-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EurfKGI/A81GDgPTuZlJGWrdW/Jd9rxrRTaUu58B7g9v20Ytne2mvRl9CUfTD4ep l1+S10zXIDxqFeMBnMw5ow== 0000711513-96-000007.txt : 19960402 0000711513-96-000007.hdr.sgml : 19960402 ACCESSION NUMBER: 0000711513-96-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDONNELL DOUGLAS FINANCE CORP /DE CENTRAL INDEX KEY: 0000711513 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 952564584 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10795 FILM NUMBER: 96542217 BUSINESS ADDRESS: STREET 1: 4060 LAKEWOOD BLVD. STREET 2: 6TH FLOOR, DOUGLAS CNTR CITY: LONG BEACH STATE: CA ZIP: 90808-1700 BUSINESS PHONE: 310-627-3000 MAIL ADDRESS: STREET 1: P O BOX 580 CITY: LONG BEACH STATE: CA ZIP: 90801-0580 10-K 1 10K FOR YEAR ENDING DEC 1995 1 United States Securities and Exchange Commission Washington, DC 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 1995 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 File No.) jurisdiction of Identification No.) Incorporation or Organization) 4060 Lakewood Boulevard, 6th Floor - Long Beach, California 90808-1700 (Address of principal executive offices) (310) 627-3000 (Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $100 per share Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _X_ As of March 29, 1996, 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 3 Table of Contents Page Part I Item 1. Business . . . . . . . . . . . 4 Item 2. Properties . . . . . . . . . . 19 Item 3. Legal Proceedings . . . . . . . 19 Item 4. Submission of Matters to a Vote of Security Holders * Part II Item 5. Market for Registrant s Common Equity and Related Stockholder Matters . . . . . . . . . . . . 19 Item 6. Selected Financial Data . . . . 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 22 Item 8. Financial Statements and Supplementary Data. . . . . . 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . 42 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 . . . . . . . 43 Signatures . . . . . . . . . . . 47 Exhibits . . . . . . . . . . . . 48 ____________________ *Omitted pursuant to General Instruction J(2)(c)of Form 10-K. 4 Part I Item 1. Business General McDonnell Douglas Finance Corporation (together with its subsidiaries the "Company") is a wholly-owned subsidiary of McDonnell Douglas Financial Services Corporation ("MDFS"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("McDonnell Douglas"). The Company was incorporated in Delaware in 1968 and originally financed only McDonnell Douglas 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, 1995, the Company had 74 employees. The Company now operates in principally two segments: commercial aircraft financing and commercial equipment leasing ("CEL"). Prior to 1995, the Company operated in three segments: commercial aircraft financing, CEL and non-core businesses. Non-core businesses represents market segments in which the Company is no longer active and continues to liquidate and manage the remaining non-core businesses as market opportunities occur. Based on trends to date, the Company does not expect to incur significant losses related to the disposal of its non-core businesses. At December 31, 1995 and 1994, the portfolio balances for non-core businesses totaled $80.6 million and $113.9 million. Information on the Company's continuing businesses is included in the following tables. New Business Volume Years ended December 31, (Dollars in millions) 1995 1994 1993 1992 1991 Commercial aircraft financing$ 349.7 $117.9 $411.4 $153.2 $ 100.9 Commercial equipment leasing 241.1 84.1 41.5 50.7 91.8 $ 590.8 $202.0 $452.9 $203.9 $ 192.7 Portfolio Balances December 31, (Dollars in millions) 1995 1994 1993 1992 1991 Commercial aircraft financing$ 1,405.7 $1,333.0 $1,237.5 $ 1,001.1 $ 907.8 Commercial equipment leasing 502.4 369.4 422.3 557.4 668.9 $ 1,908.1 $1,702.4 $1,659.8 $ 1,558.5 $1,576.7$ For financial information about the Company's segments, see Notes to Consolidated Financial Statements included in Item 8. 5 Commercial Aircraft Financing Segment The Company's commercial aircraft financing group, located in Long Beach, California, provides financing for customers purchasing aircraft. The Company primarily purchases aircraft from McDonnell Douglas and provides airline customers financing alternatives, including lease transactions and secured and unsecured notes receivable financing. A substantial majority of the commercial aircraft portfolio is comprised of aircraft manufactured by McDonnell Douglas. Additionally, this group assists the McDonnell Douglas aircraft financing group with respect to financing of some of McDonnell Douglas aircraft by others. Portfolio balances for the Company's commercial aircraft financing segment are summarized as follows: Commercial Aircraft Portfolio by Aircraft Type December 31, (Dollars in millions) 1995 1994 1993 1992 1991 McDonnell Douglas aircraft financing: Finance leases $857.4 $748.2 $732.3 $506.2 $465.6 Operating leases 256.8 197.8 176.9 93.7 30.0 Notes receivable 110.9 194.8 125.9 169.4 107.4 1,225.1 1,140.8 1,035.1 769.3 603.0 Other commercial aircraft financing: Finance leases 126.1 125.2 123.0 149.9 214.6 Operating leases 49.6 43.1 55.9 57.6 62.3 Notes receivable 4.9 23.9 23.5 24.3 27.9 180.6 192.2 202.4 231.8 304.8 $1,405.7 $1,333.0 $1,237.5 $1,001.1 $ 907.8 Commercial Aircraft Portfolio by Product Type December 31, (Dollars in millions) 1995 1994 1993 1992 1991 Aircraft leases: Finance leases Domestic $ 776.2 $653.3 $ 638.9 $601.5 $ 609.2 Foreign 207.3 220.1 216.5 54.6 70.9 Operating leases Domestic 183.5 161.9 149.7 111.4 81.5 Foreign 122.9 79.0 83.0 39.9 10.9 1,289.9 1,114.3 1,088.1 807.4 772.5 Aircraft related notes receivable: Domestic obligors 31.2 53.4 51.4 88.0 61.6 Foreign obligors 84.6 165.3 98.0 105.7 73.7 115.8 218.7 149.4 193.7 135.3 $1,405.7 $1,333.0 $1,237.5 $1,001.1 $ 907.8 6 At December 31, 1995, the Company's commercial aircraft portfolio was comprised of finance leases to 25 customers (22 domestic and three foreign) with a carrying amount of $983.5 million (49.5% of total Company portfolio), notes receivable from six customers (three domestic and three foreign) with a carrying amount of $115.8 million (5.8% of total Company portfolio) and operating leases to 12 customers (eight domestic and four foreign) with a carrying amount of $306.4 million (15.4% of total Company portfolio). At December 31, 1995, 61.6% of the Company's total portfolio consisted of financings related to McDonnell Douglas aircraft, compared with 62.8% and 56.5% in 1994 and 1993. - Factors Affecting the Commercial Aircraft Financing Portfolio A substantial portion of the Company's total portfolio is concentrated among the Company's largest commercial aircraft financing customers. The single largest commercial aircraft financing customer, Trans World Airlines, Inc. ("TWA"), accounted for $279.9 million (14.1% of total Company portfolio) and $287.9 million (15.9% of total Company portfolio) at December 31, 1995 and 1994. The Company agreed to defer six months of lease and other payments as part of a restructuring of certain indebtedness of TWA with its creditors in March 1995. The agreement calls for TWA to pay deferred amounts, aggregating $29.1 million, over a 28- month period which commenced in April 1995. As a result of such payment deferrals, McDonnell Douglas has agreed to increase the aggregate amount of its guaranties of TWA s obligations to the Company. In addition, McDonnell Douglas provides supplemental guaranties in favor of the Company for up to an additional $25.0 million of the Company's financings to TWA. These guaranties supplement individual guaranties provided by McDonnell Douglas with respect to certain of the Company's financings to TWA 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 on June 30, 1996, but may be extended under certain limited circumstances. See "Aircraft Financing Guaranties." The Company's agreement with TWA was assumed under a prepackaged plan of reorganization under Chapter 11 of the U.S. bankruptcy laws which was confirmed by the U.S. Bankruptcy Court in August 1995. Although TWA is current on its payments under the agreement with the Company and the reorganization plan is not expected to have a significant effect on the Company's earnings, cash flow or financial position, no assurance can be given that TWA will be able to continue to perform its obligations under the agreement. The Company's second largest customer, Federal Express Corporation, accounted for $220.4 million (11.1% of the total Company portfolio) and $78.1 million (4.3% of total Company portfolio) at December 31, 1995 and 1994. The five largest commercial aircraft financing customers accounted for $865.2 million (43.5% of total Company portfolio) and $748.6 million (41.2% of Company total portfolio) at December 31, 1995 and 1994. A commercial aircraft customer of the Company, located in Venezuela, has filed for bankruptcy protection in a Venezuelan bankruptcy court. Such customer is in default under a loan secured by an MD-83 aircraft. 7 The amount due to the Company under the loan is approximately $13.6 million, which approximately equals the estimated value of the aircraft securing the loan, net of maintenance reserves held by the Company of $2.4 million. The aircraft is currently in possession of the Venezuelan bankruptcy trustee and the Company has retained outside counsel in Venezuela in connection with a foreclosure and repossession of the aircraft or a potential settlement. Although Venezuelan bankruptcy law provides for compensation to privileged creditors, to date, the Company has been unsuccessful in its attempts to repossess the aircraft. No assurance can be given as to whether the Company will be successful in its attempt to repossess the aircraft or the amount, if any, otherwise recoverable by the Company in connection with such loan. The Company does not expect any impact to have a material adverse effect on earnings, cash flow or financial position. - Current Commercial Aircraft Market Conditions The Company's financial performance is dependent in part upon general economic conditions which may affect the profitability of the commercial airlines with which the Company does business. The economic downturn in the commercial airline industry, which contributed to an oversupply of aircraft through the early 1990 s is now considered within the industry to be over. Currently, domestic load factors have improved, resulting in increasing demand for new and used equipment and firming of narrowbody aircraft values. Although airlines have experienced stronger than expected earnings growth, industry-wide balance sheets remain weak resulting in a continuing focus on cost control and cautious fleet planning decisions. Difficulties in the commercial airline industry have resulted in and may again result in airlines declining deliveries of aircraft, requesting change in delivery schedules, defaulting on contracts for firm orders, or not exercising options or reserves. While new orders are expected to remain modest over the next year, the Company believes that there will be a continued demand for older aircraft and that the prices for this equipment should continue to increase. The Company also believes that realizable values for its aircraft at lease maturity will remain above the values actually booked. Although the Company continues to have a substantial portion of its total portfolio concentrated among a small number of customers, the Company anticipates that a combination of the improved earnings results of the airline industry and the increasing demand for equipment will have a positive effect on portfolio performance. The Company continues to look for opportunities to expand its commercial aircraft portfolio while taking advantage of improving market conditions to reduce exposure levels to a small number of its customers. If aircraft values decline and the Company is required as a result of customer defaults to repossess a substantial number of aircraft prior to the expiration of the related lease or financing, the Company could incur substantial losses in remarketing the aircraft, which could have a material adverse effect on the Company's earnings, cash flow or financial position. 