-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, f2ltbmGCEyutSQPKHXKvlswhDJFUjxtRzVNhqROiQvW5D7q5elqC9968nkrN32CM Hq1xr6FLb9q0zccb2kP2oA== 0000063917-94-000013.txt : 19940323 0000063917-94-000013.hdr.sgml : 19940323 ACCESSION NUMBER: 0000063917-94-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDONNELL DOUGLAS CORP CENTRAL INDEX KEY: 0000063917 STANDARD INDUSTRIAL CLASSIFICATION: 3721 IRS NUMBER: 430400674 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-03685 FILM NUMBER: 94517238 BUSINESS ADDRESS: STREET 1: P O BOX 516 STREET 2: MCDONNELL BLVD AT AIRPORT RD CITY: ST LOUIS STATE: MO ZIP: 63166-0516 BUSINESS PHONE: 3142320232 FORMER COMPANY: FORMER CONFORMED NAME: MCDONNELL CO DATE OF NAME CHANGE: 19670601 10-K 1 FORM 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES === EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: December 31, 1993 ----------------------------------- or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES === EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------------- -------------- Commission file number 1-3685 MCDONNELL DOUGLAS CORPORATION - -------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Maryland 43-0400674 - ---------------------------------- ---------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) Post Office Box 516, St. Louis, MO 63166-0516 - ---------------------------------- ---------------------------------- (Address of Principal Executive (Zip Code) Offices) 314-232-0232 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ----------------------------------- ---------------------------------- Common Stock, par value $1 a share New York & Pacific Stock Exchanges Preferred Stock Purchase Rights New York & Pacific Stock Exchanges 8 5/8% Notes due April 1, 1997 New York Stock Exchange 8 1/4% Notes due July 1, 2000 New York Stock Exchange 9 1/4% Notes due April 1, 2002 New York Stock Exchange 9 3/4% Debentures due April 1, 2012 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No === === 2 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. === State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. Aggregate market value of common stock held by non-affiliates of MDC at February 28, 1994: $4.077 billion. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: Common shares outstanding at February 28, 1994: 39,347,075 shares DOCUMENTS INCORPORATED BY REFERENCE: Portions of the 1993 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV. Portions of the proxy statement for the annual meeting to be held on April 22, 1994 are incorporated by reference into Part III. Exhibit Index on Page 13 3 [HARD COPY PG. 2] PART I ITEM 1 BUSINESS GENERAL The Company was incorporated in Maryland in 1939 under the name McDonnell Aircraft Corporation. On April 19, 1967, the shareholders approved the merger with Douglas Aircraft Company and the name of the corporation was changed to McDonnell Douglas Corporation (the Company or MDC). The Company, its divisions and its subsidiaries operate principally in four industry segments: military aircraft; missiles, space and electronic systems; commercial aircraft; and financial services and other. Operations in the first two industry segments are conducted primarily by McDonnell Douglas Aerospace, an unincorporated operating division of the Company, which is engaged in design, development, production, and support of the following major products: military transport aircraft; combat aircraft and training systems; missiles; space launch vehicles and space station systems and integration; defense and commercial electronics, lasers, sensors, and command, control, communications, and intelligence systems; and commercial and military helicopters and ordnance. Operations in the commercial aircraft segment are conducted by Douglas Aircraft Company (DAC), an unincorporated operating division of the Company, which designs, develops, produces and sells commercial transport aircraft. DAC separated its commercial and government programs into two operating units effective January 1, 1992. Prior to the reorganization of DAC, the results of operations of both the commercial and military programs were reported under the caption of "transport aircraft". The "military aircraft" segment now includes the former "combat aircraft" segment plus the C-17 Globemaster III program and other minor military programs reported under the "transport aircraft" caption prior to 1992. The "commercial aircraft" segment includes the commercial programs previously reported under the caption "transport aircraft". In August 1992, the DAC military programs became part of the McDonnell Douglas Aerospace division. Through its McDonnell Douglas Financial Services Corporation (MDFS) subsidiary, the Company is engaged in aircraft financing and commercial equipment leasing. MDFS was previously engaged in a variety of commercial and industrial equipment and aircraft financing. During 1991 and 1992, portfolios of several non-core businesses were sold. The Company's subsidiary, McDonnell Douglas Realty Company, was established in 1972 to develop the Company's surplus real estate. While continuing to serve that role, McDonnell Douglas Realty Company has become a full-service developer and property manager in the commercial real estate market as well as for the Company's aerospace business. Since 1988, substantially all of the Company's information systems business has been divested. The Company sold its network systems business and Health Systems Company in 1989, sold its North American Field Service business in 1990 and discontinued its information systems assembly operations in the U.S. in 1990. In 1991, MDC sold substantially all of the assets of McDonnell Douglas Systems Integration Company and certain related 4 assets of McDonnell Douglas Information Systems International (MDISI). In July 1992, MDC sold all the outstanding stock of TeleCheck Services, Inc. and in March 1993, MDC sold its remaining MDISI business. The business segments in which the Company is engaged and discussion of certain of their respective products appear under the captions: "Military Aircraft", "Commercial Aircraft", "Missiles, Space and Electronic Systems", and "Complementary Businesses" on pages 6 through 20, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 24 through 32, of the Company's 1993 Annual Report to Shareholders, the text portions of which are incorporated herein by this reference. [HARD COPY PG. 3] FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Financial information regarding the Company's industry segments is provided under the caption "Selected Financial Data by Industry Segment - Continuing Operations" on page 33 of the Company's 1993 Annual Report to Shareholders, which is incorporated herein by this reference. MARKETING AND MAJOR CUSTOMER - MCDONNELL DOUGLAS AEROSPACE Discussion regarding the Company's most significant customer in the military aircraft and missiles, space and electronic systems segments is included under the captions "Business and Market Considerations - Military Aerospace Business" and "Government Business Audits, Reviews and Investigations" on pages 30 through 32 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1993 Annual Report to Shareholders, which are incorporated herein by this reference. COMPETITION Programs and products comprising most of the Company's business volume are of a highly technical nature, comparatively few in number, high in unit cost, and have traditionally enjoyed relatively long production lives. There is significant competition in the aerospace industry, both in military and commercial programs. The Company's military segments compete in an industry composed of a few major competitors and a limited number of customers. The number of competitors in these segments has decreased over the past few years due to consolidation brought about by reduced defense spending. However, competition for military programs remains significant. The Company's commercial aircraft sales are subject to intense competition from aircraft manufactured by other companies, both foreign and domestic, including companies which are nationally owned or subsidized and have a larger family of commercial aircraft to meet varied and changing airline requirements. The Company's principal competitors in commercial aircraft are The Boeing Company and Airbus Industrie. To meet competition, 5 the Company maintains a continuous program directed toward enhancing the performance and capability of its products. Additionally, product improvement programs which increase airplane operational capability, improve reliability, enhance maintainability and increase commonality within current airplane families and across the entire product line will continue. A vital part of the Company's strategy is a program to develop derivatives of the current product line. MDFS is subject to competition from other financial institutions, including commercial banks, finance companies, and leasing companies. Some full-service leasing companies are larger than MDFS and have greater financial resources, greater leverage ability, and lower effective borrowing costs. SUBCONTRACTING, PROCUREMENT AND RAW MATERIALS The most important raw materials required for the Company's products, from the standpoint of aggregate cost, are aluminum (sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites (including carbon and boron). All of these materials are purchased from outside sources and generally are available at competitive prices. Additional sources and capacity exist for these raw materials, but it would take a year or more before they could become qualified alternate sources of supply. [HARD COPY PG. 4] The Company purchases many components, such as engines and accessories, electrical power systems, radars, landing gears, fuel systems, refrigeration systems, navigational equipment, and flight and engine instruments for use in aircraft, and propulsion systems, guidance systems, telemetry and gyroscopic devices in support of its space systems and missile programs. In addition, fabricated subassemblies such as engine pods and pylons, fuselage sections, wings and empennage surfaces, doors and flaps, are sometimes subcontracted to outside suppliers. The U.S. Government and commercial customers also furnish many components for incorporation into aircraft and other products they purchase from the Company. The Company is dependent upon the ability of its large number of suppliers and subcontractors to meet performance specifications, quality standards, and delivery schedules at anticipated costs, and their failure to do so would adversely affect production schedules and contract profitability, while jeopardizing the ability of the Company to fulfill commitments to its customers. The Company has encountered some difficulty from time to time in assuring long-lead time supplies of essential parts, subassemblies, and materials. The Company's success in forestalling shortages of critical commodities over the long term is difficult to predict because many factors affecting such shortages are outside its control. EMPLOYEES At December 31, 1993 the total employment of the Company, including subsidiaries, was 70,016. 6 PATENTS AND LICENSES The Company holds many patents and has licenses under patents held by others. The Company does not believe that the expiration of any patent or group of patents, nor the termination of any patent license agreement, would materially affect its business. The Company does not believe that any of its patents or trademarks are materially important to the conduct of its business. ENVIRONMENTAL REGULATIONS See "Environmental Expenditures" on page 32 in "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Company's 1993 Annual Report to Shareholders, which is incorporated herein by this reference. RESEARCH AND DEVELOPMENT A significant portion of the Company's business with the U.S. Government consists of research, development, test, and evaluation work, which are reflected as sales and costs in the Company's financial statements. Customer-sponsored research and development work amounted to approximately $1.126 billion in 1993, $1.018 billion in 1992, and $1.221 billion in 1991. Company-initiated research and development and bid and proposal work, related to both commercial business and business with the U.S. Government, amounted to $341 million in 1993, $509 million in 1992, and $429 million in 1991. [HARD COPY PG. 5] U.S. GOVERNMENT AND EXPORT SALES Although there are additional risks to the Company attendant to its foreign operations, such as currency fluctuations and devaluations, the risk of war, changes in foreign governments and their policies, differences in foreign laws, uncertainties as to enforcement of contract rights, and difficulties in negotiating and litigating with foreign sovereigns, the Company's financial position has not been materially affected. Since most of the Company's foreign export sales involve technologically advanced products, services and expertise, U.S. export control regulations limit the types of products and services that may be offered and the countries and governments to which sales may be made. The Department of State issues and maintains the International Traffic in Arms Regulations pursuant to the Arms Export Control Act. The Department of Commerce issues and maintains the Export Administration Regulations pursuant to the Export Administration Act and the Department of Treasury implements and maintains transaction controls, sanctions and trade embargoes pursuant to the Trading With the Enemy Act and the International Emergency Economic Powers Act. Pursuant to these regulations, certain products and services cannot be exported without obtaining a license. Most of the defense products that the Company sells abroad cannot be sold without such a license. Consequently, the Company's international sales may be adversely affected by changes in the United States Government's export policy, the implementation of trade sanctions or embargoes, or the suspension or revocation of the Company's foreign export control licenses. 7 Additional information required by this item is included in Note 19, "U.S. Government and Export Sales" on page 52 of the Company's 1993 Annual Report to Shareholders, which is incorporated herein by this reference. BACKLOG The backlog of orders at December 31 of the last two years has been as follows: 1993 1992 ------------------ ------------------- Backlog % Backlog % --------- ------- --------- ------- (Dollars in millions) Firm backlog: Military aircraft $ 7,997 41.3 $ 7,619 31.7 Commercial aircraft 9,172 47.3 13,364 55.5 Missiles, space and electronic systems 2,210 11.4 3,069 12.8 --------- ------- --------- ------- Total Firm Backlog $ 19,379 100.0 $ 24,052 100.0 ========= ======= ========= ======= Contingent backlog: Military aircraft $ 10,742 65.8 $ 10,760 60.6 Commercial aircraft 3,059 18.8 4,311 24.3 Missiles, space and electronic systems 2,518 15.4 2,683 15.1 --------- ------- --------- ------- Total Contingent Backlog $ 16,319 100.0 $ 17,754 100.0 ========= ======= ========= ======= [HARD COPY PG. 6] Backlog reported is that of the aerospace segments. Customer options and products produced for short-term lease are excluded from backlog. For a discussion of risks associated with backlog for commercial customers, see "Backlog" on page 32 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1993 Annual Report to Shareholders, which is incorporated herein by this reference. Contingent backlog includes: (a) U.S. and other government orders not yet funded; (b) U.S. and other government orders being negotiated as continuations of authorized programs; and (c) unearned price escalation on firm commercial aircraft orders. The backlog amounts include units scheduled for delivery over extended future periods. Since substantially all work for the U.S. and other governments is accounted for on the percentage of completion method of accounting whereby sales are recorded as work is performed, such amounts included in backlog cannot be segregated on the basis of scheduled deliveries. However, with respect to commercial jetliners and related products included in the commercial segment (which are accounted for on a delivery method), the firm backlog related to deliveries scheduled after one year was $6.9 billion at December 31, 1993, and $9.2 billion at December 31, 1992. 8 The Government may terminate its contracts for default, or for its convenience whenever it believes that such termination would be in the best interest of the Government. For a further discussion of termination for default and termination for convenience risks, see "Military Aerospace Business" on page 30 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1993 Annual Report to Shareholders, which is incorporated herein by this reference. [HARD COPY PG. 7] EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company at February 28, 1994, were as follows: EXECUTIVE AGE POSITIONS AND OFFICES HELD - ------------------ --- --------------------------------------- Dean C. Borgman 52 McDonnell Douglas Helicopter Systems (MDHS) Senior Vice President - General Manager since September 1993 and McDonnell Douglas Helicopter Company (MDHC) President since March 1992. MDHC Vice President - Commercial Programs 1992. MDHC General Manager MDX Program 1990-1992. MDHC Vice President - Advanced Product and Technology Division 1989-1990. MDHC Vice President - Engineering 1986-1989. Robert L. Brand 56 MDC Vice President and Controller since September 1992. McDonnell Douglas Missile Systems Company (MDMSC) Vice President - Business Management and Chief Financial Officer 1992. MDC Controller 1987-1992. John P. Capellupo 59 MDC Executive Vice President since August 1992. McDonnell Aircraft Company (MCAIR) President 1991-1992. DAC Deputy President 1990-1991. MDMSC President 1989-1990. MCAIR Vice President - General Manager F/A-18 Program 1985-1989. Kenneth A. Francis 60 MDC Executive Vice President since August 1992. McDonnell Douglas Space Systems Company (MDSSC) President 1990- 1992. MDSSC Executive Vice President 1989-1990. MDSSC Senior Vice President - Operations 1987-1989. Robert H. Hood, Jr. 61 DAC President since January 1989. MDMSC President 1988-1989. 9 Gerald A. Johnston 62 MDC President and Chief Operating Officer since July 1991. MDC President 1988-1991. MCAIR President 1991. Mr. Johnston is retiring from the Company effective March 31, 1994. Donald R. Kozlowski 56 MDC Senior Vice President - C-17 Program Manager since December 1993. MDC Vice President/General Manager, High Speed Civil Transport 1992-1993. MCAIR Vice President/General Manager - F/A-18 1991-1992. MCAIR Vice President/General Manager 1988-1991. F. Mark Kuhlmann 45 MDC Senior Vice President - Administration, General Counsel and Secretary since September 1992. MDC Vice President, General Counsel and Secretary 1991-1992. McDonnell Douglas Systems Integration (MDSI) President 1989-1991. McDonnell Douglas Health Systems Company (MDHSC) Senior Vice President and General Manager 1988-1989. Herbert J. Lanese 48 MDC Executive Vice President and Chief Financial Officer since August 1992. MDC Senior Vice President - Finance 1989-1992. MDC Senior Vice President 1989. Vice President and Controller of Tenneco, Inc. 1986-1989. [HARD COPY PG. 8] James H. MacDonald 57 MDC Senior Vice President - Total Quality Management since September 1992. MDC Senior Vice President 1989-1992. MDC Senior Vice President - Employee and External Relations 1988-1989. John F. McDonnell 55 MDC Chairman and Chief Executive Officer since March 1988. Charles A. Ordahl 59 MDC Senior Vice President - Space and Defense Systems since October 1993. MDC Senior Vice President - Space Systems 1992-1993. MDSSC Vice President/General Manager Advanced Product Development and Technology Division 1989-1992. James F. Palmer 44 MDC Vice President - Treasurer since July 1993. MDC Vice President/General Manager - Business Management 1992-1993. MCAIR Chief Financial Officer 1991-1992. Partner of Ernst & Young 1985-1991. 10 James C. Restelli 52 MDC Senior Vice President - Tactical Aircraft and Missile Systems since January 1993. MDC Senior Vice President - Tactical Aircraft 1992. MCAIR Executive Vice President 1991-1992. MCAIR Vice President - Business Operations 1990-1991. MCAIR Vice President - Fiscal Management 1989-1990. MCAIR Vice President - Contracts and Pricing 1986-1989. Charles E. Suyo 50 MDHS Senior Vice President - Operations since September 1993. MDHS Senior Vice President - Programs 1993. MDC Senior Vice President - Missile Systems 1992-1993. MDMSC Vice President - Program Manager Harpoon/SLAM 1989-1992. MDSI Senior Vice President 1988-1989. All executive officers serve at the pleasure of the Board of Directors of the Company and are appointed annually. Non-executive officers may be appointed by the Board or the Chairman. All of the executive officers have been employees of the Company at least five years except H. J. Lanese and J. F. Palmer. There are no arrangements or understandings between any of the executive officers and any other person pursuant to which he was selected as an officer. ITEM 2. PROPERTIES At December 31, 1993, the Company's manufacturing, laboratory, office and warehouse areas totaled 45.8 million square feet, of which 14.8 million square feet were leased. The Company plants are well maintained and in good operating condition. Leases with the U.S. Government cover plants in Columbus, Ohio and Tulsa, Oklahoma. A major commercial lease covers a plant in Culver City, California. The Company also has long-term arrangements with airport authorities enabling it to share the use of runways, taxiways, and other airport facilities at various locations, including St. Louis, Missouri; Long Beach, California; Tulsa, Oklahoma; and Mesa, Arizona. The trend of reduced defense spending and reduced commercial aircraft orders has resulted in downsizing of personnel and facility needs. In light of the Company's downsizing and current business economic conditions, many of the Company's facilities are currently underutilized. The Company has announced plans to close its plants in Tulsa, Oklahoma; Columbus, Ohio; and Torrance and Culver City, California. Although these plants continued to be operational at December 31, 1993, the Company will move the operations to other existing facilities during 1994. Leases related to Tulsa, Oklahoma; Columbus, Ohio; and Culver City, California terminate during 1994. 11 [HARD COPY PG. 9] The Company's principal locations are in six states and Canada. Those in St. Louis, Missouri are chiefly devoted to military aircraft, electronics, training systems, and missiles. Those in Mesa, Arizona are primarily used for development, manufacture, and assembly of helicopters. In the Los Angeles, California area, principal properties are located in Huntington Beach and Long Beach. Huntington Beach, California properties are utilized for research and manufacture of spacecraft, launch vehicles, and electronics. Long Beach, California properties are devoted to the development, manufacture, and assembly of commercial and military transport aircraft, and to the financial services and other segment. Subassembly work for the commercial and military aircraft business segments is performed at Macon, Georgia; Salt Lake City, Utah; and Toronto, Canada for shipment to operations at Long Beach. Florida facilities are devoted to production of missiles and space operations. The Culver City facilities have been devoted to helicopters. The Columbus, Ohio and Torrance, California facilities have been used for fabrication work for military transport aircraft and commercial aircraft, respectively. Subassembly work has been performed at Tulsa, Oklahoma. Work performed at the facilities to be closed during 1994 will be moved to existing facilities. ITEM 3. LEGAL PROCEEDINGS The Navy on January 7, 1991, notified McDonnell Douglas Corporation and General Dynamics Corporation (the Team) that it was terminating for default the Team's contract for development and initial production of the A-12 aircraft. On June 7, 1991, the Team filed a legal action to contest the Navy's default termination, assert its rights to convert the termination to one for "the convenience of the Government," and obtain payment for work done and costs incurred on the A-12 contract, but not paid to date. Additional information relative to this matter and claims filed with the Air Force on the C-17 contract and the Navy on the T45 contract is included in Note 5, "Contracts in Process and Inventories" on page 42 of the Company's 1993 Annual Report to Shareholders, which is incorporated herein by this reference. See also Note 17, "Commitments and Contingencies" on page 51 of the Company's 1993 Annual Report to Shareholders and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Government Business Audits, Reviews and Investigations", page 31, which are incorporated herein by this reference. MDC is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, or similar state statutes. MDC has been identified as a potentially responsible party (PRP) at 28 sites. Of these, MDC believes that it has de minimis liability at 19 sites, including 9 sites at which it believes that it has no future liability. At the 9 sites at which MDC's liability is not considered to be de minimis, either final or interim cost sharing agreements have been effected between the cooperating PRPs, although such agreements do not fix the amount of cleanup costs which the parties will bear. In addition, MDC is remediating, or has begun environmental engineering studies to determine cleanup requirements, at certain of its current operating sites or former sites of industrial activity. MDC estimates total reasonably possible costs of approximately 12 $48 million for study and remediation expenditures at Superfund sites and MDC's current and former operating sites, of which $21 million is accrued at December 31, 1993. A number of legal proceedings and claims are pending or have been asserted against MDC including legal proceedings and claims relating to alleged injuries to persons associated with the disposal of hazardous waste. A substantial portion of such legal proceedings and claims is covered by insurance. MDC believes that the final outcome of such proceedings and claims will not have a material adverse effect on MDC's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter. [HARD COPY PG. 10] PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this item is included on pages 46, 47 and 55 of the Company's 1993 Annual Report to Shareholders, which is incorporated herein by this reference. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data for the five years ended December 31, 1993, consisting of the data under the captions "Summary of Operations" and "Balance Sheet Information" are included at page 54 of the Company's 1993 Annual Report to Shareholders, which is incorporated herein by this reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is contained on pages 24 through 32 of the 1993 Annual Report to Shareholders, and under the captions "Military Aircraft," "Commercial Aircraft" and "Missiles, Space and Electronic Systems" on pages 6 through 19 of the 1993 Annual Report to Shareholders, the text portions, including tables, which are incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is included on pages 33 through 53, and on page 56 of the 1993 Annual Report to Shareholders, which are incorporated herein by this reference. 13 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This item is not applicable. PART III ITEMS 10, 11, 12 and 13 The information called for by Part III, Item 10 "Directors and Executive Officers of the Registrant" (except for certain information concerning Executive Officers which is provided in Part I above), Item 11 "Executive Compensation," Item 12 "Security Ownership of Certain Beneficial Owners and Management," and Item 13 "Certain Relationships and Related Transactions" is included in the Company's definitive Proxy Statement for 1993 pursuant to Regulation 14A, to be filed with the Commission within 120 days after the close of the fiscal year ended December 31, 1993, and is incorporated herein by this reference. The report of the Management Succession and Compensation Committee and the performance graph contained in the Company's definitive Proxy Statement for 1993, however, are not incorporated herein by reference and shall not be deemed filed under the Securities Act of 1933 or under the Securities Exchange Act of 1934. [HARD COPY PG. 11] PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. LIST OF FINANCIAL STATEMENTS The following consolidated financial statements of McDonnell Douglas Corporation and Subsidiaries included in the 1993 Annual Report to Shareholders at the pages indicated, are incorporated herein by this reference: Report of Ernst & Young, Independent Auditors, page 53. Consolidated Statement of Operations, years ended December 31, 1993, 1992, and 1991, page 34. Consolidated Balance Sheet, December 31, 1993 and 1992, page 35. Consolidated Statement of Shareholders' Equity, years ended December 31,1993, 1992, and 1991, page 36. Consolidated Statement of Cash Flows, years ended December 31, 1993, 1992, and 1991, page 37. Notes to Consolidated Financial Statements, pages 38 through 52. Selected Financial Data by Industry Segment - Continuing Operations, page 33. Quarterly Results of Operations, page 56. 14 (a)2. LIST OF FINANCIAL STATEMENT SCHEDULES See Index to Financial Statement Schedules on page 16. All other schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission are omitted either because they are not applicable or because the required information is included in the financial statements or notes thereto. (a)3. EXHIBITS See Index to Exhibits on pages 13 through 15. (b) Reports on Form 8-K filed in 1993: ---------------------------------- Form 8-K filed on January 29, 1993 in response to Item 5. Form 8-K filed on June 2, 1993 in response to Item 5. Form 8-K filed on December 2, 1993 in response to Item 5. Form 8-K filed on December 15, 1993 in response to Item 5. Form 8-K filed on December 27, 1993 in response to Item 5. SIGNATURES [HARD COPY PG. 12] 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 CORPORATION (Registrant) Date: March 22, 1994 By: /s/ Robert L. Brand -------------------------------- Robert L. Brand Vice President and Controller and Registrant's Authorized Officer (Principal Accounting 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 date indicated below. Signature Title Date - -------------------------- ---------------------------- ------------- John F. McDonnell* Director, Chairman & March 22, 1994 - -------------------------- Chief Executive Officer John F. McDonnell (Principal Executive Officer) Herbert J. Lanese* Executive Vice President and March 22, 1994 - -------------------------- Chief Financial Officer Herbert J. Lanese (Principal Financial Officer) /s/ Robert L. Brand Vice President and Controller March 22, 1994 - -------------------------- (Principal Accounting Officer) Robert L. Brand 15 John H. Biggs* Director March 22, 1994 B.A. Bridgewater, Jr.* Director March 22, 1994 Beverly B. Byron* Director March 22, 1994 William E. Cornelius* Director March 22, 1994 William H. Danforth* Director March 22, 1994 Kenneth M. Duberstein* Director March 22, 1994 Julian B. Goodman* Director March 22, 1994 Gerald A. Johnston Director March 22, 1994 William S. Kanaga* Director March 22, 1994 James S. McDonnell III* Director March 22, 1994 Sanford N. McDonnell* Director March 22, 1994 George A. Schaefer* Director March 22, 1994 *By his signature below, S. N. Frank has signed this Form 10-K as Attorney- in-fact on behalf of the persons listed above whose names are followed by an asterisk, pursuant to a Power of Attorney, a copy of which is filed with this Form 10-K. /s/ S. N. Frank - ----------------------------- S. N. Frank, Attorney-in-fact [HARD COPY PG. 13] MCDONNELL DOUGLAS CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS EXHIBIT 3(a) Articles of Restatement of the Incorporated by reference Company's Charter, as filed to Exhibit 3(a) to the April 13, 1992. Company's Annual Report on Form 10-K for the year ended December 31, 1992. 3(b) Bylaws of the Company, as amended July 30, 1993. 4(a) Indenture dated as of September 1, Incorporated by reference 1985 between the Company and The to Exhibit 4(a) to the Bank of New York as Successor Company's Registration Trustee to Citibank, N.A. Statement on Form S-3, Commission File No. 33-36180, filed with the Commission on August 1, 1990. 16 4(b) First Supplemental Indenture Incorporated by reference dated as of July 1, 1986 to Exhibit 4(b) to the between the Company and The Company's Registration Bank of New York as Successor Statement on Form S-3, Trustee to Citibank, N.A. Commission File No. 33-36180, filed with the Commission on August 1, 1990. 4(c) Second Supplemental Indenture Incorporated by reference dated as of April 2, 1992 to Exhibit 4(c) to the between the Company and The Company's Annual Report on Bank of New York as Successor Form 10-K for the year ended Trustee to Citibank, N.A. December 31, 1992. 4(d) Agreement of Resignation, Appoint- ment and Acceptance dated as of May 17, 1993 by and among the Company, Citibank, N.A., as Resigning Trustee, and The Bank of New York, as Successor Trustee. 4(e) Form of 8-5/8% Notes due April 1, Incorporated by reference 1997. to Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 4(f) Form of 9-1/4% Notes due April 1, Incorporated by reference 2002. to Exhibit 4(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 4(g) Form of 9-3/4% Debentures Incorporated by reference due April 1, 2012. to Exhibit 4(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. [HARD COPY PG. 14] 4(h) Form of 8-1/4% Notes due July 1, 2000. 4(i) Rights Agreement dated as of Incorporated by reference August 2, 1990 between the to Exhibits 1 and 2 to the Company and First Chicago Trust Company's Report on Form Company of New York, which 8-K filed with the includes as Exhibit B thereto Commission on the form of Rights Certificate. August 6, 1990. 17 Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company is not filing certain instruments with respect to long-term debt because the amount of securities currently authorized under any of them 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 Commission upon request. 10(a)* McDonnell Douglas Corporation Incorporated by reference Incentive Award Plan, as amended to Exhibit 10(b) to the and restated as of July 20, 1990. Company's Annual Report on Form 10-K for the year ended December 31, 1990. 10(b)* Incentive Compensation Program, Incorporated by reference as amended and restated as of to Exhibit 10(b) to the March 2, 1992 under the McDonnell Company's Annual Report on Award Plan. December 31, 1991. 10(c)* Long-Term Incentive Program, Incorporated by reference as amended and restated as of to Exhibit 10(d) to the July 20, 1990 under the McDonnell Company's Annual Report on Douglas Corporation Incentive Form 10-K for the year ended Award Plan. December 31, 1990. 10(d)* McDonnell Douglas Corporation Incorporated by reference Performance Sharing Plan. to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10(e)* McDonnell Douglas Corporation Incorporated by reference Deferred Compensation Plan for to Exhibit 10(e) to the Nonemployee Directors. Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10(f)* Service Agreement between Kenneth M. Duberstein and McDonnell Douglas Corporation, amended as of June 1, 1993. 11 Computation of earnings per share. [HARD COPY PG. 15] 13 1993 McDonnell Douglas Corporation Annual Report to Shareholders, excluding the "Financial Highlights," MDC Chairman's letter "To All Shareholders and Teammates," "Community Involvement," and "Directors and Management." 18 21 Subsidiaries. 23 Consents of Independent Auditors regarding incorporation of their report included in the 1993 Annual Report to Shareholders of McDonnell Douglas Corporation into Form 10-K and incorporation of Form 10-K into Registration Statements on Form S-3 and Form S-8. 99(a)** Form 11-K, Employee Savings Plan of McDonnell Douglas Corporation - Salaried Plan. 99(b)** Form 11-K, Employee Savings Plan of McDonnell Douglas Corporation - Component Plan. 99(c)** Form 11-K, Employee Thrift Plan of McDonnell Douglas Corporation - Subsidiary Plan. 99(d)** Form 11-K, Employee Thrift Plan of McDonnell Douglas Corporation - Hourly Plan. 99(e)** Form 11-K, McDonnell Douglas Helicopter Company Savings Plan for Hourly Employees. 99(f)** Form 11-K, Employee Investment Plan of McDonnell Douglas Corporation - Hourly West Plan. 99(g)** Form 11-K, Employee Investment Plan of McDonnell Douglas Corporation - Hourly East Plan. 99(h) Computation of Ratio of Earnings to Fixed Charges. * Represents management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. ** Financial Statements and schedules prepared in accordance with ERISA have been filed on Form SE on March 21, 1994. 19 [HARD COPY PG. 16] MCDONNELL DOUGLAS CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedules of McDonnell Douglas Corporation and Subsidiaries for the year ended December 31, 1993 are included herein: Report of Independent Auditors Schedule II Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other than Related Parties Schedule VII Guarantees of Securities of Other Issuers Schedule VIII Valuation and Qualifying Accounts Schedule IX Short-Term Borrowings Schedule X Supplementary Income Statement Information REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of McDonnell Douglas Corporation and subsidiaries (MDC) as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated January 18, 1994 (incorporated by reference elsewhere in this Annual Report on Form 10K). Our audits also included the financial statement schedules listed in item 14(a) of this Annual Report on Form 10K. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As described in the notes to the consolidated financial statements, the fixed price development contract for the A-12 advanced tactical aircraft program was terminated for default by the United States Government on January 7, 1991. MDC believes it will be successful in converting the termination for default into a termination for convenience; however, failure to do so could have a material impact on the financial position of MDC in the future. /s/ Ernst & Young St. Louis, Missouri January 18, 1994 20 SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES McDonnell Douglas Corporation Years Ended December 31, 1993, 1992, and 1991 (Dollars in Thousands)
BALANCE AT BALANCE AT MATURITY BEGINNING AMOUNTS END OF NAME OF DEBTOR DATE OF PERIOD ADDITIONS COLLECTED PERIOD - --------------- -------- ---------- --------- --------- ---------- Year Ended December 31, 1993: W. H. Brinks Apr 10, 2019 $529.2 $529.2 $0.0 C. Conrad May 24, 2020 210.0 210.0 P. T. Fagan Sep 01, 2002 179.5 179.5 A. C. Haggerty Jan 14, 2002 152.0 152.0 R. H. Hood, Jr. May 03, 2019 665.0 665.0 R. M. Linford Dec 03, 2002 259.6 259.6 E. J. Overley and C. M. Overley Mar 23, 2019 172.0 172.0 J. B. Pirkle May 05, 2019 261.0 261.0 0.0 D. D. Snyder Mar 30, 2020 507.5 507.5 0.0 D. O. Swain Mar 20, 2019 459.4 459.4 0.0 R. E. Thomas Oct 25, 2020 227.5 227.5 J. J. Van Gels Aug 08, 2020 307.5 307.5 S. W. Vogeding Aug 10, 2020 325.0 325.0 J. D. Wolf Jun 01, 2019 460.0 460.0 B. G. Zimmerman Aug 16, 2020 277.5 277.5 -------- -------- -------- -------- $4,992.7 $1,757.1 $3,235.6 ======== ======== ======== ========
21 SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES - Cont'd McDonnell Douglas Corporation Years Ended December 31, 1993, 1992, and 1991 (Dollars in Thousands)
BALANCE AT BALANCE AT MATURITY BEGINNING AMOUNTS END OF NAME OF DEBTOR DATE OF PERIOD ADDITIONS COLLECTED PERIOD - --------------- -------- ---------- --------- --------- ---------- Year Ended December 31, 1992: W. H. Brinks Apr 10, 2019 $529.2 $529.2 C. Conrad May 24, 2020 210.0 210.0 P. T. Fagan Sep 01, 2002 $179.5 179.5 A. C. Haggerty Jan 14, 2002 152.0 152.0 R. H. Hood, Jr. May 03, 2019 665.0 665.0 L. F. Impellizzeri Jul 18, 2020 400.0 $400.0 0.0 R. M. Linford Dec 03, 2002 259.6 259.6 E. J. Overley and C. M. Overley Mar 23, 2019 172.0 172.0 J. B. Pirkle May 05, 2019 261.0 261.0 D. D. Snyder Mar 30, 2020 507.5 507.5 D. O. Swain Mar 20, 2019 459.4 459.4 R. E. Thomas Oct 25, 2020 227.5 227.5 P. R. Thompson May 14, 1991 224.0 224.0 0.0 J. J. Van Gels Aug 08. 2020 307.5 307.5 S. W. Vogeding Aug 10, 2020 325.0 325.0 J. D. Wolf Jun 01, 2019 460.0 460.0 B. G. Zimmerman Aug 16, 2020 277.5 277.5 -------- -------- -------- -------- $5,025.6 $591.1 $624.0 $4,992.7 ======== ======== ======== ========
22 SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES - Cont'd McDonnell Douglas Corporation Years Ended December 31, 1993, 1992, and 1991 (Dollars in Thousands)
BALANCE AT BALANCE AT MATURITY BEGINNING AMOUNTS END OF NAME OF DEBTOR DATE OF PERIOD ADDITIONS COLLECTED PERIOD - --------------- -------- ---------- --------- --------- ---------- Year Ended December 31, 1991: M. G. Brandt Mar 14, 1991 $303.0 $303.0 $0.0 W. H. Brinks Apr 10, 2019 529.2 529.2 J. P. Capellupo Apr 03, 2020 355.0 355.0 0.0 C. Conrad May 24, 2020 210.0 210.0 R. H. Hood, Jr. May 03, 2019 665.0 665.0 L. F. Impellizzeri Jul 18, 2020 400.0 400.0 E. J. Overley and C. M. Overley Mar 23, 2019 172.0 172.0 J. B. Pirkle May 05, 2019 261.0 261.0 J. D. Smith Aug 24, 1991 591.0 591.0 0.0 D. D. Snyder Mar 30, 2020 507.5 507.5 D. O. Swain Mar 20, 2019 459.4 459.4 R. E. Thomas Oct 25, 2020 227.5 227.5 P. R. Thompson May 14, 1991 224.0 224.0 J. J. Van Gels Aug 08, 2020 307.5 307.5 S. W. Vogeding Aug 10, 2020 325.0 325.0 H. Wall, Jr. Jul 31, 2020 237.5 237.5 0.0 J. D. Wolf Jun 01, 2019 460.0 460.0 B. G. Zimmerman Aug 16, 2020 277.5 277.5 -------- -------- -------- -------- $6,512.1 $1,486.5 $5,025.6 ======== ======== ======== ======== Note: The scheduled notes are Shared Appreciation Notes, representing relocation loans to employees for the purchase of a residence. The Notes are secured by a second deed of trust on the employee's residence. The proportionate share (as defined in the Note) of the fair market value of the residence is due on the maturity date, or earlier, in case of sale of the property, termination of employment or other events as specified in the Note. Due to the nature of these notes, upon liquidation amounts forgiven are included in "amounts collected" and gains on property sold at appreciation are excluded from "amounts collected".
