributions. The Company recorded a pretax curtailment gain of $2.8 million ($1.7 million after-tax) in the fourth quarter of 1992, reflecting the termination of Company-paid retiree health care for both current and future non-union retirees. In December 1992, the Financial Accounting Standards Board issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The Statement will be effective in 1994 and will require using an accrual approach for accounting for benefits other than retiree health care to former or inactive employees. The impact of the Company's adoption of this Statement is not expected to be material. Note 10 - Fair Value of Financial Instruments The estimated fair value amounts of the Company's financial instruments have been determined by the Company, using appropriate market information and valuation methodologies. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents Because of the short maturity of these instruments, the carrying amount approximates fair value. Notes Receivable For variable rate notes that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values of fixed rate notes are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Short and Long-Term Debt The carrying amount of the Company's short-term borrowings approximates its fair value. The fair value of the Company's long- term debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Off-Balance Sheet Instruments Fair values for the Company's off-balance sheet instruments (swaps and financing commitments) are based on quoted market prices of comparable instruments (currency and interest rate swaps); and the counterparties' credit standing, taking into account the remaining terms of the agreements (financing commitments). 52 The estimated fair values of the Company's financial instruments consist of the following at December 31: (Dollars in millions) 1993 1992 Carrying Fair Carrying Fair Asset (Liability) Amount Value Amount Value ASSETS Cash and cash equivalents $ 65.5 $ 65.5 $ 11.6 $ 11.6 Notes receivable 301.8 301.8 459.7 458.2 LIABILITIES Short-term notes payable (203.3) (203.3) (124.2) (124.2) to banks Long-term debt: Senior, excluding capital (1,014.0) (1,090.3) (1,034.8) (1,055.2) lease obligations Subordinated (80.7) (89.1) (96.1) (99.2) OFF BALANCE SHEET INSTRUMENTS Commitments to extend (50.2) (50.2) (16.8) (16.8) credit Foreign currency swaps 20.9 18.5 19.0 13.3 Interest rate swaps (0.2) (0.7) (0.1) (1.4) Note 11 - Segment Information The Company provides a diversified range of financing and leasing arrangements to customers and industries throughout the United States, the United Kingdom and, to a lesser extent, other countries. The Company's operations include three financial reporting segments: commercial aircraft financing, commercial equipment leasing and non-core businesses. The commercial aircraft financing segment provides customer financing services to MDC components, primarily Douglas Aircraft Company, and also provides financing for the acquisition of non-MDC aircraft. The commercial equipment leasing segment is principally involved in large financing and leasing transactions for a diversified range of equipment. Non- core businesses represent market segments in which the Company is no longer active. The non-core businesses consist primarily of the remaining assets of three business units: MD Bank, receivable inventory financing and real estate financing. MD Bank provided financing in the United Kingdom similar to that provided in the United States by the commercial equipment leasing segment. Receivable inventory financing provides financing to dealers of rent-to-own products. Real estate financing previously specialized in fixed rate, medium term commercial real estate loans. 53 The Company's financing and leasing portfolio consists of the following at December 31: (Dollars in millions) 1993 1992 Commercial aircraft financing: MDC aircraft financing $ 1,035.1 56.5% $ 769.3 43.1% Other commercial aircraft 202.4 11.0 231.8 13.0 financing 1,237.5 67.5 1,001.1 56.1 Commercial equipment leasing: Transportation services 69.3 3.8 96.9 5.4 Transportation equipment 42.7 2.3 39.0 2.2 Trucking and warehousing 38.7 2.1 66.6 3.7 Other 271.6 14.8 354.9 19.9 422.3 23.0 557.4 31.2 Non-core businesses: Real estate 123.6 6.7 146.7 8.2 Furniture and home furnishings stores 31.0 1.7 43.2 2.4 Air transportation 5.1 0.3 5.5 0.3 Other 14.0 0.8 32.5 1.8 173.7 9.5 227.9 12.7 Total portfolio $1,833.5 100.0% $1,786.4 100.0% The single largest commercial aircraft financing customer accounted for $253.2 million (13.8% of total Company portfolio) and $120.9 million (6.8% of total Company portfolio) at December 31, 1993 and 1992. The five largest commercial aircraft financing customers accounted for $718.5 million (39.2% of total Company portfolio) and $445.1 million (24.9% of total Company portfolio) at December 31, 1993 and 1992. There were no significant concentrations by customer within the commercial equipment leasing and non-core businesses portfolios. 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. 54 Information about the Company's operations in its different financial reporting segments for the past three years is as follows: (Dollars in millions) 1993 1992 1991 Operating income: Commercial aircraft financing $ 107.4 $ 107.7 $ 125.6 Commercial equipment leasing 64.0 79.1 117.5 Non-core businesses 24.4 56.1 94.3 Corporate 2.7 11.8 4.9 $ 198.5 $ 254.7 $ 342.3 Income (loss) from continuing operations before income taxes and cumulative effect of accounting change: Commercial aircraft financing $ 26.3 $ 28.3 $ 50.7 Commercial equipment leasing 30.8 31.1 42.0 Non-core businesses (10.7) (11.4) (25.6) Corporate (5.6) - (9.9) $ 40.8 $ 48.0 $ 57.2 Identifiable assets at December 31: Commercial aircraft $ 1,369.0 $ 1,085.2 $ 1,106.7 financing Commercial equipment leasing 420.2 590.5 747.2 Non-core businesses 247.6 301.2 694.3 Corporate 26.4 22.1 34.1 $ 2,063.2 $ 1,999.0 $ 2,582.3 Depreciation expense - equipment under operating leases: Commercial aircraft financing $ 10.1 $ 5.9 $ 2.6 Commercial equipment leasing 28.2 31.8 39.4 Non-core businesses 0.7 11.1 18.0 $ 39.0 $ 48.8 $ 60.0 55 Equipment acquired for operating leases, at cost: Commercial aircraft financing $ 34.5 $ 53.5 $ 36.3 Commercial equipment leasing 22.9 18.2 30.3 Non-core businesses - 0.1 0.1 $ 57.4 $ 71.8 $ 66.7 The Company's operations are classified into two geographic segments, the United States and the United Kingdom. United Kingdom operations consist of MD Bank. Information about the Company's operations in its different geographic segments for the past three years is as follows: (Dollars in millions) 1993 1992 1991 Operating income: United States $ 194.1 $227.7 $305.7 United Kingdom 4.4 27.0 36.6 $ 198.5 $254.7 $342.3 Income (loss) from continuing operations before income taxes and cumulative effect of accounting change: United States $ 41.2 $ 41.0 $ 60.5 United Kingdom (0.4) 7.0 (3.3) $ 40.8 $ 48.0 $ 57.2 Identifiable assets at December 31: United States $ 2,033.7 $ 1,950.0 $ 2,347.8 United Kingdom 29.5 49.0 234.5 $ 2,063.2 $ 1,999.0 $ 2,582.3 Operating income from financing of assets located outside the United States by the Company's United States geographic segment totaled $20.9 million, $21.6 million and $18.1 million in 1993, 1992 and 1991, respectively. 56 McDonnell Douglas Finance Corporation and Subsidiaries Schedule II - Amounts Receivable From Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties Balance at (Dollars in End of millions) Deductions Year ------------------- ----------------- Balance at Amounts Beginning of Amounts Written Non Year Additions Collected Off Current Current 1993: Irish $ 22.3 $ - $ 22.3 $ - $ - $ - 1992: Irish $ 6.3 $ 22.3 $ 6.3 $ - $ 22.3 $ - 1991: Irish $ - $ 6.3 $ - $ - $ 6.3 $ - 57 McDonnell Douglas Finance Corporation and Subsidiaries Schedule VIII - Valuation and Qualifying Accounts (Dollars in millions) Balance Charged Allowance for at to Balance Losses on Beginning Costs at end Financing of and Other Deductions of Receivables Year Expenses Year 1993 $ 37.4 $ 8.6 $ - $ (10.4) $ 35.6 1992 $ 46.7 $ 19.1 $ (1.0) $ (27.4) $ 37.4 1991 $ 61.6 $ 47.2 $ (5.4) $ (56.7) $ 46.7 58 The 1991 amount includes allowances that were reclassified in conjunction with the sale of substantially all of the assets of MDAL and BCG. Write-offs net of recoveries. 59 McDonnell Douglas Finance Corporation and Subsidiaries Schedule IX - Short-Term Borrowings (Dollars in millions) Weighted Average Weighted Average Maximum Interest Amount Amount Average Balance Rate Outstanding Outstanding Interest Category of at End of at End During the During the Rate Aggregate Period of Period Period Period During the Short-term Period Borrowings Year ended December 31, 1993: MDC $ - - % $ 190.4 $ 23.0 4.33% MDFS - - 27.5 6.0 4.96 Banks - U.S. 202.6 4.35 203.0 72.8 4.66 Banks - U.K. - - 15.9 11.3 13.13 Year ended December 31, 1992: MDFS $9.5 5.94% $ 16.1 $ 6.4 5.35% Banks - U.S. 108.0 6.00 108.0 24.5 3.94 Banks - U.K. 16.0 12.44 124.1 87.3 14.68 Year ended December 31, 1991: Commercial $ - -% $ 44.0 $ 2.1 9.20% paper MDC - - 4.6 0.5 8.85 MDFS 4.4 5.83 22.9 1.0 8.02 Banks - U.S. - - 300.0 140.2 7.10 Banks - U.K. 158.0 12.25 289.3 197.2 12.34 60 Commercial paper was issued from time to time at various maturities and short-term notes payable to MDC are issued for 30 days. Computed by dividing the total of daily principal balances by the number of days in the year. Computed by dividing the actual interest expense by average short-term debt outstanding. The effective interest rate on short-term borrowings including the effect of fees was 5.97% in 1993, 12.38% in 1992 and 10.28% in 1991. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page Number in Form 10-K (a) 1. Financial Statements Report of Independent Auditors 33 Consolidated Balance Sheet at December 31, 1993 and 1992 34 Consolidated Statement of Income and Income Retained for Growth for the Years Ended December 31, 1993, 1992 and 1991 36 Consolidated Statement of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 38 Notes to Consolidated Financial Statements 40-55 2. Financial Statement Schedules Schedule II - Amounts Receivable From Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties 56 Schedule VIII - Valuation and Qualifying Accounts 58 Schedule IX - Short-Term Borrowings 60 Schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission (the "SEC"), except Schedules II, VIII and IX which are 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 61 3.1 Restated Certificate of Incorporation of the Company dated June 29, 1989. 3.2 By-Laws of the Company, as amended to date. 4.4 Form of Indenture, dated as of April 1, 1983, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(a) to Amendment No. 1 to the Form S-3 Registration Statement of the Company effective April 22, 1983. 4.5 Form of 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 Form S-3 Registration Statement of the Company, as filed with the SEC on June 24, 1988. 4.6 Form of Indenture, dated as of April 15, 1987, incorporated herein by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company as filed with the SEC on April 24, 1987. 