8 - 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, 1995, the Company owned or participated in the ownership of 128 leased commercial aircraft, including 71 that were manufactured by McDonnell Douglas. - Factors Affecting Aircraft Financing Volume As in the past, the Company anticipates continued fluctuations in the volume of its aircraft financing transactions. Difficulties in the commercial aircraft industry have resulted and may again result in limiting many airlines' ability to access financing and present more opportunities to the Company. At December 31, 1995, the Company had unused credit lines available to a customer totaling $91.3 million. The Company had no other commitments to provide aircraft related financing at December 31, 1995 and had outstanding commitments of $10.8 million at December 31, 1994. See "Competition and Economic Factors." The following lists information on new business volume for the Company's commercial aircraft financing segment: Years ended December 31, (Dollars in millions) 1995 1994 1993 1992 1991 McDonnell Douglas aircraft financing volume: Finance leases $220.6 $53.0 $357.3 $ 95.0 $19.2 Operating leases 81.9 15.7 33.8 53.5 30.0 Notes receivable 36.2 41.3 19.1 4.7 21.5 338.7 110.0 410.2 153.2 70.7 Other commercial aircraft financing volume: Finance leases 7.7 7.9 - - 23.9 Operating leases 3.3 - 0.7 - 6.3 Notes receivable - - 0.5 - - 11.0 7.9 1.2 - 30.2 $349.7 $117.9 $411.4 $153.2 $100.9 - Aircraft Financing Guaranties At December 31, 1995, the Company had $332.7 million of guaranties in its favor with respect to its commercial aircraft financing portfolio relating to transactions with a carrying amount of $1,405.7 million (23.7% of the commercial aircraft financing portfolio). The following table summarizes such guaranties: Domestic Foreign (Dollars in millions) Airlines Airlines Total Amounts guaranteed by: McDonnell Douglas $139.5 $ 145.7 $ 285.2 Foreign governments - 8.3 8.3 Other 26.0 13.2 39.2 9 Total guaranties $165.5 $167.2 $332.7 The Company has no reason to believe that any such guaranteed amounts will be ultimately unenforceable or uncollectible. See "Relationship With McDonnell Douglas." Commercial Equipment Leasing Segment CEL provides single-investor, tax-oriented lease financing as its primary product. CEL, which maintains its principal operations 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 machine tools, executive aircraft, highway vehicles, containers and chassis, and printing equipment and other types of equipment which it believes will maintain strong collateral and residual values. The lease term is generally between three and ten years and transaction sizes usually range between $2.0 million and $15.0 million. In addition to financing transactions for the Company, CEL also 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 1995 1994 Finance leases $266.3 $216.8 235.2 $325.9 $425.9 Operating leases 169.1 133.4 157.5 179.9 198.7 Notes receivable 67.0 18.5 28.8 50.7 41.5 Preferred and preference stock - 0.7 0.8 0.9 2.8 $502.4 $369.4 $422.3 $557.4 $668.9 - Factors Affecting CEL Volume As the Company's borrowing costs have declined in recent years, CEL s ability to compete more effectively has increased significantly. In 1995, CEL booked $241.1 million of new business volume, almost tripling that of 1994. Additionally, at year end, CEL s backlog of business was $116.6 million, surpassing the 1994 backlog of $83.6 million. The following lists information on new business volume for the Company's CEL segment: Years ended December 31, (Dollars in millions) 1995 1994 1993 1992 1991 Finance leases $102.0 $53.9 $15.3 $24.9 $55.6 Operating leases 70.5 24.3 22.9 18.2 30.3 Notes receivable 68.6 5.9 3.3 7.6 5.9 $241.1 $84.1 $41.5 $50.7 $91.8 10 Cross-Border Outstandings The extension of credit to borrowers located outside of the United States is called "cross-border" credit. In addition to the credit risk associated with any borrower, these particular credits are also subject to "country risk" - economic and political risk factors specific to the country of the borrower which may make the borrower unable or unwilling to pay principal and interest or otherwise perform according to contractual terms. Other risks associated with these credits include the possibility of insufficient foreign exchange and restrictions on its availability. The Company has relatively small 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, 1995, 1994 and 1993: (Dollars in millions) December 31, Finance Notes Operating Country Leases Receivable Leases Total 1995 Indonesia $132.6 $ - $ - $ 132.6 Italy - - 48.8 48.8 $132.6 $ - $ 48.8 $ 181.4 1994 Indonesia $ 144.8 $ - $ - $ 144.8 Japan - 35.1 - 35.1 Mexico 21.4 - 23.9 45.3 $ 166.2 $ 35.1 $ 23.9 $ 225.2 1993 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 At December 31, 1995, the Company had equipment in Mexico under both a finance lease and an operating lease agreement with an aggregate net carrying amount of $15.6 million and equipment in Belgium under an operating lease agreement with a net carrying amount of $16.0 million. At 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. At December 31, 1994, there were no countries whose outstandings were between 0.75% and 1% of the Company's total assets. 11 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, 1995: (Dollars in millions) Domestic Foreign Total Maturity Distribution 1996 $ 265.7 $ 38.6 $ 304.3 1997 182.2 39.2 221.4 1998 164.1 26.1 190.2 1999 181.1 27.8 208.9 2000 133.5 28.1 161.6 2001 and thereafter 650.9 211.4 862.3 $1,577.5 $ 371.2 $1,948.7 Financing Receivables Due 1997 and Thereafter Fixed interest rates $1,249.3 $ 83.9 $1,333.2 Variable interest rates 62.5 248.7 311.2 $1,311.8 $ 332.6 $1,644.4 Allowance for Losses on Financing Receivables and Credit Loss Experience Analysis of Allowance for Losses on Financing Receivables December 31, (Dollars in millions) 1995 1994 1993 1992 1991 Allowance for losses on financing receivables $40.7 $35.6 $37.4 $46.7 $61.6 at beginning of year Provision for losses 12.2 9.9 8.6 19.1 47.2 Write-offs, net of (10.6) (4.9) (10.4) (27.4) (56.7) recoveries Other - 0.1 - (1.0) (5.4) Allowance for losses on financing receivables $42.3 $40.7 $35.6 $37.4 $46.7 at end of year Allowance as percent of 2.1% 2.2% 1.9% 2.1% 2.2% total portfolio Net write-offs as percent of average portfolio 0.6% 0.3% 0.6% 1.4% 2.0% More than 90 days delinquent: 12 Amount of delinquent $10.0 $ 2.8 $ 3.7 $ 4.6 $19.0 installments Total receivables due from delinquent obligors $12.1 $43.2 108.4$ $10.5 $42.8 Total receivables due from delinquent obligors as a percentage of total 0.6% 2.4% 5.9% 0.6% 2.0% portfolio The portfolio at December 31, 1995 includes five CEL obligors and three airline obligors to which payment extensions have been granted. At December 31, 1995, payments so extended amounted to $22.5 million ($17.7 million airline-related), and the aggregate carrying amount of the related receivables was $406.4 million ($378.6 million airline-related). Receivable Write-offs, Net of Recoveries by Business Unit The following table summarizes the loss experience for the Company's continuing businesses: Years ended % of Respective December 31, Average Portfolio (Dollars in millions) 1995 1994 1995 1994 Commercial aircraft financing $ 5.0 $ (1.9) 0.37% (0.14)% Commercial equipment leasing 1.7 2.5 0.41 0.66 $ 6.7 $ 0.6 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 $12.2 million and $9.9 million in 1995 and 1994 for losses. The Company believes that the allowance for losses on financing receivables is adequate at December 31, 1995 to cover potential losses in the Company's total portfolio. If, however, certain major customers defaulted and the Company were forced to take possession of and dispose of significant amounts of aircraft or equipment, losses in excess of the allowance could be incurred, which would be charged directly against earnings. The Company's receivable write-offs, net of recoveries, increased in 1995 as compared to 1994 primarily attributable to certain aircraft that were repossessed during 1995. Nonaccrual and Past Due Financing Receivables Financing receivables accounted for on a nonaccrual basis consisted of the following at December 31: (Dollars in millions) 1995 1994 Domestic $ 13.6 $ 8.8 13 Foreign 17.0 21.4 $ 30.6 $30.2 Financing receivables being accrued which are contractually past due 90 days or more as to principal and interest payments consisted of domestic financings of $0.6 million and $16.5 million at December 31, 1995 and 1994. Borrowing Operations The Company principally relies on funds from operations and borrowings to operate its business. Borrowings include commercial paper, secured and unsecured senior and subordinated long-term debt, and bank borrowings. The Company also utilizes interest rate swap agreements to manage interest costs and risk associated with changing interest rates. See Note 6 of Notes to Consolidated Financial Statements. The Company has a joint revolving credit agreement under which the Company may borrow up to $220 million, reduced by borrowings of up to $16 million that can be made by MDFS under this agreement. Commercial paper, when outstanding, is fully supported by unused commitments under this agreement. At December 31, 1995, there was no commercial paper outstanding. The Company also has available approximately $120 million in uncommitted, short-term bank credit facilities. At December 31, 1995, there were no amounts outstanding under the revolving credit agreement and $10 million under the short-term bank facilities. The Company has an effective shelf registration statement relating to up to $750 million aggregate principal amount of debt securities. The Company established a $500 million medium-term note program under the shelf registration and, as of December 31, 1995, has issued and sold $135 million in aggregate principal amount of securities under the program. The following table sets forth the average debt of the Company by borrowing classification: (Dollars in millions) Average Average Average Years ended Short-Term Long-Term Total December 31, Debt Debt Debt 1995 $ 71.4 $ 1,183.6 $ 1,255.0 1994 108.0 1,167.3 1,275.3 1993 113.0 1,153.7 1,266.7 1992 118.2 1,513.1 1,631.3 1991 341.1 1,750.4 2,091.5 The weighted average interest rates on all outstanding indebtedness computed for the relevant period were as follows: 14 Weighted Weighted Weighted Years ended Average Average Average December 31, Short-Term Long-Term Total Debt Interest Rate Interest Rate Interest Rate 1995 6.34% 8.19% 8.12% 1994 5.27 8.76 8.50 1993 5.97 9.53 9.19 1992 12.38 8.75 9.00 1991 10.28 9.73 9.82 The Company's access to capital at rates that allow for a reasonable return on new business is affected by credit rating agencies' ratings of the Company's debt. All three credit rating agencies, recognizing the Company's improved financial performance, have upgraded the Company's credit ratings: - In March 1996, Standard & Poor's ("S&P") upgraded the Company's senior debt to A- and upgraded the Company's subordinated debt to BBB+ and S&P also affirmed its A-2 rating of the Company s commercial paper. - In March 1996, Duff & Phelps Credit Rating Co. raised the rating of the Company's senior debt to A-, subordinated debt to BBB+, and commercial paper to D1-. - In October 1995, Moody's Investors Service Inc. upgraded its rating of the Company's senior debt to Baa2, subordinated debt to Baa3, and short-term debt rating for commercial paper to Prime-2. Although security ratings impact the rate at which the Company can borrow funds, a security rating is not a recommendation to buy, sell or hold securities. In addition, a security rating is subject to revision or withdrawal at any time by the assigning rating organization and each rating should be evaluated independently of any other rating. Competition and Economic Factors The Company is subject to competition from other financial institutions, including commercial banks, finance companies and leasing companies, some of which are larger than the Company and have greater financial resources, greater leverage ability and lower effective borrowing costs. These factors permit many competitors to provide financing at lower rates than the Company. In its commercial equipment leasing and commercial aircraft financing segments, the ability of the Company to compete in the marketplace is principally based on rates which the Company charges its customers, which rates are related to the Company's access to and cost of funds and to the ability of the Company to utilize tax benefits attendant to leasing. See "Borrowing Operations" and "Relationship With McDonnell Douglas." Competitive factors also include, among other things, the Company s ability to be relatively 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 McDonnell Douglas aircraft. The Company's relationship with McDonnell 15 Douglas has in many cases presented opportunities for such business and has caused McDonnell Douglas to offer to the Company substantially all of the notes receivable taken by McDonnell Douglas upon the sale of its aircraft. See "Relationship With McDonnell Douglas." In past years many customers have obtained their financing for McDonnell Douglas aircraft through sources other than the Company or McDonnell Douglas, reflecting a broader range of competitive financing alternatives available to McDonnell Douglas customers. The consolidation in the United States airline industry as a result of bankruptcies and mergers has resulted in an increase in the concentration of the Company's McDonnell Douglas 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 McDonnell Douglas aircraft financings, the risk to the Company resulting from the declining creditworthiness of many airlines has increased. See "Commercial Aircraft Financing Segment" and "Allowance for Losses on Financing Receivables and Credit Loss Experience." Aircraft owned or financed by the Company may become significantly less valuable because of the introduction of new aircraft models, which may be more economical to operate, the aging of particular aircraft, technological obsolescence such as that caused by legislation for noise abatement which will over time prohibit the use of older, noisier (Stage 2) aircraft in the United States by year end 2000, or an oversupply of aircraft for sale. In any such event, carrying amounts on the Company's books may be reduced if, in the judgment of management, such carrying amounts are greater than market value, which would result in recognition of a loss to the Company. At December 31, 1995, the Company's carrying amount of Stage 2 aircraft totaled $72.9 million (5.1% of the Company's total aircraft portfolio, including any aircraft held for sale or re- lease), however, all of the Company's Stage 2 aircraft will have book values approximating the aircraft s scrap value by the year 2000. 