23 Schedule VII-GUARANTEES OF SECURITIES OF OTHER ISSUERS McDonnell Douglas Corporation December 31, 1993 (Dollars in Millions)
AMOUNT AMOUNT TITLE OWNED IN ISSUE OF BY PERSON TREASURY NAME OF ISSUER EACH TOTAL OR PERSONS OF ISSUER OF SECURITIES GUARANTEED CLASS OF GUARANTEED FOR WHICH OF NATURE NATURE BY PERSON FOR WHICH SECURITIES AND STATEMENT SECURITIES OF OF ANY STATEMENT IS FILED GUARANTEED OUTSTANDING IS FILED GUARANTEED GUARANTEE DEFAULT - ------------------------ ---------- ----------- --------- ---------- --------- ------------ Aerolineas Argentinas Notes $36 None None A None AeroMexico Notes 1 None None A None Air Liberte Notes 11 None None A None Biman Bangladesh Notes 3 None None A None British West Indies Airlines Notes 2 None None A None City of Ann Arbor Bonds 3 None None A None Continental Notes 14 None None A None Michigan National Bank Notes 1 None None A None Minerve Notes 6 None None A None TWA/Ozark Airlines Notes 11 None None A None Valujet Notes 6 None None A None Varig Notes 112 None None A None Zambia Airways Notes 4 None None A None A - MDC is obligated to purchase notes or bonds from holders in the amount shown, plus unpaid interest, in the event of non-payment by issuer.
24 SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS McDonnell Douglas Corporation Years Ended December 31, 1993, 1992, and 1991 (Dollars in Millions)
BALANCE CHARGED BALANCE AT TO CHARGED AT BEGINNING COSTS AND TO END OF AND OTHER OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ----------- ------ -------- -------- ---------- ------ Year Ended December 31, 1993: Allowance for commercial aircraft financing $ 6 $14 $20 Allowance for uncollectible accounts 48 15 $ 2 $15 50 --- --- --- --- --- $54 $29 $ 2 $15 $70 === === === === === Year Ended December 31, 1992: Allowance for commercial aircraft financing $ 6 $ 6 Allowance for uncollectible accounts 57 $22 $31 48 --- --- --- --- --- $63 $22 $31 $54 === === === === === Year Ended December 31, 1991: Allowance for commercial aircraft financing $ 6 $ 6 Allowance for uncollectible accounts 65 $53 $ 3 $64 57 --- --- --- --- --- $71 $53 $ 3 $64 $63 === === === === === NOTE: Amounts charged to other accounts are principally reclassifications. Deductions are principally the write off of uncollectible accounts.
25 SCHEDULE IX - SHORT-TERM BORROWINGS McDonnell Douglas Corporation Years Ended December 31, 1993, 1992, and 1991 (Dollars in Millions)
Maximum Average Weighted amount amount Average Balance Weighted Outstanding Outstanding Interest at Average During During Rate Category of Aggregate End of Interest the the During Short-term Borrowings Period Rate Period Period (A) Period (B) AEROSPACE SEGMENTS - ------------------ Year Ended December 31, 1993: Commercial paper (C) $0 N/A $75 $5 3.88% Notes payable to banks (D) 0 N/A 1,418 896 3.76% Year Ended December 31, 1992: Commercial paper (C) 0 N/A 81 41 4.24% Notes payable to banks (D) 774 4.16% 1,573 969 4.37% Year Ended December 31, 1991: Commercial paper (C) 0 N/A 110 3 9.15% Notes payable to banks (D) 202 5.14% 1,314 926 6.72% FINANCIAL SERVICES AND OTHER SEGMENT - ------------------------------------ Year Ended December 31, 1993: Commercial paper 0 N/A 0 0 N/A Notes payable to banks 203 4.72% 220 84 6.02% Year Ended December 31, 1992: Commercial paper (E) 0 N/A 0 0 N/A Notes payable to banks 124 4.76% 146 114 12.06% Year Ended December 31, 1991: Commercial paper (E) 0 N/A 44 2 9.20% Notes payable to banks 158 12.25% 643 381 9.74% (A) - Computed by dividing the total of daily principal balances by the number of days in the period. (B) - Computed by dividing the actual interest expense by average short-term debt outstanding. (C) - Based on proceeds from commercial paper issuance. (D) - Excludes overdraft accounts at foreign banks and note relating to workers compensation insurance, includes notes of wholly owned subsidiary McDonnell Douglas Canada, Ltd.. (E) - Based on face value of commercial paper issued.
26 SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION McDonnell Douglas Corporation Years Ended December 31, 1993, 1992, and 1991 (Dollars in Millions) ITEM CHARGED TO COSTS AND EXPENSES Years Ended December 31 1993 1992 1991 ---- ---- ---- Maintenance and repairs $170 $271 $288 NOTE: Items not presented amount to less than 1% of revenues. EX-3.B 2 BYLAWS 1 Exhibit 3(b) BYLAWS of MCDONNELL DOUGLAS CORPORATION (as amended 30 July 1993) ARTICLE I Offices In addition to its principal office in the State of Maryland, the corporation shall have an office in St. Louis, Missouri. ARTICLE II Seal The name of the corporation and the words "Seal, Maryland" shall be inscribed on the corporate seal. ARTICLE III Meetings of Shareholders Section 1. Written or printed notice, stating the place, day and hour of every meeting of shareholders (and in the case of special meetings, stating the business proposed to be transacted thereat) shall be given to each shareholder by personally delivering it to him, by leaving it with him at his residence or usual place of business, or by mailing it, postage prepaid, and addressed to him at his address as it appears upon the corporate records of the Secretary, all not less than ten (10) nor more than ninety (90) days before such meeting. Section 2. The annual meeting of the shareholders shall be held not earlier than April 15 nor later than May 15 of each year at a time within such period and at such place in the United States as shall be determined from time to time by the Board of Directors (the "Board") and stated in the notice or waiver of notice of the meeting. All other meetings of shareholders shall be held at such times and at such place or places in the United States as shall be determined from time to time by the Board and stated in the notice or waiver of notice of the meeting. Section 3. Special meetings of the shareholders, for any lawful purpose or purposes, may be called by the Chairman of the Board (the "Chairman"), the President, a majority of the Board or a majority of the Executive Committee, and shall, unless otherwise prescribed by statute, be called by the Secretary at the request in writing of shareholders entitled to cast at least twenty-five (25) percent of all votes entitled to be cast at the meeting. Such request shall state the purpose of the proposed meeting and the matters to be acted upon at such meeting and shall further comply with the provisions of Section 4 of this Article III. A meeting requested by shareholders shall be called as set forth in (a) through (d) of this Article III. 2 Exhibit 3(b) (a) The Secretary shall advise the shareholders who make the request of the estimated cost of preparing and mailing notice of the requested meeting. Such costs shall expressly include costs related to preparation of a list of shareholders entitled to vote. Notice of the meeting shall not be mailed until such costs are paid to the corporation. (b) The Secretary shall set the record date for shareholders entitled to vote which shall not be less than five (5) nor more than ten (10) days after the date on which the corporation has received payment for the estimated cost of preparing and mailing notice. (c) The notice shall be mailed within ten (10) days of the record date. (d) The time, date and place of the meeting shall be determined by the Board except that such meeting date shall not be less than ten (10) nor more than ninety (90) days after the record date. Section 4. All nominations of individuals for election to the Board and proposals of business to be considered at any meeting of the shareholders shall be made as set forth in this Section 4 of Article III. (a) Annual Meeting of Shareholders. (1) Nominations of individuals for election to the Board and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (i) pursuant to the corporation's notice of meeting, (ii) by or at the direction of the directors or (iii) by any shareholder of the corporation who was a shareholder of record at the time of giving of notice provided for in this Section 4(a) of Article III, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 4(a) of Article III. (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (iii) of paragraph (a)(l) of this Section 4 of Article III, the shareholder must have given timely notice thereof in writing to the Secretary. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act" ); (ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the 3 Exhibit 3(b) meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such shareholder, as they appear on the corporation's books, and of such beneficial owner and (y) the class and number of shares of stock of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 4 of Article III the contrary, in the event that the number of directors to be elected to the Board is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board made by the corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section 4(a) of Article III shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive office of the corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the corporation. (b) Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the Board may be made at a special meeting of shareholders at which directors are to be elected (i) pursuant to the corporation's notice of meeting (ii) by or at the direction of the Board or (iii) provided that the Board has determined that directors shall be elected at such special meeting, by any shareholder of the corporation who is a shareholder of record at the time of giving of notice provided for in this Section 4(b) of Article III, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 4(b) of Article III. In the event the corporation calls a special meeting of shareholders for the purpose of electing one or more directors to the Board, any such shareholder may nominate a person or persons (as the case may be) for election to such position as specified in the corporation's notice of meeting, if the shareholder's notice required by paragraph (a)(2) of this Section 4 of Article III shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the directors to be elected at such meeting. Proposals of business other than the nomination of persons for election to the Board may be considered at a special meeting of the shareholders requested by the shareholders in accordance with Section 3 of Article III only if the shareholder's notice required by paragraph (a)(2) of this Section 4 of Article III was delivered at the time such shareholder requested the meeting. 4 Exhibit 3(b) (c) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 4 of Article III shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 4 of Article III. The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 4 of Article III and, if any proposed nomination or business is not in compliance with this Section 4 of Article III, to declare that such defective nomination or proposal be disregarded. (2) For purposes of this Section 4 of Article III, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 4 of Article III, a shareholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 4 of Article III. Nothing in this Section 4 of Article III shall be deemed to affect any rights of shareholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 5. At any meeting of shareholders a majority of the shares outstanding and entitled to vote at the meeting shall constitute a quorum for the transaction of business. If a quorum is not present or represented at any meeting of shareholders, the shareholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of voting stock is represented. At such adjourned meeting at which the requisite amount of voting stock shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 6. Each outstanding share of stock having voting power shall be entitled to one vote on each matter submitted to a vote at each meeting of shareholders. Section 7. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Maryland. 5 Exhibit 3(b) ARTICLE IV Directors Section 1. The business and affairs of the corporation shall be managed under the direction of the Board. All powers of the corporation shall be exercised by or under authority of the Board except as conferred on or reserved to the shareholders by law or by the charter or bylaws of the corporation. Section 2. The number of Directors of the corporation shall be thirteen (13) which number may be increased or decreased upon an affirmative vote of not less than 80% of the entire Board but shall never be less than three (3). Directors shall serve for three (3) years staggered terms, with approximately one-third (1/3) of the total number of Directors to be elected at each annual meeting of the shareholders. In case of a vacancy on the Board for any cause other than an increase in the number of Directors, an affirmative vote of a majority of the remaining Directors, even though less than a quorum, may elect a successor to hold office for the Director whose place shall be vacant until the next annual meeting of shareholders. A vote of not less than 80% of the entire Board shall be required to fill a vacancy on the Board which results from an increase in the number of Directors. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible. In no case will a decrease in the number of Directors shorten the term of any incumbent Director. A Director elected to fill a vacancy on the Board which results from an increase in the number of Directors shall hold office until the next annual meeting of shareholders and until such Director's successor shall have been elected and qualified. Notwithstanding any provision of law to the contrary, a Director may be removed with or without cause only by the affirmative vote of the holders of not less than 80% of all of the outstanding shares of the corporation entitled to vote at a meeting of shareholders called for such purpose. Section 3. The Board shall hold regular and special meetings at such place and time as it determines for the purpose of organization, election of certain Officers as specified in Article VI, and consideration of other business that may come before the meeting. Section 4. A majority of the entire Board shall constitute a quorum for the transaction of all business that may properly come before any meeting of the Board. Section 5. Special meetings of the Board may be called by the Chairman, the President, or the Secretary upon written request of two Directors. Section 6. A written notice of all regular meetings of the Board shall be mailed to each Director at his address as listed in the corporate records of the Secretary at least ten (10) days before any such meeting. No irregularity of notice of any regular meeting shall invalidate the same or any proceeding thereat, provided the notice shall definitely specify the time and place fixed by the Board for holding the meeting. Special meetings of the Board may be called upon twenty-four (24) hours 6 Exhibit 3(b) notice, given personally, or by mail, telecommunications, or telephone. Any Director may waive any notice required to be given by these bylaws. Section 7. Board meetings may be held by means of a conference telephone or similar communication equipment if all members participating can hear each other at the same time. Section 8. Directors as such shall not receive any stated salary for their services, but by resolution of the Board, compensation may be established for service as a Director and as a member of special or standing committees. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE V Committees Section 1. Designation and Membership. There shall be an Executive Committee, a Management Compensation and Succession Committee, an Audit Committee, and a Nominating Committee and there may be such other committees as the Board may determine, each to consist of not less than three Directors, to be elected by the Board to hold office until the next annual organizational meeting of the Board or until their successors are elected and qualified. The Chairman shall be a member of the Executive Committee. A majority of the Committee members shall be public Directors. Members of the Management Compensation and Succession Committee shall not be eligible to participate in any remuneration plan of the Corporation providing for the acquisition of stock or options to purchase stock of the corporation which would disqualify such Committee members as disinterested administrators of the corporation's remuneration plans. Members of the Audit Committee and the Nominating Committee shall be independent of management and free from any relationships that, in the opinion of the Board, would interfere with the exercise of independent judgment. In the absence of a member of a committee, the member or members thereof present at any meeting, whether or not he or they constitute a quorum, may appoint a Director to act in place of any such absent member, provided such appointed Director is otherwise qualified to be a member of such committee. All committees may have non-voting advisory members. Section 2. Powers. The committees, to the extent provided by these bylaws and by resolution of the Board, may exercise all powers of the Board between Board meetings except the power to vote themselves compensation, amend the bylaws, authorize or declare dividends or distributions on stock, issue stock other than in accordance with Section 2-411(b) of the Maryland General Corporation Law, recommend to shareholders any action requiring shareholders' approval, or to approve any merger or share exchange which does not require shareholder approval. 7 Exhibit 3(b) Section 3. Procedure. Committees may meet at any time upon notice by any means to all members, and such notice may be waived. Meetings may be held by any means of communication, and a majority of the entire committee shall constitute a quorum, a majority of which may transact all business that may properly come before the committee. In the absence of a meeting, any resolution signed by all members of each committee shall be valid. ARTICLE VI Officers Section 1. The officers of the corporation shall include the Chairman, a President, a Secretary, and a Treasurer, and may include one or more Vice Chairmen of the Board, one or more Executive Vice Presidents, one or more component Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Vice Presidents, a Chief Financial Officer, a Controller, a Tax Officer, and one or more Assistant Secretaries, Assistant Treasurers, and Assistant Controllers (hereinafter referred to as Officers). Any two offices, except those of President and Executive Vice President, Senior Vice President, Vice President and Assistant Vice President, may be held by the same person. The Board of Directors shall elect the Chairman, any Vice Chairmen of the Board, the President, any Executive Vice President, the Chief Financial Officer, the principal accounting officer (or if none, the Controller), any Senior Vice President, the Secretary, any Vice Presidents or component Presidents or persons in charge of a principal business unit, division or corporate-wide function (such as sales, administration, legal or finance), and any other persons who perform similar policy-making functions for the corporation (hereinafter referred to as Elected Officers). Either the Board or the Chairman may appoint any other Officers (Officers other than Elected Officers hereinafter referred to as Appointed Officers). Section 2. The Chairman, the Vice Chairmen of the Board, if any, and the President, shall each be a member of the Board. Any Officer may be a member of the Board. Any Officer may be removed at any time by the Board. Any Appointed Officer may be removed at any time by either the Board or the Chairman. All vacancies among the Elected Officers shall be filled by the Board. Vacancies among the Appointed Officers shall be filled by either the Board or the Chairman. Section 3. The Officers of the corporation shall have the authority and shall perform the duties in the management of the assets and affairs of the corporation as provided in these bylaws and determined by resolutions of the Board not inconsistent therewith. Section 4. The compensation of all Elected Officers shall be fixed by the Board, or the Management Compensation and Succession Committee. The compensation of the Appointed Officers shall be fixed by the Board, the Chairman, or the Management Compensation and Succession Committee. 8 Exhibit 3(b) Section 5. The Chairman shall preside at all meetings of the Board and of the shareholders. He shall be the Chief Executive Officer (CEO) of the corporation, and shall, subject to the power and authority of the Board, have general supervision, direction and control of the business and affairs of the corporation, and shall also perform such other duties as may be assigned to him by the Board. Section 6. Each Vice Chairman of the Board shall, subject to the power of the Board, be accountable to the Chairman. He shall perform such duties as may be assigned to him by the Board or the Chairman. Section 7. The President shall, subject to the power of the Board, be accountable to the Chairman. He shall perform such duties as may be assigned to him by the Board or the Chairman. For the period of any absence or disability of the Chairman, the President shall perform the duties and, subject to the bylaws, exercise the powers of the Chairman. In the absence of both the Chairman and the President, another Officer designated by the Board shall preside at all meetings of the shareholders and the Board. Section 8. The Elected Officers and the Appointed Officers shall have the general powers and duties usually vested in his or her respective office, and shall perform such other duties as may be prescribed by the Board, the Chairman, or the President. ARTICLE VII Stock Section 1. Transfer of stock shall be made on the books of the corporation only by the person named in the certificate or by attorney, lawfully constituted in writing, and upon surrender of the certificate therefor. Certificates of stock may be issued when bearing the manual or facsimile signature of both (1) the Chairman, the President or a Vice President elected by the Board of Directors, and (2) the Secretary, Assistant Secretary, Treasurer, or Assistant Treasurer; except that if both such signatures are facsimiles, a manual signature will be required of such person, transfer agent, or registrar as may be designated by the Board or the Executive Committee. If any Officer whose duly authorized signature or a facsimile thereof appears on blank stock certificates dies, resigns or is removed prior to issuance of such certificates they may nevertheless be issued or registered as certificates of stock of the corporation and shall be valid for all purposes. Section 2. The Board may fix the time, not exceeding ninety (90) days preceding the date of any meeting of shareholders, any dividend payment date or any date for the allotment of rights, during which the books of the corporation shall be closed against transfers of stock. In lieu of closing the books against transfers of stock, as aforesaid, the Board may fix a date, not exceeding ninety (90) days preceding the date of any meeting of shareholders, any dividend payment date or any date for the allotment of rights, as a record date for the determination of the shareholders entitled to notice of and to vote at such meeting, or 9 Exhibit 3(b) entitled to receive such dividends or rights as the case may be; and only shareholders of record on such date shall be entitled to notice of and to vote at such meeting, or to receive such dividends or rights, as the case may be. Section 3. The Board may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued which are alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. The Board may delegate to any Officer or Officers of the corporation the authority to issue such new certificate or certificates and the approval of the form and amount of such indemnity bond and the surety thereon. ARTICLE VIII Authorization of Corporate Commitments Section 1. Transactions requiring Board approval under Maryland law, the annual budget for purchase of capital facilities, the annual capital facilities lease budget, maximum amounts of long and short term borrowings, and authority to proceed with new product programs and other programs or transactions committing the corporation to financial exposure exceeding limits of authority delegated to the Chairman by the Board, shall be submitted for Board review and approval. Section 2. The Chairman can commit the corporation in all transactions the approval of which is not reserved to the Board in Section 1 above. The Chairman may delegate his authority to other Officers or employees in writing, with or without restrictions and with or without authority to redelegate to other employees. Authority to approve transactions or commit the corporation includes authority to execute necessary and appropriate documents relative thereto. Section 3. The Chairman may designate one or more Officers or employees, or their designees, to sign checks, drafts, bills of exchange, promissory notes or other documents relative to any borrowing, commercial paper, guarantees of indebtedness, or demands for money of the corporation and no such instrument shall be issued unless so signed. 10 Exhibit 3(b) ARTICLE IX Limitation of Liability and Indemnification Section 1. No Director or Officer of the corporation shall be liable to the corporation or its shareholders for money damages, except to the extent such limitation of liability for Directors or Officers, as the case may be, is not permitted under the Maryland General Corporation Law, as the same exists or may hereafter be amended. Any repeal or modification of the foregoing provisions of this Section 1 of Article IX shall not adversely affect any right or protection of a Director or Officer of the corporation existing hereunder with respect to any act or omission occurring prior to or at the time of such repeal or modification. Section 2. The corporation shall indemnify, and advance expenses (without a determination of entitlement to indemnification) to, each person who at any time is or has served as a Director of the corporation (including Directors who also serve or have served as Officers of the corporation) inconnection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative, or investigative) arising out of such person's service to the corporation or to another organization at the corporation's request except with respect to any action, suit, or proceeding brought by such person against the corporation or to the extent such indemnification is expressly prohibited by the Maryland General Corporation Law, as the same exists or may hereafter be amended. The indemnification provided by this Section 2 of Article IX shall not be deemed exclusive of any other rights to which the Director may be entitled under any statute, agreement, vote of shareholders or disinterested Directors or otherwise. Section 3. With respect to Officers and other persons who serve or have served the corporation, the corporation shall provide indemnification as required by law and may, as authorized at any time by general or specific action of the Board, provide further indemnification and advance expenses (without a determination of entitlement to indemnification) in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) arising out of such persons' service to the corporation or to another organization at the corporation's request except with respect to any action, suit, or proceeding brought by such person against the corporation or to the extent such indemnification is expressly prohibited by the Maryland General Corporation Law, as the same exists or may hereafter be amended. The indemnification provided by this Section 3 of Article IX shall not be deemed exclusive of any other rights to which the Officer or other person may be entitled under any statute, agreement, vote of shareholders or disinterested Directors or otherwise. Section 4. Any indemnification of, or advance of expenses to, a Director arising out of a proceeding by or in the right of the corporation shall be reported to the shareholders with the notice of the next shareholders' meeting or prior to the meeting. 11 Exhibit 3(b) ARTICLE X Amendments The Board shall have the power to make, alter and repeal the bylaws, subject, however, to the power of the shareholders to alter, amend, or repeal any bylaws made by the Board; provided, however, that any amendment to the 80% vote requirements in Article IV, Section 2, must be approved by an affirmative vote of not less than 80% of the entire Board. EX-4.D 3 NOTE 1 Exhibit 4(d) AGREEMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, dated as of May 17th, 1993 by and among MCDONNELL DOUGLAS CORPORATION, a corporation duly organized and existing under the laws of the State of Maryland and having its principal office in St. Louis, Missouri (the "Company"), CITIBANK, N.A., a banking corporation duly organized and existing under the laws of the United States of America and having its principal corporate trust office at 111 Wall Street, New York, New York 10043 (the "Resigning Trustee") and THE BANK OF NEW YORK, a banking corporation duly organized and existing under the laws of the State of New York and having its principal corporate trust office at 101 Barclay Street, New York, New York 10286 (the "Successor Trustee"). RECITALS: WHEREAS, there was originally authorized and issued the following Notes, Debentures and Medium Term Notes in the aggregate principal amount set forth below under an Indenture dated as of September 1, 1985 by and between the Company and the Resigning Trustee as modified by a First Supplemental Indenture dated as of July 1, 1986 by and between the Company and Resigning Trustee and by a Second Supplemental Indenture dated as of April 2, 1992 by and between the Company and Resigning Trustee (said Notes, Debentures and Medium Term Notes are hereinafter collectively referred to as "Securities" and said Indenture, First Supplemental Indenture and Second Supplemental Indenture are hereinafter collectively referred to as the "Indenture"): $150 million 7 7/8% Notes due 1/15/97 $150 million 9% Notes due 7/1/93 $250 million 8 5/8% Notes due 4/1/97 $350 million 9 1/4% Notes due 4/1/02 $350 million 9 3/4% Debentures due 4/1/12 $4.00 million 5.85% Medium Term Note due 9/23/94 $6.65 million 6.30% Medium Term Note due 9/1/94 $6.65 million 7.35% Medium Term Note due 1/15/96 $6.65 million 6% Medium Term Note due 9/29/94 $6.65 million 5.70% Medium Term Note due 10/13/94 $6.65 million 5.33% Medium Term Note due 4/14/94 WHEREAS, Section 610 of the Indenture provides that the Trustee may, at any time, with respect to the Securities of one or more series, resign by giving written notice of such resignation to the Company, effective upon the acceptance by a successor Trustee of its appointment as a successor Trustee; WHEREAS, Section 610(e) of the Indenture provides that, if the Trustee shall resign with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee; 2 Exhibit 4(d) WHEREAS, Section 611 of the Indenture provides that any successor Trustee appointed under the Indenture with respect to all Securities shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an instrument accepting such appointment under the Indenture, and thereupon the resignation of the predecessor Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, trusts and duties of the predecessor Trustee; WHEREAS, the Company is obligated, pursuant to Sections 305 and 307, respectively to appoint a Security Registrar and Paying Agent to perform the duties and obligations specified in the Indenture; WHEREAS, the Company, pursuant to Section 1002 of the Indenture, appointed Resigning Trustee as Security Registrar and Paying Agent; WHEREAS, the Company desires to appoint Successor Trustee as Trustee, Security Registrar and Paying Agent to succeed Resigning Trustee under the Indenture; and WHEREAS, Successor Trustee is willing to accept such appointment as successor Trustee, Security Registrar and Paying Agent under the Indenture; NOW, THEREFORE, the Company, Resigning Trustee and Successor Trustee, for and in consideration of the premises and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby consent and agree as follows: ARTICLE I THE RESIGNING TRUSTEE SECTION 101. Pursuant to Section 610(b) of the Indenture, Resigning Trustee notified the Company in a notice dated February 14, 1993 that Resigning Trustee is resigning as Trustee under the Indenture with respect to all Securities and, in addition, that Resigning Trustee hereby notifies the Company that Resigning Trustee is resigning as Security Registrar and Paying Agent under the Indenture. SECTION 102. Resigning Trustee hereby represents and warrants to Successor Trustee that: (a) No covenant or condition contained in the Indenture has been waived by Resigning Trustee or, to the best of the knowledge of the Responsible Officers of Resigning Trustee's Corporate Trust department, by the Holders of the percentage in aggregate principal amount of the Securities of any Series required by the Indenture to effect any such waiver with respect to such Series. (b) There is no action, suit or proceeding pending or, to the best of the knowledge of the Responsible Officers assigned to Resigning Trustee's Corporate Trust department, threatened against Resigning Trustee before any court or any governmental authority arising out of any action or omission by Resigning Trustee as Trustee under the Indenture. 3 Exhibit 4(d) (c) As of the effective date of this Agreement, Resigning Trustee will have delivered to the Successor Trustee all moneys or property held by the Resigning Trustee under the Indenture. (d) Pursuant to Section 305 of the Indenture, Resigning Trustee duly authenticated and delivered, the aggregate principal amount of the Securities of each series specified above, outstanding as of the effective date hereof. (e) Each person who so authenticated the Securities in each Series was duly elected, qualified and acting as an officer of Resigning Trustee and empowered to authenticate the Securities at the respective times of such authentication and the signature of such person or persons appearing on such Securities is each such person's genuine signature. (f) This Agreement has been duly authorized, executed and delivered on behalf of Resigning Trustee and constitutes its legal, valid and binding obligation. (g) To the best of the knowledge of the responsible Officers of the Resigning Trustee's Corporate Trust department, no event has occurred and is continuing which is, or after notice or lapse of time would become, an Event of Default under Section 501 of the Indenture. SECTION 103. Resigning Trustee hereby assigns, transfers, delivers and confirms to Successor Trustee all right, title and interest of Resigning Trustee in and to the trust under the Indenture and all the rights, powers and trusts of the Trustee under the Indenture. Resigning Trustee shall execute and deliver such further instruments and shall do such other things as Successor Trustee may reasonably require so as to more fully and certainly vest and confirm in Successor Trustee all the rights, trusts and powers hereby assigned, transferred, delivered and confirmed to Successor Trustee. SECTION 104. Resigning Trustee shall deliver to Successor Trustee, as of or immediately after the effective date hereof, all of the documents listed on Exhibit A hereto. ARTICLE II THE COMPANY SECTION 201. The Company hereby accepts, with respect to the Securities of all Series, the resignation of Resigning Trustee as Trustee, Security Registrar and Paying Agent under the Indenture. SECTION 202. The Secretary or Assistant Secretary of the Company who is attesting to the execution of this Agreement by the Company hereby certifies that Exhibit B annexed hereto is a copy of the Board Resolution(s) which was (were) duly adopted by the Board of Directors of the Company, which is (are) in full force and effect on the date hereof, and which authorizes (authorize) certain officers of the Company to 4 Exhibit 4(d) (a) accept Resigning Trustee's resignation as Trustee, Security Registrar and Paying Agent under the Indenture; (b) appoint Successor Trustee as Trustee, Security Registrar and Paying Agent under the Indenture; and (c) execute and deliver such agreements and other instruments as may be necessary or desirable to effectuate the succession of Successor Trustee as Trustee, Security Registrar and Paying Agent under the Indenture. SECTION 203. The Company hereby appoints, with respect to the Securities of each Series, Successor Trustee as Trustee, Security Registrar and Paying Agent under the Indenture to succeed to, and hereby vests Successor Trustee with, all the rights, powers, trusts, duties and obligations of Resigning Trustee under the Indenture with like effect as if originally named as Trustee, Security Registrar and Paying Agent in the Indenture. SECTION 204. Promptly after the effectiveness of this Agreement, the Company shall cause a notice, substantially in the form of Exhibit C annexed hereto, to be sent to each Holder of the Securities in each Series in accordance with the provisions of Section 610(f) of the Indenture. SECTION 205. The Company hereby represents and warrants to Successor Trustee that: (a) The Company is a corporation duly and validly organized and existing pursuant to the laws of the State of Maryland. (b) The Indenture was validly and lawfully executed and delivered by the Company and all of the Securities of each Series were duly and validly issued by the Company. (c) The Company has performed or fulfilled prior to the date hereof, and will continue to perform and fulfill after the date hereof, each covenant, agreement, condition, obligation and responsibility under the Indenture. (d) No event has occurred and is continuing which is, or after notice or lapse of time would become, an Event of Default under Section 501 of the Indenture. (e) No covenant or condition contained in the Indenture has been waived by the Company or, to the best of the Company's knowledge, by Holders of the percentage in aggregate principal amount of the Securities of any Series required to effect any such waiver. (f) There is no action, suit or proceeding pending or, to the best of the Company's knowledge, threatened against the Company before any court or any governmental authority arising out of any action or omission by the Company under the Indenture. (g) This Agreement has been duly authorized, executed and delivered on behalf of the Company and constitutes its legal, valid and binding obligation. 