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, 1994
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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
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Commission file number 1-3685
MCDONNELL DOUGLAS CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Maryland 43-0400674
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Post Office Box 516, St. Louis, MO 63166-0516
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(Address of Principal Executive (Zip Code)
Offices)
314-232-0232
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(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
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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
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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. X
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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, 1995: $6.096 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, 1995: 115,578,101 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the 1994 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 28, 1995 are incorporated by reference
into Part III.
Exhibit Index on Page 13
3 Form 10-K Page 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; commercial and military helicopters and ordnance;
missiles; space launch vehicles and space station systems; and defense and
commercial electronics, lasers, sensors, and command, control,
communications, and intelligence systems. 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 and related spare parts.
Through its McDonnell Douglas Financial Services Corporation (MDFS)
subsidiary, the Company is engaged in aircraft financing and commercial
equipment leasing. 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. 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). In
1992, MDC sold all the outstanding stock of TeleCheck Services, Inc. and
in 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 4 through 20, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 24 through 31 of the Company's 1994 Annual Report to
Shareholders, the text portions of which are incorporated herein by this
reference.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information regarding the Company's industry segments is
provided under the caption "Selected Financial Data by Industry Segment" on
page 32 of the Company's 1994 Annual Report to Shareholders, which is
incorporated herein by this reference.
4 Form 10-K Page 3
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 29 through 31 in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
1994 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,
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.
5
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
Form 10-K Page 4
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, 1994 the total employment of the Company, including
subsidiaries, was 65,760.
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 31 in "Management's
Discussion and Analysis of Financial Conditions and Results of Operations"
in the Company's 1994 Annual Report to Shareholders, which is incorporated
herein by this reference.
6
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 $1.393 billion in 1994, $1.126 billion in 1993, and $1.018
billion in 1992. Company-initiated research and development and bid and
proposal work, related to both commercial business and business with the
U.S. Government, amounted to $297 million in 1994, $341 million in 1993,
and $509 million in 1992.
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.
Form 10-K Page 5
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.
Additional information required by this item is included in Note 19,
"U.S. Government and Export Sales" on page 52 of the Company's 1994 Annual
Report to Shareholders, which is incorporated herein by this reference.
7
BACKLOG
The backlog of orders follows:
December 31 1994 1993
Backlog % Backlog %
------- ----- ------- -----
(Dollars in millions)
Firm backlog:
Military aircraft $ 8,340 47.6 $ 7,997 41.3
Commercial aircraft 7,544 43.1 9,172 47.3
Missiles, space and
electronic systems 1,619 9.3 2,210 11.4
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Total Firm Backlog $17,503 100.0 $19,379 100.0
======= ===== ======= =====
Contingent backlog:
Military aircraft $ 8,597 73.3 $10,742 65.8
Commercial aircraft 2,234 19.0 3,059 18.8
Missiles, space and
electronic systems 898 7.7 2,518 15.4
------- ----- ------- -----
Total Contingent Backlog $11,729 100.0 $16,319 100.0
======= ===== ======= =====
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 31 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's 1994 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.
Form 10-K Page 6
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 $4.8 billion at December 31, 1994, and $6.9 billion at
December 31, 1993.
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
8
Business" on page 29 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's 1994 Annual Report to
Shareholders, which is incorporated herein by this reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company at February 28, 1995, were as
follows:
EXECUTIVE AGE POSITIONS AND OFFICES HELD
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Dean C. Borgman 53 McDonnell Douglas Helicopter Systems
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.
Robert L. Brand 57 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.
Laurie A. Broedling 49 MDC Vice President - Human Resources since
February 1995. Associate Administrator for
Continual Improvement of National Aeronautics
and Space Administration 1992-1995. Deputy
Under Secretary of Defense -Total Quality
Management 1990-1992.
John P. Capellupo 60 McDonnell Douglas Aerospace President since
December 1994. MDC Executive Vice President
1992-1994. McDonnell Aircraft Company (MCAIR)
President 1991-1992. DAC Deputy President
1990-1991. MDMSC President 1989-1990.
Stanley Ebner 61 MDC Senior Vice President - Washington
Operations since December 1994. Self-
employed 1990-1994. Senior Vice President-
Government Relations of Northrop Corporation
1979-1990.
Patrick J. Finneran 49 MDC Vice President/General Manager -
Production Aircraft Programs since
January 1995. MDC Vice President/General
Manager AV 8B 1992-1994. MCAIR General
Manager 1992. MCAIR Deputy General Manager
1990-1992.