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 McDonnell Douglas McDonnell Douglas is principally engaged in the design, development and production of government and commercial aerospace products. For the year ended December 31, 1995, McDonnell Douglas recorded revenues of $14.3 billion and net earnings of $707 million, excluding the effect of the accounting charge of $1.1 billion related to the MD-11 trijet. At December 31, 1995, McDonnell Douglas had assets of $10.5 billion and shareholders equity of $3.0 billion. The financial well-being of McDonnell Douglas is vital to the Company's ability to enter into significant amounts of new business in the future. Two of the principal industry segments in which McDonnell Douglas 16 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 McDonnell Douglas, and especially the ability of McDonnell Douglas'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. McDonnell Douglas s market share of firm order backlog for new commercial aircraft has declined significantly in the past several years. At December 31, 1995, approximately 20.3% of the Company's total aircraft portfolio are supported by guaranties from McDonnell Douglas. In the event a substantial portion of the guaranties become payable and in the unlikely event that McDonnell Douglas is unable to honor its obligations under these guaranties, such event could have a material adverse effect on the Company's earnings, cash flow or financial position. In addition, McDonnell Douglas participates as an intermediary in financings to a small number of the Company's commercial aircraft customers and largely as a result thereof, at December 31, 1995, McDonnell Douglas is the fifth largest commercial aircraft financing customer of the Company. For a further description of these and other significant factors which may affect McDonnell Douglas s financial condition, see McDonnell Douglas s Form 10-K for the year ended December 31, 1995 (Securities and Exchange Commission file number 1-3685). - Operating Agreement The relationship between the Company and McDonnell Douglas 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 McDonnell Douglas aircraft receivables, the leasing of McDonnell Douglas aircraft, the resale of McDonnell Douglas aircraft returned to, or repossessed by, the Company under leases or secured notes, and the allocation of federal income taxes between the companies. Under the Operating Agreement, McDonnell Douglas is required to offer to the Company all promissory notes, conditional sales contracts and certain other receivables obtained by McDonnell Douglas in connection with the sale of its commercial transport aircraft, except for any receivable that McDonnell Douglas 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 by McDonnell Douglas, 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 17 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 McDonnell Douglas 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 may refuse to accept the note receivable or may condition its acceptance upon receipt of a guaranty from McDonnell Douglas 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 McDonnell Douglas 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 McDonnell Douglas on the terms negotiated between McDonnell Douglas 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 McDonnell Douglas, with a negotiated fee, if any, to be paid by the Company for the guaranty. The Company has the option under the Operating Agreement to tender to McDonnell Douglas any McDonnell Douglas aircraft returned to or repossessed by the Company under a lease or security instrument at a price equal to the fair market value of the aircraft less 10%. This provision does not include McDonnell Douglas aircraft leased under a partnership arrangement in which the Company is one of the partners, or McDonnell Douglas aircraft subject to third party liens or other security interests, unless the Company and McDonnell Douglas determine that purchase by McDonnell Douglas is desirable. At December 31, 1995, the carrying amount of McDonnell Douglas aircraft potentially excluded by this provision amounted to approximately $65.2 million. - Federal Income Taxes The Company and McDonnell Douglas presently file consolidated federal income tax returns, with the consolidated tax payments, if any, being made by McDonnell Douglas. The Operating Agreement provides that so long as consolidated federal tax returns are filed, payments shall be made, directly or indirectly, by McDonnell Douglas to the Company or by the Company to McDonnell Douglas, as appropriate, equal to the difference between the consolidated tax liability and McDonnell Douglas s tax liability computed without consolidation with the Company. If, subsequent to any such payments by McDonnell Douglas, it incurs tax losses which may be carried back to the year for which such payments were made, the Company nevertheless will not be obligated to repay to McDonnell Douglas any portion of such payments. 18 The Company and McDonnell Douglas have been operating since 1975 under an informal arrangement, which has entitled the Company to rely upon the realization of tax benefits for the portion of projected taxable earnings of McDonnell Douglas allocated to the Company. This has been important in planning the volume of and pricing for the Company's leasing activities. Under the current arrangement, McDonnell Douglas presently charges or credits the Company for the corresponding increase or decrease in McDonnell Douglas's taxes (disregarding alternative minimum taxes) resulting from the Company's inclusion in the consolidated federal income tax return of McDonnell Douglas. Intercompany payments are made when such taxes are due or tax benefits are realized by McDonnell Douglas based on the assumption, pursuant to an informal arrangement, that taxes are due or tax benefits are realized up to 100% of the amounts forecasted by the Company with the amounts in excess of such forecast due in the year realized by McDonnell Douglas. The Company'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 McDonnell Douglas 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 McDonnell Douglas 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 McDonnell Douglas provides to the Company certain payroll, employee benefit, facilities and other services, for which the Company generally pays McDonnell Douglas the actual cost. See Note 8 of Notes to Consolidated Financial Statements. - Intercompany Credit Arrangements The Company and McDonnell Douglas 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 McDonnell Douglas on McDonnell Douglas debt constitutes a default on Company debt. There are no guaranties, direct or indirect, by McDonnell Douglas of the payment of any debt of the Company. The Company has an arrangement with McDonnell Douglas, terminable at the discretion of either of the parties, pursuant to which the Company may borrow from McDonnell Douglas and McDonnell Douglas may borrow from the Company, funds for 30-day periods at a market rate of interest. 19 Under this arrangement, there were no outstanding balances at December 31, 1995 and 1994. During 1995, the Company did not borrow under this agreement and the highest level loaned to McDonnell Douglas was $50.0 million. 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 this arrangement, borrowings of $3.7 million and $0.8 million were outstanding at December 31, 1995 and 1994. During 1995, the Company's highest level of borrowings from MDFS and highest level of loans to MDFS were $67.8 million and $22.0 million, respectively. Under another arrangement, McDonnell Douglas Realty Company, a wholly- owned subsidiary of McDonnell Douglas, owed the Company $14.6 million and $23.4 million at December 31, 1995 and 1994. Item 2. Properties The Company leases all of its office space and other facilities. The Company's principal office is subleased from McDonnell Douglas, at fair market value. 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 1994, certain debtors of the Company commenced actions against the Company seeking damages in excess of $14.0 million based on various contractual and tort claims arising out of financing and loan agreements. Concurrently, the Company brought actions against the debtors to collect overdue amounts under the loans provided by the Company. No response to discovery has taken place in any of these actions. At this early stage of the legal proceedings it is not possible to predict with any certainty the ultimate outcome of these related legal proceedings. The Company intends to vigorously defend such claims. Based on information currently available, the Company believes it has meritorious defenses to all of the allegations of wrongdoing and that there will be no material adverse effect on the Company's earnings, cash flow or financial position. 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 1995 and 1994, the Company declared dividends of $27.5 million and $27.0 million to MDFS on its common stock. The Company paid $3.5 million in dividends on its preferred stock in 1995 and 1994. Preferred stock 20 dividends of $0.6 million payable to MDFS were accrued at December 31, 1995. 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, $60.1 million of the Company's income retained for growth was available for dividends at December 31, 1995. 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, 1995 and for the year then ended and with "Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations." The following table sets forth selected consolidated financial data for the Company: Years Ended December 31, (Dollars in millions) 1995 1994 1993 1992 1991 Financing volume $590.8 $ 202.0 $453.0 $206.5 $231.3 Operating income: Finance lease income $104.3 $ 100.7 $ 90.1 $113.0 $179.3 Interest on notes receivable 27.2 29.4 38.9 47.9 61.5 Operating lease income, net 41.1 38.5 35.9 33.3 34.1 Net gain on disposal or re-lease of assets 8.7 11.1 23.7 37.1 45.8 Postretirement benefit curtailment - - - 2.8 - Other 10.2 7.9 9.9 20.6 21.6 191.5 187.6 198.5 254.7 342.3 Expenses: Interest expense 101.9 108.3 116.4 145.9 198.5 Provision for losses 12.2 9.9 8.6 19.1 47.2 Operating expenses 11.3 15.2 20.3 27.4 35.6 Other 4.9 12.3 12.4 14.3 3.8 130.3 145.7 157.7 206.7 285.1 Income from continuing operations before income taxes and cumulative effect of accounting change 61.2 41.9 40.8 48.0 57.2 Provision for taxes on income 21.9 13.6 24.0 15.9 19.1 Income from continuing operations before cumulative effect of accounting change 39.3 28.3 16.8 32.1 38.1 21 Discontinued operations, net - - - (2.5) (1.4) Cumulative effect of accounting change - - - (1.9) - Net income $ 39.3 $ 28.3 $ 16.8 $ 27.7 $ 36.7 Dividends declared $ 31.0 $ 30.5 $ 3.6 $105.8 $ 59.0 Ratio of income to fixed 1.58 1.37 1.34 1.32 1.28 charges(1) Balance sheet data: Total assets $2,049.6 $1,929.6 $2,055.5 $1,999.0 $2,582.3 Total debt 1,339.7 1,215.1 1,361.2 1,330.4 1,730.7 Shareholder's equity 280.2 271.9 269.4 256.4 340.5 Dividends accrued on preferred stock at $ 0.6 $ 0.6 $ 0.6 $ 0.5 $ 0.5 year end _______________ (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. 22 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. The Company has traditionally attempted to match-fund its business such that scheduled receipts from its portfolio will cover its expenses and debt payments as they become due. The Company believes that, absent a severe or prolonged economic downturn which results in defaults materially in excess of those provided for, receipts from the portfolio will cover the payment of expenses and debt payments when due. If cash provided by operations, issuance of commercial paper, borrowings under bank credit lines and term borrowings do not provide the necessary liquidity, the Company would be required to restrict its new business volume unless it obtained access to other sources of capital at rates that would allow for a reasonable return on new business. The Company has a $220 million revolving credit agreement which is reduced by borrowings of up to $16 million made by MDFS. The Company's commercial paper program is fully supported by this credit agreement. The Company also 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. In 1995, the Company issued $135.0 million of public senior and subordinated unsecured notes. See "Item 1. Business - Borrowing Operations." 