5 Exhibit 4(d) (h) All conditions precedent relating to the appointment of The Bank of New York as successor Trustee, Security Registrar and Paying Agent under the Indenture have been complied with by the Company. ARTICLE III THE SUCCESSOR TRUSTEE SECTION 301. Successor Trustee hereby represents and warrants to Resigning Trustee and to the Company that: (a) Successor Trustee is not disqualified under the provisions of Section 609 and is eligible under the provisions of Section 610 of the Indenture to act as Trustee under the Indenture. (b) This Agreement has been duly authorized, executed and delivered on behalf of Successor Trustee and constitutes its legal, valid and binding obligation. SECTION 302. Successor Trustee hereby accepts its appointment as successor Trustee, Security Registrar and Paying Agent under the Indenture and accepts the rights, powers, duties, trusts, and obligations of Resigning Trustee as Trustee, Security Registrar and Paying Agent under the Indenture, upon the terms and conditions set forth therein, with like effect as if originally named as Trustee, Security Registrar and Paying Agent under the Indenture. ARTICLE IV MISCELLANEOUS SECTION 401. Except as otherwise expressly provided herein or unless the context otherwise requires, all terms used herein which are defined in the Indenture shall have the meaning assigned to them in the Indenture. SECTION 402. This Agreement and the resignation, appointment and acceptance effected hereby shall be effective as of the opening of business on the date first above written. SECTION 403. Resigning Trustee hereby acknowledges payment or provision for payment in full by the Company of compensation for all services rendered by Resigning Trustee under Section 607 of the Indenture and reimbursement in full by the Company of the expenses, disbursements and advances incurred or made by Resigning Trustee in accordance with the provisions of the Indenture. Resigning Trustee acknowledges that it relinquishes any lien it may have upon all property or funds held or collected by it to secure any amounts due it pursuant to the provisions of Section 607 of the Indenture. The Company acknowledges its obligation set forth in Section 607 of the Indenture to indemnify Resigning Trustee for, and to hold Resigning Trustee harmless against, any loss, liability and expense incurred without negligence or bad faith on the part of the Resigning Trustee and arising out of or in connection with the acceptance or administration of the trust evidenced by the Indenture (which obligation shall survive the execution hereof). 6 Exhibit 4(d) SECTION 404. This Agreement shall be governed by and construed in accordance with the laws of the jurisdiction which govern the Indenture. SECTION 405. This Agreement may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 406. The Company, Resigning Trustee and Successor Trustee hereby acknowledge receipt of an executed and acknowledged counterpart of this Agreement and the effectiveness thereof. IN WITNESS WHEREOF, the parties hereby have caused this Agreement of Resignation, Appointment and Acceptance to be duly executed and acknowledged and their respective seals to be affixed hereunto and duly attested all as of the day and year first above written. [SEAL] MCDONNELL DOUGLAS CORPORATION Attest: /s/ Steven N. Frank /s/ W. M. Austin - --------------------- By: ------------------------------ Steven N. Frank Name: W. M. Austin Assistant Secretary Title: Vice President [SEAL] Attest: CITIBANK, N.A., as Resigning Trustee /s/ Robert T. Kirchner /s/ By: --------------------------------- - --------------------- Name: Robert T. Kirchner Assistant Secretary Title: Vice President Vice President [SEAL] THE BANK OF NEW YORK, as Attest: Successor Trustee /s/ /s/ T. A. Burrell - ---------------------- By:----------------------------------- Assistant Treasurer Name: T. A. Burrell Title: Assistant Vice President EX-4.H 4 NOTE 1 Exhibit 4(h) THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE THEREOF. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO A NOMINEE OF DTC OR BY DTC OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO MCDONNELL DOUGLAS CORPORATION OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. CUSIP NO.580169ANO $50,000,000 MCDONNELL DOUGLAS CORPORATION 8 1/4% Note due July 1, 2000 McDonnell Douglas Corporation, a Maryland corporation (hereinafter called the "Company", which term includes any successor corporation under the Indenture herein referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of FIFTY MILLION DOLLARS ($50,000,000) on July 1, 2000 and to pay interest thereon from July 1, 1993, or from the most recent date in respect of which interest has been paid or duly provided for, semiannually on July 1, and January 1, in each year (each an "Interest Payment Date"), commencing January 1, 1994 at the rate of 8 1/4% per annum, until the principal hereof is paid or duly made available for payment. 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 December 15 or June 15 (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest which is payable, but is not punctually paid or duly provided for on any Interest Payment Date, 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 at the close of business 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, as more fully provided in such Indenture. 2 Exhibit 4(h) Payment of the principal of and the interest on this Note will be made at the office of the agency of the Company maintained for that purpose in the Borough of Manhattan, the City of 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. This Note is one of the series of 8 1/4% Notes due July 1, 2000 (the "Notes"). 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. Unless the certificate of authentication herein has been executed by The Bank of New York, the Trustee under the Indenture, or its successor thereunder, by the manual signature of one of its authorized officers, this Note shall not be entitled to any benefits under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: July 1, 1993 CERTIFICATE OF AUTHENTICATION MCDONNELL DOUGLAS CORPORATION This is one of the Securities of the series designated therein referred to in the within- mentioned Indenture The Bank of New York, as Trustee By: -------------------------- Treasurer By: ----------------------- Attest: ---------------------- Authorized Officer Secretary 3 Exhibit 4(h) MCDONNELL DOUGLAS CORPORATION 8 1/4% Note due July 1, 2000 This Note is one of a duly authorized issue of Securities of the Company, issued and to be issued under an Indenture, dated as of September 1, 1985, as amended (herein called the "Indenture"), between the Company and The Bank of New York (as successor to Citibank, N.A.). 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 are not subject to redemption by the Company prior to maturity. If an Event of Default (as defined in the Indenture) with respect to the Notes 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 provided, 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 aggregate principal amount of the Securities at the time Outstanding, as defined in the Indenture, of each series affected thereby. 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 each 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 Holders 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 or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision 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 prescribed. As provided in the Indenture and subject to certain limitations set forth therein and on the face hereof, the transfer of this Note may be registered on the Security Register of the Company, upon surrender of this Note for registration of 4 Exhibit 4(h) transfer at the office or agency of the Company in the Borough of Manhattan, The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the Holder hereof or by his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only in registered form without coupons in denominations of $1,000 and integral multiples thereof. As provided in the Indenture and subject to certain limitations set forth therein and on the face hereof, the Notes are exchangeable for a like aggregate principal amount of Notes in authorized denominations as requested by the Holder surrendering the same. If (x) any Depository is at any time unwilling or unable to continue as Depository and a successor depository is not appointed by the Company within 60 days, (y) the Company executes and delivers to the Trustee a Company Order to the effect that this Note shall be exchangeable or (z) an Event of Default has occurred and is continuing with respect to the Notes, this Note shall be exchangeable for Notes in definitive form of like tenor and of an equal aggregate principal amount, in denominations of $1,000 and integral multiples thereof. Such definitive Notes shall be registered in such name or names as the Depository shall instruct the Trustee. If definitive Notes are so delivered, the Company may make such changes to the form of this Note as are necessary or appropriate to allow for the issuance of such definitive Notes. 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 of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. No recourse shall be had for the payment of the principal of (and premium, if any) or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. EX-10.F 5 SERVICE AGREEMENT 1 Exhibit 10(f) SERVICE AGREEMENT Service Agreement, dated as of the 1st day of April, 1992, between Kenneth M. Duberstein ("Duberstein") and McDonnell Douglas Corporation ("MDC"). WHEREAS, MDC is engaged in litigation arising out of the termination by the U.S. Navy of the A-12 contract (the "Litigation"); and WHEREAS, MDC wishes to retain Duberstein to provide certain services to MDC in connection with the Litigation, and Duberstein has agreed to provide such services; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the parties agree as follows: 1. Services Provided. Duberstein shall provide advice relative to the Litigation on behalf of MDC, to R. James Woolsey and the law firm of Shea & Gardner, special counsel to MDC and General Dynamics Corporation, and to such other persons as MDC shall request. Such services shall be provided approximately the equivalent of one day per month. 2. Duration of Contract. This Agreement shall be effective on April 1, 1992, and shall continue until terminated by either party upon 30 days prior written notice. 3. Compensation. (a) Fees. For services provided hereunder, Duberstein shall be paid a fee of $20,000 per calendar quarter, in advance, pro rated for any partial periods. (b) Expenses. For travel incurred at MDC's direction, MDC will reimburse Duberstein his actual reasonable expenses for meals and incidentals, plus the actual reasonable cost of transportation and lodging. (c) Duberstein shall invoice MDC quarterly for the service fee. Invoices and requests for reimbursement of expenses shall be directed to John F. McDonnell. MDC shall promptly pay all such invoices and requests for reimbursement. 4. Reports. Duberstein shall furnish to MDC such descriptions and details of its billings as MDC may reasonably require. 5. Nature of Relationship. Duberstein is retained by MDC as an independent contractor. Duberstein shall not enter into any agreement nor incur any obligations on MDC's behalf, nor commit MDC in any manner, without MDC's prior written consent. 2 Exhibit 10(f) 6. Agreement and Amendment. This agreement, together with the letter agreement, dated March 23, 1992, between the parties hereto, constitutes the parties' entire agreement and supersedes any other oral or written agreements or understandings between the parties regarding the subject matter hereof. This agreement may only be modified by a writing, signed by both parties. 7. Conflicts of Interest Warranty and Representation Restriction: A. Personnel 1. Conflicts of Interest. Duberstein agrees, except as provided hereinafter: (i) no current U.S. Government ("USG") employee (military or civilian), special employee, or consultant may be used. No person may be used if Duberstein has reason to believe such person advises the U.S. Government about procurements involving MDC as a prime or subcontractor; (ii) no such person may be used who is a U.S. Department of Defense military officer (0-4 [major or lieutenant commander] or above) or civilian official (GS-12 or above) out of service less than two years; (iii) any person used who is required to file a DD 1787 will promptly provide a copy of such form to MDC; (iv) no person may be used who has, within the last five years, been convicted of or pleaded nolo contendere to a felony related to a USG prime or subcontract, or otherwise been suspended, debarred or proposed for debarment from receiving contracts from the USG; and (v) Duberstein will not, unless expressly authorized by MDC, represent MDC before any branch or office of the United States Government, nor any officer, employee or elected USG official. If such representation is authorized hereunder, Duberstein will not perform any such contract tasks with any persons who have served in the U.S. Government within the last ten years. 2. Exceptions. If Duberstein cannot make these warranties and representations for any employee or agent he intends to use on MDC's behalf, Duberstein shall request and promptly have completed and submitted to MDC, a McDonnell Douglas Corporation Form 4170, "Conflicts of Interest Questionnaire," by each such employee or agent. Such employees may not be used in performance of this contract unless the MDC Law Department approves their use, and then, only in compliance with such restrictions as it may require. 3 Exhibit 10(f) 3. Breach. BREACH OF THIS WARRANTY AND REPRESENTATION CLAUSE IS CAUSE FOR IMMEDIATE TERMINATION OF THIS CONTRACT FOR DEFAULT AND/OR DUBERSTEIN'S REFUND TO MDC OF ALL PAYMENTS RECEIVED OR OWED UNDER THIS CONTRACT FOR THE SERVICES OF ANY INDIVIDUAL WHOSE PERFORMANCE ON MDC'S BEHALF IS BARRED BY THIS CLAUSE. 8. Code of Ethics. By accepting this contract, Duberstein agrees that: (a) his personnel acting on MDC's behalf will observe all applicable laws and the standards of business conduct agreed to in this contract, (b) he will avoid conflicts of interest with MDC or its components and subsidiaries, (c) he will observe MDC's policies regarding gifts, meals, and transportation when dealing with MDC personnel or third parties on MDC's behalf, (d) he will not knowingly seek, receive, disclose or use on MDC's behalf any information not legally available to Duberstein or or MDC, and (e) he will promptly and accurately disclose to MDC's representative under this Agreement any and all possible violations of this Code. 9. Duberstein's Conduct. Duberstein shall comply with all applicable existing and future laws and regulations applicable to its performance under this Agreement and the terms and conditions of this Agreement. Duberstein agrees that it has not and shall not make any payments from the funds received under this Agreement directly or indirectly to any officials or employees of any government or of any agency or other instrumentality of any government. 10. Acquisition of Information. Duberstein shall not solicit, obtain, use for or disclose to MDC, directly or indirectly, any information not legally available to Duberstein and MDC and properly authorized for release to and use by Duberstein and MDC. Duberstein shall determine in good faith whether its access to information is proper. 11. Disclosure. Duberstein shall not, without the prior written consent of MDC, disclose the terms of this Agreement to any third party except as may be required by law, in which case Duberstein shall give MDC prior written notice of the intended disclosure. 4 Exhibit 10(f) 12. Applicable Law. This Agreement shall be construed under the laws of Missouri. KENNETH M. DUBERSTEIN MCDONNELL DOUGLAS CORPORATION /s/ Kenneth M. Duberstein /s/ John F. McDonnell - ------------------------- By:----------------------------- John F. McDonnell Chairman and Chief Executive Officer 5 Exhibit 10(f) FIRST AMENDMENT TO SERVICE AGREEMENT Reference is made to that certain Service Agreement (the "Agreement") entered into as of the 1st day of April, 1992 between Kenneth M. Duberstein ("Duberstein") and McDonnell Douglas Corporation ("MDC"). WHEREAS, Duberstein has been retained to provide certain services to MDC in connection with its litigation regarding the U.S. Navy's termination of the A-12 contract (the "Litigation"); and WHEREAS, MDC and Duberstein wish to amend the Agreement to retain Duberstein's additional and similar services relative to resolving C-17 program issues (the "C-17 Matters"). NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and adequacy of which the parties hereby acknowledge, the parties hereby agree to amend the Agreement as of the 1st day of June, 1993 to include certain services relative to the C-17 Matters as follows: A. Section 1 of the Agreement shall be amended by inserting after the last sentence the following language: "Relative to the C-17 Matters, Duberstein shall provide services to MDC, and to such other persons as MDC shall request. Such services shall be provided on an as needed basis." B. Section 3(a) of the Agreement shall be amended by inserting the words "relative to the Litigation" after the word "hereunder" and by adding the following language to the end thereof: "For services provided relative to the C-17 Matters, Duberstein shall be paid $10,000 per month for the period beginning on June 1, 1993 and ending on March 31, 1994, and $10,000 per month for each month thereafter in which MDC notifies Duberstein that his services are needed." C. Section 6 of the Agreement shall be amended by inserting between the words "agreement," and "together" in the first line thereof, the following words: "as amended by the First Amendment to Service Agreement, dated as of June 1, 1993 between the parties hereto," In all other respects, the Agreement, as hereby amended, shall remain in full force and effect and shall be binding upon the parties in accordance with its terms. KENNETH M. DUBERSTEIN MCDONNELL DOUGLAS CORPORATION /s/ Kenneth M. Duberstein /s/ John F. McDonnell - ------------------------- By:----------------------------- John F. McDonnell Chairman and Chief Executive Officer EX-11 6 EARNINGS PER SHARE 1 Exhibit 11 MCDONNELL DOUGLAS CORPORATION COMPUTATION OF EARNINGS PER SHARE (Dollar amounts in millions, except share data) Years Ended December 31 1993 1992 1991 ---- ---- ---- PRIMARY Weighted average shares outstanding 39,256,911 38,839,665 38,364,477 ========== ========== ========== Net earnings: Earnings from continuing operations before cumulative effect of accounting change $359 $698 $357 Discontinued operations: Earnings (loss) from operations, net of income taxes 20 (8) Gain on disposals, net of income taxes 37 37 74 Cumulative effect of initial application of new accounting standard for postretirement benefits (1,536) ------ ------- ------- Net earnings (loss) $396 ($781) $423 ===== ====== ======= Earnings (loss) per share: Continuing operations $ 9.17 $17.97 $ 9.32 Discontinued operations: Earnings (loss) from operations, net of income taxes .50 (.22) Gain on disposals, net of income taxes .93 .96 1.93 Cumulative effect of accounting change (39.53) ------ -------- ------- Primary earnings (loss) per share $10.10 ($20.10) $11.03 ====== ======== ====== Earnings per share computations are based upon the weighted average common shares outstanding during the period. Common stock equivalents (convertible debt and options) are not material. Accordingly the computation of fully diluted earnings per share is the same as the primary computation. EX-13 7 ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 [HARD COPY PG. 6] Facing a Bright New Future in MILITARY AIRCRAFT [FULL-PAGE PHOTOGRAPH] [HARD COPY PG. 7] As a result of strong performance across an array of programs, MDC has further strengthened its position as the world's leading producer of military aircraft. MDC is producing six top-of-the-line military aircraft: - -- The dual-role F/A-18 Hornet, the only fighter or attack aircraft chosen by the U.S. Navy for production; - -- The C-17 Globemaster III, the new heavy airlifter which is the key to fulfilling the U.S. Air Force's post-Cold War mission of "global reach -- global power;" - -- The AV-8B Harrier II Plus, the world's only in-production V/STOL (vertical or short take-off and landing) aircraft; - -- AH-64 Apache helicopter, in service with the U.S. Army and three allied nations, the world's most advanced attack helicopter in production; - -- The F-15 Eagle, widely known as "the world's premier air superiority aircraft." In the F-15E configuration, the Eagle is the world's most capable fighter-bomber; - -- The T-45 trainer, the centerpiece of the U.S. Navy's first fully integrated training system. MDC secured new business across all six lines of military aircraft in 1993 and early 1994. That included full funding for the F/A-18 E/F development program in the U.S. Fiscal Year 94 budget; full funding for production of another 36 C/D model F/A-18s, six C-17 heavy airlifters, 12 T-45 trainer aircraft, and the AV-8B and AH-64 remanufacturing programs, as well as production of 10 new AH-64s. Foreign military sales in 1993 were highlighted by contracts from Saudi Arabia for 72 F-15s, Switzerland for 34 F/A-18s, and Malaysia for eight F/A-18s. In January 1994, Israel announced the selection of 20 F-15s with options for five more. Given the pressures on our military customers caused by shrinking defense budgets, MDC's strategy in military aircraft is keyed to providing superior quality and enhanced capabilities at an affordable price. That is true both at the "front end" of the business (in the development of new technologies and new generations or models of aircraft) and at the "back end" (assembly, delivery, and product support). 2 Exhibit 13 During 1993, MDC won a series of important government research and development contracts in military aerospace. That included a $28 million contract award from the United States Advanced Research Projects Agency (ARPA) to lead one of two teams selected to design and build a full-scale, powered wind tunnel model of an Advanced Short Takeoff and Vertical Landing (ASTOVL) technology demonstrator. The design could have future potential as a multi-role, multi-service strike fighter in about 20 years. In [HARD COPY PG. 8] addition to contract research and development awards, MDC won a $70 million prime contract to demonstrate the U.S. Army's Rotorcraft Pilot's Associate system. This program will establish revolutionary improvements in combat helicopter effectiveness through the automation of such physical functions as flight, information processing, and weapons management. Recognizing the increasing importance customers are placing on system affordability, MDC's "Phantom Works," which spearheads development of advanced technologies, is also involved in pioneering a number of new concepts designed to control costs when new systems are ordered at low rates. Among these concepts are integrated product definition, lean manufacturing, flexible tooling and prototyping. The insertion of new technology into existing and proven systems is an important means of providing the customer with improved performance -- at an affordable price. For example, the new E/F version of the F/A-18 -- now under development -- will result in substantial improvements that will keep the Hornet at the leading edge of combat aircraft performance for many years to come. The E/F is being developed at only about a third of the cost of a new aircraft -- as a result of the cost-effective application of new technology to a proven system. The AV-8B Harrier II Plus remanufacturing and the AH-64D Longbow Apache programs will provide similar benefits by upgrading the world's finest VSTOL aircraft and the U.S. Army's premier attack helicopter. Faced with falling production rates in several programs, MDC has managed costs aggressively, including so-called "fixed costs," such as plant, equipment, and support functions. Across most of the U.S. defense industry, overhead rates (the ratio of indirect costs to direct production costs) have climbed as production has fallen -- leading to lower earnings, higher prices, or both. But MDC has reduced its overhead costs at a faster rate than declines in production in most military aircraft programs. The result: higher earnings for MDC and cost savings that are passed along to DoD and international customers through annual procurements based on lower overhead rates. F/A-18 Hornet The much-awaited "Bottom Up Review" -- released by DoD on September 1 -- set forth the Clinton Administration's plans for restructuring U.S. Armed Forces and procurement to fit the requirements of the post-Cold War world. The document strongly endorsed the F/A-18 E/F as one of only two major development programs in the fixed wing, fighter aircraft field. 3 Exhibit 13 With a larger wing, a lengthened fuselage, and higher thrust engines, the F/A-18 E/F will have the range and payload capabilities to perform the bulk of the U.S. Navy's tactical aircraft missions well into the next century. The advanced Hornet is central to the new "From the Sea" war-fighting doctrine -- which shifts the Navy's focus from open-ocean warfare to regional and coastal operations. The E/F will have up to 50% more range than earlier versions, combined with two new weapon stations, improved survivability, and substantial capacity for future growth. The E/F program won high praise from the Navy in passing its Preliminary Design Review in June. The program is on-cost, on-schedule, and on- performance. The first flight of the F/A-18 E/F is scheduled for late 1995. MDC will design and build seven flight test aircraft and three ground test articles. The new Hornet will enter service in 1998. [HARD COPY PG. 9] Further successes for C/D model F/A-18s in winning export contracts in 1993 confirmed the aircraft's reputation as "the fighter of choice in international markets." The Hornet program now has been selected as the front-line fighter of seven countries outside the U.S.: Canada, Australia, Spain, Kuwait, Finland, Switzerland, and Malaysia. On June 6, voters in Switzerland overwhelmingly approved the purchase of 34 F/A-18s for the Swiss Air Force. The F/A-18 was first selected by the Swiss Air Force in 1988, after an intensive competition with the F-16, the Swedish JAS-39, and the French Mirage 2000-5. The Swiss Federal Council reaffirmed the Hornet selection over the Mirage in June 1991, and the Swiss Parliament approved the Hornet acquisition bill in the summer of 1992. Deliveries of aircraft kits to Switzerland will begin in September 1995 with delivery of all 34 F/A-18 aircraft to the Swiss Air Force scheduled for completion by September 1996. On June 26, the F/A-18 program won another international order. On that date, the Malaysian government announced an order for eight F/A-18s, with the potential of more to come, as part of a program to modernize its air force. DoD is planning to continue annual purchases of C/D model F/A-18s through FY 97, when the transition to F/A-18 E/F procurements will begin. C-17 Globemaster III The C-17 achieved a major milestone in June 1993 with the delivery of the first new airlifter to an operational unit of the U.S. Air Force. Four C- 17 Globemaster IIIs were delivered to Charleston Air Force Base, S.C., during 1993. Combined with six aircraft in the flight test program, ten C- 17s were flying by year-end. The C-17's basic mission is to provide rapid deployment in time of emergency. Wherever the future crisis may be, U.S. forces will be able to get there quickly -- and in strength -- as a result of the combination of heavy lift, extended range, and on-the-ground agility provided by the C-17. The C-17 is the only aircraft that can deliver heavy firepower -- such as 4 Exhibit 13 Patriot missile batteries, Apache helicopters, and main battle tanks -- over intercontinental distances direct to small, austere airfields. The C-17 program passed major structural tests of the fuselage and wing in 1993 -- permitting flight test of the aircraft up to 100% of design limit load. The flight test program was almost 75% complete at the end of 1993, and is expected to conclude in late 1994. The C-17 successfully tested some of its mission systems in 1993, such as equipment and cargo loading and parachute drops of troops and containers. MDC began preparations for testing low-altitude deliveries of combat cargo extracted from the aircraft by parachute. Following an extensive review of the program in 1993, DoD and MDC reached a settlement of a wide range of issues related to the C-17 fixed price development contract. The settlement -- which is subject to Congressional approval -- was the principal cause of a $450 million pre-tax write-off against MDC's 1993 earnings. The settlement resolves a number of areas of conflict between MDC and the customer, and it modifies certain specifications without compromising the aircraft's ability to perform its mission. The settlement contemplates an initial purchase of up to 40 aircraft, including nine already delivered by the end of 1993 and another 11 in different stages of production. That gives MDC until the end of 1995 [HARD COPY PG. 10] to demonstrate it can deliver high quality airplanes on schedule, on specification, and at affordable costs. If successful in improving contract performance, MDC believes there will be additional orders for C- 17s in future years well beyond the initial purchase. AV-8B Harrier II Plus & AH-64D Longbow Apache New radar-equipped versions of AV-8B Harrier and the AH-64 Apache provide substantially improved capability at affordable prices. With the addition of the proven APG-65 radar and night attack systems, the Harrier becomes a more versatile, multi-mission aircraft -- featuring new air-to-air capabilities to complement its renowned air-to-ground capabilities. On February 26, 1993 Spain authorized the purchase of eight Harrier II Plus aircraft. That followed Italy's decision in late 1992 to purchase 13 radar- equipped Harrier II Plus aircraft. The U.S. FY 94 budget contains funds for the remanufacture of four day- attack Harriers from the Marine Corps fleet to the Harrier II Plus configuration. The remanufacturing program will equip existing day-attack Harrier IIs with new fuselages, APG-65 radar, night attack avionics, increased thrust engines, and other new systems. At two thirds the cost of new aircraft, the Marines will receive remanufactured Harriers with expanded multi-mission capabilities -- and with the same functional 6,000- hour service life as new aircraft. Current DoD plans call for the remanufacture of a total of 73 AV-8Bs in coming years. Nevertheless, in a 5 Exhibit 13 declining defense budget environment, this is a program that will have to be rejustified every year. Similarly, the U.S. Army plans to modernize its entire fleet of nearly 800 Apache helicopters through a remanufacturing program adding greater firepower and the capability of including the Longbow Fire Control Radar. The fully-modernized Apache is able to detect and classify up to 256 targets within 30 seconds, and to engage its choice of targets from extreme standoff ranges, and in virtually all weather conditions. By year's end, five AH-64D Longbow Apache prototypes had flown more than 800 combined hours. The FY 94 budget contains funds for an additional 10 AH-64A Apaches for the U.S. Army. There have been a total of 94 Apache aircraft orders from five allied nations. In order to sustain the production line into 1996, when the U.S. Army plans to begin the Apache remanufacture program, MDC needs to obtain approximately 44 new Apache orders in 1994 from domestic and international customers. F-15 Eagle In May 1993, Saudi Arabia signed a letter of offer and acceptance with the U.S. for the purchase of 72 F-15s. In early 1994, the government of Saudi Arabia, MDC, the U.S. Government, and other major U.S. defense contractors [HARD COPY PG. 11] developed a conceptual outline aimed at restructuring payments due from Saudi Arabia in 1994 for military product purchases, including the purchase of F-15s. On January 27, 1994, Israel announced its intent to order at least 20 new F-15s to meet future defense requirements. The Saudi and Israeli orders assure production into the late 1990s, and provide additional opportunities for the program to win export orders. Along with most other MDC combat aircraft programs, the F-15 program maintained a perfect record of on-time or ahead-of-schedule deliveries in 1993. In May MDC delivered the 200th and last F-15E of the Air Force's original procurement. An additional order for nine F-15Es was made as part of a Desert Storm supplemental appropriation. MDC delivered the first of those in December -- seven months ahead of schedule. T-45 Training System In January 1994, the first class of naval aviators at the Naval Air Station in Kingsville, Texas, began training with MDC's T45TS training system. The T-45 passed sea trials in September 1993 and successfully completed the first phase of operational evaluation in November. Current Navy plans call for 268 aircraft to be delivered through the year 2003. Light Helicopters The MD Explorer, a new twin-engine, eight-place helicopter that made its maiden flight on December 18, 1992, is on schedule to receive FAA certification in the last quarter of 1994. Two additional production prototype MD Explorers joined the test program in 1993. The three aircraft flew more than 150 hours. 