4.7 Form of Series I Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Form S-3 Registration Statement of the Company effective April 22, 1983. 4.8 Form of Series II Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Form 8-K of the Company dated August 22, 1983. 4.9 Form of Series III Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Form S-3 Registration Statement of the Company effective June 17, 1985. 4.10 Form of Series IV Medium Term Note, incorporated herein by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company effective June 17, 1985. 4.11 Form of Series V Medium Term Note, incorporated herein by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company , as filed with the SEC on April 24, 1987. 4.12 Form of Series VI Medium Term Note, incorporated herein by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company, as filed with the SEC on April 24, 1987. 4.13 Form of Series VII Medium Term Note, incorporated herein by reference to Exhibit 4 to the Form S-3 Registration Statement of the Company, as filed with the SEC on April 24, 1987. 4.14 Form of Series VIII Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Form S-3 Registration Statement of the Company, as filed with the SEC on June 24, 1988. 4.15 Form of Series VIII Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Form 62 S-3 Registration Statement of the Company, as filed with the SEC on June 24, 1988. 4.16 Form of Series IX Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Form S-3 Registration Statement of the Company, as filed with the SEC on October 4, 1989. 4.17 Form of Series IX Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Form S-3 Registration Statement of the Company, as filed with the SEC on October 4, 1989. 4.18 Form of General Term Note(R), incorporated herein by reference to Exhibit 4(c) to Form 8-K of the Company dated May 26, 1993. 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 since 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 among MDC, the Company and MDFS dated as of April 12, 1993. 10.2 Operating Agreement by and between the Company and MDFS effective as of February 8, 1989, incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 1989. 10.3 By-Laws of MDC as amended January 29, 1993, incorporated by reference from MDC's Exhibit 3.2 to its Form 8-K Report filed February 1, 1993 (file No. 1-3685). 10.4 Supplemental Guaranty Agreement by and between the Company and MDC, dated as of December 30, 1993. 10.5 Supplemental Guaranty Agreement by and between the Company and MDC, dated as of December 30, 1993. 12.1 Statement regarding computation of ratio of earnings to fixed charges. 23.1 Consent of Ernst & Young. (b) Reports on Form 8-K On February 3, 1994, the Company filed a current report on Form 8-K, which included the Company's Consolidated Balance Sheet at December 31, 1993 and 1992 and Consolidated Statement of Income and Income Retained for Growth for each of the years ended December 31, 1993, 1992 and 1991. 63 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. McDonnell Douglas Finance Corporation By /s/ Douglas E. Scudamore March 30, 1994 Vice President and Controller 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. Signature Title Date /s/ Herbert J. Lanese Chairman March 30, 1994 /s/ George M. Rosen President and Director March 30, 1994 (Principal Executive Officer) /s/ Robert W. Owsley Sr. Vice President March 30, 1994 (Principal & Treasurer Financial Officer) /s/ Douglas E. Scudamore Vice President March 30, 1994 (Principal & Controller Accounting Officer) F. Mark Kuhlmann Director /s/ Thomas J. Lawlor, Jr. Director March 30, 1994 John F. McDonnell Director EX-3 2 EXHIBIT 3 1 Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION of McDONNELL DOUGLAS FINANCE CORPORATION McDonnell Douglas Finance Corporation, a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is McDonnell Douglas Finance Corpor- ation. McDonnell Douglas Finance Corporation (the "Corporation") was origin- ally incorporated under the same name, and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on April 1, 1968. A Certificate of Amendment was filed with the Secretary of State of the State of Delaware on July 6, 1971 and a Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on May 10, 1989. 2. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation, as amended, of the Corporation. 3. The text of the Restated Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: FIRST: The name of the Corporation is McDonnell Douglas Finance Corporation. SECOND: Registered Office and Agent. The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The name of the registered agent at that address is the Corporation Trust Company. THIRD: Purpose. The purpose for which the Corporation is organized is the transaction of any and all lawful activity for which corporations may be organized under the General Corporation Law of Delaware, as it may be amended from time to time. FOURTH: Authorized Capital. A. The total number of shares of all classes of stock which the Corporation shall have authority to issue is Two Hundred Thousand (200,000), consisting of: (1) One Hundred Thousand (100,000) shares of Common Stock, $100.00 par value (the "Common Stock"); and (2) One Hundred Thousand (100,000) shares of Preferred Stock, no par value (the "Preferred Stock"). 2 The initial series of Preferred Stock, designated the Series A Preferred Stock, shall have the following designation, rights, preferences, privileges and restrictions: 1. Designations. The initial series of Preferred Stock shall be designated "Series A Preferred Stock." 2. Number of Shares. The number of shares constituting the Series A Preferred Stock shall be 10,000 shares. 3. Dividend Provisions. The holders of the Series A Preferred Stock shall be entitled to 7.00% cumulative dividends payable semi-annually on May 1 and November 1 in each year commencing on November 1, 1989. No dividends shall be paid on the Common Stock unless and until all accrued dividends have been paid on the Series A Preferred Stock. 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock or other classes of Preferred Stock by reason of their ownership thereof, an amount per share equal to the sum of $5,000.00 for each outstanding share of Series A Preferred Stock plus accrued and unpaid dividends. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment of the full preferential amounts to such holders, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the amount of such stock owned by each such holder. (b) After the distribution described in subsection (a) above has been paid, the holders of Common Stock shall be entitled to receive the remaining assets of the Corporation available for distribution to stock- holders. 5. Merger, Consolidation. (a) Effect on Shares. At any time, in the event of any consolidation or merger of the Corporation with or into any other corpor- ation or other entity or person, or any other corporate reorganization not approved by the holders of at least two-thirds of the Series A Preferred Stock, considered separately as a class, in which the Corporation shall not be the continuing or surviving entity of such consolidation, merger or reorganization, the holders of the Series A Preferred Stock who did not vote to approve such consolidation, merger or reorganization shall be entitled to receive for each share of such stock, in cash or in securities received from the acquiring corporation, or in a combination thereof, at the closing of any such transaction, an amount per share equal to the sum of $5,000 for each outstanding share of Series A Preferred Stock plus accrued and unpaid dividends. (b) Notice. The Corporation shall give each holder of record of Series A Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders' meeting called to 3 approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 5, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner then ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of two-thirds of the shares of Series A Preferred Stock then outstanding. (c) Cumulative Effect. The provisions of this Section 5 are in addition to the protective provisions of Section 7 hereof. 6. Voting Rights. The holders of the Series A Preferred Stock shall have no right to vote on any matters except in the event of three (3) consecutive semi-annual dividend arrearages. In such event, the holders of the Series A Preferred Stock, voting as a class, shall be entitled to elect two additional members to the Board of Directors of the Corporation who shall remain as Directors until all such arrearages are paid. Such voting rights shall continue until all dividend arrearages on the Series A Preferred Stock have been paid in full. 7. Protective Provisions. So long as shares of Series A Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least two-thirds of the then outstanding shares of the Series A Preferred Stock: (a) alter or change the rights, preferences or privileges of the shares of the Series A Preferred Stock so as to affect adversely the shares; or (b) reduce the number of authorized shares of the Preferred Stock below the number of shares then outstanding or increase the number of shares of the Series A Preferred Stock; or (c) create any new class or series of stock (i) having a prefer- ence over, or being on a parity with, the Series A Preferred Stock with respect to dividends or upon liquidation, or (ii) having rights similar to any of the rights of the Series A Preferred Stock under this Section 7 except that the Corporation may authorize up to 100,000 shares of Preferred Stock or other stock ranking on a parity with the Series A Preferred Stock without the consent of the holders of the Series A Preferred Stock. Notwithstanding the foregoing the Corporation shall not issue (1) any stock ranking on a parity with the Series A Preferred Stock, (2) any authorized but unissued Preferred Stock, or (3) any obligations or security convertible into or evidencing a right to purchase the Preferred Stock or stock ranking on a parity with such Preferred Stock unless (a) holders of more than two- thirds of the outstanding shares of the Series A Preferred Stock, voting separately as a class, shall consent to such issuance or (b) unless the Corporation's consolidated net income for a period of each of two of the latest three fiscal years preceding such issue and a total of four of the 4 latest six quarterly reporting periods preceding such issue shall equal at least 1.25 times the annual dividend requirement of all series of the Preferred Stock, and any stock ranking on a parity with the Preferred Stock, then outstanding. (d) effect any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization or any transaction or series of related trans- actions by the Corporation in which in excess of 50% of the Corporation's voting power is transferred; or (e) effect the sale of all or substantially all of the assets of the Corporation; or (f) do any act or thing which would result in taxation of the holders of shares of any series of Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of theInternal Revenue Code as hereafter from time to time amended). 