1995 vs. 1994 Portfolio income (lease and interest income) increased $4.0 million (2.4%), primarily attributable to increased financing volume. Net gain on disposal or re-lease of assets decreased $2.4 million (21.6%) during 1995 compared to 1994, primarily attributable to a $1.3 million gain in 1994 from a sale of an executive jet within the CEL portfolio and $1.2 million of losses in 1995 due to a prepayment of a commercial aircraft financing note. Other income increased $2.3 million (29.1%) during 1995 compared to 1994, primarily attributable to a $1.0 million gain recognized in 1995 related to a debt maturity, and $0.6 million recognized in 1995 related to certain arrangements in connection with the Company's deferred agreement with TWA. Interest expense decreased $6.4 million (5.9%) during 1995 compared to 1994, primarily attributable to the Company's refinancing of a portion of its high coupon debt with lower coupon debt. Provision for losses increased $2.3 million (23.2%) during 1995 compared to 1994, primarily attributable to the overall increase in the Company's portfolio balances. The allowance for losses on financing receivables as a percent of the portfolio at December 31, 1995 and December 31, 1994 was 23 2.1% and 2.2%, respectively. Operating expenses decreased $3.9 million (25.7%) during 1995 compared to 1994, attributable primarily to the closing of certain of the Company's former non-core businesses. Other expenses decreased $7.4 million (60.2%) during 1995 compared to 1994, attributable primarily to a decrease of $3.2 million related to real estate owned expenses and the 1994 realization of the Company's $3.5 million foreign translation loss. 1994 vs. 1993 Finance lease income increased $10.6 million (11.8%) in 1994 compared to 1993, due to the late 1993 purchase of two new MD-11 aircraft financed under direct financing lease agreements. Interest on notes receivable in 1994 was $9.5 million (24.4%) lower than 1993, reflecting a decrease in bridge financings within the aircraft portfolio. Net gain on disposal or re-lease of assets decreased $12.6 million (53.2%) in 1994, primarily attributable to reduced dispositions within the aircraft portfolio. Other income decreased $2.0 million (20.2%) in 1994, primarily due to lower short-term investment income. The provision for losses increased $1.3 million (15.1%) during 1994 compared to 1993, attributable primarily to concerns with certain credits within the aircraft portfolio. Operating expenses decreased $5.1 million (25.1%) during 1994 compared to 1993, attributable primarily to the closings of certain business units within the non-core businesses segment portfolio. Item 8. Financial Statements and Supplementary Data The following pages include the consolidated financial statements of the Company as described in Item 14 (a) 1 and (a) 2 of Part IV herein. 24 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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, 1993, 1992 and 1991, and the related consolidated statements of income and income retained for growth, and cash flows for the years ended December 31, 1992 and 1991 (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, 1995, appearing on pages ? - ? is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived. /s/ ERNST & YOUNG LLP Orange County, California 25 January 17, 1996 26 McDonnell Douglas Finance Corporation and Subsidiaries Consolidated Balance Sheet December 31, (Dollars in millions, except stated value 1995 1994 and par value) ASSETS Financing receivables: Investment in finance leases $ 1,249.7 $1,090.3 Notes receivable 263.5 351.7 1,513.2 1,442.0 Allowance for losses on financing (42.3) (40.7) receivables Financing receivables, net 1,470.9 1,401.3 Cash and cash equivalents 12.6 13.1 Equipment under operating leases, net 475.5 374.3 Equipment held for sale or re-lease 28.6 12.1 Accounts with McDonnell Douglas and MDFS 18.5 44.9 Other assets 43.5 83.9 $ 2,049.6 $1,929.6 LIABILITIES AND SHAREHOLDER S EQUITY Short-term notes payable $ 13.7 $ 103.8 Accounts payable and accrued expenses 41.8 44.0 Other liabilities 82.5 92.5 Deferred income taxes 305.4 306.1 Long-term debt: Senior 1,206.3 1,023.8 Subordinated 119.7 87.5 1,769.4 1,657.7 Commitments and contingencies Note 7 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 Common stock $100 par value; authorized 100,000 shares; issued and 5.0 5.0 outstanding 50,000 shares Capital in excess of par value 89.5 89.5 Income retained for growth 135.7 127.4 280.2 271.9 $ 2,049.6 $ 1,929.6 See notes to consolidated financial statements. 27 McDonnell Douglas Finance Corporation and Subsidiaries Consolidated Statement of Income and Income Retained for Growth Years Ended December 31, (Dollars in millions) 1995 1994 1993 OPERATING INCOME Finance lease income $ 104.3 $ 100.7 $90.1 Interest income on notes receivable 27.2 29.4 38.9 Operating lease income, net of depreciation expense of $48.2, $39.9 and $39.0 in 1995, 1994 41.1 38.5 35.9 and 1993, respectively Net gain on disposal or re-lease of 8.7 11.1 23.7 assets Other 10.2 7.9 9.9 191.5 187.6 198.5 EXPENSES Interest expense 101.9 108.3 116.4 Provision for losses 12.2 9.9 8.6 Operating expenses 11.3 15.2 20.3 Other 4.9 12.3 12.4 130.3 145.7 157.7 Income before taxes on income 61.2 41.9 40.8 Provision for income taxes 21.9 13.6 24.0 Net income 39.3 28.3 16.8 Income retained for growth at beginning 127.4 129.6 116.4 of year Dividends (31.0) (30.5) (3.6) Income retained for growth at end of $ 135.7 $ 127.4 $129.6 year See notes to consolidated financial statements. 28 McDonnell Douglas Finance Corporation and Subsidiaries Consolidated Statement of Cash Flows Years Ended December 31, (Dollars in millions) 1995 1994 1993 OPERATING ACTIVITIES Net income $ 39.3 $ 28.3 $ 16.8 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation expense - equipment under operating leases 48.2 39.9 39.0 Net gain on disposal or re-lease of assets (8.7) (11.1) (23.7) Provision for losses 12.2 9.9 8.6 Change in assets and liabilities: Accounts with McDonnell Douglas and MDFS 26.4 25.5 (29.5) Other assets 40.4 5.8 51.2 Accounts payable and accrued liabilities 8.8 (18.5) 10.3 Other liabilities (10.0) 18.0 0.6 Deferred income taxes (0.7) 7.2 1.8 Other, net 0.4 9.2 3.3 156.3 114.2 78.4 INVESTING ACTIVITIES Net change in short-term notes and leases receivable 60.6 (58.6) 88.5 Purchase of equipment for operating leases (155.7) (40.0) (57.4) Proceeds from disposition of equipment, notes and leases receivable 109.6 109.0 139.5 Collection of notes and leases receivable 181.6 170.5 164.1 Acquisition of notes and leases receivable (435.6) (179.0) (385.7) (239.5) 1.9 (51.0) FINANCING ACTIVITIES Net change in short-term borrowings (90.1) (98.8) 69.1 Debt having maturities more than 90 days: Proceeds 572.8 229.9 183.0 Repayments (358.0) (280.1) (222.0) Payment of cash dividends (42.0) (19.5) (3.6) 82.7 (168.5) 26.5 Increase (decrease) in cash and cash equivalents (0.5) (52.4) 53.9 Cash and cash equivalents at beginning of year 13.1 65.5 11.6 Cash and cash equivalents at end of year $ 12.6 $ 13.1 $ 65.5 See notes to consolidated financial statements. 29 McDonnell Douglas Finance Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1995 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 ("McDonnell Douglas"). The Company was incorporated in Delaware in 1968 and provides equipment financing and leasing arrangements to a diversified range of customers and industries. The Company's primary operations include two financial reporting segments: commercial aircraft financing and commercial equipment leasing. The commercial aircraft financing segment provides customer financing services to McDonnell Douglas components, primarily Douglas Aircraft Company, and also provides financing for the acquisition of non- McDonnell Douglas aircraft. The commercial equipment leasing segment is principally involved in large financing and leasing transactions for a diversified range of equipment. 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 prior year amounts have been reclassified to conform to the 1995 presentation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of operating income and expenses during the reporting period. Actual results could differ from those estimates. 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, 1995 and 1994 were $10.0 million and $11.7 million. At December 31, 1995 and 1994, the Company has classified as other assets restricted cash deposited with banks in interest bearing accounts of $37.2 million and $37.0 million for specific lease rents and contractual purchase options related to certain aircraft leased by the 30 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, guaranties, prior loss experience and results of periodic credit reviews. Collateral that is repossessed in satisfaction of a receivable is transferred to equipment held for sale or re-lease at its estimated fair value. Subsequent to such transfer, these assets are carried at the lower of the former loan amount or estimated net realizable value. Payments from a few of the Company's commercial aircraft customers are delinquent and, as a result, the Company may be required to repossess aircraft from such customers. Losses from repossession of aircraft from these delinquent customers in the currently depressed aircraft market could have an adverse affect on future earnings. However, based on its current assessment of probable credit losses, management believes its loss reserves are adequate and does not believe that these matters would have a material adverse affect on the Company's earnings, cash flow or financial position. 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 McDonnell Douglas. McDonnell Douglas presently charges or credits the Company for the corresponding increase or decrease in McDonnell Douglas s taxes resulting from such inclusion. Intercompany payments are made when such taxes are due or tax benefits are realized by MDC based on the assumption, pursuant to an informal arrangement, that taxes are due or tax benefits are realized up to 100% of the amounts forecasted by the Company with the amounts in excess of such forecast due in the year realized by McDonnell Douglas. 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. Taxes on income is computed at current tax rates and adjusted for items that do not have tax consequences. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and the carrying amounts recognized for tax purposes. Future Accounting and Reporting Requirements Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued in March 1995. SFAS No. 121, which is effective beginning in 1996, addressed accounting for the impairment of long-lived assets to be disposed of or that will be held and used in operations. The impact of 31 the Company's adoption of this standard is not expected to be material. Note 2 Investment in Finance Leases The following lists the components of the investment in finance leases at December 31: (Dollars in millions) 1995 1994 Minimum lease payments receivable $1,687.0 1,466.9$ Estimated residual value of leased assets 309.4 261.1 Unearned income (749.6) (640.9) Deferred initial direct costs 2.9 3.2 $1,249.7 1,090.3$ The following lists the components of the investment in finance leases at December 31 that relate to aircraft leased by the Company under capital leases that have been subleased to others under finance leases: (Dollars in millions) 1995 1994 Minimum lease payments receivable $417.4 $ 74.3 Estimated residual value of leased assets 54.6 15.0 Unearned income (217.8) (36.6) Deferred initial direct costs 0.6 0.2 $254.8 $ 52.9 At December 31, 1995, finance lease receivables of $71.4 million serve as collateral to senior long-term debt. At December 31, 1995, finance lease receivables are due in installments as follows: 1996, $206.4 million; 1997, $181.9 million; 1998, $171.2 million; 1999, $189.9 million; 2000, $142.4 million; 2001 and thereafter, $795.2 million. Under a finance lease agreement, the Company leases a DC-10-30 aircraft to McDonnell Douglas. The lease requires monthly rent payments of $0.4 million through April 14, 2004. At December 31, 1995 and 1994, the carrying amount of this aircraft was $30.1 million and $31.6 million. Note 3 Notes Receivable The following lists the components of notes receivable at December 31: (Dollars in millions) 1995 1994 Principal $261.7 $ 349.2 Accrued interest 2.1 2.3 Unamortized discount (0.9) (0.6) Deferred initial direct costs 0.6 0.8 $263.5 $ 351.7 At December 31, 1995, notes receivables are due in installments as follows: 1996, $97.8 million; 1997, $39.4 million; 1998, $19.1 million; 1999, $19.1 million; 2000, $19.2 million; 2001 and thereafter, $67.1 32 million. During November 1995, the Company agreed to provide an aircraft financing customer with a credit facility of $100.0 million for the purpose of purchasing used McDonnell Douglas aircraft. This facility expires upon delivery of the first scheduled new McDonnell Douglas aircraft, presently expected to occur in 1999. Borrowings under this agreement must be repaid within 180 days and the interest rate is based on the London Interbank Offering Rate ("LIBOR"). At December 31, 1995, receivables outstanding pursuant to this agreement totaled $8.7 million. Note 4 Equipment Under Operating Leases Equipment under operating leases consists of the following at December 31: (Dollars in millions) 1995 1994 Commercial aircraft $364.1 $275.3 Executive aircraft 99.5 67.9 Highway vehicles 70.9 73.0 Printing equipment 34.1 28.6 Machine tools and production equipment 30.2 25.9 Medical equipment 8.5 14.0 Computers and related equipment 2.6 6.2 Other 7.1 3.8 617.0 494.7 Accumulated depreciation (132.7) (114.7) Rentals receivable 7.3 6.1 Deferred lease income (17.3) (13.0) Deferred initial direct costs 1.2 1.2 $475.5 $374.3 At December 31, 1995, future minimum rentals scheduled to be received under the noncancelable portion of operating leases are as follows: 1996, $93.7 million; 1997, $74.4 million; 1998, $66.0 million; 1999, $53.0 million; 2000, $31.9 million; 2001 and thereafter, $70.8 million. At December 31, 1995, equipment under operating leases of $26.7 million are assigned as collateral to senior long-term debt. Equipment under operating leases of $13.4 million at December 31, 1995, 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 McDonnell Douglas. The leases require quarterly rent payments of $2.1 million through May 31, 2002. At December 31, 1995 and 1994, the carrying amount of these aircraft was $54.0 million and $57.2 million. During January 1995, under a separate operating lease agreement, the Company leased a corporate aircraft to McDonnell Douglas. The lease requires monthly rent payments of $0.2 million through January 27, 2002. At December 31, 1995, the carrying amount of this aircraft was $16.2 33 million. Note 5 Income Taxes The components of the provision (benefit) for taxes on income for the year ended December 31 are as follows: (Dollars in millions) 1995 1994 1993 Current: Federal $19.4 $ 3.8 $ 19.8 State 3.2 2.6 2.4 22.6 6.4 22.2 Deferred: Federal (0.7) 7.2 1.0 Foreign - - 0.8 (0.7) 7.2 1.8 $21.9 $ 13.6 $ 24.0 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) 1995 1994 Deferred tax assets: Allowance for losses $14.8 $ 14.2 Deferred installment sales - 3.5 Other 5.2 16.6 20.0 34.3 Deferred tax liabilities: Leased assets (322.8) (316.9) Other (2.6) (23.5) (325.4) (340.4) Net deferred tax liability $(305.4) $ (306.1) 34 Income taxes computed at the United States federal income tax rate and the provision (benefit) for taxes on income differ as follows for the year ended December 31: (Dollars in millions) 1995 1994 1993 Tax computed at federal statutory $21.4 $ 14.7 $14.3 rate State income taxes, net of federal 2.1 1.7 1.5 tax benefit Foreign sales corporation benefit (2.1) - - Effect of foreign tax rates - 1.6 0.9 U.S. tax effect from the sale of MD - (3.2) - Bank Effect of investment tax credits (0.3) (0.3) (0.6) Effect of tax rate change - - 8.4 Other 0.8 (0.9) (0.5) $21.9 $ 13.6 $24.0 During December 1994, the Company disposed of its investment in McDonnell Douglas Bank Limited, a former United Kingdom company and an indirect wholly-owned subsidiary of the Company, for $23.8 million and recognized a loss on disposition totaling $3.2 million. The cumulative foreign currency translation adjustment was recognized and charged to other expenses. In addition, tax benefits totaling $3.2 million were recognized as a result of this sale. 