6 Exhibit 13 The MD Explorer incorporates the company's exclusive NOTAR(R) system for anti-torque and directional control. The NOTAR system entered service in October 1991 on the MD 520N, a single-engine, five-place helicopter that is regarded as the quietest helicopter flying. MDC delivered 21 MD 520Ns in 1993, down from 30 in 1992, due mainly to depressed market conditions. The super-quiet MD 520N has proved particularly popular with law enforcement agencies, which must fly low over populated areas. Six law enforcement agencies in Arizona, California and Ohio currently operate MD 520N helicopters. MDC continues to produce MD 500 configurations for commercial and military customers. In Conclusion MDC's military aircraft businesses performed extremely well in 1993 despite continuing defense budget reductions. MDC continued to strengthen its product lines through the cost-effective application of new technologies to existing, proven systems. Looking toward the future, MDC now has six military aircraft programs in production and has won a variety of advanced research and development contracts involving new technologies that will be essential to new generations of aircraft. [HARD COPY PG. 12] Facing a Bright New Future in COMMERCIAL AIRCRAFT [FULL-PAGE PHOTOGRAPH] [HARD COPY PG. 13] In the midst of the worst airline recession in history, MDC's commercial aircraft business has reduced costs, improved quality, successfully defended its customer base, and continued to invest in the future. It also made a profit in 1993 for the third consecutive year and generated a large positive cash flow. Specific achievements in 1993 include: - -- further reductions in costs and assembly span times in both the twin jet and trijet lines. MDC delivered 42 MD-80s during the year, down from 84 in 1992 and 138 in 1991. Despite the large decline in volume, assembly hours per MD-80 continued to fall. Assembly hours per MD-11 have also come down substantially. - -- continued improvements in quality at all stages of the production process -- and in customer service. Dramatic reductions in costs have been achieved through increased quality. The rejection rate for parts delivered was cut by more than 50% in 1993 and the total cost of processing and working around rejected parts was similarly reduced. During 1993, MDC had a 100% success rate in meeting on- time delivery commitments to customers. The new MD-11 trijet achieved a dispatch reliability in airline service of 98% for the last 12 weeks of 1993. 7 Exhibit 13 - -- achievement of a succession of milestones in the MD-11 program. The 100th MD-11 came off the assembly line in mid-year. MDC delivered a total of 36 MD-11s over the course of 1993. By the end of 1993, a worldwide fleet of 112 MD-11s was in service or about to enter service with 17 airlines, serving more than 90 cities around the world. Carriers with fleets of five or more MD-11s include American Airlines, Delta, and Federal Express in the U.S., and Alitalia, China Eastern, Garuda, Korean Air, Swissair, and Varig, among international carriers. Two more of the world's most prestigious airlines -- Japan Airlines and KLM Royal Dutch Airlines -- took deliveries of their first MD-11 trijets late in 1993. - -- reaffirmation of customer commitments to MDC aircraft. Finnair decided to maintain a predominantly MDC-built fleet of aircraft in 1993 after considering an aggressive bid by competitors to provide the airline with a mixture of new and used Boeing aircraft. MDC was also successful in maintaining its MD-11s in the fleet of LTU, the large German charter operator, following a challenge mounted by Airbus Industrie. MDC's finance subsidiary assisted Garuda in finding the financing required to take delivery of three MD-11s in 1993. - -- successful placement of 13 "white tail" aircraft with new customers. [HARD COPY PG. 14] MDC placed eight twin jets and five trijets in 1993 that were without purchase commitments early in the year. As a result, MDC ended 1993 with no unsold airplanes in finished inventory. - -- roll-out and first flight of the new MD-90 twin jet. The MD-90 accumulated over 700 hours in flight test in 1993. The program is within budget and on schedule in progressing toward FAA certification in late 1994, with first deliveries to customers expected in early 1995. The MD-90 is the quietest aircraft in the 150-seat class, and the cleanest environmentally. It also has the most fuel efficient engines in its class. MDC has 77 firm orders for the new twin jet. Many of the world's airlines have suffered devastating financial losses over the past few years. Those losses have depleted their equity capital and resulted in an on-going drought in new orders for jetliners. The world's airlines and leasing companies placed firm orders for only 26 new airliners in 1993, net of cancellations. There were bookings for only 626 new airliners in all of 1991, 1992, and 1993. By contrast, over the 1988 to 1990 period, when the commercial aircraft market was booming, airlines and leasing companies placed orders for more than 3,500 aircraft. Some airlines had improved earnings in 1993, although many continued to suffer losses. MDC does not expect a strong, industry-wide resumption in orders for new aircraft until 1995, at the earliest. However, MDC expects to book some new orders in 1994. In February 1994, Saudi Arabian Airlines announced its intention of purchasing a total of about 50 commercial airliners from MDC and Boeing. The number and type of aircraft has not yet been finally determined. 8 Exhibit 13 During 1993, MDC received six new orders for MD-11s and ten new orders for MD-80s, but those orders were offset by the loss of seven trijet orders and eleven twin jet orders. As of December 31, 1993, the MD-11 program status included 112 deliveries, 60 aircraft on firm order, and 101 options and reserves representing potential future orders. On the same date, the MD80/90 program included 1,089 deliveries, 143 aircraft on firm order, and 185 options and reserves. The small number of incoming orders placed in the past three years dictates further reductions in aircraft deliveries in 1994. However, MDC's commercial aircraft business expects to continue to generate a positive cash flow for 1994 as a whole due to continued cost controls and continued improvements in productivity. MDC's near-term strategy in commercial aircraft is based on reducing costs and assembly span times on current models, improving current products through enhancements and advanced derivatives, and delivering high quality, defect-free airplanes to customers. The focus is on providing customers with affordable technology and low-cost product improvements. When the next upturn in the industry's new order cycle begins, MDC is positioned to expand and grow within at least the two important segments of the overall market that are now served by MDC products. While MDC has a 9% share of world firm [HARD COPY PG. 15] backlog for large jetliners of all types, the MD80/90 program holds a 31% share of the world market in the medium-range, 150-seat category, competing against the Boeing 737-400 and the Airbus A320. The MD-11 program holds a 34% market share in the long-range, 300-seat category, competing against the Boeing 777B and the Airbus A340. MDC invested over $75 million on research and development in the commercial aircraft business in 1993. That included spending on the MD-90 twin jet, which, in addition to fuel-efficient new engines and an all-digital cockpit, includes a long list of improvements in aircraft systems aimed at reducing airline maintenance costs and making the MD-90 the industry leader in dispatch reliability. MDC is also examining possible extensions of the MD-11 line to include stretched and unstretched versions of the aircraft that would provide more seating, longer range, or both. MDC expects to launch a DC-9X modernization program -- a program that would provide substantial cost savings for customer airlines. The upgrade program will take full advantage of the durable and reliable airframe and systems of the DC-9 aircraft. There is a potential for modernization of up to 600 DC-9s in service with airlines around the world. Government- mandated noise requirements would otherwise force the retirement of many of these popular aircraft in the U.S. and other countries over the next few years. The DC-9X program will offer upgraded propulsion options and introduce new avionics and a major overhaul of their interiors. The program will provide DC-9X customers with an extended warranty and service life policy -- and serve as a bridge to the MD-95, a 100-seat aircraft now under consideration at MDC. MDC will act as the DC-9X integrator, responsible for design, contracting, and product support. 9 Exhibit 13 As described in the chairman's letter (see p.5), MDC's long-term strategy in commercial aircraft includes the potential of transforming the airliner business into an international alliance with multiple owners. MDC's reputation with key airline customers has steadily improved as a result of a sustained period of on-time deliveries of high-quality airplanes and enhanced customer service. As a result of large improvements in productivity, the company is positioned to remain healthy through the current downturn and to take advantage of the opportunities that will arise in the next upturn in the market for commercial airliners. [HARD COPY PG. 16] Facing a Bright New Future in MISSILES, SPACE & ELECTRONIC SYSTEMS [FULL-PAGE PHOTOGRAPH] [HARD COPY PG. 17] This segment had record operating earnings of $338 million in 1993 -- a 77% increase over the previous record of $191 million set a year earlier in 1992. The large increase in earnings occurred despite reduced business volume. Revenues totaled $2.575 billion, down 19% from $3.169 billion in 1992. There have been steady improvements in productivity and profit margins across many of the businesses in this segment since 1989. But the decisive factor in lifting earnings to new heights in 1993 was an MDC-wide organizational restructuring, announced in the fall of 1992, aimed at reducing costs in advance of anticipated declines in revenues. MDC's consolidation of six semi-independent defense companies into one group with two regions resulted in major reductions in overhead costs in the Missiles, Space and Electronic Systems segment. Space The Delta II -- the world's most reliable launch vehicle -- broke its own record of consecutive successful launches on August 30, 1993 with its 44th in a row -- boosting a U.S. Air Force NAVSTAR Global Positioning System into geosynchronous transfer orbit. The Delta II extended its record to 45 on October 26 -- and to 46 on December 7. In total, the Delta II completed seven launches in 1993, which included six launches for the Air Force, and one for a commercial customer. The Delta's string of successful launches dates back to 1986. The Delta has had 89 successes in 90 launches between 1977 and the end of 1993. In April 1993, MDC won a new contract to launch up to 36 payloads for the Air Force between 1996 and 2002, including 25 additional NAVSTAR GPS satellites. The contract value could exceed $1 billion if all options are exercised. While the Delta II was setting new records for reliability, the MDC- designed and built Delta Clipper Experimental (DC-X) successfully completed a series of "first ever" maneuvers -- in a Government-funded program designed to demonstrate vertical takeoff and landing, subsonic 10 Exhibit 13 maneuverability, and airplane-like supportability and maintainability in a true reusable rocket. In three flights between mid-August and the end of September, the rocket-powered DC-X ascended to a maximum height of 1,200 feet, hovered, moved laterally in a straight line, and then descended vertically, coming to rest on its landing pad. In late October, further flight tests were halted after Government funding for the program was exhausted. However, in late January 1994, NASA provided nearly $1 million to maintain the DC-X vehicle and ground systems in a readiness state for future flight testing. NASA and DoD may decide to resume flight testing of the experimental launch vehicle. [HARD COPY PG. 18] MDC remains one of the largest contractors in the U.S. Space Station program, but the company's role underwent significant change in 1993 as a result of a major restructuring of the program. Previously, MDC had been responsible for the largest part of the program. In August, NASA appointed The Boeing Company as prime contractor for a redesigned Space Station. The Clinton Administration also moved during the year to broaden international and popular support for Space Station by including Russian-built propulsion and power systems. The Space Station program is now undergoing final definition. As a major subcontractor to Boeing, MDC will develop and build unpressurized structures and four of the major systems (command and data handling; communications and tracking; active thermal control; and extra- vehicular activities and health monitoring) for Space Station. Missiles In March 1993, the Navy announced its intention of selecting a single supplier for production of Tomahawk missiles for the years FY 94 to FY 98 and development of the new Block IV Tomahawk. MDC and GM/Hughes are competing for the award, valued at approximately $1.4 billion for the production and development of approximately 1,000 missiles over the anticipated life of the program. The Navy is expected to select a winner in 1994. MDC has won the majority production share in the last two annual dual- source competitions to build Navy Tomahawks. In January 1993, MDC received a $201.6 million contract to build 120 Tomahawks and to remanufacture an additional 120 missiles in inventory into upgraded Block III Tomahawks. The contract represents 60% of the total Tomahawk procurement for FY 93, and includes 70% of the depot maintenance work for the year. MDC delivered the first Tomahawk with Block III systems improvements to the Navy in March 1993. Developed by MDC, the Block III upgrades include the addition of a Global Position System receiver and antenna, plus guidance, payload, software, and propulsion improvements. MDC was awarded the Block III development contract in December 1988. The FY 94 defense budget includes funds for continued production of Harpoon- derived Standoff Land Attack Missiles, or SLAMs, and the budget also includes funds for development of an "Expanded Response" upgrade of the same missile, called SLAM ER. MDC expects to receive a contract from the Navy in mid 1994 to commence work on SLAM ER development. Production 11 Exhibit 13 [HARD COPY PG. 19] of baseline SLAMs is expected to continue through 1997, when production work on retrofitting existing SLAMs to the new ER configuration would begin. The SLAM ER will include aerodynamic and guidance system improvements extending the missile's range by more than 50% and improving the warhead's ability to penetrate hardened targets. Initial funding of the SLAM ER development program strengthens MDC's position in the competition for the United Kingdom's Conventionally Armed Stand Off Missile (CASOM) program. MDC will submit a variant of SLAM ER in that competition in a bid to be submitted in 1994. The U.K. Government has said it will award a contract in 1996. The program is valued at over $1 billion. The basic Harpoon has been in service with the Royal Air Force and Royal Navy for more than a decade. While U.S. orders for the Harpoon missile ended in FY 89, the missile continues to win international orders. Overseas customers ordered 103 Harpoon anti-ship missiles in FY 93. Almost half of the 6,100-plus Harpoons ordered since the program began 22 years ago have been delivered to foreign customers. Electronics The electronic systems business reported a loss in 1993 as a result of charges in several advanced programs, including the Nighthawk electro- optical surveillance and targeting system. The Government decided in November to discontinue a laser crosslink program, which had been the source of more than $130 million in losses for MDC since 1980. The laser crosslink is an advanced product that enables satellites to communicate directly with one another in orbit. In 1993 MDC completed the divestiture of its Visual Simulation Systems business, which produced computer-generated image display systems for aircraft simulators. For FY 94, Congress approved another 15 Mast Mounted Sights for the U.S. Army and seven for sale to Taiwan, bringing the total number of systems bought to 412. The Mast Mounted Sight is an electro-optical system which enables helicopter pilots or ships' crews to detect and designate targets, at night or day and in inclement weather. Most parts of MDC's electronic systems business continued to operate profitably in 1993. Work performed in complex software, micro-processors, and lasers contributes to many MDC products. MDC is also involved in the command, control, communications, and intelligence (C3I) field. [HARD COPY PG. 20] COMPLIMENTARY BUSINESS McDonnell Douglas Finance Corporation (MDFC) While continuing to dispose of peripheral businesses, MDFC performed well in 1993 in its core markets of aircraft and commercial equipment leasing. 12 Exhibit 13 MDFC's aircraft financing operation provided $450 million in financing for MDC commercial aircraft customers -- more than double the previous year's aircraft financing volume. MDFC funding included purchases of two MD-83 aircraft for Transwede; two MD-11s for Garuda; and six MD-83s for TWA. Also, MDFC was instrumental in arranging another $1 billion in third-party financing for an additional 24 aircraft. At year end, the MDFC aircraft portfolio totaled $1.3 billion, with MDC- built aircraft accounting for 82% of the total. MDFC's commercial equipment operation wrote $38 million in new leases in 1993 and ended the year with a portfolio totaling $422 million. Included in its business is the lease of corporate aircraft and other large equipment items. MDFC obtained better access to capital markets and lower borrowing costs as a result of improved earnings and reduced debt of MDC, the parent corporation. This improved access to capital markets will enhance MDFC's competitiveness. McDonnell Douglas Realty Company (MDRC) MDRC manages a 4.9 million square-foot real estate portfolio valued in excess of $500 million. In 1993, MDRC provided increased consulting services to other units in MDC which were in the process of disposing of excess facilities. MDRC negotiated rental reductions, audited existing lease arrangements, and consolidated lease facilities to utilize space more efficiently. McDonnell Douglas Technical Services Company (MDTSC) MDTSC's pool of experienced and skilled workers (including retirees) provided $68 million of temporary professional assistance to MDC and other employers in 1993. For the second consecutive year, MDTSC's business increased by more than 50% as it placed professionals in over 3,000 contract assignments within MDC and at commercial clients. In 1993, MDTSC provided increased services in commercial markets for engineering, computer software development, and aircraft maintenance. McDonnell Douglas Travel Company (MDTC) MDTC increased business travel sales to $169 million in 1993, up 11% from 1992. External sales increased to over two thirds of total sales, reflecting MDTC's increasing penetration into the business travel market. MDTC's primary client remains the MDC business traveler. 13 Exhibit 13 [HARD COPY PG. 24] Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------- The following discussion should be read in conjunction with the consolidated financial statements and notes thereto beginning on page 34, which are incorporated herein by this reference. Narrative descriptions of MDC's principal products appear under the captions "Military Aircraft", "Commercial Aircraft" and "Missiles, Space and Electronics" beginning at page 6 and "Selected Financial Data by Industry Segment - Continuing Operations" at page 33, which descriptions are also incorporated herein by this reference. Overview MDC exceeded all of its key financial goals in 1993 with the exception of achieving positive earnings on the C-17. Aerospace debt decreased $1.142 billion, or 41%, during 1993. The year-end level fell to $1.625 billion, the lowest debt level in six years. MDC's trijet, the MD-11, was cash positive in every quarter and $454 million positive for the year. Earnings per share were $10.10, almost a five times increase over 1992, excluding last year's unusual items related to the adoption of a new retiree health care accounting standard. The C-17 program was not profitable in 1993 as a result of a $450 million pre-tax loss provision reflecting the estimated impact of a C-17 business settlement with the Department of Defense (DoD) and other increases in the estimated remaining cost on the development and initial production contracts. However, MDC was able to reach a settlement with the DoD which resolves many past differences and conflicts, establishes new parameters for success, and provides for an initial purchase of up to 40 C-17s. MDC and the Air Force will be developing plans and contractual modifications and agreements to implement the settlement, which is subject to congressional authorization and appropriations. Financial Condition General. MDC's financial statements include McDonnell Douglas Financial Services Corporation (MDFS) and McDonnell Douglas Realty Company (MDRC) on a fully consolidated basis. MDFS is the parent company of McDonnell Douglas Finance Corporation (MDFC), a diversified financial services company that has a capital structure significantly different from MDC's other business segments. The following table allocates MDC's capital structure at December 31, 1993 and December 31, 1992 between its aerospace segments (including aerospace-related obligations of MDRC in the amount of $107 million and $111 million as of December 31, 1993 and December 31, 1992, respectively) and its financial services and other segment, which is comprised principally of MDFS, MDFC and MDRC. The debt of MDFS, MDFC and MDRC is non-recourse to MDC. See also Note 11, Debt and Credit Arrangements, page 46 and Note 4, Finance Receivables and Property on Lease, page 41. 14 Exhibit 13
Financial Services Aerospace and Other December 31, 1993 Segments Segment Total - ----------------- --------- ---------- ------- (Dollar amounts in millions) Debt $ 1,625 $ 1,513 $ 3,138 Equity 3,123 290 3,413 ------- ------- ------- $ 4,748 $ 1,803 $ 6,551 ======= ======= ======= Debt-to-equity ratio .52 5.22 ======= ======= Financial Services Aerospace and Other December 31, 1992 Segments Segment Total - ----------------- --------- --------- ------ (Dollar amounts in millions) Debt $ 2,767 $ 1,474 $ 4,241 Equity 2,750 272 3,022 ------- ------ ------ $ 5,517 $ 1,746 $ 7,263 ======= ======= ======= Debt-to-equity ratio 1.01 5.42 ======= =======
The aerospace segments' debt-to-equity ratio decreased during 1993 as a result of improved earnings and a $1.142 billion reduction in aerospace debt. MDC generated positive cash flow from operations, primarily due to improved operating results, the reduction of inventories which was partially offset by reduced accounts payable and accrued expenses in the commercial aircraft segment, and from divestitures of non-core assets which were used to reduce debt during 1993. Cash provided by aerospace operations, exclusive of the approximately $200 million generated from divestitures of non-core assets, was approximately $900 million in 1993 while cash used by aerospace operations was approximately $300 million in 1992. Cash provided by operations on a consolidated basis was $475 million during 1993 while cash used by operations on the same basis was $587 million during 1992. 15 Exhibit 13 [HARD COPY PG. 25] Commercial Aircraft. MDC delivered 42 MD-80 twin jets (including eight under lease arrangements) and 36 MD-11 trijets (including three under lease arrangements) during 1993 as compared to 84 twin jets and 42 trijets during 1992. The weakness in the commercial aircraft market is expected to continue during 1994. Current aircraft production rates reflect approximately 20 MD-80 twin jet and 20 MD-11 trijet deliveries in 1994. MDC has undertaken aggressive cost reduction actions in the commercial aircraft segment in its effort to match costs with its production rate. Employment in the commercial aircraft segment decreased from 35,418 at December 31, 1991 to 12,540 at December 31, 1993, reflecting cost reduction efforts and scheduled production rate declines. C-17 Globemaster III. During 1993 and 1992, MDC increased its cost estimate at completion for the C-17 Globemaster III contracts for the full- scale engineering development and first ten initial production aircraft. The 1993 charge reflected the estimated impact of the C-17 settlement with the DoD and other increases in the estimated remaining cost on the development and initial production contracts. The 1992 charges reflected the estimated cost of strengthening the C-17 wing, which was damaged during stress tests on October 1, 1992, and other cost growth in test, assembly and procurement. See Note 5, Contracts in Process and Inventories, page 42 and Results of Operations. A-12. MDC and General Dynamics Corporation (GD) have filed a legal action to contest the Navy's termination for default on the A-12 contract. MDC and GD have reported different financial results for the program. For the quarter ended June 30, 1990, GD reported a $450 million pre-tax provision for loss on the full-scale development and test portion and the first production option on the contract which included reversing $24 million of earnings it had previously recognized on the contract. At that time, MDC reported no loss on the contract (including the first production option) based on cost estimates that differed from those used by GD, the recognition of the probable recovery of claims as future revenue, and the fact that it had not previously recognized earnings on the contract. For the fourth quarter of 1990, GD announced an additional loss provision on the A-12 contract of $274 million, and MDC established a pre- tax provision of $350 million for loss on the contract. See Note 5, Contracts in Process and Inventories, page 42. The Navy has agreed to continue to defer repayment of $1.335 billion alleged to be due, with interest from January 7, 1991, from MDC and GD as a result of the termination for default of the A-12 program. The agreement provides that it will remain in force until the dispute as to the type of termination is resolved by the pending litigation in the U.S. Court of Federal Claims or negotiated settlement, subject to review by the U.S. Government annually on December 1, to determine if there has been a substantial change in the financial condition of either MDC or GD such that deferment is no longer in the best interest of the Government. The Government, which extended the December 1, 1993 review beyond the time to which MDC and GD agreed, has not advised the contractors of the results of that review. On February 15, 1994, however, the U.S. Court of Federal Claims entered an Order, deferring rulings on the merits of the legal action to July 21, 1994, to enable the parties to pursue settlement 16 Exhibit 13 negotiations among other things, conditioned on an undertaking made by the Government that it would not seek to terminate the deferment agreement in the interim. MDC firmly believes it is entitled to continuation of the deferment agreement in accordance with its terms. However, if the agreement is not continued, MDC intends to contest collection efforts. If payments of the deferred amount were required, such payments would have a material adverse effect on MDC's cash flows. For additional information regarding Government claims and inquiries on the C-17 and A-12 programs, see also Government Business Audits, Reviews and Investigations, page 31. Results of Operations MDC revenues decreased 17% in 1993 to $14.487 billion, down from $17.365 billion in 1992 and $18.061 billion in 1991. The 1993 decrease resulted principally from reduced deliveries in the commercial aircraft segment and lower volume in the F-15 program, and to a lesser extent due to the winding down of the Advanced Cruise Missile program and reduced commercial space launches. In spite of the revenue decrease, MDC's 1993 earnings increased to $396 million. That compares with 1992 earnings of $79 million and 1991 earnings of $423 million, after excluding from 1992 a charge of $1.536 billion related to the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and a subsequent curtailment gain of $676 million related to the termination of certain postretirement health care benefits. MDC had a 1992 net loss of $781 million including these SFAS No. 106 items. Excluding curtailment gains, after-tax retiree health care costs associated with SFAS No. 106 were $117 million lower in 1993 than in 1992, and $26 million lower than in 1991 when these costs were recorded on a pay-as-you-go basis. The lower costs in 1993 reflect the elimination or reduction of company-paid health care for many current and future retirees. The 1993 and 1992 military aircraft segment results were reduced by C-17 loss provisions. Earnings in the commercial aircraft segment decreased in both 1993 and 1992 due to significant reductions in MD-80 deliveries and an [HARD COPY PG. 26] increased costing percentage on the MD-11 implemented in the second quarter of 1992. These decreases were partially offset by increased 1993 earnings in the missiles, space and electronic systems segment. Net earnings in each of the last three years included gains from discontinued operations. These totaled $37 million in 1993, $57 million in 1992, and $66 million in 1991. Earnings in 1993 and 1991 included $158 million and $32 million, respectively, associated with successful resolution of issues with the IRS, offset in 1993 by $13 million resulting from an additional tax provision related to the Omnibus Budget Reconciliation Act. Earnings in 1993 also include a $43 million postretirement benefit curtailment gain. 17 Exhibit 13 Pension income totaled $138 million in 1993, up from $106 million in 1992 and $34 million in 1991. During the first quarter of 1992, actuarial assumptions were changed with respect to (i) the expected long-term return on plan assets, (ii) withdrawal and (iii) retirement used in the determination of pension income. At the latest measure-ment date (December 31, 1993), MDC recognized decreasing long-term interest rates by reducing the discount rate from 9% to 7.5%. As a result, pension credits are expected to be moderately lower in 1994 than in 1993. See Note 15, Retirement Plans, page 49. In 1993, MDC reclassified certain income and expense related to an executive life insurance program to general and administrative expenses. These items were previously reflected as revenues or interest expense. Prior years have been restated to conform with the 1993 presentation. Neither the first quarter 1992 one-time charge for adoption of the accounting change for postretirement health care benefits nor the subsequent postretirement benefit curtailment gains impact the revenues or operating earnings of the business segments. In light of declining defense spending and the continuing depressed condition of the commercial aircraft business, reported financial information by segment may not be indicative of MDC's future operating results. Military Aircraft Operating revenues in the military aircraft segment decreased 5% in 1993 after a 7% decrease in 1992. The 1993 decrease was largely due to reduced volume in the F-15 program, partially offset by increased revenue in the C- 17 program. Loss provisions on the C-17 program and decreased production in the F-15 program accounted for the decrease in 1992 revenues from the 1991 level. The military aircraft segment reported operating earnings of $83 million in 1993 as compared to $8 million in 1992 and $394 million in 1991. The 1993 and 1992 operating earnings were reduced by pre-tax loss provisions of $450 million and $383 million, respectively, on the C-17 program. The 1993 charge covered both a settlement of a range of issues related to the C-17 military aircraft program and increased cost on the C-17 development and first ten initial production aircraft contracts, which was in part interrelated to the settlement. The settlement is subject to congressional authorization and appropriations. The 1992 charges reflected the estimated cost of strengthening the C-17 wing, and other cost growth in test, assembly and procurement. See Note 5, Contracts in Process and Inventories, page 42. The increase in 1993 operating earnings over the 1992 level was in part related to the C-17. Even with a loss provision in 1993 in excess of the 1992 loss provisions, C-17 program losses in 1993 were lower than in 1992. Decreased production in the F-15 program reduced earnings in this segment. Pre-tax retiree health care costs in this segment decreased by $82 million in 1993, reflecting the elimination or reduction of company-paid health care for many current and future retirees. Pre-tax retiree health care costs increased $58 million in 1992 when SFAS No. 106 was first adopted. 18 Exhibit 13 The T-45 program generated positive operating earnings in 1993 and 1992 as the program moved from development to the production stage. Earnings from the AH-64 Apache helicopter and reduced losses on other helicopter programs also had a positive impact on both 1993 and 1992 earnings. Other helicopter programs recorded losses in 1991 primarily as a result of adjustments to inventory. Commercial Aircraft Operating revenues in the commercial aircraft segment decreased 28% in 1993 after a 2% decrease in 1992. The sharp decrease in 1993 revenues is due to reduced aircraft deliveries. MDC delivered 42 MD-80 twin jets (including 8 under lease arrangements) in 1993, as compared with 84 in 1992 and 138 in 1991. The continued decrease in MD-80 deliveries reflects the overall softness in the commercial aircraft market. MDC delivered 36 trijets (including 3 under lease arrangements) in 1993, compared with 42 in 1992 and 31 in 1991. The commercial aircraft segment reported operating earnings of $40 million in 1993, and $102 million and $283 million in 1992 and 1991, respectively. Similar to revenues, earnings reductions were the result of fewer MD-80 deliveries. In addition, margins on the MD-11 trijet, which are determined using the program-average cost method, were reduced by approximately 4% of the airframe sales price in 1992 from the 1991 level. Operating earnings for the commercial aircraft segment in 1993 included a $41 million pre-tax gain from the sale of McDonnell Douglas' 25% interest in Irish Aerospace, more than offset by charges of $61 million related to a commercial lease guarantee, a product enhancement associated with a [HARD COPY PG. 27] commercial customer, and other items. The retention of $37 million of advance payments made by commercial airline customers which defaulted on their contracts contributed to earnings in 1992. Reduced development costs and lower retiree health care costs allocated to the segment also contributed to the segment's continued profitability in 1993. Development expenditures decreased $111 million in 1993 compared to 1992, principally as a result of decreased research and development expenditures on the MD-12 and lower MD-90 development costs. MD-90 development costs for 1993 were reduced by $27 million received from risk-sharing subcontractors. Pre-tax retiree health care costs in this segment decreased by $51 million in 1993, reflecting the elimination or reduction of company-paid health care for many current and future retirees. Pre-tax retiree health care costs increased $42 million in 1992 when SFAS No. 106 was first adopted. The MD-11 program incurred an operating loss in 1993 slightly greater than its 1992 loss. MDC is accounting for the MD-11 program on a delivery basis using the program-average cost method. Under this method, certain production costs incurred during assembly of early MD-11 aircraft as well as tooling costs are being deferred and will be recognized on delivery of aircraft in future years based on a planned number of aircraft in the program. Production costs, combined with an allocation of tooling costs, on some aircraft delivered in 1993 were less than program-average costs. 