8. Optional Redemption of Series A Preferred Stock. (a) Annually, beginning on the first anniversary of the initial issuance of the Series A Preferred Stock, the Corporation may (at its option) redeem pro-rata at $5,000 per share, plus accrued dividends, a portion or all of the Series A Preferred Stock. If at any time there shall be accrued and unpaid dividends on the outstanding shares of Series A Preferred Stock, thereafter and until all dividends accrued on the then outstanding shares of Series A Preferred Stock shall have been paid or declared and set apart for payment, the Corporation shall not redeem any shares of the Series A Preferred Stock, or any stock ranking on a parity with the Series A Preferred Stock by operation of a sinking fund or other- wise, unless all then outstanding shares of Series A Preferred Stock are redeemed. All shares of Series A Preferred Stock, and any stock ranking on a parity with the Series A Preferred Stock are entitled to share ratably, in accordance with the respective amounts payable thereon, when the dividends thereon are not paid in full or in any distribution in liquidation which is less then the aggregate of amounts payable to all of the holders of the Series A Preferred Stock. (b) In the event of a merger or consolidation with another company in which the Corporation is not the surviving corporation, or sale of all or substantially all of the assets, and if the merger or consolidation or sale of all or substantially all of the assets is not approved by the holders of at least two-thirds of the Series A Preferred Stock, considered separately as a class, the Corporation shall have the obligation to redeem the shares of the Series A Preferred Stock not approving the merger or consolidation or sale of all or substantially all of the assets at a price per share equal to the sum of $5,000 plus all accrued and unpaid dividends. B. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in one or more additional series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, 5 and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. FIFTH: Amendment of Bylaws. The Board of Directors shall have the power to make, alter, amend or repeal the Bylaws of the Corporation, except as otherwise provided in a Bylaw adopted by the stockholders then entitled to vote, but Bylaws so made, altered or amended by the Board of Directors may be altered, amended or repealed by the stockholders then entitled to vote. SIXTH: Board of Directors. The election of directors need not be by written ballot unless the Bylaws shall so provide. SEVENTH: Liability of Directors. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from whichthe director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to author- ize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing provisions of this Article SEVENTH by the stockholders of the Corporation shall not result in any liability for a director with respect to any action or omission occurring prior to such repeal or modification. IN WITNESS WHEREOF, the Corporation has caused this Restated Certif- icate of Incorporation to be signed by James T. McMillan, its Chairman and attested by H. David Heumann, its Secretary, as of the 29th day of June, 1989. ATTEST: BY: s/James T. McMillan H. David Heumann ITS: Chairman Secretary [Corporate Seal appears here] EX-3 3 EXHIBIT 3 1 EXHIBIT 3.2 0358L-023L 4-28-82 (Revised 5/20/86) (Revised 7/22/93) BY-LAWS OF MCDONNELL DOUGLAS FINANCE CORPORATION ARTICLE I. Offices. SECTION 1. Registered Office. The Corporation shall have and maintain a registered office with a registered agent in the State of Delaware. The Corporation's principal place of business shall be in St. Louis County, Missouri. SECTION 2. Other Offices. The Corporation may have other offices, either within or outside of the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. ARTICLE II. Seal. The Corporation shall have a corporate seal which shall be in circular form and shall have inscribed thereon the name of the Corporation and the words "Corporate Seal Delaware", and may use the same by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise placed upon any paper or document. ARTICLE III. Meeting of Stockholders. SECTION 1. Place of Meeting. All meetings of the stockholders shall be held at the principal offices of this Corporation in St. Louis County, Missouri, or at such other place either within or without the State of Missouri as the Board of Directors may from time to time determine. SECTION 2. Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held on the fourth Wednesday in April of each year (or if said day be a legal holiday, then on the next succeeding day not a legal holiday), at such time as the Board of Directors may determine, for the purpose of electing directors and for the transaction of other business within the powers of the Corporation, provided such business was listed in the advance notice of the meeting. SECTION 3. Special Meetings. Special meetings of stockholders, for any purposes other than those regulated by statute, may be called by the Chairman 2 of the Board of Directors or the President, and shall be called by the President or the Secretary at the direction of any three members of the Board of Directors or upon the written request of the holders of not less than twenty-five per centum (25%) of all the outstanding stock entitled to vote thereat. Such request shall state the purpose or purposes of the meeting and shall be delivered to the President or Secretary. SECTION 4. Notices. Notice of any meeting of stockholders shall be given to each stockholder of record entitled to vote thereat, in the manner provided in Article XXVI of these By-laws, not less than ten or more than fifty days before the date of the meeting. Notice of each special meeting of stockholders, stating the place, day and hour thereof and, unless otherwise required by law, briefly the business proposed to be transacted thereat, shall be given to each stockholder of record entitled to vote thereat, in the manner provided in Article XXVI of these By-laws, not less than ten or more than fifty days before the date of the meeting. SECTION 5. Quorum. Except as otherwise required by law, by the Certificate of Incorporation of the Corporation or by these By-laws, the presence, in person or by proxy, of stockholders holding a majority of the stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. SECTION 6. Proxies. Any stockholder entitled to vote at any meeting of stockholders may be represented and vote thereat by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to such meeting, unless such proxy shall, on its face, provide a longer period for which it is to remain in force. SECTION 7. Voting. Each stockholder entitled to vote shall be entitled to one vote for each share of stock entitled to vote held by him. Upon the demand of any stockholder entitled to vote thereon, the vote upon any question before the meeting shall be by ballot. Except as otherwise required by law, by the Certificate of Incorporation of the Corporation or by these By-laws, all elections shall be had and all questions decided by plurality vote. SECTION 8. Voting Lists. The Secretary shall have charge of the stock ledger and shall prepare and make, at least ten days before each election of directors, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of and the number of shares registered in the name of each such stockholder, which shall be open to the examination of any stockholder during ordinary business hours, for a period of at least ten days prior to the election either at a place within the city, town or village where the election is to be held and which place shall be specified in the notice of the meeting or, if not so specified, at the place where said meeting is to be held, and the list shall be produced and 3 kept at the time and place of election during the whole time thereof, and subject to the inspection of any stockholder who may be present. SECTION 9. Action Without Meeting. Any action which, under any provision of the Delaware Corporation Law, may be taken at a meeting of the shareholders, except approval of any agreement for merger or consolidation of the Corporation with other corporations, may be taken without a meeting if authorized by a writing signed by all of the persons who would be entitled to vote upon such action at a meeting, and filed with the Secretary of the Corporation. ARTICLE IV. Directors. SECTION 1. Powers. The Board of Directors shall exercise all of the powers of the Corporation except such as are by law, or by the Certificate of Incorporation of the Corporation, or by these By-laws conferred upon or reserved to the stockholders of any class or classes. SECTION 2. Number. The Board of Directors shall consist of seven (7) persons. However, the Board of Directors is hereby authorized by the vote of a majority of the Board of Directors to increase or decrease the number of directors, at any time, or from time to time. No such decrease shall, however, reduce the Board to a number less than the minimum number of directors required by the laws of the State of Delaware nor shall any such decrease take effect (except as respects vacancies then existing and directors who may thereafter resign) until the next annual meeting of stockholders, or the meeting in lieu thereof at which new directors are elected for the ensuing year. SECTION 3. Term of Office. Except as otherwise provided in the Certificate of Incorporation of the Corporation, each director shall be elected to serve until the next annual meeting of stockholders and until his successor is elected and qualified. In case one or more vacancies shall occur in the Board of Directors by reason of resignations effective at a future date, a majority of the directors then in office, including those who have so resigned, may elect directors to fill such vacancies, such election to take effect when such resignations become effective, and each director so elected shall hold office as herein provided in the filling of other vacancies. In case of newly created directorships resulting from an increase in the authorized number of directors or in case one or more vacancies shall occur in the Board of Directors, except in so far as otherwise provided in the case of a vacancy or vacancies occurring by reason of removal by stockholders or by reason of resignations to take effect at a future date, the remaining directors, although less than a quorum may, by a majority vote, elect directors to fill such vacancies or newly created directorships, to serve until the next annual meeting of stockholders and until their successors are duly elected and qualified, unless sooner displaced. SECTION 4. Removal. At any special meeting of the stockholders, duly called as provided in these By-laws, any director or directors may by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote for the election of directors be removed from office, either with or without cause, and his successor or their successors may be elected at such meeting or the remaining directors may, to the extent 4 vacancies are not filled by such election, fill any vacancy or vacancies created by such removal. SECTION 5. Meetings. The newly elected Board of Directors may meet immediately after the annual meeting of stockholders at the same place at which such meeting is held or at such place and time as shall be fixed by the vote of the holders of a majority of the shares of stock entitled to vote at the annual meeting, and no notice of such meeting shall be necessary to the newly elected directors in order to legally constitute the meeting, provided a quorum shall be present; or it may meet without notice at such place and time as shall be fixed by the consent in writing of all the directors. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, or the President, and shall be called by the President or Secretary upon the written request of any one of the directors. Notice of special meetings shall be given, personally or in the manner provided in Article XXVI of these By-laws, to each director at lease one day prior to such meeting. Such notice shall specify the time and place of meeting. SECTION 6. Place of Meetings. The Board of Directors may hold its meetings either within or outside the State of Delaware at such place or places as it may from time to time determine, or as shall be stated in the call of the meeting or in the respective waivers of notice thereof. SECTION 7. Quorum and Powers of a Majority. At all meetings of the Board of Directors, a majority of the directors then in office shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as otherwise specifically required by law, or by the Certificate of Incorporation of the Corporation, or by these By-laws; provided, however, that a majority of the directors present at any meeting, although less than a quorum, may adjourn the meeting from time to time without notice other than announcement at the meeting. SECTION 8. Compensation. No stated salary shall be paid directors, as such, for their services, but by resolution of the Board of Directors a fixed sum and expenses of attendance, if any, may be allowed for attendance at each meeting of the Board of Directors and for attendance at each meeting of a committee of the Board of Directors; provided, however, that nothing herein contained shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 9. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee consent thereto in writing and the writing is filed with the minutes of the proceedings of the Board or committee. ARTICLE V. Executive Committee. SECTION 1. Powers. The Board of Directors may designate, by resolution passed by a majority of the whole board, two or more directors to constitute an Executive Committee to serve during the pleasure of the Board of Directors. 5 The Board of Directors by resolution so passed is authorized to remove at any time, without notice, and with or without cause, any member of the Executive Committee and designate another member in his place and stead. In all cases in which specified directions shall not have been given by the Board of Directors, the Executive Committee shall have and may exercise all the powers of the Board of Directors (except, in so far as not specifically granted herein, the power to designate or remove a member of the Executive Committee or other committee and the power to remove an officer appointed by the Board of Directors), so far as may be permitted by law, in the management of the business and affairs of the Corporation whenever the Board of Directors is not in session and such Committee shall have and may exercise the power to authorize the seal of the Corporation to be affixed to all papers which may require it. The fact that the Executive Committee has acted shall be conclusive evidence that the Board of Directors was not in session at the time of such action and had not theretofore given specific directions with respect to the matters concerning which the Executive Committee took action, unless actual notice to the contrary shall have been given. The Board of Directors may delegate to such Committee any or all of the powers of the Board of Directors in the management of the business and affairs of the Corporation and may from time to time extend, modify, curtail or restrict the powers so delegated. During the temporary absence of a member or the Executive Committee, the remaining member of members may appoint a member of the Board of Directors to act in his place, but vacancies in the membership of the Executive Committee shall be filled by the Board of Directors at a regular meeting or at a special meeting called for that purpose. SECTION 2. Meetings. The Executive Committee may meet at stated times, or on notice, given personally or in the manner provided in Article XXVI of these By-laws, by any member thereof to all members. During the intervals between meetings of the Board of Directors, the Executive committee shall advise and aid the officers of the Corporation in all matters concerning the interests and management of its business. SECTION 3. Quorum and Powers of a Majority. At all meetings of the Executive Committee, a majority of the members shall be necessary and sufficient to constitute a quorum for the transaction of business, and at any meeting at which a quorum shall be present, all action of the Executive Committee shall be taken by a majority of the members present. SECTION 4. Minutes. The Executive Committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when requested. ARTICLE VI. Officers. SECTION 1. Election. The officers of the Corporation shall be a Chairman of the Board of Directors, a President, a Treasurer, a Controller and a Secretary and such Vice Presidents, Assistant Vice Presidents, Assistant Treasurers and Assistant Secretaries as the Board of Directors may deem proper. All of such officers shall be elected by the Board of Directors. None of the officers, except the Chairman of the Board of Directors and the President, need to be directors. The officers shall be elected at the first 6 meeting of the Board of Directors after each annual meeting of the stockholders. SECTION 2. Hold Two Offices. Any two offices may be held by the same person. More than two offices other than the offices of President and Secretary may be held by the same person. SECTION 3. Terms of Office. The officers hereinbefore mentioned shall hold office for one year and until their successors are elected and qualified, but any officer may be removed from office, either with or without cause, at any time by the affirmative vote of a majority of the Board of Directors then in office. Any vacancy occurring among the officers shall be filled by the Board of Directors, but the person so elected to fill the vacancy shall hold office only until the first meeting of the Board of Directors after the next annual meeting of stockholders and until his successor is elected and qualified. SECTION 4. Other Officers and Agents. The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 5. Salaries. The salaries of all officers of the Corporation shall be fixed by the Board of Directors. SECTION 6. Voting Shares in Other Corporations. The Corporation may vote any and all shares of stock or other certificates of interest held by it in any other corporation or corporations by such officer, agent or proxy as the Board of Directors may appoint, or, in default of any such appointment, by its President or by a Vice President. ARTICLE VII. Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors and of the Stockholders at which he is present. He shall be an ex officio member of all committees. He shall act in an advisory capacity with respect to matters of policy and other matters of importance pertaining to the affairs of the Corporation, and he shall also perform such other duties as may be assigned to him by the Board. ARTICLE VIII. The President and Chief Executive Officer. The President shall be the chief executive officer of the Corporation; in the absence of the Chairman of the Board, the President or another officer designated by him shall preside at all meetings of the Board and Stockholders; he shall have charge of general and active management of the business of the Corporation, and shall see that all orders and resolutions of the Board and of the Executive Committee, if any, are carried into effect. He shall be an ex officio member of all committees and shall have general supervision and direction of all other officers of the Corporation except for the Chairman of the Board and shall see that their duties are properly performed and shall have the general powers and duties of supervision of the active management of the business usually vested in the President and Chief Executive Officer of a 7 corporation. He shall make annual reports showing the condition of the affairs of the corporation, and make such recommendations as he thinks proper, and submit the same to the Board of Directors, and he shall from time to time bring before the Directors, and the Executive Committee, if any, such information as may be required, pertaining to the business and property of the Corporation. ARTICLE IX. Vice Presidents. Each Vice President shall perform such duties and shall have such powers and shall generally assist the Chairman of the Board of Directors and the President, and may have such descriptive titles as may be appropriate such as "Executive Vice President", as may be prescribed and assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board of Directors or the President; and the Board of Directors, the Executive Committee, and the Chairman of the Board or the President may from time to time designate any Vice Presidents who shall, in the absence or the disability of the President, perform the duties and exercise the powers of the President. ARTICLE X. The Treasurer. SECTION 1. Custody of Funds. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. He shall deposit all moneys and other valuables in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors. SECTION 2. Disbursements. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, the Chairman of the Board of Directors, or the President, taking proper vouchers for such disbursements. He shall render to the Chairman of the Board of Directors, the President and the Board of Directors at the regular meeting of the Board of Directors, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. SECTION 3. Bond. He shall give the Corporation a bond, if required by the Board of Directors, in a sum and with one or more sureties satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, moneys and other property of whatever kind in his possession or under his control belong to the Corporation. ARTICLE XI. The Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and shall record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give or cause to be given notice of all meetings of the stockholders and of the Board of 8 Directors, and he shall keep the seal of the Corporation in safe custody. He shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board of Directors, or by the President. ARTICLE XII. Controller. The Controller shall act as the principal accounting officer in charge of the general accounting books and records of the Corporation. The controller shall be responsible for the preparation of the Corporation's financial statements and reports. The Controller shall be responsible for approving for payment of all accounts payable when authorized or approved by the proper person. The Controller shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board of Directors, or by the President. ARTICLE XIII. Assistant Vice Presidents. Each Assistant Vice President shall perform such duties and shall have such powers as may be prescribed and assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board of Directors, or the President. ARTICLE XIV. Assistant Treasurers and Assistant Secretaries. The Assistant Treasurers and Assistant Secretaries shall generally assist the Treasurer or Secretary, respectively, and perform such duties as may be prescribed hereunder, or by the Board of Directors, or by the Chairman of the Board of Directors, or by the President. In the absence of the Treasurer, his duties may be performed by an Assistant Treasurer, and taking of any action by any Assistant Treasurer in place of the Treasurer shall be conclusive evidence of the absence of the Treasurer. Any Assistant Treasurer may be required to give bond to the Corporation in the same manner that the Treasurer is required to by Section 3 of Article X. In the absence of the Secretary, his duties may be performed by any Assistant Secretary, and the taking of any action by any Assistant Secretary in place of the Secretary shall be conclusive evidence of the absence of the Secretary. ARTICLE XV. Duties of Officers May Be Delegated. For any reason that the Board of Directors or the President or any Executive Vice President may in their sole discretion deem sufficient, the Board of Directors or the President or any Executive Vice President may delegate in writing, with or without limitation, the powers or duties or 9 authority of any office (except that an Executive Vice President may not delegate the powers or duties or authority reserved to the office of the President) to any Director or to any officer of the Corporation or to any other person. Such delegated powers or duties or authority shall not be redelegated by the delegate. ARTICLE XVI. Certificates of Stock. The certificates of stock of the Corporation shall be numbered and shall be entered in the books of the Corporation as they are issued. They shall exhibit the holder's name and certify the number of shares owned by him and shall be signed by, or in the name of the Corporation by, the Chairman of the Board of Directors, the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation and sealed with its seal, or a facsimile thereof; provided, however, that where any such certificate is signed (1) by a transfer agent or an assistant transfer agent or (2) by a transfer clerk acting on behalf of the Corporation and by a registrar, the signatures of any such Chairman of the Board of Directors, President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, may be facsimiles, engraved or printed. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the Corporation. ARTICLE XVII. Transfer of Stock. The shares of stock shall be transferable on the books of the Corporation by the person named in the certificate or by power of attorney, lawfully constituted in writing, upon surrender of the certificate therefor. The Board of Directors shall have power and authority to make all such rules and regulations as it shall deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. The Board of Directors may appoint and remove transfer agents and registrars, and may require all stock certificates to bear the signature of any such transfer agent or of any such registrar. ARTICLE XVIII. Closing of Transfer Books. The Board of Directors shall have power to close the stock transfer books of the Corporation for a period not exceeding fifty days preceding the date of any meeting of stockholders or the date for the payment of any dividend or the 10 date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect or for a period of not exceeding fifty days in connection with obtaining the consent of stockholders for any purpose; provided, however, that in lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not exceeding fifty days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining such consent, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after such record date fixed as aforesaid; and in the event that the Board of Directors shall not either have closed the transfer books of the Corporation or fixed a date for the determination of stockholders entitled to vote, as aforesaid, no share of stock of the Corporation shall be voted on at any election for directors which has been transferred on the books of the Corporation within twenty days next preceding such election of directors. ARTICLE XIX. Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other period, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Delaware. ARTICLE XX. Lost Certificates. Any person claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact and verify the same in such manner as the Board of Directors may require, and shall, if the Board of Directors so requires, give the Corporation, its transfer agents, registrars and other agents a bond of indemnity in form and with one or more sureties satisfactory to the Board of Directors, and in such amount as the Board may determine sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of such certificate or the issuance of a new certificate, before a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to have been lost or destroyed. ARTICLE XXI. Books and Records. 11 SECTION 1. Place of Keeping Books and Records. In so far as permitted by law, the stock ledgers, books and other records of the Corporation may, at the option of the officer or officers in charge of the same, be kept at any office of the corporation within or without the State of Delaware, unless otherwise directed by the Board of Directors or by any committee thereunto authorized. SECTION 2. Inspection of Books. The Board of Directors shall determine from time to time whether, and if allowed, when and under what conditions and regulations the accounts and books of the Corporation (except such as may by statute be specifically open to inspection), or any of them, shall be open to the inspection of any stockholder and the rights of any stockholder in this respect are and shall be restricted and limited accordingly. ARTICLE XXII. Bank Accounts, Checks, Loans, Etc. SECTION 1. No checks, drafts, bills of exchange, promissory notes, commercial paper, or demands for money of the Corporation shall be issued until signed by such officer or officers or agent or agents of the Corporation as the Board of Directors may from time to time designate for that purpose. ARTICLE XXIII. Indemnification of Directors and Officers. (a) The Corporation may indemnify every person, his heirs, executors and administrators against any and all judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by him in connection with any claim, action, suit or proceeding (whether actual or threatened, brought by or in the right of the Corporation or otherwise, civil, criminal, administrative or investigative, including appeals), to which he may be or is made a party by reason of his being or having been a director or officer of the Corporation, or at its request of any other corporation in which it owns shares of capital stock or of which it is a creditor. (b) There shall be no indemnification however (i) as to amounts paid to the Corporation or such other corporation in settlement or other disposition of any threatened or pending action by or in the right of the Corporation or such other Corporation, or (ii) in the case of any criminal action or proceeding, in relation to matters as to which such person shall be adjudged to have had reasonable cause to believe that his conduct was unlawful. (c) Any such person shall be entitled to indemnification as of right (i) if he has been wholly successful, on the merits or otherwise, with respect to any claim, action, suit or proceeding, or (ii) except as hereinabove provided, in respect of matters as to which a court or independent legal counsel shall have determined that he acted in good faith for a purpose which he reasonably believed to be in the best interests of the Corporation or such other corporation and, in addition, in the case of any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. Such court or independent counsel shall have the power to determine that such director or officer is entitled to indemnification as to some matters even though he is not so entitled as to others. The termination of any claim, action, suit, or proceeding by judgment, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not in itself create a presumption that any such director or officer did not act in good faith for a purpose 12 which he reasonably believed to be in the best interests of the Corporation and, in the case of any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. (d) Amounts paid in indemnification shall include, but shall not be limited to, counsel and other fees and disbursements and judgments, fines or penalties against, and amounts paid in settlement by, such director or officer. The Corporation may advance expenses to, or where appropriate may itself at its expense undertake the defense of, any such director or officer provided that he shall have undertaken to repay or to reimburse such expenses if it should be ultimately determined that he is not entitled to indemnification under this article. (e) Payments of indemnification made pursuant to this article shall be reported to the shareholders in the next proxy statement or otherwise, except that no such payments need be reported if such director or officer has been wholly successful on the merits or otherwise. (f) The provisions of this article shall be applicable to claims, actions, suits or proceedings made or commenced after the adoption hereof by the Board of Directors, whether arising from acts or omissions to act occurring before or after the adoption hereof. (g) The indemnification provided in this article shall not be exclusive of any rights to which any such director or officer may otherwise be entitled by contract or as a matter of law. (h) If any portion of this article or any award of indemnification made hereunder shall for any reason be determined to be invalid, the remaining provisions hereof shall not otherwise be affected thereby but shall remain in full force and effect. ARTICLE XXIV. Fiscal Year. The fiscal year of the Corporation shall end on the last day of December in each year. ARTICLE XXV. Dividends. Subject to the provisions of the Certificate of Incorporation of the Corporation, dividends upon the capital stock of the Corporation, out of funds legally available for the payment of dividends, may be declared at the discretion of the Board of Directors at any regular or special meeting. ARTICLE XXVI. Notices. SECTION 1. How Given. Whenever any notice whatsoever is required to be given under the provisions of any law, or under the provisions of the certificate of incorporation of the Corporation of the By-laws, it shall not be construed to require personal notice, but such notice, except as otherwise 13 specifically provided by law or by these By-laws, may be given either (1) by depositing the same in a post office, letter box or mail chute, in a post-paid sealed wrapper addressed to the stockholder, officer or director, as the case may be, at such address as appears on the books of the Corporation, or (2) by telegraphing the same to such stockholder, officer or director, as the case may be, at such address, and the time of the mailing of such notice, or the delivery thereof to the sending office of the telegraph company, as the case may be, shall be deemed to be the time of delivery thereof. SECTION 2. Waiver of Notice. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the Corporation or these By-laws, a waiver thereof in writing, signed by the person or person entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. The presence, in person or by proxy, of any stockholder at a meeting of the stockholders shall constitute a waiver of notice of such meeting by such stockholder. The presence in person of a director at any meeting of the Board of Directors shall constitute a waiver of notice of such meeting by such director. ARTICLE XXVII. Amendments. These By-laws may be altered or repealed and by-laws may be made at any annual meeting of the stockholders, or at any special meeting thereof, if notice of the proposed alteration or repeal or by-law or by-laws to be made be contained in the notice of such special meeting, by the affirmative vote of the holders of a majority of the stock issued and outstanding and entitled to vote thereat, or by the affirmative vote of a majority of the Board of Directors, at any regular meeting of the Board of Directors or at any special meeting of the Board of Directors. EX-10 4 EXHIBIT 10 1 Exhibit 10.1 AMENDED AND RESTATED OPERATING AGREEMENT THIS AGREEMENT, dated as of January 15, 1975, by and between McDonnell Douglas Corporation, a Maryland corporation ("MDC"), and McDonnell Douglas Finance Corporation, a Delaware corporation ("MDFC"), as previously amended as of February 8, 1989, is hereby amended to read as follows: "This Amended and Restated Operating Agreement, dated as of April 12, 1993, by and among McDonnell Douglas Corporation, a Maryland corporation ("MDC"), McDonnell Douglas Financial Services Corporation, a Delaware corporation ("MDFS"), and McDonnell Douglas Finance Corporation, a Delaware corporation ("MDFC"); W I T N E S S E T H: Section 1. Aircraft Purchase and Loan Financing. MDC agrees to tender, or cause to be tendered, to MDFS, for purchase by MDFS or a subsidiary thereof, all (i) promissory notes, (ii) participations in promissory notes, (iii) installment sales contracts, (iv) conditional sales contracts, and (v) all other similar evidences of indebtedness or title retention agreements (other than leases), all of such financing to be tendered together with any related security agreements or other lien instruments, arising out of and taken by MDC in connection with the sale and delivery of a new or used MDC manufactured commercial aircraft. Such tender shall be made by MDC at the time the aircraft with respect to which the particular financing relates is delivered and any security interest therefor is perfected. The provisions of this paragraph shall not apply with respect to any predelivery financing undertaken by MDC. Notwithstanding the standard tender requirements set forth in the first sentence of this paragraph, MDC shall not be required to tender to MDFS any financing committed to and taken by MDC with the expressed intention of being sold to outside financial institutions, nor shall MDC be required to tender to MDFS any portion of the financing taken by it in any particular transaction where in the opinion of MDC such transaction involves unusual or exceptional circumstances, it being understood however that the parties may by separate agreement from time to time provide for MDC tenders which are additional to those provided for hereunder. MDFS agrees to purchase (or to cause one of its subsidiaries to purchase) all financing tendered by MDC pursuant to the provisions of this Section 1, provided that MDFS may refuse to purchase all or any portion of the financing tendered if any of the following shall exist: (1) MDFS shall not be able, or shall not deem it appropriate, to obtain funds or allocate its existing funds for the acquisition of such financing; (2) such financing shall not comply with the customary standards of MDFS as to terms and conditions or as to the creditworthiness of the obligor and/or any guarantor thereof; or (3) such purchase, when added to the amount of any existing note and lease receivables of the same obligor or guarantor held or committed to be taken by MDFS and its subsidiaries, shall exceed the amount of receivables from a single obligor which would be prudent, in MDFS's judgment, for MDFS and its subsidiaries to carry. MDFS shall make such advance determinations with respect to the foregoing as shall be agreed upon from time to time by the parties. 2 Purchases of tendered financing shall be without recourse to MDC, except that MDFS shall have the option (subject to the limitation of the next succeeding sentence) in its discretion to purchase (or to refuse to purchase as aforesaid) any financing tendered pursuant to the provisions hereof with partial or full recourse to MDC, the amount of such recourse to be determined by the extent to which there shall be a failure to meet the customary standards of MDFS. In the case of any financing with respect to which the amount of recourse requested by MDFS shall be unacceptable to MDC, MDC may in lieu of providing such recourse either carry the financing itself or request MDFS to find a third party willing to purchase the financing on terms acceptable to MDC. MDFS shall pay MDC a reasonable guarantee fee on any financing purchased by MDFS with partial or full recourse to MDC, it being understood that the purchase price of the financing shall be calculated to produce MDFS's (or its subsidiary's) required rate of return after payment of any such fee, and allowance for the reduced risk to MDFS (or such subsidiary). MDFS shall simultaneously with its purchase and acceptance of any financing pursuant to this Section pay to MDC a cash price calculated to achieve a reasonable rate of return on MDFS's (or its subsidiary's) investment in such financing, taking into account such factors as (i) projected borrowing costs, (ii) expenses, (iii) credit risk, and (iv) rates of return and debt to equity ratios of independent finance companies. The factors used in these calculations shall be reviewed periodically by MDFS and MDC in order to insure a reasonable reflection of current conditions. With respect to any transaction, MDFS may assign its rights and obligations under this Section to any wholly-owned subsidiary of MDFS and such subsidiary may in turn assign such rights and obligations to MDFS or any other subsidiary thereof. Section 2. Lease Transactions. Where it is determined that a lease of two years or more may be a feasible and desirable method for financing the purchase of new or used MDC aircraft by a customer, MDC shall request MDFS to make, or arrange for other potential lessors to make, a proposal to the customer. MDFS may, but shall not be obligated to, make a lease proposal. If MDFS makes a lease proposal itself, it will do so on such terms as it may reasonably require, and will be guided, where pertinent, by the standards relating to the purchase of financing as described in the last paragraph of Section 1 above. MDFS's proposal may be conditioned upon a guarantee by MDC of all or a portion of the obligations of the lessee and/or a guarantee of the value of the equipment upon termination of the lease. In the event the amount of any such guarantee requested by MDFS shall be unacceptable to MDC, MDC may in lieu of providing such guarantee either lease the aircraft itself or request MDFS to find a third party lessor willing to lease the aircraft on terms acceptable to both MDC and the proposed lessee. MDFS agrees to pay to MDC a reasonable fee for any lease guarantee issued by it to MDFS, provided that the lease payments are sufficient to meet MDFS's (or its subsidiary's) requirements after allowance therefor. With respect to any transaction, MDFS may assign its rights and obligations under this Section to any wholly-owned subsidiary of MDFS and such subsidiary may in turn assign such rights and obligations to MDFS or any other subsidiary thereof. Section 3. Remarketing. Except as otherwise specifically provided in this Section 3, MDFS and MDFC (and their subsidiaries) shall each have the option to sell to MDC any aircraft manufactured by MDC and owned by MDFS, MDFC or a subsidiary thereof which have been returned to or repossessed by MDFS, 3 MDFC or a subsidiary thereof under the terms of any lease, security agreement or lien instrument. The provisions of this Section 3 shall not apply in the case of: (i) aircraft leased by MDFS, MDFC or a subsidiary thereof under a partnership or similar arrangement with other lessors, and (ii) aircraft with respect to which third parties hold liens or other security interests unless it is determined by agreement between MDC and MDFS to be desirable for the provisions of this paragraph to apply. MDC agrees to purchase each aircraft tendered to it under the provisions of this Section 3 in an "as-is-where-is" condition without warranty of any kind other than a warranty of good and marketable title, promptly upon tender thereof by MDFS, MDFC or a subsidiary thereof, which tender shall not be made until such time as MDFS, MDFC or their subsidiary shall have the right of immediate possession. The purchase price of each aircraft which MDFS, MDFC or their subsidiary elects to tender to MDC shall be a cash amount equal to the fair market value of the aircraft as determined by mutual agreement of the parties in an "as-is- where-is" condition at the time of tender by MDFS, MDFC or a subsidiary reduced by a sales commission equal to ten percent of such fair market value price. If within a reasonable time after tender of the aircraft, the parties shall be unable to agree upon the fair market value of the aircraft, MDFS, MDFC or the subsidiary shall thereupon (or at any time thereafter while the aircraft remains unsold) have the right to submit the matter to a mutually satisfactory qualified aircraft appraiser for binding arbitration. In the event the parties are unable to agree on the selection of an appraiser, a qualified third party aircraft appraiser shall be appointed by the Chief Executive Officer of MDC or his designee and the decision of any such appraiser shall be binding upon the parties. The out-of-pocket costs of any arbitration as herein described shall be borne equally by the parties. Terms of payment of the purchase price determined