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 1990 through 1992. The outcome of the IRS audit is not expected to have a material effect on the Company's financial condition or results of operations. Income tax refunds received by the Company from McDonnell Douglas totaled $2.9 million in 1995. Income taxes paid by the Company to McDonnell Douglas totaled $15.2 million in 1994 and $54.0 million in 1993. 35 Note 6 Indebtedness Short-term notes payable consist of the following at December 31: Weighted Average Balance at End of Interest Rate Year at End of Year (Dollars in millions) 1995 1994 1995 1994 Commercial paper $ - $103.0 - % 6.55 % Uncommitted credit facilities 10.0 - 6.05 - MDFS 3.7 0.8 6.38 6.64 $13.7 $103.8 At December 31, 1995, MDFS and the Company had a joint revolving credit agreement under which the Company may borrow a maximum of $220.0 million, reduced by MDFS borrowings under this same agreement. By the terms of this agreement, which expires in August 1999, MDFS can borrow no more than $16.0 million. The interest rate, at the option of MDFS or the Company, is either a floating rate generally based on a defined prime rate or fixed rate related to LIBOR. There were no amounts outstanding under this agreement at December 31, 1995 and 1994. Commercial paper, when outstanding, is fully supported by unused commitments under this agreement. The Company has available approximately $120.0 million in uncommitted, short-term bank credit facilities whereby the Company may borrow, at interest rates which are negotiated at the time of the borrowings, upon such terms as the Company and the banks may mutually agree. At December 31, 1995, borrowings on these credit facilities totaled $10.0 million. The Company has an effective shelf registration statement relating to up to $750.0 million aggregate principal amount of debt securities. The Company established a $500.0 million medium-term note program under a shelf registration and, as of December 31, 1995, has issued and sold $135.0 million in aggregate principal amount of securities under the program. 36 Senior long-term debt consists of the following at December 31: (Dollars in millions) 1995 1994 8.46% Note due 1995 $ - $ 8.0 10.52% Note due 1995 - 58.8 7.0% Notes due through 1996 0.3 1.2 7.0% Notes due through 1998, net of discount based on imputed interest rate of 10.88% 1.8 2.6 3.9% Notes due through 1999, net of discount based on imputed interest rates of 9.15% - 10.6% 6.3 7.9 5.75% - 6.875% Notes due through 2000, net of discount based on imputed interest rates of 9.75% - 11.4% 8.4 10.2 6.263% - 17.5% Notes due through 2001 84.8 80.3 5.0% - 8.375% Retail medium term notes due through 2011 84.5 88.9 5.48% - 13.55% Medium term notes due through 2005 773.8 684.1 Capital lease obligations due through 2003 246.4 81.8 1,206.3$ $1,023.8 Subordinated long-term debt consists of the following at December 31: (Dollars in millions) 1995 1994 9.26% Note due 1996 $ 5.0 $ 5.0 10.25% Notes due through 1997 - 15.0 12.35% Note due 1996 10.0 20.0 5.97% - 9.85% Medium term notes due through 1999 104.7 47.5 $119.7 $ 87.5 The Company uses interest rate swap agreements to manage interest costs and risks associated with changing interest rates. The differential to be paid or received is accrued as interest rates change and is recognized in interest expense over the life of the agreements. Counterparties to the interest rate swap contracts are major financial institutions and credit loss from counterparty non-performance is not anticipated. At December 31, 1995, the Company had interest rate swap agreements outstanding as follows: (Dollars in millions) Contract Notional Maturity Principal Receive Rate Pay Rate Capital lease 2007 $168.4 Floating(1) 6.65% - 6.885% obligations Medium term notes 1997 $20.0 Floating(1) 6.65% Medium term notes 2000 $20.0 8.59% - 8.61% Floating(1) _____________ (1) Floating rates are based on LIBOR or Federal Funds. As of December 31, 1995, $87.0 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 6.263% - 17.5% Notes due through 2001. Payments required on long-term debt and capital lease obligations during the years ending December 31 are as follows: 37 Long-Term Capital (Dollars in millions) Debt Leases 1996 $172.7 $ 33.4 1997 160.0 37.3 1998 176.3 37.3 1999 145.3 34.5 2000 138.6 53.0 2001 and thereafter 291.8 181.5 1,084.7 377.0 Deferred debt expenses (5.1) (0.6) Imputed interest - (130.0) 1,079.6$ $246.4 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, $60.1 million of the Company's income retained for growth was available for dividends at December 31, 1995. Interest payments totaled $99.2 million in 1995, $110.8 million in 1994 and $116.3 million in 1993. Note 7 Commitments and Contingencies In 1994, certain debtors of the Company commenced actions against the Company seeking damages in excess of $14.0 million based on various contractual and tort claims arising out of financing and loan agreements. Concurrently, the Company brought actions against the debtors to collect overdue amounts under the loans provided by the Company. No response to discovery has taken place in any of these actions. At this early stage of the legal proceedings it is not possible to predict with any certainty the ultimate outcome of these related legal proceedings. The Company intends to vigorously defend such claims. Based on information currently available, the Company believes it has meritorious defenses to all of the allegations of wrongdoing and that there will be no material adverse effect on the Company's earnings, cash flow or financial position. A certain commercial aircraft customer of the Company, located in Venezuela, has filed for bankruptcy protection in a Venezuelan bankruptcy court. Such customer is in default under a loan secured by an MD-83 aircraft. The amount due to the Company under the loan is approximately $13.6 million, which approximately equals the estimated value of the aircraft securing the loan, net of maintenance reserves held by the Company of $2.4 million. The aircraft is currently in possession of the Venezuelan bankruptcy trustee and the Company has retained outside counsel in Venezuela in connection with a foreclosure and repossession of the aircraft or a potential settlement. Although Venezuelan bankruptcy law provides for compensation to privileged creditors, to date, the Company has been unsuccessful in its attempts to repossess the aircraft. The Company does not expect any impact to have a material adverse effect on earnings, cash flows or financial position. 38 Trans World Airlines, Inc. ("TWA"), the Company's largest customer, completed a restructuring of its indebtedness and leasehold obligations to its creditors via a prepackaged reorganization plan confirmed by the U.S. Bankruptcy Court in August 1995. As part of the reorganization plan, McDonnell Douglas and the Company agreed to defer six months of lease and other payments. The plan calls for TWA to pay deferred amounts over a 28- month period which commenced in April 1995. The reorganization plan is not expected to have a significant adverse effect on the Company's earnings, cash flow or financial position. At December 31, 1995 and 1994, the Company had commitments to provide leasing and other financing totaling $116.6 million and $94.4 million. In conjunction with prior asset dispositions, at December 31, 1995, the Company is subject to a maximum recourse of $37.8 million. Based on trends to date, the Company's exposure to such loss is not expected to be significant. The Company leases aircraft under capital leases which have been subleased to others. At December 31, 1995, the Company had guaranteed the repayment of $7.9 million in capital lease obligations associated with a 50% partner. The Company's principal office is leased from McDonnell Douglas under an operating lease agreement, expiring in 1999. Rent expense in 1995, 1994 and 1993 totaled $0.9 million, $1.1 million, and $1.3 million. At December 31, 1995, the minimum future rental commitments under noncancelable leases payable over the remaining lives of the leases aggregate $3.4 million. Note 8 Transactions with McDonnell Douglas and MDFS Accounts with McDonnell Douglas and MDFS consist of the following at December 31: (Dollars in millions) 1995 1994 Notes receivable $ 14.6 $ 23.4 Federal income tax receivable 0.7 35.7 State income tax receivable (payable) (0.7) 1.3 Other payables 3.9 (15.5) $ 18.5 $ 44.9 The Company has arrangements with McDonnell Douglas, terminable at the discretion of either of the parties, pursuant to which the Company may borrow from McDonnell Douglas and McDonnell Douglas may borrow from the Company, funds for 30-day periods at a market rate of interest. Under these arrangements, there were no outstanding balances at December 31, 1995 and 1994. Under a similar arrangement, the Company may borrow from MDFS and MDFS and its subsidiaries may borrow from the Company, funds for 30-day periods at the Company's cost of funds for short-term borrowings. Under 39 these arrangements, borrowings of $3.7 million and $0.8 million were outstanding at December 31, 1995 and 1994. 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 McDonnell Douglas, 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 a market rate of interest. At December 31, 1995 and 1994, $14.6 million and $23.4 million was outstanding under this note. During 1995, 1994 and 1993, the Company purchased aircraft and aircraft related notes from McDonnell Douglas in the amount of $276.8 million, $227.1 million and $400.2 million, respectively. During 1995, 1994 and 1993, the Company recorded operating income from McDonnell Douglas relating to financings aggregating $16.2 million, $14.8 million and $13.1 million, respectively. At December 31, 1995 and 1994, $285.2 million and $281.8 million of the commercial aircraft financing portfolio was guaranteed by McDonnell Douglas. This represents 20.3% and 21.1% of the Company's total commercial aircraft financing portfolio at December 31, 1995 and 1994. Fees related to these guaranties that were paid to McDonnell Douglas totaled $1.9 million, $0.9 million, and $0.4 million in 1995, 1994 and 1993, respectively. During 1995, 1994 and 1993, the Company collected $0.5 million, $1.7 million and $0.2 million, respectively, under these guaranties. 