19 Exhibit 13 Deferred costs in total on the MD-11 program decreased in 1993. See Note 5, Contracts in Process and Inventories, page 42. Due to costs on the MD- 11 program not declining as rapidly as planned, MDC raised its cost estimate for the total program during the second quarter of 1992. As a result, under the program-average cost method, MDC reduced the reported earnings for each MD-11 aircraft delivered subsequent to March 31, 1992 by approximately 4% of the airframe sales price. This increased cost estimate has a significant negative impact on MD-11 earnings. Program development costs and general and administrative costs are expensed as incurred as period costs. See Note 1, Accounting Policies, page 38 and Note 5, Contracts in Process and Inventories, page 42. Missiles, Space and Electronic Systems Operating revenues in the missiles, space and electronic systems segment decreased 19% in 1993 as compared to 1992, primarily as a result of the winding down of the Advanced Cruise Missile program, which was terminated in 1992, lower electronic systems' revenues as a result of reduced defense budgets on the Strategic Defense Initiative Organization (SDIO) and surveillance activity, and lower Delta and other space systems program activities. Operating revenues in 1992 increased 6% from 1991. Increased 1992 activity in the Delta and Space Station programs more than offset reduced revenues in the electronic systems programs. Increased Tomahawk cruise missile 1992 revenues, due to MDC winning a higher percentage of a competitively awarded production contract, were offset by reductions in the Harpoon missile program. Operating earnings of the missiles, space and electronic systems segment were $338 million in 1993, up 77% from $191 million in 1992 and $163 million in 1991. MDC's missile programs had significantly higher operating earnings due to the realization of lower costs brought about by an MDC-wide organizational restructuring in the fall of 1992 and overall improved contract performance. Earnings in 1993 also include a bonus earned for achieving 100% launch success on a Delta Global Positioning Satellite contract for the Air Force. Pre-tax retiree health care costs in this segment decreased by $52 million in 1993, reflecting the elimination or reduction of company-paid health care for many current and future retirees. Pre-tax retiree health care costs increased $33 million in 1992 when SFAS No. 106 was first adopted. The electronic systems programs' 1993 results include $70 million in pre- tax loss provisions recorded as a result of difficulties in several electronic systems programs. The electronic systems 1992 results included $38 million in pre-tax loss provisions on the Air Force Defense Support Program (DSP). The DSP program was terminated for convenience of the government during the fourth quarter of 1993. Financial Services and Other Operating revenues in the financial services and other segment, which are primarily from MDFC operations, decreased to $287 million in 1993 compared to $352 million in 1992 and $519 million in 1991. Decreased 20 Exhibit 13 revenues are primarily the result of the significant decrease in the size of the financial services unit's portfolio following the sale of assets of several of its non-core businesses in 1991 and 1992. A decision was made in 1991 to streamline MDFC's operations and focus its new business efforts almost entirely within its two core business lines, aircraft financing and commercial equipment leasing. Operating earnings of the segment were $31 million in 1993 as compared to $20 million in 1992 and $26 million in 1991. Gains on sale and re-lease of equipment, including aircraft, were $24 million in 1993 as compared to $37 million in 1992 and $46 million in 1991. Operating earnings of the financial services and other segment have been reduced by interest expense, an operating expense of that segment. [HARD COPY PG. 28] Interest Expense Interest expense allocated between the aerospace segments and financial services and other segment is shown below: Years Ended December 31 1993 1992 1991 - ---------------------- ---- ---- ---- (Millions of dollars) Aerospace segments $ 89 $309 $232 Financial services and other segment 126 159 221 ---- ---- ---- $215 $468 $453 ==== ==== ==== Interest expense related to aerospace segments was reduced by $135 million in 1993 and by $107 million in 1991 to reflect the reversal of previously accrued IRS settlement related interest expense. Beginning in the first quarter of 1989, provisions for interest expense were made for anticipated resolution with the IRS as to when certain long-term contracts are completed for tax purposes. In November 1991, MDC settled tax years 1977-1985 with the IRS and all issues for this period were resolved. See Note 10, Income Taxes, page 45. Excluding the effect of the settlement related interest expense, aerospace interest expense decreased 28% in 1993 following a 9% decrease in 1992. The interest expense decrease reflects lower debt levels and reduced interest rates. Interest expense in the financial services and other segment decreased 21% in 1993 after decreasing 28% in 1992. The decreases are a result of significant reductions in both short-term and long-term average borrowings as business volume decreased and the segment sold assets to generate cash and improve liquidity. 21 Exhibit 13 Discontinued Operations Earnings from discontinued operations were $37 million in 1993, compared to $57 million in 1992 and $66 million in 1991. The 1993 discontinued operations include the gain related to the sale of McDonnell Douglas Information Systems International (MDISI). Discontinued operations for 1992 include the gain related to the sale of TeleCheck Services, Inc. (TeleCheck) and the 1992 operations related to MDISI. Discontinued operations in 1991 include MDC's sale of substantially all of the assets of McDonnell Douglas Systems Integration Company and certain related assets of MDISI. See Note 2, Discontinued Operations, page 40. Liquidity As detailed in the following, MDC believes that it has sufficient sources of capital to meet anticipated needs. In addition to the discussion in this section which follows, see also A-12, page 25, for a discussion of the A-12 deferment status. Debt and Credit Arrangements. MDC has in place a number of credit facilities with banks and other institutions. At December 31, 1993, MDC had two revolving credit agreements aggregating $1.4 billion, which are in effect until April 30, 1995, and a third revolving credit agreement under which MDC could borrow up to $175 million through January 28, 1994. There were no amounts outstanding under these credit agreements at December 31, 1993. In August 1992, MDC commenced an offering of up to $550 million aggregate principal amount of its medium-term notes. As of December 31, 1993, MDC had issued $132 million of medium-term notes and $200 million of 8.25% senior debt securities under the shelf registration. Amounts available under these credit facilities may be accessed to meet cash requirements. Increased borrowings under the revolving credit agreements may not be available in the event of a material adverse change in the operations, financial condition, business or prospects of MDC and its consolidated subsidiaries, taken as a whole. On December 22, 1993 MDC notified holders of its 7.875% notes due January 15, 1997 that the $150 million issue would be redeemed on January 21, 1994. The notes were redeemed at 100% of their principal amount plus accrued interest to the redemption date. In August 1990, MDC entered into a three-year agreement with a financial institution to sell a participation interest in a designated pool of government and commercial receivables, with limited recourse, in amounts up to $300 million. A replacement agreement with another financial institution for up to $300 million was completed during February 1994. Under both agreements, participation interests in new receivables have been and will continue to be sold as previously sold amounts are collected. The participation interests are sold at a discount which is included in general and administrative expenses in the consolidated statement of operations. 22 Exhibit 13 Under both agreements, MDC has and will continue to act as an agent for the purchaser by performing record keeping and collection functions. During the negotiation of the replacement agreement, MDC continued to sell, and the original financial institution continued to purchase, participation interests. At December 31, 1993, accounts receivable are net of $100 million, representing receivable interests sold pursuant to that agreement. See Note 3, Accounts Receivable, page 40. On September 8, 1992, Standard and Poor's affirmed MDC's senior long- term debt credit rating at BBB and short-term debt rating for commercial paper at A-3 and removed MDC's ratings from CreditWatch. On February 2, 1993, Moody's Investors Service Inc. (Moody's) lowered its ratings of MDC and MDFC debt. MDC's senior debt rating was lowered to Ba-2 [HARD COPY PG. 29] from Baa-3, while the short-term debt rating for commercial paper was cut to Not Prime from Prime-3. Ratings on the senior debt of MDFC were reduced to Ba-1 from Baa-2; on subordinated debt to Ba-3 from Ba-1; and on its shelf registration to (P) Ba-1 and (P) Ba-3 from (P) Baa-2 and (P) Ba-1. In November 1993, Moody's placed the debt ratings of MDC and MDFC under review for possible upgrade. During 1993, MDC received a credit rating from Duff & Phelps Credit Rating Co. This rating, announced in June 1993, assigned an initial investment grade rating of BBB- to MDC's senior unsecured debt. Additionally, Duff & Phelps assigned ratings of BBB and BBB- to MDFC's senior unsecured debt and subordinated debt, respectively. Taxes. In November 1991, MDC settled tax years 1977-1985 with the Internal Revenue Service (IRS). The settlement resulted in net earnings of $32 million in 1991 and a substantial future obligation payable upon completion of the 1986-1989 IRS audit. MDC is currently under audit by the IRS for tax years 1986-1989. Issues resolved in the IRS settlement of the tax years 1977-1985 will impact results of the current IRS audit. During 1993, MDC resolved several issues with the IRS related to prior years' taxes. The resolution of these issues resulted in net earnings of $158 million in 1993. Excluding the after-tax benefit of the related reduction in accrued interest, the resolution of such issues resulted in a $75 million federal tax benefit. Taxes and interest related to the payment for the 1986-1989 tax period have been provided. Payment of the tax and interest for the 1986-1989 tax period obligation approximates $300 million and is expected to be made in mid-1994. See Note 10, Income Taxes, page 45. C-17 Settlement. As previously discussed, MDC recently reached a settlement with the DoD which covered a range of issues related to the C-17 military aircraft program. The settlement is subject to congressional authorization and appropriations. The settlement is not expected to have any significant adverse cash impact. 23 Exhibit 13 Government Progress Payment Rate. During 1993, progress payment rates on domestic and foreign military sales contracts entered into subsequent to November 10, 1993 were reduced by congressional action from 85% to 75%. This reduction will negatively impact cash flow, primarily in years subsequent to 1994. Foreign Military Product Purchases. In an effort to restructure work and payments due in 1994 for military product purchases of the government of Saudi Arabia, MDC, the U.S. Government, and other major U.S. defense contractors have been meeting with Saudi representatives. Although a restructuring plan has not been finalized, a conceptual outline has been developed. MDC does not anticipate any significant adverse cash impact in 1994 as a result of this restructuring plan. Commercial Aircraft Financing. Difficulties in the commercial aircraft industry may continue to result in airlines not taking deliveries of aircraft, requesting changes in delivery schedules, or defaulting on contracts for firm orders. Aircraft delivery delays or defaults by commercial aircraft customers not anticipated by MDC could have a negative short-term impact on cash flow. During recent years, several airlines filed for protection under the Federal Bankruptcy Code or became delinquent on their obligations for commercial aircraft. As indicated in Note 17, Commitments and Contingencies, page 51, MDC also has outstanding guarantees of $251 million related to the marketing of commercial aircraft. MDC does not anticipate that the existence of such guarantees will have a material adverse effect upon its financial condition. In addition, some existing commercial aircraft contracts contain provisions requiring MDC to repurchase used aircraft at the option of the commercial customers. In view of the current market conditions for used aircraft, MDC's earnings and cash flows could be adversely impacted by the exercise of such options. However, it is not anticipated that the existence of such repurchase obligations will have a material adverse effect on cash flow or financial position. See also Note 4, Finance Receivables and Property on Lease, page 41, for additional details regarding concentration of credit risk. Capital Expenditures. MDC's capital expenditures were $64 million in 1993, $217 million in 1992, and $171 million in 1991. At December 31, 1993, MDC was not committed to the purchase of a significant amount of property, plant and equipment. Capital expenditures comparable to 1992 are expected in 1994. Asset Sales. MDC closed the sale of its Visual Simulation Systems (VSS) business unit on January 29, 1993 and the sale of its remaining information technology business, MDISI, in March 1993. Operations. Employment levels were reduced 20% during 1993 to 70,016 as a result of consolidation and streamlining of MDC's government aerospace companies, reduced production on several major programs, and personnel reduction associated with the divestitures of MDISI and VSS and the outsourcing of data processing services. MDC has continued implementing its aggressive asset management plan of reducing accounts receivable, inventory, and work in process levels, as well as reducing facilities commensurate with the levels of ongoing business. 24 Exhibit 13 MDFS and Other. The financial services and other segment debt on December 31, 1993 was $1.513 billion, compared with $1.474 billion at December 31, 1992. MDFS, through its MDFC subsidiary, has traditionally [HARD COPY PG. 30] obtained cash from operating activities, placements of debt, issuances of commercial paper and the normal run-off of its portfolio to fund its operations. Beginning in 1990 and continuing through mid-1993, MDFC's access to new capital had been severely limited due to a lowering of MDFC's credit ratings, the recession, and capital constraints imposed by MDC. MDFC has utilized bank borrowings available under its credit facilities in recent years to fund operations. These limitations had less impact on MDFC in 1993. In June 1993, MDFC commenced an offering of up to $250 million of its unsecured senior debt securities, its first debt offering since 1990, and in November 1993 commenced accepting inquires for the sale of its medium-term notes. As of December 31, 1993, approximately $81 million associated with the June offering and $90 million associated with the medium-term notes had been sold. MDFC has also used asset sales and secured borrowings as sources of funding. MDFC anticipates using asset sales and the normal run-off of the lease portfolio as sources to provide additional liquidity in the future. Business and Market Considerations General MDC is a major participant in both the defense and commercial aerospace industries. MDC has a wide range of programs in production and development, and is the world's leading producer of military aircraft. Since 1987, MDC has been the largest U.S. defense contractor, based on the DoD's list of prime contract awards and one of the larger NASA prime contractors based on prime contracts awarded. MDC is one of the three principal manufacturers of large commercial transport aircraft outside the former Soviet Union. Programs and products comprising most of MDC's business volume are of a highly technical nature, comparatively few in number, high in unit cost, and have traditionally enjoyed relatively long production lives. MDC's aerospace segments compete in an industry composed of a few major competitors and a limited number of customers. The number of competitors in the military segment of the business has decreased over the past few years due to consolidations brought about by reduced defense spending. However, competition remains significant both in military and commercial programs. The trend of reduced defense spending and reduced commercial aircraft orders has resulted in the downsizing of MDC over the last several years. MDC has reduced its capital expenditures from $396 million in 1990 to $64 million in 1993 and total employment from 132,960 at June 30, 1990 to 70,016 at December 31, 1993. 25 Exhibit 13 The downsizing has had and continues to have a negative impact on the utilization of MDC's facilities and capacity, and on labor costs due to inefficiencies caused by the reassignment of workers as a result of layoffs. During 1992, MDC consolidated its six government aerospace companies into one division and since then has closed or announced plans to close several of its manufacturing facilities to streamline operations and create greater efficiencies. MDC also communicated its strategy to concentrate on its principal aerospace businesses, and as a result completed sales of non-core business assets to implement this strategy. As a result of this strategy, MDC: sold TeleCheck in July 1992; signed a 10-year outsourcing agreement with, transferred 1,400 employees to, and sold its data processing assets to Integrated Systems Solutions Corp. in December 1992; completed the sale of its VSS business unit in January 1993; and in March 1993 sold its remaining information technology business, MDISI, to a group of investors in the United Kingdom. MDC continues to pursue a possible strategic alliance with organizations throughout the world in order to support the commercial aircraft segment. See also Note 2, Discontinued Operations, page 40, and Note 7, Outsourcing of Information Technology Operations, page 44. Military Aerospace Business MDC's most significant customer in the military aircraft and missiles, space and electronic systems segments is the U.S. Government. Certain foreign governments also purchase a significant share of MDC's aerospace products. Companies engaged in supplying military and space equipment to the U.S. Government are subject to risks in addition to those found in commercial business. These additional risks include dependence on congressional appropriations and annual administrative allotment of funds, general reductions in the U.S. defense budget, and changes in Government policies. In addition, at times MDC invests funds in programs that are both competitive and still in the pre-development stage yet may never result in production. Moreover, the costs of maintaining adequate research and development as well as manufacturing capabilities are substantial. MDC may also enter into firm fixed-price contracts. Under these arrangements, work is performed and paid for at a fixed amount without adjustment for actual costs experienced in connection with the contract. While this arrangement offers MDC opportunities for increased profits if costs are lower than expected, risk of loss due to increased cost is also borne by MDC. In addition, the U.S. Government may terminate its contracts (i) for its convenience whenever it believes that such termination would be in the best interest of the Government or (ii) for default. Under contracts terminated for the convenience of the Government, a contractor is generally entitled to receive payments for its contract cost and the proportionate share of [HARD COPY PG. 31] its fee or earnings for the work done, subject to the availability of funding. The U.S. Government may terminate a contract for default if the contractor materially breaches the contract. 26 Exhibit 13 Defense spending by the U.S. Government has declined, and is likely to continue to decline. In November 1993, Congress completed its action on the 1994 defense spending bill, and the President formally approved the fiscal year (FY) 94 defense budget. Adjusting for inflation, the 1994 defense procurement budget represents a real decline of 18% from 1993 and 33% from 1992 expenditures. On the same basis, the 1994 defense research and development budget represents a real decline of 10% from 1993. Further significant reductions in defense spending and the U.S. Government's decision to emphasize weapons research over production may have a material impact on MDC. The loss of a major program or a major reduction or stretch-out in one or more programs could have a material adverse impact on MDC's future revenues, earnings and cash flow. However, any such impact could be mitigated by foreign sales and by programs to upgrade existing products. Certain foreign sales may require some portion of the production to be completed in the purchasing country. In light of the uncertainty regarding the changes in defense spending, reported financial information may not be indicative of MDC's future operating results. Production contracts awarded under the FY 94 budget will generally continue through 1996. Commercial Aircraft Business MDC is currently engaged in production of the MD-80 twin jet and MD-11 trijet commercial aircraft, development and initial production of the MD-90 advanced version of the MD-80, and support of commercial aircraft, spare parts and related services. As discussed later in this section, MDC has also considered a new wide-body commercial aircraft designated the MD-12. 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. Due to increasing air travel, particularly in the Asia/Pacific region, an aging fleet, stricter noise and pollution standards and the desire to assure delivery positions in production lines that were near capacity, a large number of commercial transport aircraft were ordered during 1988 through 1990. Since then, as airlines dealt with falling profits, orders for all types of aircraft have dramatically declined. Difficulties in the industry have resulted and may continue to result in airlines not taking deliveries of aircraft, requesting changes in delivery schedules, defaulting on contracts for firm orders, or not exercising options or reserves. These difficulties could have a negative short-term impact on cash flows; the impact could be mitigated by MDC's retention of progress payments on firm orders. See also "Backlog", page 32, for a discussion of certain risks related to commercial aircraft customers. The commercial aircraft market for new orders (including the MD-11 and MD-80/MD-90) is currently very soft, and the competition and pricing is very aggressive. MDC has refrained from drastic price reductions, instead focusing on cost control measures. As cost controls are put in place and the commercial aircraft market rebounds, MDC believes it will be in a good position to capture profitable new orders. 27 Exhibit 13 Continued research and development effort on the MD-12 has been deferred due to the softness in the commercial aircraft market. In order to strengthen the commercial aircraft segment, MDC is continuing to pursue strategic alliances with organizations throughout the world. Over the past few years, MDC has had discussions with risk-sharing subcontractors and potential equity investors to obtain a globally competitive production capability, improve financial strength, and increase market presence. No prediction can be made as to whether or when MDC will reach an agreement with potential risk-sharing subcontractors or equity investors. Government Business Audits, Reviews and Investigations MDC, as a large defense contractor, is subject to many audits, reviews and investigations by the U.S. Government of its negotiation and performance of, accounting for, and general practices relating to Government contracts. An indictment of a contractor may result in suspension from eligibility for award of any new government contract, and a guilty plea or conviction may result in debarment from eligibility for awards. The Government may, in certain cases, also terminate existing contracts, recover damages, and impose other sanctions and penalties. Based upon presently known facts, MDC believes that it has not engaged in any criminal misconduct with respect to any of the matters currently known to be under investigation and that the ultimate resolution of these investigations will not have a material adverse effect on MDC's financial position. In March 1991, the Securities and Exchange Commission (SEC) issued a Formal Order of Private Investigation (the "1991 SEC Investigation") looking into whether MDC violated the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with disclosures about and accounting for the A-12. In February 1993, the SEC issued subpoenas requesting additional information and broadened its inquiry to include the C-17 and possibly other programs. MDC believes that it has properly reported and disclosed information and accounted for its programs in accordance with generally accepted accounting principles. [HARD COPY PG. 32] In January 1993, the DoD Inspector General (IG) completed an inquiry into an allegation of favoritism and advantageous treatment accorded MDC by the DoD in connection with the C-17 Globemaster III program. The IG's report questioned contracting actions and payments by the U.S. Air Force and related information provided by the U.S. Air Force and MDC personnel. MDC believes that it properly reported and disclosed information relative to the C-17 contract and that it properly submitted bills to and was paid by the U.S. Air Force in accordance with DoD rules then in effect for work performed. In April 1993, the Air Force issued an extensive report responding to the allegations made by the DoD. Although the Air Force report reflected the difference between the parties concerning the segregation and payment of certain C-17 engineering costs, the report concluded that there was no illegal or improper plan or actions taken to provide payments to MDC and that the integrity of the acquisition system had not been compromised. In a November 1993 reply, the IG reasserted his conclusion that there had been an Air Force plan to assist MDC that exceeded the limits of what was permissible. 28 Exhibit 13 In May 1993, a Defense Acquisition Board (DAB) initiated by the Under Secretary of Defense for Acquisitions began a review of the C-17 program in an effort to resolve outstanding issues and to make recommendations regarding the C-17's future. In connection with the review, MDC provided data and participated in numerous discussions. The DoD, in conjunction with the DAB, submitted a proposal to MDC in December 1993 for a business settlement of a variety of issues concerning the C-17 program. In January 1994, MDC and the DoD agreed to such a settlement. MDC and the Air Force will be developing plans and contractual modifications and agreements to implement the business settlement, which is subject to congressional authorization and appropriations. This process is expected to be completed during 1994. The settlement covered issues open as of the date of the settlement, including the allocation of sustaining engineering costs to the development and production contracts, the sharing of flight test costs over a previous level, and the resolution of claims and of performance/specification issues. The settlement also stipulated that MDC will expend additional funds in an effort to achieve product and systems improvements. MDC estimated the financial impact of the settlement in conjunction with a review of the estimated remaining costs on the C-17 development and initial production contracts. This resulted in recording a pre-tax charge of $450 million, excluding general and administrative and other period expenses, in the fourth quarter of 1993. Environmental Expenditures MDC believes that expenditures which may be required to comply with federal, state, and local provisions regulating the discharge of materials into the environment or otherwise relating to the environment will not be material in relation to the financial position of MDC. Compliance with such regulations has not had a material effect on earnings or the financial condition of MDC; however, the costs of complying with environmental regulations is increasing. MDC is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, or similar state statutes. MDC has been identified as a potentially responsible party (PRP) at 28 sites. Of these, MDC believes that it has de minimis liability at 19 sites, including 9 sites at which it believes that it has no future liability. At the 9 sites at which MDC's liability is not considered to be de minimis, either final or interim cost sharing agreements have been affected between the cooperating PRPs, although such agreements do not fix the amount of cleanup costs which the parties will bear. In addition, MDC is remediating, or has begun environmental engineering studies to determine cleanup requirements, at certain of its current operating sites or former sites of industrial activity. MDC estimates total reasonably possible costs of approximately $48 million for study and remediation expenditures at Superfund sites and at MDC's current and former operating sites, of which $21 million is accrued at December 31, 1993. 29 Exhibit 13 Backlog Several risk factors should be considered in evaluating MDC's firm backlog for commercial customers. Approximately 75% of the firm backlog for commercial aircraft is scheduled for delivery after 1994. Difficulties in the commercial airline industry, in part related to falling profits, could result in less than currently anticipated airline equipment requirements resulting in requests to negotiate rescheduling, or defaults by customers, of firm orders. Also, approximately 15% of the commercial aircraft backlog represents orders from leasing companies which may be at risk if not supported by firm contracts between such leasing companies and airlines. Orders from customers which have filed for bankruptcy, purchase options and announced orders for which definitive contracts have not been executed are excluded from firm backlog. Inflation The effects of inflation have not been significant to MDC because inflation rates have been relatively low. Contracts for both government and commercial products generally either include estimates of inflation or adjust for inflation's effect. [HARD COPY PG. 33] Selected Financial Data by Industry Segment - Continuing Operations (Millions of Dollars) MDC's aerospace segments include military aircraft, commercial aircraft, and missiles, space and electronic systems. The military aircraft segment's products include the design, development and production of attack and fighter aircraft, military and commercial helicopters, and military transport aircraft, spare parts and related services. The attack and fighter aircraft cover a full spectrum of missions (air superiority, all weather and night attack, close air-support, reconnaissance, etc.) and include land-based and aircraft carrier-based aircraft as well as the latest in vertical-takeoff-and-landing technologies. The commercial aircraft segment's products include commercial aircraft, spare parts and related services. The missiles, space and electronic systems segment's products include advanced studies and development and production of tactical and strategic missiles, satellite launching vehicles, space station design and development, space shuttle and payload integration, lasers and laser communication systems, ballistic missile defense systems, and defense electronic components and systems. 