as set forth above shall be agreed to by the parties. Nothing contained in this Section 3 shall be construed so as to satisfy in whole or in part any specific obligation MDC may have to MDFS or any subsidiary under the terms of any guarantee of credit or guarantee of aircraft value provided by MDC to MDFS or any subsidiary with respect to any particular transaction. With respect to any transaction, MDFS may assign its rights and obligations under this Section to any wholly-owned subsidiary of MDFS and such subsidiary may in turn assign such rights and obligations to MDFS or any other subsidiary thereof. Section 4. Federal Income Taxes. It is the intention of MDC to continue to file its Federal income tax returns on a consolidated basis with MDFS and its subsidiaries in accordance with the income tax regulations under Section 1502 of the Internal Revenue Code of 1986, as amended. With respect to each taxable year for which such practice remains in effect, MDC agrees to pay to MDFS an amount equal to the excess of (i) the amount of MDC consolidated Federal income taxes which would be due for such taxable year if such taxes were computed by excluding MDFS and its subsidiaries, over (ii) the amount of MDC consolidated Federal income taxes which would be due for such taxable year if such taxes were computed including MDFS and its subsidiaries. If for any such taxable year the amount of taxes computed in accordance with clause (ii) hereof shall exceed the amount of taxes computed under clause (i), MDFS shall pay MDC an amount equal to the excess of the clause (ii) amount over the 4 clause (i) amount. If subsequent to any payments made by MDC pursuant to this Section MDC shall incur Federal income tax losses which under applicable law could be carried back to the taxable year for which such payments were made, MDFS will nevertheless be under no obligation to repay to MDC any portion of such payments. Section 5. Miscellaneous. 5.1 This Agreement is not and does not constitute a direct or indirect guarantee by MDC of any obligation or debt of MDFS. 5.2 MDFS shall have the right in its discretion to assign, transfer or convey any financing purchased from MDC pursuant to the provisions of Section 1 hereof, unless the obligors on such financing shall have previously obtained the agreement of MDC not to sell such financing to an outside party. 5.3 This Agreement may be amended, waived or terminated at any time by written agreement of the parties, subject to outstanding indenture or other provisions relating to securities issued by any of the parties hereto; provided, however, no amendment or termination of this Agreement will be effective unless agreed to in writing by MDC, MDFS and MDFC." MCDONNELL DOUGLAS CORPORATION By: s/Herbert J. Lanese Its: Executive Vice President and Chief Financial Officer 5 MCDONNELL DOUGLAS FINANCIAL SERVICES CORPORATION By: s/George M. Rosen Its: President MCDONNELL DOUGLAS FINANCE CORPORATION By: s/George M. Rosen Its: President EX-10 5 EXHIBIT 10 1 EXHIBIT 10.4 SUPPLEMENTAL GUARANTY AGREEMENT THIS SUPPLEMENTAL GUARANTY AGREEMENT ("the "Guaranty"), dated as of December 30, 1993, is by and between McDonnell Douglas Corporation, a Maryland corporation (hereinafter called the "Guarantor"), and McDonnell Douglas Finance Corporation, a Delaware corporation (hereinafter called "MDFC"). W I T N E S S E T H : WHEREAS, the Guarantor has previously provided the guaranties listed on Exhibit A hereto, covering some of the lease or financing agreements between Continental Airlines, Inc. ("Continental") and MDFC; and WHEREAS, the parties deem it to be in their mutual best interest to supplement such existing guaranties in order to safeguard MDFC against a default affecting MDFC's entire Continental portfolio; NOW, THEREFORE, in consideration of the premises and for valuable consideration both parties hereto hereby agree as follows: 1. Upon the occurrence of a material default by Continental under any of the agreements between Continental (or its affiliates or trustees) and MDFC (or its affiliates and trustees) listed on Exhibit B hereto (the "Continental Agreements") under circumstances (such as a Continental bankruptcy) which lead MDFC to reasonably conclude that it has incurred or is likely to incur a loss on its Continental portfolio, MDFC shall promptly estimate and inform Guarantor of the net fair market value, taking into account the guaranties listed in Exhibit A, of MDFC's interest in the Continental Agreements. Such estimate shall be accompanied by a copy of MDFC's calculations and other pertinent information demonstrating to MDC's reasonable satisfaction the basis utilized by MDFC in arriving at such estimated value. If such estimated value is less than the net asset value of the Continental Agreements on MDFC's books, Guarantor shall, within 30 days of written demand, pay to MDFC the full amount of such loss (the "Total Portfolio Loss"); provided, however, that the liability of Guarantor for the Total Portfolio Loss under this Section 1 shall be limited to an aggregate amount equal to $15,000,000. 2. Until all the assets covered by the Continental Agreements have been disposed of, after the end of each calendar quarter following payment of the Total Portfolio Loss, MDFC will recalculate the Total Portfolio Loss taking into account (a) any changes in the estimated fair market value of MDFC's interest in any of the Continental Agreements, (b) the amount by which any net proceeds received or receivable by MDFC from the remarketing of any repossessed equipment covered by any Continental Agreement (together with any proceeds of a guaranty listed on Exhibit A with respect to such equipment) exceeds or is less than MDFC's estimated value of such equipment incorporated in any prior calculation of the Total Portfolio Loss and (c) any recoveries from Continental, and furnish the Guarantor with a copy of such recalculation. Within 30 days of receipt of any such recalculation the Guarantor shall (subject to the 2 limit in Section 1) pay to MDFC the amount of any increase in the Total Portfolio Loss or, as the case may be, MDFC shall refund to Guarantor the amount of any decrease in the Total Portfolio Loss. 3. If no Event of Default under any Continental Agreement has occurred and is continuing, MDFC may enter into payment deferral arrangements with Continental without limiting Guarantor's liability hereunder and without Guarantor's consent. If a material Event of Default has occurred and is continuing under any Continental Agreement which could lead to a Total Portfolio Loss, MDFC shall not consent to any deferral arrangement with Continental without the consent of Guarantor. If Guarantor consents to any such deferral, it shall pay MDFC the amount of all deferred payments when such amounts would have been due but for the granting of the deferral. Only the portion of such payments of deferred amounts allocable to principal shall be deemed to reduce the amount of Guarantor's total liability under Section 1. 4. The obligations hereunder of Guarantor shall remain in full force and effect without regard to, and shall not be impaired or affected by, (a) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of Continental, or (b) any repudiation or disaffirmance of any Continental Agreement by any trustee in bankruptcy of Continental. 5. This Guaranty shall remain in full force and effect until payment in full of all sums payable, and the full and complete performance and discharge of all covenants, agreements and obligations to be performed or discharged by Guarantor hereunder; provided, however, that this Guaranty shall terminate on March 31, 1996 unless (a) an Event of Default which could result in a Total Portfolio Loss has occurred and is continuing under any Continental Agreement on such date or (b) the parties agree that MDFC's exposure on its Continental portfolio justifies a continuation of all or a portion of this Guaranty. Guarantor agrees that this Guaranty shall continue to be effective or shall be reinstated, as the case may be, if any payment of any sum hereby guaranteed is rescinded or must be otherwise restored or returned by MDFC upon the insolvency, bankruptcy or reorganization of Continental, all as though such payment had not been made. 6. This Guaranty contains all of the agreements of Guarantor and MDFC in connection with the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings or inducements, oral or written, except as expressly stated herein. Notwithstanding the immediately preceding sentence, the guaranty agreements described in Exhibit A shall continue in full force and effect and nothing in this Guaranty shall be construed as limiting such guaranty agreements. The terms of this Guaranty may not be changed orally but only by agreement in writing, duly executed on behalf of Guarantor and MDFC. 3 7. At the end of each calendar quarter commencing in 1994 and so long as this Guaranty remains in effect, MDFC will pay to the Guarantor a guaranty fee in an amount equal to $45,000. Such guaranty fee shall cease to be payable at the time a payment becomes due under this Guaranty. At the end of each calendar quarter MDFC shall have the option to terminate or reduce the maximum coverage set forth in Section 1 of this Guaranty (with a proportionate reduction in future guaranty fees). Any such voluntary reduction by MDFC shall be permanent for purposes of this Guaranty. MCDONNELL DOUGLAS FINANCE MCDONNELL DOUGLAS CORPORATION CORPORATION By:___________________________ By:___________________________ Its:__________________________ Its:__________________________ 4 EXHIBIT "A" TO SUPPLEMENTAL GUARANTY AGREEMENT GUARANTIES FROM MDC TO MDFC COVERING LEASE AGREEMENTS BETWEEN MDFC AND CONTINENTAL: SERIAL NO. OF REGIS. NO. OF TYPE OF GUARANTY LEASED LEASED AGREEMENT DATE AIRCRAFT AIRCRAFT Deficiency 9/2/83 49127 N10801 Guaranty Deficiency 4/4/85 49250 N17812 Guaranty GUARANTY FROM MDC TO MDFC LOAN CORPORATION COVERING SECURED NOTE: Guaranty from MDC to MDFC Loan Corporation, dated as of March 29, 1985, covering Continental's obligations under a secured note dated as of March 29, 1985 relating to Aircraft N12811. 