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 million at December 31, 1995 and 1994. Substantially all employees of McDonnell Douglas and its subsidiaries are members of defined benefit pension plans and insurance plans. McDonnell Douglas also provides eligible employees the opportunity to participate in savings plans that permit both pretax and after-tax contributions. McDonnell Douglas generally charges the Company with the actual cost of these plans which are included with other McDonnell Douglas charges for support services and reflected in operating expenses. McDonnell Douglas charges for services provided during 1995, 1994 and 1993 totaled $1.1 million, $0.9 million and $1.1 million, respectively. Additionally, the Company was compensated by certain affiliates for a number of support services, which are netted against operating expenses, amounting to $1.2 million, $0.2 million and $1.8 million in 1995, 1994 and 1993, respectively. Note 9 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 40 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 (interest rate swaps); and the counterparties' credit standing, taking into account the remaining terms of the agreements (financing commitments). The estimated fair values of the Company's financial instruments consist of the following at December 31: (Dollars in millions) 1995 1994 Carrying Fair Carrying Fair Asset (Liability) Amount Value Amount Value ASSETS Cash and cash equivalents $ 12.6 $ 12.6 $ 13.1 $ 13.1 Notes receivable 263.5 270.0 351.7 347.5 LIABILITIES Short-term notes payable to (13.7) (13.7) (103.8) (103.8) Long-term debt: Senior, excluding capital (976.8) (1,025.7) (959.4) (965.6) Subordinated (123.5) (127.8) (90.8) (92.3) OFF BALANCE SHEET INSTRUMENTS Commitments to extend credit (116.6) (116.6) (97.5) (97.5) Interest rate swaps (1.5) (11.8) - - Note 10 Segment Information The Company's financing and leasing portfolio consists of the following at December 31: (Dollars in millions) 1995 1994 Commercial aircraft financing: 41 MDC aircraft financing $1,225.1 61.6% $1,140.8 62.8% Other commercial aircraft 180.6 9.1 192.2 10.6 financing 1,405.7 70.7 1,333.0 73.4 Commercial equipment leasing: Transportation services 69.3 3.5 56.3 3.1 Transportation equipment 58.3 2.9 38.2 2.1 Printing and publishing 35.7 1.8 16.0 0.9 Other 339.1 17.0 258.9 14.1 502.4 25.2 369.4 20.2 Other 80.6 4.1 113.9 6.4 Total portfolio $1,988.7 100.0% $1,816.3 100.0% A substantial portion of the Company's total portfolio is concentrated among a small number of the Company's largest commercial aircraft financing customers. The single largest commercial aircraft financing customer accounted for $279.9 million (14.1% of total Company portfolio) and $287.9 million (15.9% of total Company portfolio) at December 31, 1995 and 1994. The five largest commercial aircraft financing customers accounted for $865.2 million (43.5% of total Company portfolio) and $748.6 million (41.2% of total Company portfolio) at December 31, 1995 and 1994. There were no significant concentrations by customer within the commercial equipment leasing portfolio. In 1995 and 1994, a single aircraft financing customer accounted for 21.6% and 19.8% of the Company's operating income; no other customer accounted for more than 10% of the Company's operating income. The Company generally holds title to all leased equipment and generally has a perfected security interest in the assets financed through note and loan arrangements. Information about the Company's operations in its different financial reporting segments for the past three years is as follows: (Dollars in millions) 1995 1994 1993 Operating income: Commercial aircraft financing $124.3 $121.4 $107.4 Commercial equipment leasing 52.8 49.8 64.0 Other 12.4 15.7 24.4 Corporate 2.0 0.7 2.7 $191.5 $187.6 $198.5 Income (loss) before taxes on income: Commercial aircraft financing $37.0 $27.2 $ 26.3 Commercial equipment leasing 27.3 27.9 30.8 Other 1.4 (5.3) (10.7) Corporate (4.5) (7.9) (5.6) $61.2 $41.9 $ 40.8 Identifiable assets at December 31: Commercial aircraft financing $ 1,443.6 $1,364.1 $1,361.4 42 Commercial equipment leasing 507.3 382.7 420.2 Other 97.3 160.2 247.6 Corporate 1.4 22.6 26.3 $ 2,049.6 $1,929.6 $2,055.5 Depreciation expense - equipment under operating leases: Commercial aircraft financing $ 26.2 $17.2 $ 10.1 Commercial equipment leasing 22.0 22.2 28.2 Other - 0.5 0.7 $ 48.2 $39.9 $ 39.0 Equipment acquired for operating leases, at cost: Commercial aircraft financing $ 85.2 $ 15.7 $ 34.5 Commercial equipment leasing 70.5 24.3 22.9 $155.7 $ 40.0 $ 57.4 Operating income from financing of assets located outside the United States totaled $45.7 million, $41.7 million and $20.9 million in 1995, 1994 and 1993, respectively. McDonnell Douglas Finance Corporation and Subsidiaries Schedule II Valuation and Qualifying Accounts (Dollars in millions) Allowance Balance Charged For Losses at to Balance on Beginning Costs at End Financing of and (1) of Receivables Year Expenses Other Deductions Year 1995 $ 40.7 $ 12.2 $ - $ (10.6) $ 42.3 1994 $ 35.6 $ 9.9 $ 0.1 $ (4.9) $ 40.7 1993 $ 37.4 $ 8.6 $ - $ (10.4) $ 35.6 _____________ (1) Write-offs net of recoveries Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 43 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 ? Consolidated Balance Sheet at December 31, 1995 and 1994 ? Consolidated Statement of Income and Income Retained for Growth for the Years Ended December 31, 1995, 1994 and 1993 ? Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 ? Notes to Consolidated Financial Statements ? 2. Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts ? Schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission (the "SEC"), except Schedule II, which is included herein, have been omitted because they are not required, or the information is set forth in the financial statements or notes thereto. 3. Exhibits: 3.1 Restated Certificate of Incorporation of the Company dated June 29, 1989, incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1993. 3.2 By-Laws of the Company, as amended to date, incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1993. 4.1 Indenture, dated as of April 1, 1983, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(a) to the Company's Form S-3 Registration Statement(File No. 2-83007). 4.2 First Supplemental Indenture, dated as of June 12, 1995, between the Company and Bankers Trust Company, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 33-58989). 4.3 Subordinated Indenture, dated as of June 15, 1988, by and between the Company and Bankers Trust Company of California, N.A., as Subordinated Indenture Trustee, incorporated by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement 44 (File No. 33-26674). 4.4 First Supplemental Subordinated Indenture, dated as of June 12, 1995, between the Company and Bankers Trust Company, as successor Trustee to Bankers Trust Company of California, N.A., incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration Statement (File No. 33-58989). 4.5 Indenture, dated as of April 15, 1987, incorporated herein by reference to Exhibit 4 to the Company's Form S-3 Registration Statement (File No. 33-26674). 4.6 Form of Series II Medium Term Note. 4.7 Form of Series III Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration Statement (File No. 2-98001). 4.8 Form of Series V Medium Term Note, incorporated herein by reference to Exhibit 4(b) to the Company's Form S-3 Registration (File No. 33-13735). 4.9 Form of Series VI Medium Term Note. 4.10 Form of Series VII Medium Term Note. 4.11 Form of Series VIII Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Company's Form S-3 Registration Statement (File No. 33-26674). 4.12 Form of Series VIII Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration Statement (File No. 33-26674). 4.13 Form of Series IX Senior Medium Term Note, incorporated herein by reference to Exhibit 4(c) to the Company's Form S-3 Registration Statement(File No. 33-31419). 4.14 Form of Series IX Senior Federal Funds Medium Term Note, incorporated herein by reference to Exhibit 4(d) of the Company's Form 8-K dated May 16, 1995. 4.15 Form of Series IX Subordinated Medium Term Note, incorporated herein by reference to Exhibit 4(d) to the Company's Form S-3 Registration (File No. 33-31419). 4.16 Form of General Term Note(R), incorporated herein by reference to Exhibit 4(c) to the Company's Form 8-K dated May 26, 1993. 4.17 Form of Series X Senior Fixed Rate Medium Term Note, incorporated herein by reference to Exhibit 4(e) to the Company's Form S-3 Registration Statement (File No. 33-58989). 4.18 Form of Series X Senior Floating Rate Medium Term Note, 45 incorporated herein by reference to Exhibit 4(h) to the Company's Form S-3 Registration Statement (File No. 33-58989.) 4.19 Form of series X Subordinated Fixed Rate Medium Term Note, incorporated herein by reference to Exhibit 4(f) to the Company's Form S-3 Registration Statement (File No. 33-58989). 4.20 Form of Series X Subordinated Floating Rate Medium Term Note, incorporated herein by reference to Exhibit 4(g) to the Company's Form S-3 Registration Statement (File No. 33-58989). Pursuant to Item 601 (b)(4)(iii) of Regulation S-K, the Company is not filing certain instruments with respect to its long-term debt because the total amount of securities currently provided for under each of such instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request. 10.1 Amended and Restated Operating Agreement, dated as of April 12, 1993, among McDonnell Douglas, the Company and MDFS, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-K for the year ended December 31, 1993. 10.2 Operating Agreement, effective as of February 8, 1989, by and between the Company and MDFS. 10.3 By-Laws of McDonnell Douglas, as amended March 6, 1996, incorporated by reference from McDonnell Douglas s Exhibit 3.2 to its Form 10-K Report for the year ended December 31, 1995 (file No. 1-3685). 10.4 Supplemental Guaranty Agreement, dated as of December 30, 1993, by and between the Company and McDonnell Douglas, incorporated herein by reference to Exhibit 10.4 to the Company's Form 10-K for the year ended December 31, 1993. 10.5 Supplemental Guaranty Agreement, dated as of December 30,1993, by and between the Company and McDonnell Douglas, incorporated herein by reference to Exhibit 10.5 to the Company's Form 10-K for the year ended December 31, 1994. 10.6 Agreement, dated as of December 30, 1994, by and between the Company and McDonnell Douglas incorporated herein by reference to Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1994. 10.7 Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein incorporated herein by reference to Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1994. 10.8 Amendment No. 1, dated as of August 31, 1995, to Credit Agreement, dated as of September 29, 1994, among the Company, MDFS and the banks listed therein, incorporated herein by 46 reference to Exhibit 10 to the Company's Form 10-Q for the quarterly period ended September 30, 1995. 12 Statement regarding computation of ratio of earnings to fixed charges. 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule. (b) Reports on Form 8-K On February 27, 1996, the Company filed a Current Report on Form 8-K, which included the Company's Consolidated Balance Sheet at December 31, 1995 and 1994 and Consolidated Statement of Income and Income Retained for Growth for each of the years ended December 31, 1995, 1994 and 1993. 47 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/ STEVEN W. VOGEDING Steven W. Vogeding March 29, 1996 Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ JAMES F. PALMER Chairman and Director March 29, 1996 James F. Palmer /s/ THOMAS J. MOTHERWAY Thomas J. Motherway President and Director March 29, 1996 (Principal Executive Officer) /s/ STEVEN W. VOGEDING Steven W. Vogeding Vice President and Chief Financial Officer March 29, 1996 (Principal Financial Officer) Director F. Mark Kuhlmann Director Robert H. Hood /s/ MAURA R. MIZUGUCHI Controller March 29, 1996 Maura R. Mizuguchi (Principal Accounting Officer) /s/ DANIEL O. ANDERSON Vice President - Operations and Director March 29, 1996 Daniel O. Anderson EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 12,600 0 263,500 (42,300) 0 0 0 0 2,049,600 0 1,326,000 5,000 0 50,000 135,700 2,049,600 0 191,500 0 0 4,900 12,200 101,900 61,200 21,900 39,300 0 0 0 39,300 0 0
EX-23 3 EXHIBIT 23.1 1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-3, No. 33-58989) of McDonnell Douglas Finance Corporation and in the related Prospectuses of our report dated January 17, 1996 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, 1995. /s/ ERNST & YOUNG LLP Orange County, California March 29, 1996 EX-12 4 FIXED CHARGES 1 EXHIBIT 12 McDonnell Douglas Finance Corporation and Subsidiaries Computation of Ratio of Income to Fixed Charges Years Ending December 31, (Dollars in millions) 1995 1994 1993 1992 1991 Income: Income from continuing operations before taxes on income and cumulative effect of accounting change $ 61.2 $ 41.9 $ 40.8 $48.0 $ 57.2 Fixed charges 105.4 111.8 120.0 149.4 202.0 Income from continuing operations before taxes on income, cumulative effect of accounting change and fixed charges $ 166.6 $ 153.7 $ 160.8 $197.4 $ 259.2 Fixed charges: Interest expense $ 101.9 $ 108.3 $ 116.4 $145.9 $ 198.5 Preferred stock cash dividends 3.5 3.5 3.6 3.5 3.5 $ 105.4 $ 111.8 $ 120.0 $149.4 $ 202.0 Ratio of income from continuing operations before taxes on income, cumulative effect of accounting change and fixed charges to fixed charges 1.58 1.37 1.34 1.32 1.28 EX-4 5 EXHIBIT 4.6 1 EXHIBIT 4.6 NOTE AGENT'S NAME (MDFC logo appears here) NUMBER McDONNELL DOUGLAS FINANCE CORPORATION 100 Oceangate, Suite 900 Long Beach, California PRINCIPAL TRADE DATE DATE OF NOTE AMOUNT MATURITY TRUSTEE'S TRUSTEE'S INTEREST TAXPAYER'S ID TRANSFERRED DATE CUST. NO. TICKET NO. RATE OR SOC. SEC. NO. NAME AND ADDRESS OF REGISTERED OWNER SERIES II MEDIUM-TERM NOTE CONFIRMATION PAYING AGENT - TRUSTEE BANKERS TRUST COMPANY CUSTOMER'S RETAIN FOR THE TIME OF THE PLEASE SIGN AND SEE REVERSE COPY TAX TRANSACTION WILL BE RETURN ENCLOSED SIDE PURPOSES FURNISHED UPON WRITTEN RECEIPT REQUEST OF THE CUSTOMER REGISTERED (MDFC logo appears here) REGISTERED NO. $ McDONNELL DOUGLAS FINANCE CORPORATION % Series II Medium-Term Note ORIGINAL ISSUE DATE MATURITY DATE McDONNELL DOUGLAS FINANCE CORPORATION, a Delaware corporation (hereinafter called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to) for value received, hereby promises to pay to or registered assigns, the principal sum of DOLLARS on the Maturity Date shown above, and to pay interest thereon at the rate per annum shown above. The Company will pay interest semi-annually on February 15 and August 15, commencing with the February 15 or August 15 immediately following the Original Issue Date shown above, and on the Maturity Date shown above, provided, however, that if the Original Issue Date shown above is after 2 February 1 and on or before the immediately following February 15 or after August 1 and on or before the immediately following August 15, interest payments will commence on the next succeeding August 15 or February 15 as the case may be. Interest on the Note will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Original Issue Date shown above. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date, will, as provided in such Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the March 1 or the September 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the registered Holder on such Regular Record Date, and may be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to the Holder of this Note not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange upon which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of and interest on this Note will be made at the office or agency of the Company maintained for that purpose in New York, New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Note is one of the series designated as Series II Medium-Term Notes (the "Notes"). Unless the certificate of authentication hereof has been executed by the Trustee under such Indenture this Note shall not be entitled to any benefit under such Indenture, or be valid or obligatory for any purposes. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed manually or in facsimile, under its corporate seal to be imprinted hereon. Dated: McDONNELL DOUGLAS FINANCE CORPORATION (MDFC corporate seal appears here) By TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities /s/ James T. McMillan of the series designated herein referred to in the within-mentioned Indenture President BANKERS TRUST COMPANY, as Trustee Attested: By /s/ H. David Heumann Authorized Officer/Assistnt Secretary 3 COMMISSION SCHEDULE On sales agent of McDonnell Douglas Finance Corporation we will receive a commission equal to the following percentage of the principal amount of Notes sold: Term Commission Rate From 9 months to 1 year .125% More than 4 years to 7 years .50 % More than 7 years to 15 years .625% For each Note with a term of more than one year and not more than four years, the commission rate shall be: Term (in number of full months) X 1/12 X .125% of principal amount. McDONNELL DOUGLAS FINANCE CORPORATION Series II Medium-Term Note This Note is one of a duly authorized issue of Securities of the Company (hereinafter called the "Securities"), unlimited as to principal amount, issued and to be issued under an indenture dated as of April 1, 1983 (herein called the "Indenture"), between the Company and Bankers Trust Company, trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights thereunder of the Company, the Trustee and the Holders of the Securities, and the terms upon which the Securities are, and are to be, authenticated and delivered. The Notes will not have a sinking fund and are not redeemable prior to maturity. If an Event of Default shall occur and be continuing, the principal of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provide, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of 66-2/3% in principal amount of the Securities at the time Outstanding of each series affected. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon 4 all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor in lieu hereof whether or not notation for such consent or waiver is made upon this Note. No reference herein to the Indenture and no provisions of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the time, place and rate, and in the coin or currency, herein and in the Indenture prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable by the Holder hereof in the Security Register upon due presentment of this Note for registration of transfer at the office or agency of the Company in any place where the principal of and interest on this Note are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of the same series in authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only as registered Notes without coupons in denominations of $100,000 and any larger denomination which is an integral multiple of $1,000. As provided in the Indenture and subject to certain limitations therein set forth, Notes of this series are exchangeable for a like principal amount of Notes of this series of different authorized denominations, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment for registration of transfer, the Company, the Trustee, the Security Registrar and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the absolute owner hereof for all purposes whether or not this Note be overdue, and neither the Company, the Trustee, the Security Registrar nor any such agent shall be affected by notice to the contrary. The Holder of this Note shall not have recourse for the payment of principal of or interest on this Note or for any claim based on this Note or the Indenture, against any director, officer or stockholder, past, present or future, of the Company. By acceptance of this Note, the Holder waives any such claim against any such Person. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto 5 PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE ______________________________________________________________________________ ______________________________________________________________________________ the within Note of McDONNELL DOUGLAS FINANCE CORPORATION and hereby does irrevocably constitute and appoint ______________________________________________________________________Attorney to transfer the said Note on the books of the within Company, with full power of substitution in the premises. Dated _______________________ _____________________________________ _____________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. 6 (THIS PAGE REPRESENTS THE CARBON COPY FOR TRUSTEE, AGENT AND COMPANY) NOTE AGENT'S NAME (MDFC logo appears here) NUMBER McDONNELL DOUGLAS FINANCE CORPORATION 100 Oceangate, Suite 900 Long Beach, California PRINCIPAL TRADE DATE DATE OF NOTE AMOUNT MATURITY TRUSTEE'S TRUSTEE'S INTEREST TAXPAYER'S ID TRANSFERRED DATE CUST. NO. TICKET NO. RATE OR SOC. SEC. NO. NAME AND ADDRESS OF REGISTERED OWNER SERIES II MEDIUM-TERM NOTE CONFIRMATION PAYING AGENT - TRUSTEE BANKERS TRUST COMPANY FOR TRUSTEE/AGENT/COMPANY RECORDS REGISTERED (MDFC logo appears here) REGISTERED NO. $ McDONNELL DOUGLAS FINANCE CORPORATION % Series II Medium-Term Note Received of BANKERS TRUST COMPANY, the Series II Medium-Term Note of McDonnell Douglas Finance Corporation bearing the above serial number, payable to or registered assigns, Dated: _____________________________________ RECEIPT NOT NEGOTIABLE By __________________________________ Date ________________________________ EX-4 6 EXHIBIT 4.9 1 EXHIBIT 4.9 NOTE AGENT'S NAME (MDFC logo appears here) NUMBER McDONNELL DOUGLAS FINANCE CORPORATION 340 Golden Shore Long Beach, California 90802 PRINCIPAL TRADE DATE OF AMOUNT DATE NOTE MATURITY TRUSTEE'S TRUSTEE'S INTEREST TAXPAYER'S ID REDEMPTION DATE CUST. NO. TICKET NO. RATE OR SOC. SEC. DATE NO. NAME AND ADDRESS OF REGISTERED OWNER SERIES VI MEDIUM TERM NOTE CONFIRMATION PAYING AGENT - TRUSTEE BANKERS TRUST COMPANY CUSTOMER'S RETAIN THE TIME OF THE PLEASE SIGN SEE COPY FOR TAX TRANSACTION WILL BE AND RETURN REVERSE PURPOSES FURNISHED UPON ENCLOSED SIDE WRITTEN REQUEST OF RECEIPT THE CUSTOMER REGISTERED (MDFC logo appears here) REGISTERED NO. $ McDONNELL DOUGLAS FINANCE CORPORATION % Series VI Medium-Term Note ORIGINAL ISSUE DATE REDEMPTION DATE MATURITY DATE McDONNELL DOUGLAS FINANCE CORPORATION, a Delaware corporation (hereinafter called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to) for value received, hereby promises to pay to or registered assigns, the principal sum of DOLLARS on the Maturity Date shown above, and to pay interest thereon at the rate per annum shown above. The Company will pay interest semi-annually on June 15 and December 15, commencing with the June 15 or December 15 immediately following the Original Issue Date shown above, and on the Maturity Date shown above, provided, however, that if the Original Issue Date shown above is after June 1 and on or before the immediately following June 15 or after December 1 and on or before the immediately following December 15, interest payments will 2 commence on the next succeeding December 15 or June 15 as the case may be. Interest on the Note will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Original Issue Date shown above. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date, will, as provided in such Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the June 1 or the December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the registered Holder on such Regular Record Date, and may be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to the Holder of this Note not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange upon which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of and interest on this Note will be made at the office or agency of the Company maintained for that purpose in New York, New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Note is one of the series designated as Series VI Medium-Term Notes (the "Notes"). Unless the certificate of authentication hereof has been executed by the Trustee under such Indenture this Note shall not be entitled to any benefit under such Indenture, or be valid or obligatory for any purposes. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed manually or in facsimile, under its corporate seal to be imprinted hereon. Dated: McDONNELL DOUGLAS FINANCE CORPORATION (MDFC corporate seal appears here) By TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities /s/ James T. McMillan of the series designated herein referred to in the within-mentioned Indenture President BANKERS TRUST COMPANY, as Trustee Attested: By /s/ H. David Heumann Authorized Officer Assistant Secretary 3 McDONNELL DOUGLAS FINANCE CORPORATION Series VI Medium-Term Note This Note is one of a duly authorized issue of Securities of the Company (hereinafter called the "Securities"), unlimited as to principal amount, issued and to be issued under an indenture dated as of April 15, 1987 (herein called the "Indenture"), between the Company and Bankers Trust Company, trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights thereunder of the Company, the Trustee and the Holders of the Securities, and the terms upon which the Securities are, and are to be, authenticated and delivered. This Note may not be redeemed prior to the Redemption Date shown above. If no Redemption Date is shown above, this Note is not redeemable prior to maturity. On and after the Redemption Date shown above, this Note is redeemable in whole or in part in increments of $1,000 (provided that any remaining principal amount of this Note shall be at least $100,000) at the option of the Company at a redemption price equal to 100% of the principal amount to be redeemed, together with interest thereon payable to the date of redemption, upon notice given not more than 60 nor less than 30 days prior to the date of redemption. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the surrender hereof. The Notes will not have a sinking fund. If an Event of Default shall occur and be continuing, the principal of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provide, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of 66-2/3% in principal amount of the Securities at the time Outstanding of each series affected. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor in lieu hereof whether or not notation for such consent or waiver is made upon this Note. No reference herein to the Indenture and no provisions of this Note or of 4 the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the time, place and rate, and in the coin or currency, herein and in the Indenture prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable by the Holder hereof in the Security Register upon due presentment of this Note for registration of transfer at the office or agency of the Company in any place where the principal of and interest on this Note are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of the same series in authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only as registered Notes without coupons in denominations of $100,000 and any larger denomination which is an integral multiple of $1,000. As provided in the Indenture and subject to certain limitations therein set forth, Notes of this series are exchangeable for a like principal amount of Notes of this series of different authorized denominations, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment for registration of transfer, the Company, the Trustee, the Security Registrar and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the absolute owner hereof for all purposes whether or not this Note be overdue, and neither the Company, the Trustee, the Security Registrar nor any such agent shall be affected by notice to the contrary. The Holder of this Note shall not have recourse for the payment of principal of or interest on this Note or for any claim based on this Note or the indenture, against any director, officer or stockholder, past, present or future, of the Company. By acceptance of this Note, the Holder waives any such claim against any such Person. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE ______________________________________________________________________________ ______________________________________________________________________________ 5 the within Note of McDONNELL DOUGLAS FINANCE CORPORATION and hereby does irrevocably constitute and appoint______________________________________Attorney to transfer the said Note on the books of the within Company, with full power of substitution in the premises. Dated _______________________ _____________________________________ _____________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. 6 (THIS PAGE REPRESENTS THE CARBON COPY FOR TRUSTEE, AGENT AND COMPANY) NOTE AGENT'S NAME (MDFC logo appears here) NUMBER McDONNELL DOUGLAS FINANCE CORPORATION 340 Golden Shore Long Beach, California 90802 PRINCIPAL TRADE DATE OF AMOUNT DATE NOTE MATURITY TRUSTEE'S TRUSTEE'S INTEREST TAXPAYER'S ID REDEMPTION DATE CUST. TICKET NO. RATE OR SOC. SEC. DATE NO. NO. NAME AND ADDRESS OF REGISTERED OWNER SERIES VI MEDIUM-TERM NOTE CONFIRMATION PAYING AGENT - TRUSTEE BANKERS TRUST COMPANY FOR TRUSTEE/AGENT/COMPANY RECORDS REGISTERED (MDFC logo appears here) REGISTERED NO. $ McDONNELL DOUGLAS FINANCE CORPORATION % Series VI Medium-Term Note ORIGINAL ISSUE DATE REDEMPTION DATE MATURITY DATE Received of BANKERS TRUST COMPANY, the Series VI Medium-Term Note of McDonnell Douglas Finance Corporation bearing the above serial number, payable to or registered assigns, Dated: _____________________________________ RECEIPT NOT NEGOTIABLE By __________________________________ Date ________________________________ EX-4 7 EXHIBIT 4.10 1 EXHIBIT 4.10 NOTE AGENT'S NAME (MDFC logo appears here) NUMBER McDONNELL DOUGLAS FINANCE CORPORATION VII- 340 Golden Shore Long Beach, California 90802 PRINCIPAL TRADE DATE OF AMOUNT DATE NOTE MATURITY TRUSTEE'S TRUSTEE'S INTEREST TAXPAYER'S ID OR REDEMPTION DATE CUST. NO. TICKET NO. RATE SOC. SEC. NO. DATE NAME AND ADDRESS OF REGISTERED OWNER SERIES VII MEDIUM-TERM NOTE CONFIRMATION PAYING AGENT - TRUSTEE BANKERS TRUST COMPANY CUSTOMER'S RETAIN THE TIME OF THE PLEASE SIGN SEE COPY FOR TAX TRANSACTION WILL BE AND RETURN REVERSE PURPOSES FURNISHED UPON ENCLOSED SIDE WRITTEN REQUEST OF RECEIPT THE CUSTOMER REGISTERED (MDFC logo appears REGISTERED here) NO. VII- $ McDONNELL DOUGLAS FINANCE CORPORATION % Series VII Medium-Term Note ORIGINAL ISSUE DATE REDEMPTION DATE MATURITY DATE McDONNELL DOUGLAS FINANCE CORPORATION, a Delaware corporation (hereinafter called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to) for value received, hereby promises to pay to or registered assigns, the principal sum of DOLLARS on the Maturity Date shown above, and to pay interest thereon at the rate per annum shown above. The Company will pay interest semi-annually on March 15 and September 15, commencing with the March 15 or September 15 immediately following the Original Issue Date shown above, and on the Maturity Date shown above, provided, however, that if the Original Issue Date shown above is after March 1 and on or before the immediately following March 15 or after 2 September 1 and on or before the immediately following September 15, interest payments will commence on the next succeeding September 15 or March 15 as the case may be. Interest on the Note will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Original Issue Date shown above. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date, will, as provided in such Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the March 1 or the September 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the registered Holder on such Regular Record Date, and may be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to the Holder of this Note not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange upon which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of and interest on this Note will be made at the office or agency of the Company maintained for that purpose in New York, New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS NOTE SET FORTH ON THE REVERSE HEREOF, WHICH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE. THIS NOTE IS ONE OF THE SERIES DESIGNATED AS SERIES VII MEDIUM-TERM NOTES (THE "NOTES"). Unless the certificate of authentication hereof has been executed by the Trustee under such Indenture this Note shall not be entitled to any benefit under such Indenture, or be valid or obligatory for any purposes. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed manually or in facsimile, under its corporate seal to be imprinted hereon. Dated: McDONNELL DOUGLAS FINANCE CORPORATION (MDFC corporate seal appears here) By TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities /s/ James T. McMillan of the series designated herein referred to in the within-mentioned Indenture President BANKERS TRUST COMPANY, as Trustee Attested: By /s/ H. David Heumann Authorized OfficerAssistant Secretary 3 COMMISSION SCHEDULE On sales agent of McDonnell Douglas Finance Corporation we will receive a commission equal to the following percentage of the principal amount of Notes sold: Term Commission Rate From 9 months to 1 year .125% More than 1 year to 18 months .150% More than 18 months to 2 years .200% More than 2 years to 3 years .250% More than 3 years to 4 years .325% More than 4 years to 5 years .450% More than 5 years to 6 years .500% More than 6 years to 7 years .550% More than 7 years to 10 years .600% More than 10 years to 15 years .625% More than 15 years to 20 years .700% More than 20 years to 30 years .750% For each Note with a term of more than one year and not more than four years, the commission rate shall be: Term (in number of full months) X 1/12 X .125% of principal amount. McDONNELL DOUGLAS FINANCE CORPORATION Series VII Medium-Term Note This Note is one of a duly authorized issue of Securities of the Company (hereinafter called the "Securities"), unlimited as to principal amount, issued and to be issued under an indenture dated as of April 15, 1987 (herein called the "Indenture"), between the Company and Bankers Trust Company, trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights thereunder of the Company, the Trustee and the Holders of the Securities, and the terms upon which the Securities are, and are to be, authenticated and delivered. This Note may not be redeemed prior to the Redemption Date shown above. If no Redemption Date is shown above, this Note is not redeemable prior to maturity. On and after the Redemption Date shown above, this Note is redeemable in whole or in part in increments of $1,000 (provided that any remaining principal amount of this Note shall be at least $100,000) at the option of the Company at a redemption price equal to 100% of the principal amount to be redeemed, together with interest thereon payable to the date of redemption, upon notice given not more than 60 nor less than 30 days prior to the date of redemption. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the surrender hereof. The Notes will not have a sinking fund. If an Event of Default shall occur and be continuing, the principal of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. 4 The Indenture permits, with certain exceptions as therein provide, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of 66-2/3% in principal amount of the Securities at the time Outstanding of each series affected. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor in lieu hereof whether or not notation for such consent or waiver is made upon this Note. No reference herein to the Indenture and no provisions of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the time, place and rate, and in the coin or currency, herein and in the Indenture prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable by the Holder hereof in the Security Register upon due presentment of this Note for registration of transfer at the office or agency of the Company in any place where the principal of and interest on this Note are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of the same series in authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only as registered Notes without coupons in denominations of $100,000 and any larger denomination which is an integral multiple of $1,000. As provided in the Indenture and subject to certain limitations therein set forth, Notes of this series are exchangeable for a like principal amount of Notes of this series of different authorized denominations, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment for registration of transfer, the Company, the Trustee, the Security Registrar and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the absolute owner hereof for all purposes whether or not this Note be overdue, and neither the Company, the Trustee, the Security Registrar nor any such agent shall be affected by notice to the contrary. The Holder of this Note shall not have recourse for the payment of principal of or interest on this Note or for any claim based on this Note or the Indenture, against any director, officer or stockholder, past, present or future, of the Company. By acceptance of this Note, the Holder waives any such claim against any such Person. 5 All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. ASSIGNMMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE ______________________________________________________________________________ ______________________________________________________________________________ the within Note of McDONNELL DOUGLAS FINANCE CORPORATION and hereby does irrevocably constitute and appoint___________________________________Attorney to transfer the said Note on the books of the within Company, with full power of substitution in the premises. Dated _______________________ _____________________________________ _____________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. 6 (THIS PAGE REPRESENTS THE CARBON COPY FOR TRUSTEE, AGENT AND COMPANY) NOTE AGENT'S NAME (MDFC logo appears here) NUMBER McDONNELL DOUGLAS FINANCE CORPORATION VII- 340 Golden Shore Long Beach, California 90802 PRINCIPAL TRADE DATE OF AMOUNT DATE NOTE MATURITY TRUSTEE'S TRUSTEE'S INTEREST TAXPAYER'S ID REDEMPTION DATE CUST. NO. TICKET NO. RATE OR SOC. SEC. DATE NO. NAME AND ADDRESS OF REGISTERED OWNER SERIES VI MEDIUM-TERM NOTE CONFIRMATION PAYING AGENT - TRUSTEE BANKERS TRUST COMPANY FOR TRUSTEE/AGENT/COMPANY RECORDS REGISTERED (MDFC logo appears here) REGISTERED NO. VII- $ McDONNELL DOUGLAS FINANCE CORPORATION % Series VII Medium-Term Note ORIGINAL ISSUE DATE REDEMPTION DATE MATURITY DATE Received of BANKERS TRUST COMPANY, the Series VII Medium-Term Note of McDonnell Douglas Finance Corporation bearing the above serial number, payable to or registered assigns, the principal sum of DOLLARS Dated: _____________________________________ RECEIPT NOT NEGOTIABLE By __________________________________ Date ________________________________ EX-10 8 EXHIBIT 10.2 1 EXHIBIT 10.2 Operating Agreement THIS AGREEMENT, dated effective as of February 8, 1989 by and between 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: WHEREAS, McDonnell Douglas Corporation ("MDC") and the parties hereto have entered into an Amended and Restated Operating Agreement dated effective as of February 8, 1989, (the "Operating Agreement") which provides that MDC shall pay MDFS for certain tax savings realized by MDC as a result of including MDFS shall pay MDC for certain additional taxes incurred by MDC as a result of including MDFS and its subsidiaries in such return. NOW, THEREFORE, the parties hereto agree as follows: Section 1. Federal Income Taxes. Pursuant to the Operating Agreement, 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 of 1986, as amended. With respect to each taxable year for which such practice remains in effect, MDFS agrees to pay to MDFC 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 MDFC 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 MDFC 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), MDFC shall pay MDFS an amount equal to the excess of the clause (ii) amount over the clause (i) amount. If subsequent to any payments made by MDFS pursuant to this Section 1, MDC or MDFS shall incur Federal income tax losses which under applicable law could be carried back to the taxable year for which such payments were made, MDFC will nevertheless be under no obligation to repay to MDFS any portion of such payments. Section 2. Miscellaneous. 2 2.1 This Agreement is not and does not constitute a direct or indirect guarantee by MDFS of any obligation or debt of MDFC. 2.2 This Agreement may be amended, waived or terminated at any time by written agreement of the parties, subject to outstanding indenture provisions relating to securities issued by MDFC. 2.3 In no event shall MDFC receive an amount under this Agreement which is less than the amount that MDFC would have received under the Operating Agreement dated as of January 15, 1975 between MDC and MDFC prior to its amendment. 2.4 MDFS hereby assigns to MDFC its rights and obligations under Sections 1, 2 and 3 of the Operating Agreement. MCDONNELL DOUGLAS FINANCIAL SERVICES CORPORATION By___________________________________ Its:_________________________________ MCDONNELL DOUGLAS FINANCE CORPORATION By___________________________________ Its:_________________________________ -----END PRIVACY-ENHANCED MESSAGE-----