30 Exhibit 13 The financial services and other segment is engaged in a wide range of financial services, including the financing of commercial and private aircraft, commercial equipment, and real estate. The segment also acquires and develops properties for other MDC segments and commercial customers. The financial services and other segment includes McDonnell Douglas Financial Services Corporation and McDonnell Douglas Realty Company. Operating earnings of the segment have been reduced by interest expense, an operating expense of that segment. The financial services and other segment includes interest earned on advances or loans to other industry segments in its operating revenues and earnings. Other intersegment revenues and earnings were immaterial and have been eliminated. Assets of individual segments have been stated net of applicable progress payments. Years Ended December 31 1993 1992 1991 --------- --------- --------- REVENUES Military aircraft $ 6,852 $ 7,238 $ 7,795 Commercial aircraft 4,760 6,595 6,752 Missiles, space and electronic systems 2,575 3,169 2,979 Financial services and other 287 352 519 --------- --------- --------- Operating revenues 14,474 17,354 18,045 Non-operating income 13 11 16 --------- --------- --------- $14,487 $17,365 $18,061 ========= ========= ========= Years Ended December 31 1993 1992 1991 --------- --------- --------- EARNINGS Military aircraft $ 83 $ 8 $ 394 Commercial aircraft 40 102 283 Missiles, space and electronic systems 338 191 163 Financial services and other 31 20 26 ------ ------ ------ Operating earnings 492 321 866 Discontinued operations 37 57 66 Non-operating/net (5) (4) (13) General corporate expenses (9) (12) (6) Postretirement benefit curtailment 70 1,090 - Interest expense (89) (309) (232) Income taxes (100) (388) (258) Cumulative effect of accounting change - (1,536) - --------- --------- --------- $ 396 $ (781) $ 423 ========= ========= ========= 31 Exhibit 13 Years Ended December 31 1993 1992 1991 --------- --------- --------- FIRM BACKLOG (Unaudited) Military aircraft $ 7,997 $ 7,619 $ 9,540 Commercial aircraft 9,172 13,364 17,913 Missiles, space and electronic systems 2,210 3,069 2,995 --------- --------- --------- $19,379 $24,052 $30,448 ========= ========= ========= Years Ended December 31 1993 1992 1991 --------- --------- --------- Assets Military aircraft $ 3,715 $ 3,960 $ 4,328 Commercial aircraft 4,561 5,850 5,529 Missiles, space and electronic systems 1,330 1,524 1,741 Financial services and other 2,340 2,222 2,793 --------- --------- --------- Continuing operations 11,946 13,556 14,391 Corporate 80 133 133 Discontinued operations - 92 77 --------- --------- --------- $12,026 $13,781 $14,601 ========= ========= ========= Years Ended December 31 1993 1992 1991 --------- --------- --------- Property, Plant and Equipment Acquired Military aircraft $ 23 $ 70 $ 49 Commercial aircraft 1 29 51 Missiles, space and electronic systems 38 116 70 Financial services and other - 2 - --------- --------- --------- Continuing operations 62 217 170 Corporate 2 - 1 --------- --------- --------- $ 64 $ 217 $ 171 ========= ========= ========= 32 Exhibit 13 Years Ended December 31 1993 1992 1991 --------- --------- --------- Depreciation and Amortization Military aircraft $ 149 $ 191 $ 212 Commercial aircraft 70 89 79 Missiles, space and electronic systems 48 102 102 Financial services and other 49 71 102 --------- --------- --------- Continuing operations 316 453 495 Corporate 7 12 4 --------- --------- --------- $ 323 $ 465 $ 499 ========= ========= ========= 33 Exhibit 13 [HARD COPY PG. 34] CONSOLIDATED STATEMENT OF OPERATIONS (Millions of dollars, except share data) YEARS ENDED DECEMBER 31 1993 1992 1991 ------ ------ ----- Revenues $14,487 $17,365 $18,061 Costs and expenses: Cost of products, services and rentals 12,822 15,567 15,561 General and administrative expenses 720 825 1,003 Research and development 341 509 429 Postretirement benefit curtailment (70) (1,090) - Interest expense: Aerospace segments 89 309 232 Financial services and other segment 126 159 221 -------- -------- -------- Total Costs and Expenses 14,028 16,279 17,446 -------- -------- -------- EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 459 1,086 615 Income taxes 100 388 258 -------- -------- -------- EARNINGS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 359 698 357 Discontinued operations: Earnings from operations, net of income taxes - 20 (8) Gain on disposals, net of income taxes 37 37 74 -------- -------- -------- 37 57 66 -------- -------- -------- EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 396 755 423 Cumulative effect of initial application of new accounting standard for postretirement benefits - (1,536) - -------- -------- -------- NET EARNINGS (LOSS) $ 396 $ (781) $ 423 ======== ======== ======== EARNINGS (LOSS) PER SHARE: Continuing operations $ 9.17 $ 17.97 $ 9.32 Discontinued operations: Earnings from operations - .50 (.22) Gain on disposals .93 .96 1.93 Cumulative effect of accounting change - (39.53) - -------- -------- -------- $ 10.10 $(20.10) $ 11.03 ======== ======== ======== DIVIDENDS DECLARED PER SHARE $ 1.40 $ 1.40 $ 1.40 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 34 Exhibit 13 [HARD COPY PG. 35] CONSOLIDATED BALANCE SHEET (Millions of dollars and shares) DEC 31 DEC 31 1993 1992 --------- --------- ASSETS Cash and cash equivalents $ 86 $ 82 Accounts receivable 555 604 Finance receivables and property on lease 2,357 2,262 Contracts in process and inventories 5,774 7,230 Property, plant and equipment 1,750 1,991 Other assets 1,504 1,612 --------- --------- Total Assets $ 12,026 $ 13,781 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 2,190 $ 3,018 Accrued retiree benefits 1,388 1,544 Income taxes 574 572 Advances and billings in excess of related costs 1,251 1,384 Notes payable and long-term debt: Aerospace segments 1,625 2,767 Financial services and other segment 1,513 1,474 --------- --------- 8,541 10,759 Minority Interest 72 - Shareholders' Equity: Preferred Stock - none issued Common Stock - issued and outstanding: 1993, 39.3 shares; 1992, 39.2 shares 39 39 Additional capital 335 327 Retained earnings 3,043 2,702 Translation of foreign currency statements (4) (10) Unearned ESOP compensation - (36) --------- --------- 3,413 3,022 --------- --------- Total Liabilities and Shareholders' Equity $ 12,026 $ 13,781 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 35 Exhibit 13 [HARD COPY PG. 36] CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Millions of dollars) YEARS ENDED DECEMBER 31 1993 1992 1991 -------- -------- -------- COMMON STOCK Beginning balance $ 39 $ 38 $ 38 Shares issued to employee savings plans - 1 - -------- -------- -------- 39 39 38 ADDITIONAL CAPITAL Beginning balance 327 287 283 Employee stock awards and options 6 2 4 Shares issued to employee savings plans 2 38 - -------- -------- -------- 335 327 287 RETAINED EARNINGS Beginning balance 2,702 3,538 3,168 Net earnings (loss) 396 (781) 423 Cash dividends declared (55) (55) (53) -------- -------- -------- 3,043 2,702 3,538 TRANSLATION OF FOREIGN CURRENCY STATEMENTS (4) (10) 14 UNEARNED ESOP COMPENSATION Beginning balance (36) - - Prepayment of future employee benefits - (50) - Shares allocated to employees 36 14 - -------- -------- -------- - (36) - -------- -------- -------- SHAREHOLDERS' EQUITY $ 3,413 $ 3,022 $ 3,877 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 36 Exhibit 13 [HARD COPY PG. 37] CONSOLIDATED STATEMENT OF CASH FLOWS (Millions of dollars) YEARS ENDED DECEMBER 31 1993 1992 1991 -------- -------- -------- OPERATING ACTIVITIES Earnings from continuing operations before cumulative effect of accounting change $ 359 $ 698 $ 357 Adjustments to reconcile earnings from continuing operations before cumulative effect of accounting change to net cash provided (used) by operating activities: Depreciation of property, plant and equipment 258 353 370 Depreciation of rental equipment 50 58 89 Amortization of intangible and other assets 15 54 40 Gain on sale of assets (44) - - Pension income (138) (107) (55) Postretirement benefit curtailment (70) (1,090) - Non-cash retiree health care costs 20 133 - Change in operating assets and liabilities: Accounts receivable 40 97 2 Finance receivables and property on lease (521) (316) 111 Contracts in process and inventories 1,445 43 (1,098) Accounts payable and accrued expenses (822) (22) 612 Income taxes (5) 217 240 Advances and billings in excess of related costs (112) (703) 38 Discontinued operations - (2) (26) -------- -------- -------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 475 (587) 680 INVESTING ACTIVITIES Property, plant and equipment acquired (64) (217) (171) Proceeds from sale of property, plant and equipment - 173 - Finance receivables and property on lease 414 529 706 Proceeds from sale of discontinued businesses 181 70 200 Proceeds from sale of assets 32 - - Other, including discontinued operations 11 (51) (2) -------- -------- -------- NET CASH PROVIDED BY INVESTING ACTIVITIES 574 504 733 37 Exhibit 13 YEARS ENDED DECEMBER 31 1993 1992 1991 (Continued) -------- -------- -------- FINANCING ACTIVITIES Net change in borrowings (maturities 90 days or less) (830) 574 (1,087) Debt having maturities more than 90 days: New borrowings 681 1,461 487 Repayments (954) (2,009) (743) Minority interest 72 - - Payments from (to) ESOP - net 36 (36) - Proceeds of stock options exercised 5 - - Dividends paid (55) (54) (67) -------- -------- -------- NET CASH USED BY FINANCING ACTIVITIES (1,045) (64) (1,410) -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4 (147) 3 Cash and cash equivalents at beginning of year 82 229 226 -------- -------- -------- Cash and cash equivalents at end of year $ 86 $ 82 $ 229 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. [HARD COPY PG. 38] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of dollars, except share data) 1. Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of McDonnell Douglas Corporation and its subsidiaries (MDC) including McDonnell Douglas Financial Services Corporation (MDFS), parent company of McDonnell Douglas Finance Corporation (MDFC). In consolidation, all significant intercompany balances and transactions are eliminated. Accounting and Reporting Changes Effective January 1, 1992, MDC adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 109, "Accounting for Income Taxes" as described in Notes 15 and 10, respectively. 38 Exhibit 13 Revenue Recognition Revenues and earnings on cost-reimbursement and fixed price government contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Revenues include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs. Some contracts contain incentive provisions which provide increased or decreased earnings based upon performance in relation to established targets. Incentives based upon cost performance are generally recorded currently and other incentives are recorded when such amounts can reasonably be determined. Revenues relating to contracts or contract changes that have not been completely priced, negotiated, documented, or funded are not recognized unless realization is considered probable. Major contracts for complex military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extend over prolonged periods of time. Any anticipated losses on contracts (estimated final contract costs, excluding period costs, in excess of estimated final contract revenues) are charged to current operations as soon as they are evident. Estimates of final contract revenues on certain fixed price development contracts include future revenue from expected recovery on claims. Such revenues are generally included when it is probable that the claim will result in additional contract revenue and when the amount can be reliably estimated. Revenues are recognized on commercial aircraft programs based on sales prices as aircraft are delivered. Cost of sales of the MD-80 aircraft program is determined on a specific-unit cost method. Cost of sales of the MD-11 aircraft program is determined on a program-average cost method and is computed as a percentage of the sales price of the aircraft. The percentage is calculated as the total of estimated tooling and production costs for the entire program divided by the estimated sales prices of all aircraft in the program. Revenues, costs and earnings on government contracts and commercial aircraft programs are determined, in part, based on estimates. Adjustment of such estimates are made on a cumulative basis whereby the effect of such changes is recognized currently. Losses anticipated on government contracts or commercial programs, excluding period costs, are charged to operations in full when determined. Revenues and costs from the manufacturing aspects of sales-type leases are generally recognized at the inception of such leases. Revenues from the financing aspects of sales-type and direct financing leases are recognized as the excess of aggregate rentals over the cost of leased equipment (reduced by estimated residual values) using the interest method. The interest method results in a constant rate of return on the unrecovered investment. 39 Exhibit 13 Contracts in Process and Inventories Government contracts in process are stated on the basis of incurred costs plus estimated earnings, less amounts billed to customers when items are completed and delivered. Incurred costs include production costs and related overhead. Commercial products in process are stated on the basis of production and tooling costs incurred, less the cost allocated to delivered items, reduced to realizable market, where applicable. Material and spare parts are stated at the lower of cost (principally moving average) or market. [HARD COPY PG. 39] General and administrative expenses and research and development expenses are considered period costs and, accordingly, are charged to operations on a current basis. The U.S. Government has title to, or a security interest in, certain inventories by reason of progress payments. Cash and Cash Equivalents Cash equivalents consist of short-term highly liquid investments purchased with a maturity of three months or less. Cash equivalents are stated at cost which approximates market. Finance Receivables and Property on Lease Rental equipment subject to operating leases is stated at cost and is generally depreciated using the straight line method, except for aircraft which are depreciated using the declining balance method. Property, Plant and Equipment Property, plant and equipment is carried at cost and depreciated over the useful lives of the various classes of properties, using primarily accelerated methods. Intangible Assets Intangible assets consist principally of computer software, deferred debt expense and deferred leasing costs. Intangibles are being amortized over three to ten years. Income Taxes United States and foreign income taxes are computed at current tax rates, less tax credits, and adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, plus changes in deferred tax assets and liabilities that arise because of temporary differences between the time when items of income and expense are recognized for financial reporting and income tax purposes. 40 Exhibit 13 The undistributed earnings of foreign subsidiaries are considered to be permanently invested for continuing operations; accordingly, no provisions are made for taxes which would become payable upon the distribution of such earnings as a dividend to MDC. MDC files a consolidated return for federal and certain state income taxes, and dividends from domestic subsidiaries included therein are not subject to income tax. Minority Interest Minority interest represents the limited partner's equity interest in a real estate venture. MDC is the general partner and contributed land, buildings and improvements to the partnership. At December 31, 1993, MDC's participation in the partnership was approximately 53%. Foreign Currency Translation Assets and liabilities for MDC's foreign subsidiaries whose functional currencies are other than the U.S. dollar are translated to U.S. dollars at current exchange rates, with the resulting translation adjustments carried as a separate component of shareholders' equity. Research and Development Research and development costs include the costs of independent research and development, bid and proposal efforts, and costs incurred in excess of amounts estimated to be recoverable under cost-sharing research and development agreements, and all such costs are expensed as incurred. Research and development expense has been reduced by $27 million in 1993, $6 million in 1992 and $20 million in 1991 for risk-sharing funds received from vendors and subcontractors participating in the development of commercial aircraft. Some amounts may be repayable under certain circumstances. Environmental Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Earnings per Share Earnings per share computations are based upon the weighted average of common shares outstanding during the year. Common stock equivalents (options) are not material. Reclassification In 1993, MDC reclassified certain income and expense related to an executive life insurance program to general and administrative expenses. These items were previously reflected as revenues or interest expense. Prior years have been restated to conform with the 1993 presentation. 41 Exhibit 13 [HARD COPY PG. 40] 2. Discontinued Operations Over the past several years, MDC divested its information systems business. In 1991, MDC sold substantially all of the assets of McDonnell Douglas Systems Integration Company and certain related assets of McDonnell Douglas Information Systems International (MDISI) to Electronic Data Systems Corporation. The terms of this sale included a provision for additional contingent cash consideration which was not included in the gain on disposal. In July 1992, MDC sold all the outstanding stock of TeleCheck Services, Inc., and in March 1993, effective January 1, 1993, MDC sold its remaining MDISI business. Operating results of these businesses were classified as discontinued operations. Gains on disposal of the discontinued businesses were $37 million in 1993 and 1992, and $74 million in 1991, net of income taxes of $25 million, $23 million and $33 million, respectively. Operating results of the discontinued operations were as follows: Years Ended December 31 1992 1991 ------ ------ Revenues $ 316 $ 646 ====== ====== Earnings before income taxes $ 15 $ 5 Income taxes (benefit) (5) 13 ------ ------ Net earnings (loss) from discontinued operations $ 20 $ (8) ====== ====== Net assets of the discontinued operations of $92 million were classified as Other Assets in the 1992 consolidated balance sheet. 3. Accounts Receivable Accounts receivable consist of the following at December 31: 1993 1992 ------ ------ U.S. Government - primarily from long-term contracts: Billed $ 187 $ 236 Unbilled 273 273 ------ ------ 460 509 Commercial and other governments 95 95 ------ ------ $ 555 $ 604 ====== ====== Unbilled receivables at December 31, 1993 include unbillable amounts of $136 million. Unbillable amounts include the estimated sales value of items delivered or other work performed which lack contractual documentation to permit billing. Approximately $64 million of the 1993 unbilled amount is expected to be collected after one year. 42 Exhibit 13 In August 1990, MDC entered into a three-year agreement with a financial institution to sell a participation interest in a designated pool of government and commercial receivables, with limited recourse, in amounts up to $300 million. A replacement agreement with another financial institution for up to $300 million was completed during February 1994. Under the agreements, participation interests in new receivables have been and will continue to be sold as previously sold amounts are collected. The participation interests are sold at a discount which is included in general and administrative expenses in the consolidated statement of operations. Under both agreements, MDC has and will continue to act as an agent for the purchaser by performing record keeping and collection functions. During the negotiation of the replacement agreement, MDC continued to sell, and the original financial institution continued to purchase, participation interests. At December 31, 1993 and 1992, accounts receivable are net of $100 million and $151 million, respectively, representing receivable interests sold. [HARD COPY PG. 41] 4. Finance Receivables and Property on Lease Finance and lease receivables and property on lease consist of the following at December 31: 1993 1992 -------- -------- Sales-type and direct financing leases: Minimum lease payments $ 1,744 $ 1,356 Residual values 313 226 Unearned income (793) (572) -------- -------- 1,264 1,010 Notes receivable 381 600 -------- -------- 1,645 1,610 Allowances for doubtful receivables (36) (39) -------- -------- 1,609 1,571 Investment in operating leases, net of accumulated depreciation of $182 in 1993, $175 in 1992 635 446 -------- -------- 2,244 2,017 Property held for sale or lease 113 245 -------- -------- $ 2,357 $ 2,262 ======== ======== 43 Exhibit 13 The aggregate amount of scheduled principal payments and installments to be received on notes and lease receivables and minimum rentals to be received under noncancelable operating leases consist of the following at December 31, 1993: Principal Payments Minimum and Installments Rentals ------------------ ------- 1994 $380 $116 1995 267 90 1996 217 66 1997 186 61 1998 191 51 After 1998 884 133 Concentration of Credit Risk MDC provides a diversified range of financing and leasing arrangements through its wholly owned subsidiary, MDFS, to customers and industries throughout the United States, the United Kingdom and to a lesser extent, other countries. MDFS' financing and leasing portfolio consists of the following at December 31: 1993 1992 -------------- -------------- Commercial aircraft financing: MDC commercial jet transports on lease $1,048 56.3% $ 769 42.7% Other commercial aircraft on lease 217 11.6% 247 13.7% ------ ------ ------ ------ 1,265 67.9% 1,016 56.4% Other commercial and industrial financing: Real estate 124 6.7% 147 8.2% Transportation services 69 3.7% 98 5.4% Transportation equipment 43 2.3% 39 2.2% Motor freight transportation and warehousing 39 2.1% 67 3.7% Furniture and home furnishings 31 1.7% 43 2.4% Other 292 15.6% 391 21.7% ------ ------ ------ ------ 598 32.1% 785 43.6% ------ ------ ------ ------ Total Portfolio $1,863 100.0% $1,801 100.0% ====== ====== ====== ====== The single largest commercial aircraft financing customer accounted for $276 million (14.8% of total portfolio) in 1993 and $136 million (7.5% of total portfolio) in 1992. The five largest accounted for $726 million (39.0%) and $460 million (25.5%) in 1993 and 1992, respectively. There were no significant concentrations by customer in MDFS' other commercial and industrial financing portfolio. 44 Exhibit 13 MDC holds title to all leased equipment and generally has a perfected security interest in the assets financed through note and loan arrangements. [HARD COPY PG. 42] 5. Contracts in Process and Inventories Contracts in process and inventories consist of the following at December 31: 1993 1992 -------- -------- Government contracts in process $ 6,347 $ 6,535 Commercial products in process 4,005 5,598 Material and spare parts 873 1,091 Progress payments to subcontractors 1,362 1,421 Progress payments received (6,813) (7,415) -------- -------- $ 5,774 $ 7,230 ======== ======== Substantially all government contracts in process (less applicable progress payments received) represent unbilled revenue and revenue which is currently not billable. The Navy on January 7, 1991, notified MDC and General Dynamics Corporation (the Team) that it was terminating for default the Team's contract for development and initial production of the A-12 aircraft. On June 7, 1991, the Team filed a legal action to contest the Navy's default termination, assert its rights to convert the termination to one for "the convenience of the Government," and obtain payment for work done and costs incurred on the A-12 contract, but not paid to date. The Navy has agreed to continue to defer repayment of $1.335 billion alleged to be due with interest from January 7, 1991, from the Team as a result of the termination for default of the A-12 program. The agreement provides that it will remain in force until the dispute as to the type of termination is resolved by the pending litigation in the United States Court of Federal Claims or negotiated settlement, subject to review by the U.S. Government annually on December 1, to determine if there has been a substantial change in the financial condition of either Team member such that deferment is no longer in the best interest of the Government. The Government, which extended the December 1, 1993 review beyond the time to which MDC and GD agreed, has not advised the contractors of the results of that review. On February 15, 1994, however, the U.S. Court of Federal Claims entered an Order, deferring rulings on the merits of the legal action to July 21, 1994, to enable the parties to pursue settlement negotiations among other things, conditioned on an undertaking made by the Government that it would not seek to terminate the deferment agreement in the interim. MDC firmly believes it is entitled to continuation of the deferment agreement in accordance with its terms. At December 31, 1993, Contracts in Process and Inventories include approximately $508 million of recorded costs on the A-12 contract, against which MDC has established a loss provision of $350 million. The amount of the provision, which was established in 1990, is based on MDC's belief that 45 Exhibit 13 the termination for default will be converted to a termination for convenience, that the Team will recover a minimum of $250 million in claims, that there is a range of reasonably possible results on termination for convenience and that it is prudent to provide for what MDC believes is the upper range of possible loss on termination for convenience, namely $350 million. In MDC's opinion, this loss provision continues to provide adequately for the reasonably possible reduction in value of A-12 net contracts in process and nonreimbursed supplier termination payments as of December 31, 1993, as a result of termination of the contract for the convenience of the Government. MDC has been provided with an opinion of outside counsel that the Government's termination of the contract for default is contrary to law and fact, that the default is excusable, that the rights and obligations of MDC are the same as if the termination had been issued for the convenience of the Government and that, subject to prevailing that the termination is properly one for the convenience of the Government, the probable recovery on the claims is not less than $250 million. If, contrary to MDC's belief, the termination is not deemed to be for the convenience of the Government, it is estimated that an additional loss would be incurred which could amount to approximately $1.2 billion. In 1984, MDC entered into a full scale development letter contract, containing a not-to-exceed price, for the conversion of the land-based British Hawk aircraft with minimal change into a carrier-capable Navy aircraft, designated the T-45A, and to provide training systems. The final negotiated firm fixed price contract was agreed to in 1986. As a result of flight testing in late 1988, the Navy indicated that changes to the T-45 aircraft were necessary to meet its operational desires. MDC advised the Navy that incorporation of the requested improvements into the aircraft configuration would entitle it to additional compensation. MDC proceeded with the improvements, and their cost has increased the cost at completion for the development and low rate initial production contracts to a point where it exceeds the fixed price of such contracts. At December 31, 1993, Contracts in Process and Inventories include costs for the related contracts of $192 million. Realization of this amount is dependent in part on [HARD COPY PG. 43] (i) costs to complete these contracts not exceeding present estimates and (ii) realization of expected amounts of recovery on claims filed with respect to these contracts. MDC believes it is entitled to an equitable adjustment in contract price and schedule and other appropriate relief for such improvements and submitted claims to the Navy during 1990 for such relief. During 1993 the Navy denied these claims. MDC has appealed the Navy's decision to the Armed Services Board of Contract Appeals. The estimated revenue of the contracts at completion includes $225 million from expected recovery on such claims filed with the Navy. MDC's belief as to expected claims recovery is supported by an opinion of outside counsel provided to MDC that there are reasonable factual and legal bases for the current claims against the Navy and that, based on MDC's labor and cost accounting records and computations, it is probable that MDC will recover in excess of $225 million on the claims. Additionally, if MDC were not to recover a portion of the claims amount related to work for which a subcontractor is responsible, MDC, supported by the opinion of outside counsel, believes the 46 Exhibit 13 subcontractor would be legally liable for such costs. If revenue from such claims is not realized, a loss provision of approximately $148 million would be required on the related development and low rate initial production contracts. Resolution of claims on the A-12 and T-45 contracts will involve negotiation with the Government or litigation, and the ultimate realization and receipt of future revenue may vary from current estimates. In May 1993, a Defense Acquisition Board (DAB) initiated by the Under Secretary of Defense for Acquisitions began a review of the C-17 program in an effort to resolve outstanding issues and to make recommendations regarding the C-17's future. In connection with the review, MDC provided data and participated in numerous discussions. The Department of Defense (DoD), in conjunction with the DAB, submitted a proposal to MDC in December 1993 for a business settlement of a variety of issues concerning the C-17 program. In January 1994, MDC and the DoD agreed to such a settlement. MDC and the Air Force will be developing plans and contractual modifications and agreements to implement the business settlement, which is subject to congressional authorization and appropriations. Completion of this process is expected during 1994. The settlement covered many issues open as of the date of the settlement, including the allocation of sustaining engineering costs to the development and production contracts, the sharing of flight test costs over a previous level, and the resolution of claims and of performance/specification issues. Terms of the settlement also stipulated that MDC will expend funds in an effort to achieve product and systems improvements. MDC estimated the financial impact of the settlement in conjunction with a review of the estimated remaining cost on the C-17 development and initial production contracts. As a result, MDC recorded a loss provision of $450 million, excluding general and administrative and other period expenses, in the fourth quarter of 1993. The $450 million loss provision reflects some increases in the estimated costs to complete the C-17 development and initial production contracts, which was in part interrelated to the settlement. At December 31, 1993, Contracts in Process and Inventories include incurred costs totaling $702 million for the fixed price type contracts for development and first ten initial production C-17 military transport aircraft for the Air Force. The estimated value of these contracts at completion includes $208 million of claim revenues expected to be collected as part of the settlement. MDC's loss provision of $450 million is an offset to the December 31, 1993 balance, resulting in a $252 million net balance associated with these contracts. During 1991, MDC combined the C-17 contracts for the development and first ten initial production aircraft for financial accounting purposes. The estimated costs at completion of the combined C-17 contracts, excluding general and administrative costs and other period costs, exceed the estimated revenue of the combined contracts. For the year ended December 31, 1992, MDC recorded loss provisions totaling $383 million, which 47 Exhibit 13 represent the amount by which estimated costs on the combined contracts, excluding general and administrative costs and other period costs, exceeded estimated revenues from the remaining work on the contracts. [HARD COPY PG. 44] Since 1990, the Air Force has reduced the progress payments to MDC under the C-17 contracts because the DoD has projected the development and initial production costs at completion to be substantially in excess of the ceiling price of the then authorized work and in excess of MDC's estimate at completion. In addition, during 1992 the Air Force questioned MDC's segregation of certain C-17 engineering costs between full-scale engineering development (FSED) and production lots. Pending resolution of the segregation question, for progress payment purposes the Air Force has reclassified to FSED a substantial portion of sustaining engineering costs applied by MDC to production lots. As of December 31, 1993, the Air Force had withheld approximately $312 million from MDC's progress payment requests on the C-17 contracts principally as a result of higher cost estimates and the sustaining engineering reclassification. MD-11 production and tooling costs are charged to cost of sales based upon the estimated average unit cost for the program. The estimated average unit costs are based upon cost estimates of a 301 aircraft program. The costs incurred in excess of the estimated average unit cost are deferred to be recovered by production and sale of lower-than-average cost units. Commercial products in process for the MD-11 program at December 31, 1993, includes net deferred production costs of $1.324 billion and unamortized tooling of $257 million. These amounts are being averaged over the 301 aircraft pool. Under the current costing percentage, an estimated $1.1 billion of current and future deferred costs will be recovered from firm orders received after December 31, 1993. As of December 31, 1993, MDC had delivered 112 MD-11 aircraft, including one aircraft leased by MDC, and has 60 aircraft on firm order. In addition, MDC had 101 options and reserves representing potential future orders for the MD-11. Estimated proceeds from the undelivered aircraft in the pool exceed the production and tooling costs in inventory at December 31, 1993, plus the estimated additional production and tooling costs to be incurred. However, if fewer than 301 MD-11 aircraft are sold, if the proceeds from future sales of MD-11 aircraft are less than currently estimated, or if the costs to complete the program exceed current estimates, substantial amounts of unrecoverable costs may be charged to expense in subsequent fiscal periods. MDC believes that the slowdown in MD-11 orders is temporary and that it will sell in excess of 301 MD-11 aircraft over the life of the program. 48 Exhibit 13 6. Property, Plant and Equipment The major categories of properties consist of the following at December 31: 1993 1992 -------- -------- Land $ 116 $ 117 Buildings and fixtures 1,809 1,819 Machinery and equipment 2,428 2,518 -------- -------- 4,353 4,454 Accumulated depreciation (2,603) (2,463) -------- -------- $ 1,750 $ 1,991 ======== ======== 7. Outsourcing of Information Technology Operations In December 1992, MDC signed an agreement with Integrated Systems Solutions Corporation (ISSC), a wholly owned subsidiary of IBM Corporation, for the outsourcing of its information technology operations and the related sale of its data center processing, network, and dedicated end user service assets. Net proceeds from the sale of assets at book value were $173 million. Approximately 1,400 personnel became employees of ISSC as a result of the agreement. ISSC provided data processing services to MDC under the agreement during 1993. Service payments are expected to aggregate approximately $3 billion over the term of the 10 year agreement. The contract is cancelable after two years with substantial buy out/ termination provisions in the early years. 8. Other Assets Other assets consist of the following at December 31: 1993 1992 -------- -------- Prepaid pension asset $ 1,161 $ 1,126 Prepaid expenses 52 76 Intangible assets 53 49 Net assets of discontinued operations - 92 Other 238 269 -------- -------- $ 1,504 $ 1,612 ======== ======== 49 Exhibit 13 9. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following at December 31: 1993 1992 -------- -------- Accounts and drafts payable $ 796 $ 1,466 Accrued expenses 1,105 1,243 Employee compensation 289 309 -------- -------- $ 2,190 $ 3,018 ======== ======== [HARD COPY PG. 45] 10. Income Taxes MDC adopted SFAS No. 109, "Accounting for Income Taxes," as of January 1, 1992. This statement supersedes SFAS No. 96, which MDC previously adopted as of January 1, 1989. The impact of the adoption of SFAS No. 109 was not material. Income taxes consist of the following: December 31 1993 1992 ------ ------ Current $ 208 $(157) Deferred 366 729 ------ ------ $ 574 $ 572 ====== ====== Tax effects of temporary differences that gave rise to the deferred tax liability consist of the following: December 31 1993 1992 ------ ------ Deferred tax assets: Retiree medical $ (513) $ (486) Bad debts (75) (74) Other (219) (167) ------- ------- (807) (727) Deferred tax liabilities: Pension plan 441 380 Leased assets 278 294 Long-term contracts 290 574 Other 164 208 ------- ------- 1,173 1,456 ------- ------- Net deferred tax liability $ 366 $ 729 ======= ======= 50 Exhibit 13 The income tax provision consists of the following: Years Ended December 31 1993 1992 1991 ------ ------ ------ U.S. federal: Current $ 120 $(117) $ 211 Deferred (50) 434 (7) ------ ------ ------ 70 317 204 State: Current 26 - 41 Deferred 1 63 3 ------ ------ ------ 27 63 44 Foreign 3 8 10 ------ ------ ------ Income tax provision $ 100 $ 388 $ 258 ====== ====== ====== The 1993 income tax provision includes $13 million relating to the increased tax rates applicable to previously deferred taxes as a result of various 1993 federal and state tax legislation. Reconciliation of the pro forma income tax provision, computed by applying the U.S. federal statutory rate of 35% in 1993 and 34% in 1992 and 1991, to the recorded income tax provision follows: Years Ended December 31 1993 1992 1991 ------ ------ ------ Pro forma income tax provision computed at the statutory U.S. federal income tax rate $ 161 $ 369 $ 209 State income tax provision net of effect on pro forma U.S. federal tax 18 41 29 Increase (decrease) in taxes resulting from: Export tax-exempt income (7) (15) (15) Federal tax rate change 13 - - IRS federal settlement (75) - 35 Executive life insurance (11) (6) (2) Other - net 1 (1) 2 ------ ------ ------ Income tax provision $ 100 $ 388 $ 258 ====== ====== ====== Pre-tax earnings from foreign subsidiaries included in continuing operations, but excluding the operations of McDonnell Douglas Foreign Sales Corporation, were $3 million in 1993, $13 million in 1992 and $25 million in 1991. Provisions for foreign income taxes are computed using applicable foreign rates. Undistributed earnings of foreign subsidiaries are considered to be permanently invested. Accordingly, no provision has been made for U.S. federal income taxes on $122 million of undistributed earnings of foreign subsidiaries. 