5 EXHIBIT "B" TO SUPPLEMENTAL GUARANTY AGREEMENT DESCRIPTION DATE PARTIES A/C SER. NO. A/C REG. NO. ------------- ------- ----------- ------------ ------------ Deferral Note Stip MDFC/ 47638 and N19504 and 6/26/91 Continental 49250 N17812 Note 7/1/92 Deferral Note Stip MDFC/ 49127, 49441 N10801, 12/22/92 Continental and 49439 N35836 and Note N18835 10/1/93 Deferral Note Stip MDFC Loan 49265 N12811 12/22/92 Corporation/ Note First 10/1/93 Security Bank of Utah, National Association Deferral Note Stip Manufacturers 48073, 48074 N16883, 12/22/92 Hanover Trust and 49635 N16884 and Note Company of N14839 10/1/93 California/ Continental Restructured 4/27/93 MDFC/ N/A N/A NY Air Spares Continental and Note from first Cont. Bankruptcy Secured Note 12/23/92 MDFC/ 49122 N92874 Continental Secured Note 3/29/85 MDFC/Texas 49265 N12811 Air Corporation Finance Lease 9/2/83 MDFC/New York 49127 N10801 Airlines, Inc. Finance Lease 9/29/88 MDFC/ 49635 N14839 Continental Finance Lease 4/4/85 MDFC/Texas 49250 N17812 Air Corporation Finance Lease 5/28/74 MDFC/Texas 47638 N19504 International Airlines, Inc. 6 DESCRIPTION DATE PARTIES A/C SER. NO. A/C REG. NO. ------------- -------- -------------- ------------ ------------ Finance Lease 11/12/86 Manufacturer's 48073 N16883 Hanover Trust Company of California/ New York Airlines, Inc. Finance Lease 11/12/86 Manufacturer's 48074 N16884 Hanover Trust Company of California/ New York Airlines, Inc. Finance Lease 12/8/86 MDFC/ 49441 N35836 Continental Amended and 7/31/91 MDFC/ 49439 N18835 Restated Continental Lease Agreement EX-10 6 EXHIBIT 10 1 EXHIBIT 10.5 SUPPLEMENTAL GUARANTY AGREEMENT THIS SUPPLEMENTAL GUARANTY AGREEMENT ("the "Guaranty"), dated as of December 30, 1993, is by and between McDonnell Douglas Corporation, a Maryland corporation (hereinafter called the "Guarantor"), and McDonnell Douglas Finance Corporation, a Delaware corporation (hereinafter called "MDFC"). W I T N E S S E T H : WHEREAS, the Guarantor has previously provided the guaranties listed on Exhibit A hereto, covering some of the lease or financing agreements between Trans World Airlines, Inc. ("TWA") and MDFC; and WHEREAS, the parties deem it to be in their mutual best interest to supplement such existing guaranties in order to safeguard MDFC against a default affecting MDFC's entire TWA portfolio; NOW, THEREFORE, in consideration of the premises and for valuable consideration both parties hereto hereby agree as follows: 1. Upon the occurrence of a material default by TWA under any of the agreements between TWA and MDFC listed on Exhibit B hereto (the "TWA Agreements") under circumstances (such as a TWA bankruptcy) which lead MDFC to reasonably conclude that it has incurred or is likely to incur a loss on its TWA portfolio, MDFC shall promptly estimate and inform Guarantor of the net fair market value, taking into account the guaranties listed in Exhibit A, of MDFC's interest in the TWA Agreements. Such estimate shall be accompanied by a copy of MDFC's calculations and other pertinent information demonstrating to MDC's reasonable satisfaction the basis utilized by MDFC in arriving at such estimated value. If such estimated value is less than the net asset value of the TWA Agreements on MDFC's books, Guarantor shall, within 30 days of written demand, pay to MDFC the full amount of such loss (the "Total Portfolio Loss"); provided, however, that the liability of Guarantor for the Total Portfolio Loss under this Section 1 shall be limited to an aggregate amount equal to $25,000,000. 2. Until all the assets covered by the TWA Agreements have been disposed of, after the end of each calendar quarter following payment of the Total Portfolio Loss, MDFC will recalculate the Total Portfolio Loss taking into account (a) any changes in the estimated fair market value of MDFC's interest in any of the TWA Agreements, (b) the amount by which any net proceeds received or receivable by MDFC from the remarketing of any repossessed equipment covered by any TWA Agreement (together with any proceeds of a guaranty listed on Exhibit A with respect to such equipment) exceeds or is less than MDFC's estimated value of such equipment incorporated in any prior calculation of the Total Portfolio Loss and (c) any recoveries from TWA, and furnish the Guarantor with a copy of such recalculation. Within 30 days of receipt of any such recalculation the Guarantor shall (subject to the limit in Section 1) pay to MDFC the amount of any increase in the Total Portfolio Loss or, as the case may be, MDFC shall refund to Guarantor the amount of any decrease in the Total Portfolio Loss. 3. If no Event of Default under any TWA Agreement has occurred and is continuing, MDFC may enter into payment deferral arrangements with TWA without limiting Guarantor's liability hereunder and without Guarantor's consent. If a material Event of Default has occurred and is continuing under any TWA 2 Agreement which could lead to a Total Portfolio Loss, MDFC shall not consent to any deferral arrangement with TWA without the consent of Guarantor. If Guarantor consents to any such deferral, it shall pay MDFC the amount of all deferred payments when such amounts would have been due but for the granting of the deferral. Only the portion of such payments of deferred amounts allocable to principal shall be deemed to reduce the amount of Guarantor's total liability under Section 1. 4. The obligations hereunder of Guarantor shall remain in full force and effect without regard to, and shall not be impaired or affected by, (a) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of TWA, or (b) any repudiation or disaffirmance of any TWA Agreement by any trustee in bankruptcy of TWA. 5. This Guaranty shall remain in full force and effect until payment in full of all sums payable, and the full and complete performance and discharge of all covenants, agreements and obligations to be performed or discharged by Guarantor hereunder; provided, however, that this Guaranty shall terminate on March 31, 1996 unless (a) an Event of Default which could result in a Total Portfolio Loss has occurred and is continuing under any TWA Agreement on such date or (b) the parties agree that MDFC's exposure on its TWA portfolio justifies a continuation of all or a portion of this Guaranty. Guarantor agrees that this Guaranty shall continue to be effective or shall be reinstated, as the case may be, if any payment of any sum hereby guaranteed is rescinded or must be otherwise restored or returned by MDFC upon the insolvency, bankruptcy or reorganization of TWA, all as though such payment had not been made. 6. This Guaranty contains all of the agreements of Guarantor and MDFC in connection with the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings or inducements, oral or written, except as expressly stated herein. Notwithstanding the immediately preceding sentence, the guaranty agreements described in Exhibit A shall continue in full force and effect and nothing in this Guaranty shall be construed as limiting such guaranty agreements. The terms of this Guaranty may not be changed orally but only by agreement in writing, duly executed on behalf of Guarantor and MDFC. 7. At the end of each calendar quarter commencing in 1994 and so long as this Guaranty remains in effect, MDFC will pay to the Guarantor a guaranty fee in an amount equal to $75,000. Such guaranty fee shall cease to be payable at the time a payment becomes due under this Guaranty. At the end of each calendar quarter MDFC shall have the option to terminate or reduce the maximum coverage set forth in Section 1 of this Guaranty (with a proportionate reduction in future guaranty fees). Any such voluntary reduction by MDFC shall be permanent for purposes of this Guaranty. MCDONNELL DOUGLAS FINANCE MCDONNELL DOUGLAS CORPORATION CORPORATION By:___________________________ By:___________________________ Its:__________________________ Its:__________________________ 3 EXHIBIT "A" TO SUPPLEMENTAL GUARANTY AGREEMENT GUARANTIES FROM MDC TO MDFC COVERING LEASE AGREEMENTS BETWEEN MDFC AND TWA: SERIAL NO. REGIS. NO. OF OF GUARANTY LEASED LEASED TYPE OF AGREEMENT DATE AIRCRAFT AIRCRAFT ------------------- -------- --------- --------- Deficiency Guaranty 10/15/87 49157 N905TW Deficiency Guaranty 10/20/87 49160 N906TW Deficiency Guaranty 10/21/87 49154 N903TW Deficiency Guaranty 10/27/87 49185 N914TW Deficiency Guaranty 10/15/87 49166 N901TW Deficiency Guaranty 10/15/87 49153 N902TW Guaranty* 6/30/93 53139 N9403W Guaranty* 6/30/93 53138 N9402W Guaranty* 9/30/93 53141 N9405T Guaranty* 9/30/93 53137 N9401W Guaranty* 9/30/93 53140 N9404V Guaranty* 9/30/93 53126 N9406W -------------- * It is contemplated that these guaranties will be replaced by similar guaranties from MDC covering a smaller percentage of TWA's obligations under the respective covered Lease Agreements. As of the date such replacement guaranties are signed and delivered to MDFC (or MDAFC in the case of the guaranty covering Aircraft N9401W) they shall automatically be deemed listed on this Exhibit A in lieu of the replaced guaranties. GUARANTY FROM MDC TO MDFC COVERING SUBORDINATED NOTE Guaranty from MDC to MDFC, dated as of August 27, 1993, covering TWA's obligations under a subordinated note dated as of November 27, 1991 relating to Aircraft N952U. 4 EXHIBIT "B" TO SUPPLEMENTAL GUARANTY AGREEMENT A/C SER. A/C REG. DESCRIPTION DATE PARTIES NO. NO. ------------ -------- ------------------ -------- -------- Sub. Note 11/27/91 Equitable/MDFC/TWA -- N952U Secured Note 6/19/84 MDFC Loan 49230 N950U Corp./Ozark/TWA Finance Lease 12/8/69 MDFC/Ozark/TWA 47589 N986Z Finance Lease 10/15/82 MDFC/Ozark/TWA 47669 N932L Finance Lease 5/26/83 MDFC/TWA 49157 N905TW Finance Lease 6/23/83 MDFC/TWA 49160 N906TW Finance Lease 5/12/83 MDFC/TWA 49154 N903TW Finance Lease 4/12/84 MDFC/TWA 49185 N914TW Finance Lease 4/18/83 MDFC/TWA 49166 N901TW Finance Lease 4/26/83 MDFC/TWA 49153 N902TW Finance Lease 6/1/93 *MDC/TWA 53139 N9403W Finance Lease 6/1/93 *MDC/TWA 53138 N9402W Finance Lease 6/1/93 *MDC/TWA 53141 N9405T Finance Lease 6/1/93 **MDC/TWA 53137 N9401W Finance Lease 6/1/93 *MDC/TWA 53140 N9404V Finance Lease 6/1/93 *MDC/TWA 53126 N9406W Operating 6/1/93 MDFC/TWA 47676 N418EA Lease Operating 6/1/93 MDFC/TWA 47751 N416EA Lease Operating 6/1/93 MDFC/TWA 47753 N417EA Lease Operating 6/1/93 MDFC/TWA 47749 N415EA Lease 5 Operating 6/1/93 MDFC/TWA 47746 N414EA Lease Operating 6/1/93 MDFC/TWA 47731 N410EA Lease Operating 6/1/93 MDFC/TWA 47728 N409EA Lease Operating 6/1/93 MDFC/TWA 47732 N411EA Lease *** **** - - ----------- * Assigned by MDC to MDFC ** Assigned by MDC to MDAFC *** TWA will lease from MDFC (or an affiliate) under an operating lease four additional DC-9-51 aircraft and such leases are hereby deemed covered by the Supplemental Guaranty Agreement. **** TWA will lease from MDFC under a finance lease two MD-82 aircraft and such leases are hereby deemed covered by the Supplemental Guaranty Agreement. EX-12 7 EXHIBIT 12 1 EXHIBIT 12.1 McDonnell Douglas Finance Corporation and Subsidiaries Computation of Ratio of Income to Fixed Charges Years Ending December 31, (Dollars in millions) 1993 1992 1991 1990 1989 Income from continuing perations before income taxes and cumulative effect of accounting $ 40.8 $ 48.0 $ 57.2 $ 98.9 $ 75.6 change Fixed charges 120.0 149.4 202.0 219.9 186.2 Income from continuing operations before income taxes, cumulative effect of accounting $ 160.8 $ 197.4 $ 259.2 $ 318.8 $ 261.8 change and fixed charges Ratio of income to fixed charges 1.34 1.32 1.28 1.45 1.41 Includes interest expense discount and preferred stock dividends. EX-23 8 EXHIBIT 23 1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-3, No. 33-31419) of McDonnell Douglas Finance Corporation and in the related Prospectuses of our report dated January 18, 1994, with respect to the consolidated financial statements, schedules and selected financial data of McDonnell Douglas Finance Corporation included in this Form 10-K for the year ended December 31, 1993. /s/ Ernst & Young Orange County, California March 30, 1994 -----END PRIVACY-ENHANCED MESSAGE-----