51 Exhibit 13 In November 1991, MDC settled tax years 1977-1985 with the Internal Revenue Service (IRS). The settlement resulted in net earnings of $32 million in 1991 and a substantial future obligation payable upon completion of the 1986-1989 IRS audit. During 1993, this obligation was reduced by the resolution with the IRS of certain accounting method and tax credit issues. The resolution of these issues for the 1986-1989 tax period resulted in net earnings of $158 million in 1993. Excluding the after-tax benefit of the related reduction in accrued interest, the resolution of such issues resulted in a $75 million federal tax benefit. Payment of the tax and interest for the 1986-1989 tax period obligation approximates $300 million and is expected to be made in mid-1994. Taxes and interest related to this payment have been provided. 52 Exhibit 13 [HARD COPY PG. 46] 11. Debt and Credit Arrangements Consolidated debt consists of the following classifications at December 31: Interest Rate Averages or Ranges 1993 1992 ------------ -------- -------- Short-Term Debt Aerospace segments: Revolving credit agreements $ - $ 689 Other notes 4.99% 91 434 -------- -------- 91 1,123 Financial services and other segment: Revolving credit agreements 4.82% 53 108 Other notes 4.75% 150 16 -------- -------- 203 124 -------- -------- Total short-term debt 294 1,247 Long-Term Debt Aerospace segments: Senior debt securities, due through 2012 7.9%-9.8% 1,295 1,494 Senior medium-term notes, due through 1996 5.3%-7.4% 132 37 Other debt, due through 2003 7.3%-11.5% 107 113 -------- -------- 1,534 1,644 Financial services and other segment: Senior debt securities, due through 2008 3.9%-13.0% 421 365 Senior medium-term notes, due through 2005 5.6%-14.2% 737 817 Subordinated notes, due through 1999 8.9%-12.4% 78 93 Other notes, due through 2017 4.0%-12.9% 74 75 ----- ----- 1,310 1,350 -------- -------- Total long-term debt 2,844 2,994 -------- -------- Total Debt $ 3,138 $ 4,241 ======== ======== 53 Exhibit 13 The aggregate amount of long-term debt at December 31, 1993 maturing by calendar year for 1994 to 1998 is as follows: Aerospace Financial Services Segments and Other Segment --------- ------------------ 1994 $ 192 $ 187 1995 51 269 1996 61 148 1997 255 133 1998 11 160 Aerospace Credit Agreements At December 31, 1993, MDC has two revolving credit agreements under which MDC may borrow up to $1.4 billion through April 1995, and a third revolving credit agreement under which MDC may borrow up to $175 million to January 28, 1994. MDC did not renew this third revolving credit agreement. Under the three credit agreements, the interest rate, at the option of MDC, is a floating rate generally based on a defined prime rate, a fixed rate related to either the London interbank offered rate (LIBOR) or a certificate of deposit rate, or as quoted under a competitive bid or a negotiated rate. A fee is charged on the amount of the commitments. The agreements contain restrictive covenants relating to net worth (as defined), liquidity (as defined), indebtedness, customer financing, fixed asset dispositions and subsidiary indebtedness. There are no amounts outstanding under the credit agreements at December 31, 1993. In August 1992, MDC commenced an offering of up to $550 million of its medium-term notes due from and exceeding nine months from the date of issue. The interest rate applicable to each note and certain other variable terms are established at the date of issue. As of December 31, 1993, MDC has issued $132 million of medium-term notes at rates ranging from 5.3% to 7.4% due in 1994 through 1996. On July 1, 1993, MDC issued $200 million of 8.25% senior debt securities due on July 1, 2000. As of December 31, 1993, $218 million of securities registered under the shelf registration remain unissued. On December 22, 1993, MDC notified holders of its 7.875% notes due January 15, 1997 that the $150 million issue would be redeemed on January 21, 1994. The notes were redeemed at 100% of their principal amount plus accrued interest to the redemption date. Financial Services Credit Agreements At December 31, 1993, McDonnell Douglas Finance Corporation (MDFC) has a revolving credit agreement under which it can borrow a maximum of $125 million through January 31, 1995. The maximum amount available to MDFC is reduced quarterly by $25 million through January 1995. The interest rate, at the option of MDFC, is either a floating rate generally based on a defined prime rate, a fixed rate related to either LIBOR or a certificate of deposit rate, or as quoted under a competitive bid. Borrowings of $53 million under the revolving credit agreement are outstanding at December 31, 1993. 54 Exhibit 13 At December 31, 1993, MDFS and MDFC has a revolving credit agreement under which MDFC may borrow a maximum of $45 million, reduced by MDFS borrowings under this same agreement. Under this agreement, MDFS can borrow a maximum [HARD COPY PG. 47] of $6 million. The interest rate, at the option of MDFC, is either a floating rate generally based on a defined prime rate or fixed rate related to LIBOR. There are no outstanding borrowings under this agreement at December 31, 1993. Commercial paper, when outstanding, is fully supported by unused commitments under this agreement. The provisions of various credit and debt agreements require MDFC to maintain a minimum net worth, restrict indebtedness, and limit MDFC's cash dividends and other distributions. MDFC's senior debt at December 31, 1993 includes $249 million secured by equipment having a carrying value of $288 million. In June 1993, MDFC commenced an offering of up to $250 million of its general term notes and in November 1993 an offering of up to $250 million of its medium-term notes. The interest rate applicable to each note and certain other variable terms are established at the date of issue. As of December 31, 1993, MDFC has issued $81 million of general term notes at rates ranging from 5.3% to 8.4% due in 1995 through 2008, and $90 million of medium-term notes at rates ranging from 4.6% to 6.8% due in 1995 through 1998. McDonnell Douglas Bank, Limited has entered into several interest rate swap agreements which have effectively fixed interest rates on 11 million pounds sterling ($17 million) of LIBOR based notes. The fixed rates payable under these agreements range from 11.5% to 13.3% with terms expiring at various dates through the year 1995. The interest rate differential to be received or paid is recognized over the lives of the agreements as an adjustment to interest expense. McDonnell Douglas Realty Company's (MDRC) debt of $180 million at December 31, 1993 is secured by indentures of mortgage and deeds of trust on MDRC's interest in real estate developments having a carrying value of $233 million. 12. Fair Values of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. The following methods and assumptions were used in estimating the fair value disclosures of financial instruments: 55 Exhibit 13 Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Notes receivable: Fair values for variable rate notes that reprice frequently and with no significant change in credit risk are based on carrying values. The fair values of fixed rate notes are estimated 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 amounts of borrowings under the short-term revolving credit agreements approximate their fair value. The fair values of long-term debt, which excludes capital lease obligations, are estimated using public quotations or discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements. Foreign currency exchange contracts: The fair values of foreign currency exchange forward contracts are estimated based on quoted market prices of comparable contracts. At December 31, 1993 and 1992, MDC had approximately $77 million and $94 million, respectively, of foreign currency exchange forward contracts. The fair values of these off-balance sheet financial instruments represent the amount at which the contracts could be settled. The carrying amounts and fair values of financial instruments are as follows: Financial Services Aerospace Segments and Other Segment ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- ------- December 31, 1993 ----------------- Cash and cash equivalents $ 15 $ 15 $ 71 $ 71 Notes receivable 80 79 301 301 Short-term notes payable 91 91 203 203 Long-term debt 1,534 1,685 1,221 1,334 Foreign currency exchange contracts - (2) - - December 31, 1992 ----------------- Cash and cash equivalents $ 65 $ 65 $ 17 $ 17 Notes receivable 143 135 457 458 Short-term notes payable 1,123 1,123 124 124 Long-term debt 1,644 1,598 1,254 1,310 Foreign currency exchange contracts - (6) - - 56 Exhibit 13 [HARD COPY PG. 48] 13. Common and Preferred Shares The authorized common stock of MDC is 100 million shares, each of $1.00 par value. The following table summarizes changes in shares outstanding for the periods presented. Common Shares Outstanding ------------- Balance January 1, 1992 38,391,313 Employee stock awards and options 29,120 Shares issued to employee savings plans 766,455 Other 3,331 ------------ Balance December 31, 1992 39,190,219 Employee stock awards and options 118,681 Shares issued to employee savings plans 15,008 Other 3,662 ------------ Balance December 31, 1993 39,327,570 ============ At December 31, 1993, a total of 2,529,122 shares of authorized and unissued common stock are reserved for issuance of stock awards and options granted or authorized to be granted. Also 3,975,607 shares are reserved for contributions to MDC's savings plans. At December 31, 1993, there are 10 million shares, $1.00 par value, preferred stock authorized for issuance; however, none have been issued. During 1990, the Board of Directors declared a dividend distribution of one preferred stock purchase right (Right) for each outstanding share of common stock. Among other provisions, each Right may be exercised to purchase from MDC one one-hundredth of a share of a new series of preferred stock, at an exercise price of $200 (Purchase Price), subject to adjustment. The Rights are exercisable only after (i) a person or group has acquired or obtained the right to acquire 20% or more of MDC's Common Stock or (ii) following the commencement of a tender offer or exchange offer, for 20% or more of the voting power of MDC. The Rights expire on August 2, 2000, and may be redeemed by MDC at a price of 1 cent per Right at any time until ten business days after the acquisition of 20% of MDC's Common Stock. The Board of Directors of MDC retains a broad ability to amend or supplement the Rights. If any person or group acquires 20% of MDC's Common Stock, each holder of a Right will have the right to receive upon exercise the number of shares of common stock having a market value of two times the exercise price of the Right. If MDC is acquired, each Right may be exercised to purchase the number of shares of common stock of the surviving or purchasing company which at the time of such transaction would have a market value of two times the Purchase Price. 57 Exhibit 13 14. Stock Option and Incentive Plans Awards may be granted under the Incentive Award Plan (Plan) approved by shareholders in 1986 in the form of cash, stock, non-qualified stock options, incentive stock options or stock appreciation rights. Under the Plan, options (including stock appreciation rights) are limited to a maximum of 2,500,000 shares through January 1, 1996. Options may be granted to officers and employees at an exercise price of either the market price on the date of grant or the average market price for a specified period of time. Options to purchase MDC Common Stock have been granted under MDC's Plan and other incentive compensation and option plans. A summary of options for MDC Common Stock follows: Years Ended December 31 1993 1992 -------- -------- Granted under the Plan: Number of shares 18,923 40,380 Price per share $56 $62 Exercised: Number of shares 101,553 7,402 Price per share $38-$62 $38-$62 December 31 1993 1992 -------- -------- Outstanding: Number of shares 107,296 230,555 Price per share $38-$90 $38-$90 Exercisable: Number of shares 88,964 192,256 Price per share $38-$90 $38-$90 At December 31, 1993, a total of 30,657 stock appreciation rights are outstanding and exercisable at prices ranging from $41 to $90 per right. MDC has a Long-Term Incentive Plan (LTIP) approved by shareholders in 1986. Participants in LTIP are selected by a committee of the Board of Directors and awards earned are payable in either cash or stock. Earned awards are achieved when MDC Common Stock yields a return superior to a peer group of companies during a defined period which may range from 2 to 5 years. At December 31, 1993 MDC has accrued $16 million for LTIP. [HARD COPY PG. 49] 15. Retirement Plans Substantially all employees of MDC and its subsidiaries are members of defined benefit pension plans, including several multi-employer and foreign plans. In addition, MDC has a supplementary unfunded pension plan to provide those benefits otherwise due employees under the defined benefit pension plans' benefit formulas, but which are in excess of benefits permitted by the Internal Revenue Code to be covered under the defined benefit pension plans. Benefits for salaried plans are based primarily upon salary and years of service while benefits for hourly plans are generally based upon a fixed dollar amount per year of service. 58 Exhibit 13 MDC measures pension cost and makes contributions to its pension plans based upon independent actuarial valuations. The projected unit credit actuarial cost method is used to determine pension cost for financial accounting purposes consistent with the provisions of SFAS No. 87, "Employers' Accounting for Pensions." Funding levels and pension cost allocable to government contracts are determined by the entry age normal actuarial cost method and are not affected by SFAS No. 87. The assets of the plans consist principally of marketable fixed income and equity securities. At December 31, 1993, the plans hold $30 million of MDC's medium-term notes and $36 million of MDC's senior debt securities with varying interest rates and maturity dates, and 35,000 shares of MDC Common Stock. Assumptions used in determining net periodic pension expense (income) and the actuarial present value of benefit obligations for the significant domestic plans were: Years Ended December 31 1993 1992 1991 -------- -------- -------- Discount rate: January 1 9.0% 9.0% 9.0% December 31 7.5% 9.0% 9.0% Average rates of increase in compensation based upon age - salaried plans January 1 6.0% 6.7% 6.9% December 31 5.0% 6.7% 6.9% Expected return on plan assets 9.3% 9.3% 8.3% Components of periodic pension expense (income) for the significant domestic plans include the following: Years Ended December 31 1993 1992 1991 ------ ------ ------ Service cost for the year $ 100 $ 126 $ 130 Interest cost on pension benefit obligations 266 246 235 Return on plan assets: Actual (426) (512) (624) Deferred gain (loss) (13) 93 283 Net amortization (65) (59) (58) ------- ------ ------ Domestic plans $(138) $(106) $ (34) ====== ====== ====== Foreign and other plans $ 7 $ 7 $ 8 ====== ====== ====== 59 Exhibit 13 An analysis of the funded status of the significant domestic pension plans follows: December 31 1993 1992 -------- -------- Actuarial present value of accumulated benefit obligations: Vested $ 3,191 $ 2,687 Non-vested 272 273 -------- -------- Accumulated benefit obligation 3,463 2,960 Additional amounts related to projected future salary increases 343 368 -------- -------- Projected benefit obligation 3,806 3,328 Plan assets, at fair value 5,260 5,348 -------- -------- Excess of plan assets 1,454 2,020 Items not yet recognized in earnings: Unrecognized net transition asset (563) (636) Unrecognized prior service cost 446 524 Deferred net gain (186) (789) -------- -------- 1,151 1,119 Foreign plans 10 7 -------- -------- Prepaid pension asset $ 1,161 $ 1,126 ======== ======== Effective January 1, 1993, MDC amended its significant domestic pension plans to provide a supplemental pension benefit to non-union retirees electing to participate in the new health care plan funded entirely by participant contributions. The effect of this amendment was to increase unrecognized prior service cost as of December 31, 1992 by $385 million. MDC recorded this liability in connection with the adoption of and subsequent accounting for SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," during 1992. MDC has no intention of terminating any of its pension plans. However, if a qualified defined benefit pension plan is terminated and all accrued liabilities to employees and their beneficiaries are satisfied, all remaining assets in the plan's trust revert to the employer (except in certain limited circumstances where a change in control has occurred within the five-year period preceding the termination), with the following consequences: first, a non-deductible 20% to 50% excise tax upon the gross amount of the reversion is imposed; second, the Department of Defense and other Government contracting agencies have issued a regulation which indicates that the Government is entitled to its equitable share, to the extent that the Government participated in pension costs through their contracts with MDC; third, any amount that the employer then retains is treated as taxable income. 60 Exhibit 13 [HARD COPY PG. 50] In addition to the defined benefit pension plans, MDC provides eligible employees the opportunity to participate in savings plans that permit both pre-tax and after-tax contributions. Most domestic employees with at least 30 days of continuous service are eligible to participate in a plan. Under these plans, the employee may contribute to various savings alternatives, including investment in MDC's Common Stock. In most cases, MDC matches a portion of the employee's contribution with contributions to the MDC Common Stock fund. Generally, MDC's contributions are vested after five years of service. MDC's contributions to the savings plans during 1993 totaled $59 million of which $1 million was the market value of 15,008 shares of MDC Common Stock contributed, and during 1992 totaled $94 million of which $39 million was the market value of 766,455 shares of MDC Common Stock contributed. Contributions for the year ended December 31, 1991 amounted to $61 million. In August 1992, MDC converted the company matching portion of its existing salaried employee savings plan to an employee stock ownership plan (ESOP). The ESOP borrowed $50 million from MDC to fund the plan. The ESOP used the proceeds to purchase 1,216,992 shares of MDC Common Stock. Unearned compensation (equal to the outstanding balance of the ESOP loan) of $36 million was reflected as a reduction of Shareholders' Equity at December 31, 1992. No balance remained on the ESOP loan as of December 31, 1993. MDC made contributions to the plan sufficient to enable the ESOP to repay its loan, including interest. These contributions were classified as expense when the related shares were allocated to employees' accounts. Contributions to the ESOP of $36 million and $14 million were expensed during 1993 and 1992, respectively. In addition to the above plans, MDC and certain of its domestic subsidiaries provide health care benefits for their retirees covered by collective bargaining agreements. Generally, employees become eligible for retiree health care upon retirement from active service at or after age 55 with 10 or more years of service. Qualifying dependents are also eligible for medical coverage. MDC's policy is to fund the cost of medical benefits as claims are received. The retiree health care plan has provisions for participant contributions, deductibles, coinsurance percentages, out-of- pocket limits, schedule of reasonable fees, coordination of benefits with other plans, Medicare carve-out, and a maximum lifetime benefit per covered individual. MDC and certain of its domestic subsidiaries previously provided health care coverage similar to the above for its non-union retirees. On October 8, 1992, effective January 1, 1993, MDC terminated company-paid retiree health care for both current and future non-union retirees and their dependents and survivors and replaced it with a new arrangement funded entirely by participant contributions. At the same time, MDC amended its existing pension plans to provide a supplemental pension benefit to current and future non-union retirees who elect to receive health care during the period 1993 through 1996 under the new arrangement. The supplemental benefit, net of withholding taxes, approximates the expected average cost of benefits for the period 1993 through 1996. 61 Exhibit 13 During 1993, MDC and the International Association of Machinists and Aerospace Workers (IAMAW) in St. Louis, Huntington Beach, Long Beach and Torrance, California agreed to a new three-year union contract. The new contract includes a provision requiring employees retiring subsequent to 1993 to pay one-third of the cost of their retiree health care. Prior to 1992, company-paid retiree health care benefits were included in costs as covered expenses were actually incurred. Accordingly, MDC recorded expenses of $122 million in 1991. In December 1990, the Financial Accounting Standards Board issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires companies to accelerate the recognition of costs by causing their full accrual over the employees' years of service up to their date of full eligibility. MDC elected to implement this new accounting standard for 1992 by immediately recognizing the January 1, 1992 accumulated postretirement benefit obligation of $2.477 billion ($1.536 billion after- tax). The effect of adopting SFAS No. 106 increased net periodic postretirement health care cost by $133 million and decreased net income by $82 million, prior to the recording of a curtailment gain in the 1992 fourth quarter. MDC recorded a curtailment gain of $1.090 billion in the 1992 fourth quarter, reflecting the aforementioned termination of company-paid retiree health care for both current and future non-union retirees. The gain equaled the reduction in accrued retiree benefits, after providing as a liability the $385 million representing the aforementioned supplemental pension benefit. MDC recorded a curtailment gain of $70 million in the second quarter of 1993, reflecting a similar arrangement negotiated with the Southern California Professional Engineering Association for employees retiring after July 1, 1993. [HARD COPY PG. 51] An analysis of the accrued retiree benefits at December 31 follows: 1993 1992 -------- -------- Accumulated postretirement benefit obligation: Retirees $ 790 $ 559 Active participants fully eligible to retire 130 246 Other active participants 149 273 -------- -------- Accumulated postretirement benefit obligation 1,069 1,078 Items not yet recognized in earnings: Unrecognized prior service gain 205 37 Deferred net gain (loss) (175) 44 -------- -------- Accrued retiree health care liability 1,099 1,159 Liability for pension supplement 289 385 -------- -------- Accrued retiree benefits $ 1,388 $ 1,544 ======== ======== 62 Exhibit 13 Components of periodic postretirement benefit expense, exclusive of the curtailment gains, include the following: Years Ended December 31 1993 1992 ------ ------ Service cost for the year $ 13 $ 74 Interest cost on accumulated post- retirement benefit obligations 80 189 Net amortization (11) - ------ ------ $ 82 $ 263 ====== ====== Assumptions used in determining periodic postretirement benefit costs and the actuarial present value of benefit obligations were as follows: Years Ended December 31 1993 1992 -------- -------- Discount rate: January 1 9.0% 9.0% December 31 7.5% 9.0% Health care cost trend rate* Non-medicare 11.0% 15.0% Medicare 9.0% 9.0% HMO premiums 6.5% 9.0% * Decreasing to 5.3% after 2002 Increasing the health care cost trend rates by one percentage point would result in an 8% increase in the sum of the service and interest cost components of periodic postretirement benefit cost and an 8% increase in the accumulated postretirement benefit obligation at December 31, 1993. 16. Leased Properties Rental expense for leased properties, substantially all of which is minimum rentals, was $106 million in 1993, $155 million in 1992 and $193 million in 1991. Minimum rental payments under operating leases with initial or remaining terms of one year or more at December 31, 1993, aggregated $210 million, and payments due during the next several years are: 1994, $80 million; 1995, $46 million; 1996, $35 million; 1997, $27 million and 1998, $12 million. MDC has negotiated noncancelable sublease agreements on certain of its facilities and equipment totaling $52 million during the next several years. 17. Commitments and Contingencies The marketing of commercial aircraft at times will result in agreements to provide or guarantee long-term financing of some portion of the delivery price of aircraft, to lease aircraft, or to guarantee customer lease payments, tax benefit transfers or aircraft values. At December 31, 1993, $251 million in guarantees are outstanding, and commitments of $116 million are outstanding to lease aircraft, accept notes in payment for aircraft, or 63 Exhibit 13 guarantee financing for customers for ordered but undelivered aircraft. In addition, MDFS has commitments to provide leasing and other financing in the aggregate amount of $34 million at December 31, 1993. MDC is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, or similar state statutes. MDC has been identified as a potentially responsible party (PRP) at 28 sites. Of these, MDC believes that it has de minimis liability at 19 sites, including 9 sites at which it believes that it has no future liability. At the 9 sites at which MDC's liability is not considered to be de minimis, either final or interim cost sharing agreements have been effected between the cooperating PRPs, although such agreements do not fix the amount of cleanup costs which the parties will bear. In addition, MDC is remediating, or has begun environmental engineering studies to determine cleanup requirements, at certain of its current operating sites or former sites of industrial activity. At December 31, 1993, the accrued liability for environmental cleanup matters at Superfund sites and on MDC's current and former operating sites was $21 million. [HARD COPY PG. 52] A number of legal proceedings and claims are pending or have been asserted against MDC including legal proceedings and claims relating to alleged injuries to persons associated with the disposal of hazardous waste. A substantial portion of such legal proceedings and claims is covered by insurance. MDC believes that the final outcome of such proceedings and claims will not have a material adverse effect on MDC's financial position. See Note 5, Contracts in Process and Inventories, for a discussion of certain risks on fixed price development contracts including the termination on January 7, 1991, by the Navy of a contract with MDC and General Dynamics Corporation for the development and initial production of the A-12 aircraft. 18. Investment in Financial Services Subsidiary The condensed financial data presented below have been summarized from the audited consolidated financial statements of MDFS. Prior year amounts have been reclassified to conform to the current year presentation. 64 Exhibit 13 December 31 1993 1992 -------- -------- Assets Cash and cash equivalents $ 65 $ 15 Accounts with MDC 59 43 Notes and leases receivable - net 1,467 1,431 Investment in operating leases 358 333 Other assets 154 194 -------- -------- Total $ 2,103 $ 2,016 ======== ======== Liabilities and Equity Accounts payable and accrued expenses $ 128 $ 121 Income taxes 303 299 Notes payable and long-term debt 1,456 1,393 Shareholder's equity 216 203 -------- -------- Total $ 2,103 $ 2,016 ======== ======== Years Ended December 31 1993 1992 1991 ------ ------ ------ Earned income $ 201 $ 256 $ 373 Costs and expenses 166 222 322 Cumulative effect of accounting change - (2) - Net earnings 13 23 33 Dividends and other distributions - 103 67 19. U.S. Government and Export Sales Consolidated sales to U.S. Government agencies (including sales to foreign governments through foreign military sales contracts with U.S. Government agencies) amounted to $9.052 billion in 1993, $9.286 billion in 1992, and $10.196 billion in 1991. No other single customer accounted for 10% or more of consolidated revenues in 1993, 1992, or 1991. Foreign sales by geographical area, of which a portion were through foreign military sales contracts with the U.S. Government, are shown in the table below: Years Ended December 31 1993 1992 1991 ------- ------- ------- North America $ 41 $ 43 $ 70 South America 306 348 14 Europe 1,000 2,195 3,428 Asia/Pacific 1,114 1,561 1,264 Mideast/Africa 944 836 1,082 ------- ------- ------- $ 3,405 $ 4,983 $ 5,858 ======= ======= ======= 65 Exhibit 13 20. Future Accounting and Reporting Requirements SFAS No. 112, "Employers' Accounting for Postemployment Benefits" was issued in December 1992. SFAS No. 112 is effective beginning in 1994 and requires using an accrual approach for accounting for benefits other than retiree health care to former or inactive employees. The impact of MDC's adoption of this standard is not expected to be material. 21. Supplementary Payment Information Years Ended December 31 1993 1992 1991 ------- ------- ------- Interest paid $ 314 $ 446 $ 532 Income taxes paid 84 158 32 22. Business Segment Reporting Selected Financial Data by Industry Segment is presented on page 33. [HARD COPY PG. 53] Report of Management Responsibilities The financial statements of McDonnell Douglas Corporation and consolidated subsidiaries have been prepared under the direction of management in conformity with generally accepted accounting principles and, particularly with respect to long-term contracts and programs, include amounts based upon estimates and judgments. The integrity and reliability of data in these financial statements is the responsibility of management. In the opinion of management, the financial statements set forth a fair presentation of the consolidated financial condition of MDC at December 31, 1993 and 1992, and the consolidated results of its operations for the years ended December 31, 1993, 1992 and 1991. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Furthermore, the effectiveness of an internal control system can change with circumstances. MDC and its consolidated subsidiaries maintain accounting systems and related internal controls which, in the opinion of management, provide reasonable assurances that transactions are executed in accordance with management's authorization, that financial statements are prepared in accordance with generally accepted accounting principles, and that assets are properly accounted for and safeguarded. Ethical decision making is a fundamental key in MDC's management philosophy. Management recognizes its responsibility for fostering a strong ethical climate. Written codes of ethics and standards of business conduct are distributed to every employee, and each employee has been trained or is being scheduled to be trained in ethical decision making. The Board of Directors' Corporate Responsibility Committee has oversight responsibilities relative to standards of business conduct. 66 Exhibit 13 The Board of Directors has appointed four of its non-employee members as an Audit Committee. This Committee meets periodically with management and the internal and independent auditors. Both internal and independent auditors have unrestricted access to the Audit Committee to discuss the results of their examinations and the adequacy of internal controls. In addition, the Audit Committee makes its recommendation as to the selection of independent auditors to the Board. /s/ J. F. McDonnell Chairman and Chief Executive Officer /s/ R. L. Brand Vice President and Controller January 18, 1994 Report of Ernst & Young, Independent Auditors Shareholders and Board of Directors McDonnell Douglas Corporation We have audited the accompanying consolidated balance sheet of McDonnell Douglas Corporation and subsidiaries (MDC) as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of MDC's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDonnell Douglas Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. 67 Exhibit 13 As described in Note 5 to the consolidated financial statements, the fixed price development contract for the A-12 advanced tactical aircraft program was terminated for default by the United States Government on January 7, 1991. MDC believes it will be successful in converting the termination for default into a termination for convenience; however, failure to do so could have a material impact on the financial position of MDC in the future. As discussed in Note 15 to the consolidated financial statements, in 1992 MDC changed its method of accounting for retiree health care benefits. /s/ Ernst & Young St. Louis, Missouri January 18, 1994 68 Exhibit 13 [HARD COPY PG. 54 & 55] Ten Year Consolidated Financial Summary - ----------------------------------------------------------------------------------------------- (Dollar amounts in millions, except per share data)
- ----------------------------------------------------------------------------------------------- December 31 or Years Then Ended 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------- Summary of Operations Revenues by industry segment: Military aircraft $ 6,852 $ 7,238 $ 7,795 $ 7,707 $ 7,484 Commercial aircraft 4,760 6,595 6,752 3,935 3,151 Missiles, space and electronic systems 2,575 3,169 2,979 3,188 2,761 Financial services and other 287 352 519 658 534 -------------------------------------------------------- Operating revenues 14,474 17,354 18,045 15,488 13,930 Earnings (loss) from continuing operations 359 698 (a) 357 258 (c) (30) Per share 9.17 17.97 (a) 9.32 6.73 (c) (0.78) Net earnings (loss) 396 (781)(b) 423 306 (c) 219(d) Per share 10.10 (20.10)(b) 11.03 7.99 (c) 5.72(d) As a % of revenues 2.7% 2.3% 2.0% 1.6% As a % of beginning equity 13.1% 12.0% 9.3% 6.9% Research and development 341 509 429 565 571 Interest expense: Aerospace segments 89 309 232 343 335 Financial services and other segment 126 159 221 233 198 Income taxes (benefit) 100 388 258 108 (92) Cash dividends declared 55 55 53 108 108 Per share 1.40 1.40 1.40 2.82 2.82 - --------------------------------------------------------------------------------------------- Balance Sheet Information Receivables and property on lease $ 2,912 $ 2,866 $ 3,234 $ 4,144 $ 4,372 Contracts in process and inventories 5,774 7,230 7,273 6,175 5,103 Property, plant and equipment 1,750 1,991 2,307 2,446 2,474 Total assets 12,026 13,781 14,601 14,692 13,160 Notes payable and long-term debt: Aerospace segments 1,625 2,767 2,324 2,944 2,558 Financial services and other segment 1,513 1,474 1,891 2,614 2,338 Shareholders' equity 3,413 3,022 3,877 3,514 3,287 Per share 86.80 77.10 100.99 91.72 85.88 Debt-to-equity ratios: Aerospace segments .52 1.01 .66 .95 .87 Financial services and other segment 5.22 5.42 5.25 6.55 6.82 - -----------------------------------------------------------------------------------------------
69 Exhibit 13 Ten Year Consolidated Financial Summary (cont.) - ----------------------------------------------------------------------------------------------- (Dollar amounts in millions, except per share data)
- ----------------------------------------------------------------------------------------------- December 31 or Years Then Ended 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------- General Information Shares outstanding (in millions) 39.3 39.2 38.4 38.3 38.3 Shareholders of record 28,513 34,124 35,039 37,662 33,237 Personnel 70,016 87,377 109,123 121,190 127,926 Salaries and wages $ 3,464 $ 4,258 $ 4,905 $ 5,300 $ 4,969 Firm backlog $19,379 $24,052 $ 30,448 $ 36,544 $ 32,531 Total backlog $35,698 $41,806 $ 42,577 $ 52,770 $ 50,230 (a) Includes a gain of $676 million ($17.40 per share) from a postretirement benefit curtailment relating to SFAS No. 106. (b) Includes a net charge of $860 million ($22.13 per share) related to the initial adoption and subsequent curtailment gain associated with SFAS No. 106. (c) Includes $376 million earnings ($9.82 per share) from pension settlement. (d) Includes earnings from the cumulative effect of an accounting change of $179 million ($4.68 per share).
Total backlog includes firm backlog plus (i) U.S. and other government orders not yet funded, (ii) U.S. and other government orders being negotiated as continuations of authorized programs and (iii) unearned price escalation on firm commercial aircraft orders. Backlog is that of the aerospace segments only and includes all but a minor portion of the work to be performed under long-term contracts. Customer options and products produced for short-term lease are excluded from backlog. In 1993, MDC reclassified certain income and expense related to an executive life insurance program to general and administrative expenses. These items were previously reflected as revenues and interest expense. Prior years have been restated to conform with the 1993 presentation. 70 Exhibit 13 [HARD COPY PG. 54-55 cont.] Ten Year Consolidated Financial Summary - ----------------------------------------------------------------------------------------------- (Dollar amounts in millions, except per share data)
- ----------------------------------------------------------------------------------------------- December 31 or Years Then Ended 1988 1987 1986 1985 1984 - ----------------------------------------------------------------------------------------------- Summary of Operations Revenues by industry segment: Military aircraft $ 7,426 $ 7,144 $ 7,049 $ 6,930 $ 5,953 Commercial aircraft 3,499 2,728 2,493 1,903 1,558 Missiles, space and electronic systems 2,390 2,176 2,040 1,681 1,420 Financial services and other 465 387 317 242 198 -------------------------------------------------------- Operating revenues 13,780 12,435 11,899 10,756 9,129 Earnings (loss) from continuing operations 407 347 312 398 342 Per share 10.62 8.60 7.73 9.90 8.51 Net earnings (loss) 350 313 277 346 325 Per share 9.13 7.75 6.86 8.60 8.10 As a % of revenues 2.5% 2.5% 2.3% 3.2% 3.6% As a % of beginning equity 11.8% 11.0% 10.5% 14.8% 15.7% Research and development 520 567 449 376 326 Interest expense: Aerospace segments 173 109 95 89 57 Financial services and other segment 145 113 105 99 84 Income taxes (benefit) 184 164 242 257 157 Cash dividends declared 98 94 84 74 65 Per share 2.56 2.32 2.08 1.84 1.62 - --------------------------------------------------------------------------------------------- Balance Sheet Information Receivables and property on lease $ 3,745 $ 3,227 $ 2,999 $ 2,638 $ 2,295 Contracts in process and inventories 4,207 3,673 3,154 2,925 2,470 Property, plant and equipment 2,242 2,002 1,700 1,350 1,114 Total assets 11,562 10,327 9,233 8,318 7,081 Notes payable and long-term debt: Aerospace segments 1,840 1,596 927 936 689 Financial services and other segment 1,770 1,464 1,096 899 785 Shareholders' equity 3,186 2,970 2,845 2,635 2,344 Per share 83.42 76.71 70.13 65.34 58.55 Debt-to-equity ratios: Aerospace segments .64 .59 .35 .38 .32 Financial services and other segment 5.92 5.25 4.72 5.08 4.82 - -----------------------------------------------------------------------------------------------
71 Exhibit 13 Ten Year Consolidated Financial Summary (cont.) - ----------------------------------------------------------------------------------------------- (Dollar amounts in millions, except per share data)
- ----------------------------------------------------------------------------------------------- December 31 or Years Then Ended 1988 1987 1986 1985 1984 - ----------------------------------------------------------------------------------------------- General Information Shares outstanding (in millions) 38.2 38.7 40.6 40.3 40.0 Shareholders of record 34,310 35,354 37,525 38,959 40,534 Personnel 121,421 112,400 105,696 97,067 88,391 Salaries and wages $ 4,399 $ 3,913 $ 3,561 $ 3,057 $ 2,648 Firm backlog $26,351 $ 18,890 $ 16,512 $ 16,585 $ 14,968 Total backlog $40,492 $ 33,102 $ 28,419 $ 23,914 $ 22,460
Supplemental Information Quarterly Common Stock Prices and Dividends The range of market prices for a share of MDC Common Stock is shown below, by quarters for 1993 and 1992. Prices are as reported in the consolidated transaction reporting system. - ------------------------------------------------------------ 1993 1992 - ------------------------------------------------------------ Quarter High Low High Low 1st $67-3/4 $47-7/8 $78 $57-3/4 2nd 74-3/4 54-1/2 62-5/8 36-3/8 3rd 90-7/8 67-3/8 44-1/8 34-1/2 4th 118-3/8 88-1/8 57-1/2 34-1/4 Cash dividends of $.35 a share were declared for each quarter in 1993 and 1992. The number of holders of MDC common stock at January 31, 1994 was 27,628. 72 Exhibit 13 [HARD COPY PG. 55] Annual Report on Form 10-K Shareholders may obtain a copy of MDC's or MDFC's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission by writing Shareholder Services Department, Mailcode 1001240, McDonnell Douglas Corporation, P.O. Box 516, St. Louis, MO 63166-0516. Transfer Agent and Registrar Correspondence and questions concerning shareholder accounts, payment of dividends, or transfer of stock should be addressed to: First Chicago Trust Company, Attn: Shareholder Relations Department, 30 W. Broadway, New York, NY 10007. Stock Exchanges McDonnell Douglas Corporation's Common Stock is listed on the New York Stock and Pacific Stock Exchanges (ticker symbol MD) and is traded on these and other exchanges. It is commonly abbreviated in market reports as "McDnD". [HARD COPY PG. 56] Supplemental Information (continued) (Dollar amounts in millions, except per share data) Quarterly Results of Operations The tables below present unaudited quarterly financial information for the years ended December 31, 1993 and 1992. Gross margin is net of interest expense of the financial services and other segment. The sum of the 1992 quarterly earnings per share does not equal the 1992 annual earnings per share due to the significant earnings impact in the first and fourth quarters of 1992 relating to the adoption of SFAS No. 106 concurrent with increasing shares outstanding during the year. 73 Exhibit 13
1993 - ------------------------------------------------------------ Quarter 1st 2nd 3rd 4th - ------------------------------------------------------------ Revenues $3,617 $3,810 $3,428 $3,632 Gross margin 469 495 447 128 Earnings (loss) from continuing operations 179 170 142 (132) Net earnings(loss) 216 170 142 (132) Earnings (loss) per share 5.51 4.33 3.62 (3.36) 1992 - ------------------------------------------------------------ Quarter 1st 2nd 3rd 4th - ------------------------------------------------------------ Revenues $4,058 $4,799 $3,888 $4,620 Gross margin 426 420 254 539 Earnings (loss) from continuing operations 20 5 (83) 756 ** Net earnings (loss) (1,512)* 11 (42) 762 ** Earnings (loss) per share (39.29)* 0.29 (1.09) 19.46 ** * Includes the cumulative effect of an accounting change of $1.536 billion or $39.91 per share. ** Includes postretirement benefit curtailment gain of $676 or $17.26 per share.
Quarterly revenues and gross margin for 1992 and the first three quarters of 1993 have been restated for the reclassification of certain income and expense related to an executive life insurance program to general and administrative expenses. These items were previously reflected as revenues or interest expense. 74 Exhibit 13
1993 -------------------------------------------------------------- Quarter 1st 2nd 3rd -------------------------------------------------------------- Revenues as previously reported $3,620 $3,817 $3,436 Reclassification (3) (7) (8) ------ -------- ------- Revenues as restated $3,617 $3,810 $3,428 =============================================================== Gross margin as previously reported $472 $502 $455 Reclassification (3) (7) (8) ----- ----- ----- Gross margin as restated $469 $495 $447 ================================================================
1992 -------------------------------------------------------------------- Quarter 1st 2nd 3rd 4th -------------------------------------------------------------------- Revenues as previously reported $4,061 $4,803 $3,893 $4,627 Reclassification (3) (4) (5) (7) ------ ------ ------ ------ Revenues as restated $4,058 $4,799 $3,888 $4,620 ===================================================================== Gross margin as previously reported $429 $424 $259 $546 Reclassification (3) (4) (5) (7) ----- ----- ----- ----- Gross margin as restated $426 $420 $254 $539 ======================================================================
75 Exhibit 13 ANNUAL REPORT APPENDIX DESCRIPTION OF GRAPHIC MATERIAL OF THE COMPANY'S 1993 ANNUAL REPORT Hard Copy Page 6 (Full-page photo: An MDC Field Representative discussing C-17 operations with two U.S. Air Force representatives -- C-17 tail in the background.) Hard Copy Page 7 (Top photo: Integrated Management Information and Control System Team consisting of 16 MDC employees who were 1993 Spirit of Excellence Award winners. Quote relating to photo: The philosophy behind IMICS is open communication. "Everybody gets the same data at the same time -- no exceptions!") (Bottom photo: Artist concept of the F/A-18 E/F Hornet.) Hard Copy Page 8 (Photo: Two F/A-18 Hornets.) Hard Copy Page 9 (Photo: C-17 Globemaster III.) Hard Copy Page 10 (Top photo: AH-64D Longbow Apache.) (Bottom photo: AV-8B Harrier II Plus.) (Chart: Two bar graphs depicting the five-year history of Military Aircraft Segment Revenues and Operating Earnings.) Hard Copy Page 11 (Top photo: F-15E Eagle.) (Middle photo: T-45 Goshawk.) (Bottom photo: MD 520N.) Hard Copy Page 12 (Full-page photo: Three MD-80 employees in a discussion on the production floor.) 76 Exhibit 13 Hard Copy Page 13 (Top photo: MD-11 Fuel Team consisting of 9 MDC employees who were 1993 Spirit of Excellence Award winners. Quote relating to photo: "We investigated anything that came up and we would trace problems to the root cause.") (Bottom photo: MD-11 trijet.) Hard Copy Page 14 (Chart: Two bar graphs depicting the five-year history of Commercial Aircraft Market Share of Boeing, Airbus, MDC and Other for Seats Delivered and Firm Backlog.) (Photo: Six MD-80's on Douglas Aircraft Company's flight ramp.) Hard Copy Page 15 (Photo: MD-90.) (Chart: Two bar graphs depicting the five-year history of Commercial Aircraft Segment Revenues and Operating Earnings.) Hard Copy Page 16 (Full-page photo: Three Delta Advanced Launch Control System engineers in a discussion.) Hard Copy Page 17 (Top photo: Delta Propulsion Engineering Team consisting of 7 MDC employees who were 1993 Spirit of Excellence Award winners. Quote relating to photo: "We go out of our way to make sure the customer is satisfied, and that starts with a great deal of openness.") (Bottom photo: Delta Clipper Experimental.) Hard Copy Page 18 (Chart: Two bar graphs depicting the five-year history of Missiles, Space & Electronics Systems Segment Revenues and Operating Earnings.) (Photo: Harpoon missile.) Hard Copy Page 19 (Photo: Tomahawk Cruise Missile.) Hard Copy Page 20 (Chart: Two bar graphs depicting the five-year history of Financial Services and Other Segment Revenues and Operating Earnings.) EX-21 8 SUBSIDIARIES 1 Exhibit 21 MCDONNELL DOUGLAS CORPORATION SUBSIDIARIES (1)
State of Company Incorporation Business Name ------- ------------- -------------- McDonnell Douglas Financial Delaware McDonnell Douglas Financial Services Corporation (2) Services Corporation or MDFS McDonnell Douglas Finance Delaware McDonnell Douglas Finance Corporation (3) Corporation or MDFC McDonnell Douglas Helicopter Delaware McDonnell Douglas Helicopter Company Company (MDHC) or McDonnell Douglas Helicopter Systems (MDHS) (1) All other subsidiaries have been omitted from this listing, as considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. (2) A consolidated subsidiary meeting the test as a significant subsidiary. (3) A consolidated subsidiary of McDonnell Douglas Financial Services Corporation meeting the test as a significant subsidiary.
EX-23 9 AUDITORS CONSENTS 1 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference of our report dated January 18, 1994 on the consolidated financial statements and schedules of McDonnell Douglas Corporation and subsidiaries incorporated by reference in the annual report on Form 10-K of McDonnell Douglas Corporation for the year ended December 31, 1993 in the following filings: - -- Registration Statement File Numbers 33-34326 (filed April 11,1990) and 33-50063 (filed August 23, 1993) on Form S-8, Employee Savings Plan of McDonnell Douglas Corporation - Salaried Plan. - -- Post Effective Amendment Number 7 to Registration Statement File Number 2-76396 on Form S-8, Employee Savings Plan of McDonnell Douglas Corporation - Component Plan, filed April 4, 1988. - -- Registration Statement File Numbers 33-40207 (filed April 29, 1991) and 33-50059 (filed August 23, 1993) on Form S-8, Employee Thrift Plan of McDonnell Douglas Corporation - Subsidiary Plan. - -- Post Effective Amendment Number 1 to Registration Statement File Number 33-11144 on Form S-8, Employee Thrift Plan of McDonnell Douglas Corporation - Hourly Plan, filed April 29, 1988. - -- Post Effective Amendment Number 2 to Registration Statement File Number 33-13342 on Form S-8 (which pursuant to Rule 429, also constitutes Post Effective Amendment Number 10 to S-8 Registration Statement File Number 2-64039), Incentive Award Plan, Incentive Compensation Plan and Non-Qualified Stock Option Plan, filed April 28, 1989. - -- Registration Statement File Numbers 33-40205 (filed April 29, 1991) and 33-50057 (filed August 23, 1993) on Form S-8, Employee Investment Plan of McDonnell Douglas Corporation - Hourly West Plan. - -- Registration Statement File Numbers 33-40206 (filed April 29, 1991) and 33-50055 (filed August 23, 1993) on Form S-8, Employee Investment Plan of McDonnell Douglas Corporation - Hourly East Plan. - -- Registration Statement File Numbers 33-26542 (filed January 13, 1989) and 33-50061 (filed August 23, 1993) on Form S-8, McDonnell Douglas Helicopter Company Savings Plan for Hourly Employees. - -- Registration Statement File Number 33-36180 on Form S-3, McDonnell Douglas Corporation Senior Debt Securities, filed August 1, 1990 and Amendment No. 1 thereto filed March 5, 1992. /s/ Ernst & Young St. Louis, Missouri March 21, 1994 2 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 Number 2-76396, Post Effective Amendment Number 7) pertaining to the Employee Savings Plan of McDonnell Douglas Corporation - Component Plan, of our report dated March 4, 1994, with respect to the financial statements and Schedule I - Assets Held for Investment of the McDonnell Douglas Corporation - Master Savings Trust of the Employee Savings Plan of McDonnell Douglas Corporation - Component Plan included in this Annual Report (Form 11-K) for the fiscal year ended November 28, 1993. /s/ Ernst & Young St. Louis, Missouri March 21, 1994 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 Numbers 33-40207 and 33-50059) pertaining to the Employee Thrift Plan of McDonnell Douglas Corporation - Subsidiary Plan, of our report dated March 4, 1994, with respect to the financial statements and Schedule I - Assets Held for Investment of the McDonnell Douglas Corporation - Master Savings Trust of the Employee Thrift Plan of McDonnell Douglas Corporation - Subsidiary Plan included in this Annual Report (Form 11-K) for the fiscal year ended November 28, 1993. /s/ Ernst & Young St. Louis, Missouri March 21, 1994 3 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 Number 33-11144, Post Effective Amendment Number 1) pertaining to the Employee Thrift Plan of McDonnell Douglas Corporation - Hourly Plan, of our report dated March 4, 1994, with respect to the financial statements and Schedule I - Assets Held for Investment of the McDonnell Douglas Corporation - Master Savings Trust of the Employee Thrift Plan of McDonnell Douglas Corporation - Hourly Plan included in this Annual Report (Form 11- K) for the fiscal year ended November 28, 1993. /s/ Ernst & Young St. Louis, Missouri March 21, 1994 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 Numbers 33-26542 and 33-50061) pertaining to the McDonnell Douglas Helicopter Company Savings Plan for Hourly Employees, of our report dated March 4, 1994, with respect to the financial statements and Schedule I - Assets Held for Investment of the McDonnell Douglas Corporation - Master Savings Trust of the McDonnell Douglas Helicopter Company Savings Plan for Hourly Employees included in this Annual Report (Form 11-K) for the fiscal year ended November 28, 1993. /s/ Ernst & Young St. Louis, Missouri March 21, 1994 4 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 Numbers 33-40205 and 33-50057) pertaining to the Employee Investment Plan of McDonnell Douglas Corporation - Hourly West Plan, of our report dated March 4, 1994, with respect to the financial statements and Schedule I - Assets Held for Investment of the McDonnell Douglas Corporation - Master Savings Trust of the Employee Investment Plan of McDonnell Douglas Corporation - Hourly West Plan included in this Annual Report (Form 11-K) for the fiscal year ended November 28, 1993. /s/ Ernst & Young St. Louis, Missouri March 21, 1994 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 Numbers 33-34326 and 33-50063) pertaining to the Employee Savings Plan of McDonnell Douglas Corporation - Salaried Plan, of our report dated March 4, 1994, with respect to the financial statements and Schedule I - Assets Held for Investment of the McDonnell Douglas Corporation - Master Savings Trust of the Employee Savings Plan of McDonnell Douglas Corporation - - Salaried Plan included in this Annual Report (Form 11-K) for the fiscal year ended November 28, 1993. /s/ Ernst & Young St. Louis, Missouri March 21, 1994 5 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 Numbers 33-40206 and 33-50055) pertaining to the Employee Investment Plan of McDonnell Douglas Corporation - Hourly East Plan, of our report dated March 4, 1994, with respect to the financial statements and Schedule I - Assets Held for Investment of the McDonnell Douglas Corporation - Master Savings Trust of the Employee Investment Plan of McDonnell Douglas Corporation - Hourly East Plan included in this Annual Report (Form 11-K) for the fiscal year ended November 28, 1993. /s/ Ernst & Young St. Louis, Missouri March 21, 1994 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10- K) of McDonnell Douglas Corporation and subsidiaries of our report dated January 18, 1994, included in the 1993 Annual Report to Shareholders of McDonnell Douglas Corporation and subsidiaries. /s/ Ernst & Young St. Louis, Missouri March 21, 1994 EX-24 10 POWER OF ATTORNEY 1 Exhibit 24 POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below does hereby constitute and appoint F. Mark Kuhlmann and Steven N. Frank and each of them, acting severally, his true and lawful attorneys and agents to execute, in his or her name, place and stead (whether on behalf of McDonnell Douglas Corporation, as an officer or director thereof, or otherwise) McDonnell Douglas Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, and any and all amendments thereto, and to file the same with all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys and agents may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have duly executed this power of attorney as of the 22 day of March, 1994. /s/ John F. McDonnell /s/ Julian B. Goodman - ----------------------------- ---------------------------- John F. McDonnell Julian B. Goodman /s/ John H. Biggs /s/ William S. Kanaga - ----------------------------- ----------------------------- John H. Biggs William S. Kanaga /s/ B. A. Bridgewater, Jr. /s/ James S. McDonnell III - -------------------------- ----------------------------- B. A. Bridgewater, Jr. James S. McDonnell III /s/ Beverly B. Byron /s/ Sanford N. McDonnell - -------------------------- ----------------------------- Beverly B. Byron Sanford N. McDonnell /s/ William E. Cornelius /s/ George A. Schaefer - -------------------------- ------------------------------ William E. Cornelius George A. Schaefer /s/ William H. Danforth /s/ Herbert J. Lanese - -------------------------- ------------------------------ Willam H. Danforth Herbert J. Lanese /s/ Kenneth M. Duberstein - --------------------------- Kenneth M. Duberstein Gerald A. Johnston EX-99.A 11 FORM 11-K 1 Exhibit 99(a) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended November 28, 1993 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: EMPLOYEE SAVINGS PLAN OF MCDONNELL DOUGLAS CORPORATION - SALARIED PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: MCDONNELL DOUGLAS CORPORATION P.O. BOX 516 ST. LOUIS, MISSOURI 63166 Financial Statements and Exhibits ---------------------------------- a. Financial Statements The following financial statements of the Plan, together with the report of Ernst & Young, Independent Auditors, are included herein: Statement of Net Assets Available for Plan Benefits as of November 28, 1993 and November 29, 1992 Statement of Changes in Net Assets Available for Plan Benefits for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 2 Exhibit 99(a) Notes to Financial Statements b. Exhibits The following financial statements and schedule of the McDonnell Douglas Corporation - Master Savings Trust, together with the report of Ernst & Young, Independent Auditors are included herein: Statement of Net Assets as of November 28, 1993 and November 29, 1992 Statement of Changes in Trust Equity for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 Notes to Financial Statements Schedule - Investments in Securities as of November 28, 1993 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrator has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. EMPLOYEE SAVINGS PLAN OF MCDONNELL DOUGLAS CORPORATION-SALARIED PLAN ---------------------------------- (Name of Plan) Date: March 17, 1994 /s/ R. M. Smoski R. M. Smoski, Director, Compensation Administration EX-99.B 12 FORM 11-K 1 Exhibit 99(b) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended November 28, 1993 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: EMPLOYEE SAVINGS PLAN OF MCDONNELL DOUGLAS CORPORATION - COMPONENT PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: MCDONNELL DOUGLAS CORPORATION P.O. BOX 516 ST. LOUIS, MISSOURI 63166 Financial Statements and Exhibits ---------------------------------- a. Financial Statements The following financial statements of the Plan, together with the report of Ernst & Young, Independent Auditors, are included herein: Statement of Net Assets Available for Plan Benefits as of November 28, 1993 and November 29, 1992 Statement of Changes in Net Assets Available for Plan Benefits for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 2 Exhibit 99(b) Notes to Financial Statements b. Exhibits The following financial statements and schedule of the McDonnell Douglas Corporation - Master Savings Trust, together with the report of Ernst & Young, Independent Auditors are included herein: Statement of Net Assets as of November 28, 1993 and November 29, 1992 Statement of Changes in Trust Equity for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 Notes to Financial Statements Schedule - Investments in Securities as of November 28, 1993 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrator has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. EMPLOYEE SAVINGS PLAN OF MCDONNELL DOUGLAS CORPORATION-COMPONENT PLAN ---------------------------------- (Name of Plan) Date: March 17, 1994 /s/ R. M. Smoski R. M. Smoski, Director, Compensation Administration EX-99.C 13 FORM 11-K 1 Exhibit 99(c) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended November 28, 1993 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: EMPLOYEE THRIFT PLAN OF MCDONNELL DOUGLAS CORPORATION - SUBSIDIARY PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: MCDONNELL DOUGLAS CORPORATION P.O. BOX 516 ST. LOUIS, MISSOURI 63166 Financial Statements and Exhibits --------------------------------- a. Financial Statements The following financial statements of the Plan, together with the report of Ernst & Young, Independent Auditors, are included herein: Statement of Net Assets Available for Plan Benefits as of November 28, 1993 and November 29, 1992 Statement of Changes in Net Assets Available for Plan Benefits for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 2 Exhibit 99(c) Notes to Financial Statements b. Exhibits The following financial statements and schedule of the McDonnell Douglas Corporation - Master Savings Trust, together with the report of Ernst & Young, Independent Auditors are included herein: Statement of Net Assets as of November 28, 1993 and November 29, 1992 Statement of Changes in Trust Equity for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 Notes to Financial Statements Schedule - Investments in Securities as of November 28, 1993 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrator has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. EMPLOYEE THRIFT PLAN OF MCDONNELL DOUGLAS CORPORATION-SSUBSIDIARY PLAN ------------------------------------ (Name of Plan) Date: March 17, 1994 /s/ R. M. Smoski R. M. Smoski, Director, Compensation Administration EX-99.D 14 FORM 11-K 1 Exhibit 99(d) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended November 28, 1993 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: EMPLOYEE THRIFT PLAN OF MCDONNELL DOUGLAS CORPORATION - HOURLY PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: MCDONNELL DOUGLAS CORPORATION P.O. BOX 516 ST. LOUIS, MISSOURI 63166 Financial Statements and Exhibits ---------------------------------- a. Financial Statements The following financial statements of the Plan, together with the report of Ernst & Young, Independent Auditors, are included herein: Statement of Net Assets Available for Plan Benefits as of November 28, 1993 and November 29, 1992 Statement of Changes in Net Assets Available for Plan Benefits for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 2 Exhibit 99(d) Notes to Financial Statements b. Exhibits The following financial statements and schedule of the McDonnell Douglas Corporation - Master Savings Trust, together with the report of Ernst & Young, Independent Auditors are included herein: Statement of Net Assets as of November 28, 1993 and November 29, 1992 Statement of Changes in Trust Equity for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 Notes to Financial Statements Schedule - Investments in Securities as of November 28, 1993 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrator has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. EMPLOYEE THRIFT PLAN OF MCDONNELL DOUGLAS CORPORATION-HOURLY PLAN --------------------------------- (Name of Plan) Date: March 17, 1994 /s/ R. M. Smoski R. M. Smoski, Director, Compensation Administration EX-99.E 15 FORM 11-K 1 Exhibit 99(e) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended November 28, 1993 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: MCDONNELL DOUGLAS HELICOPTER COMPANY SAVINGS PLAN FOR HOURLY EMPLOYEES B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: MCDONNELL DOUGLAS CORPORATION P.O. BOX 516 ST. LOUIS, MISSOURI 63166 Financial Statements and Exhibits ---------------------------------- a. Financial Statements The following financial statements of the Plan, together with the report of Ernst & Young, Independent Auditors, are included herein: Statement of Net Assets Available for Plan Benefits as of November 28, 1993 and November 29, 1992 Statement of Changes in Net Assets Available for Plan Benefits for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 2 Exhibit 99(e) Notes to Financial Statements b. Exhibits The following financial statements and schedule of the McDonnell Douglas Corporation - Master Savings Trust, together with the report of Ernst & Young, Independent Auditors are included herein: Statement of Net Assets as of November 28, 1993 and November 29, 1992 Statement of Changes in Trust Equity for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 Notes to Financial Statements Schedule - Investments in Securities as of November 28, 1993 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrator has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. MCDONNELL DOUGLAS HELICOPTER COMPANY SAVINGS PLAN FOR HOURLY EMPLOYEES ------------------------------------ (Name of Plan) Date: March 17, 1994 /s/ R. M. Smoski R. M. Smoski, Director, Compensation Administration EX-99.F 16 FORM 11-K 1 Exhibit 99(f) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended November 28, 1993 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: EMPLOYEE INVESTMENT PLAN OF MCDONNELL DOUGLAS CORPORATION - HOURLY WEST PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: MCDONNELL DOUGLAS CORPORATION P.O. BOX 516 ST. LOUIS, MISSOURI 63166 Financial Statements and Exhibits --------------------------------- a. Financial Statements The following financial statements of the Plan, together with the report of Ernst & Young, Independent Auditors, are included herein: Statement of Net Assets Available for Plan Benefits as of November 28, 1993 and November 29, 1992 Statement of Changes in Net Assets Available for Plan Benefits for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 2 Exhibit 99(f) Notes to Financial Statements b. Exhibits The following financial statements and schedule of the McDonnell Douglas Corporation - Master Savings Trust, together with the report of Ernst & Young, Independent Auditors are included herein: Statement of Net Assets as of November 28, 1993 and November 29, 1992 Statement of Changes in Trust Equity for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 Notes to Financial Statements Schedule - Investments in Securities as of November 28, 1993 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrator has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. EMPLOYEE INVESTMENT PLAN OF MCDONNELL DOUGLAS CORPORATION-HOURLY WEST PLAN -------------------------------------- (Name of Plan) Date: March 17, 1994 /s/ R. M. Smoski R. M. Smoski, Director, Compensation Administration EX-99.G 17 FORM 11-K 1 Exhibit 99(g) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K ANNUAL REPORT Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended November 28, 1993 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: EMPLOYEE INVESTMENT PLAN OF MCDONNELL DOUGLAS CORPORATION - HOURLY EAST PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: MCDONNELL DOUGLAS CORPORATION P.O. BOX 516 ST. LOUIS, MISSOURI 63166 Financial Statements and Exhibits a. Financial Statements The following financial statements of the Plan, together with the report of Ernst & Young, Independent Auditors, are included herein: Statement of Net Assets Available for Plan Benefits as of November 28, 1993 and November 29, 1992 Statement of Changes in Net Assets Available for Plan Benefits for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 2 Exhibit 99(g) Notes to Financial Statements b. Exhibits The following financial statements and schedule of the McDonnell Douglas Corporation - Master Savings Trust, together with the report of Ernst & Young, Independent Auditors are included herein: Statement of Net Assets as of November 28,1993 and November 29, 1992 Statement of Changes in Trust Equity for the fiscal years ended November 28, 1993, November 29, 1992 and November 24, 1991 Notes to Financial Statements Schedule - Investments in Securities as of November 28, 1993 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrator has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. EMPLOYEE INVESTMENT PLAN OF MCDONNELL DOUGLAS CORPORATION-HOURLY EAST PLAN -------------------------------------- (Name of Plan) Date: March 17, 1994 /s/ R. M. Smoski R. M. Smoski, Director, Compensation Administration EX-99.H 18 EARNINGS TO FIXED CHARGES 1 Exhibit 99(h)
MCDONNELL DOUGLAS CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) Years Ended December 31 ------------------------------------------- 1993 1992 1991 1990 1989 ------ ------ ------ ------ ------ EARNINGS Earnings (loss) from continuing operations before income taxes and cumulative effect of accounting change $459 $1,086 $615 $366 ($122) ADD: Interest expense (A) 215 468 453 576 533 Interest factor in rents 39 57 66 64 50 Amortization of capitalized interest 1 2 2 2 2 ------ ------ ------ ------ ------ $714 $1,613 $1,136 $1,008 $463 ====== ====== ====== ====== ====== FIXED CHARGES Interest expense (A) $215 $468 $453 $576 $533 Capitalized interest 2 4 Interest factor in rents 39 57 66 64 50 ------ ------ ------ ------ ------ $256 $525 $519 $640 $587 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.8X 3.1X 2.2X 1.6X .8X(B) ====== ====== ====== ====== ====== (A) Prior year amounts have been restated for the reclassification of interest expense related to an executive life insurance program to general and administrative expenses. (B) For the year ended December 31, 1989, earnings of the Company were inadequate to cover fixed charges. The amount of such deficiency for the period was $124 million.
EX-99 19 COVER LAW DEPARTMENT STEVEN N. FRANK Associate General Counsel & Assistant Secretary (314) 234-8091 March 22, 1994 Securities and Exchange Commission Operations Center Stop 0-7 6432 General Green Way Alexandria, VA 22312 Re: McDonnell Douglas Corporation 1993 Annual Report on Form 10-K Ladies and Gentlemen: On behalf of McDonnell Douglas Corporation, I enclose (via EDGAR transmission) MDC's Annual Report on Form 10-K for the year ended December 31, 1993 for filing pursuant to Section 13 of the Securities Exchange Act of 1934. The company has previously wired $250 to the SEC lockbox in payment of the filing fee. If you have any questions or comments, please call me at (314) 234-8091. Thank you for your assistance Very truly yours, /s/ Steven N. Frank Steven N. Frank -----END PRIVACY-ENHANCED MESSAGE-----