9 Form 10-K Page 7
Kenneth A. Francis 61 MDC Executive Vice President since August
1992. McDonnell Douglas Space Systems
Company (MDSSC) President 1990-1992. MDSSC
Executive Vice President 1989-1990.
Steven N. Frank 46 MDC Vice President, Associate General Counsel
& Secretary since April 1994. MDC Vice
President, Associate General Counsel &
Assistant Secretary 1992-1994. Partner of
Peper, Martin, Jensen, Maichel & Hetlage
1988-1992.
Robert H. Hood, Jr. 62 DAC President since January 1989.
Donald R. Kozlowski 57 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 46 MDC Senior Vice President - Administration
and General Counsel since April 1994.
MDC Senior Vice President - Administration -
General Counsel and Secretary 1992-1994. MDC
Vice President, General Counsel and Secretary
1991-1992. McDonnell Douglas Systems
Integration President 1989-1991.
Herbert J. Lanese 49 MDC Executive Vice President and Chief
Financial Officer since August 1992.
MDC Senior Vice President - Finance
1989-1992.
James H. MacDonald 58 MDC Senior Vice President - Total Quality
Management since September 1992. MDC Senior
Vice President 1989-1992.
John F. McDonnell 56 MDC Chairman of the Board since September
1994. MDC Chairman and Chief Executive
Officer 1988-1994.
Willard P. Olson 55 MDC Senior Vice President - Space & Defense
Systems since January 1995. MDC Vice
President/General Manager - Space & Defense
Systems 1994-1995. MDC Vice President/General
Manager Huntsville 1990-1994. MDSSC Director
Design & Technology 1989-1990.
James F. Palmer 45 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 B. Peterson 50 MDC Vice President/General Manager - Missiles
& Aerospace Support since January 1995. MDC
Vice President/General Manager Cruise Missiles
1994-1995. MDC Vice President/General Manager
Tomahawk Program 1993-1994. MDC Vice President
& Deputy New Aircraft & Missile Products 1992-
1993. MDMSC Vice President Advanced Programs &
Technology 1992. MDMSC Vice President Technology
Division 1991-1992. MDMSC Director Tomahawk
All-Up-Round (Block III) 1986-1991.
Form 10-K Page 8
Michael M. Sears 47 MDC Vice President/General Manager
F/A-18 since January 1994. MDC Vice
President/General Manager F/A-18E/F 1991-1994.
MCAIR Vice President/General Manager New
Aircraft Products Division 1990-1991.
James M. Sinnett 55 MDC Senior Vice President - New Aircraft &
Missile Products since December 1993. MDC Vice
President/General Manager New Aircraft Products
Division 1991-1993. MCAIR Vice President/
General Manager ATF 1990-1991.
Harry C. Stonecipher 58 MDC President and Chief Executive Officer
since September 1994. Chairman of the Board,
President and Chief Executive Officer of
Sundstrand Corporation 1991-1994. President
and Chief Executive Officer of Sundstrand
Corporation 1989-1991.
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 Laurie A.
Broedling, Stanley Ebner, Steven N. Frank, James F. Palmer and Harry C.
Stonecipher. 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, except for Harry C. Stonecipher, who is party to an
employment agreement attached hereto as Exhibit 10(h). A summary of a
proposed amendment to Mr. Stonecipher's employment agreement appears on
page 24 of the Company's definitive Proxy Statement for 1995 which is
incorporated herein by the reference contained on page 10 hereof.
11
ITEM 2. PROPERTIES
At December 31, 1994 the Company's manufacturing, laboratory, office
and warehouse areas totaled 37.1 million square feet, of which 6.2 million
square feet were leased. The Company plants are well maintained and in
good operating condition. The Company 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; 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. Leases related to Tulsa, Oklahoma;
Columbus, Ohio; and Culver City, California terminated during 1994.
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.
In early March 1995, the Company announced that in late 1995 it will
close two facilities, one in Titusville, Florida and another in St.
Charles, Missouri, as part of its continuing consolidation of facilities
due to excess capacity throughout the Company. The plant in Titusville
will close after production of Tomahawk cruise missiles for the U.S. Navy
and other operations come to an end there in August 1995. Operations at
the St. Charles facility, which included production of electrical wire
bundles and ground support equipment for aircraft and missile systems, will
be reassigned to other Company locations.
Form 10-K Page 9
ITEM 3. LEGAL PROCEEDINGS
In 1991, McDonnell Douglas Corporation and General Dynamics (GD) filed
a legal action to contest the Navy's termination for default on the A-12
contract. Additional information relative to this matter and claims filed
with the Navy on the T45 contract is included in Note 5, "Contracts in
Process and Inventories" on page 41 of the Company's 1994 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 1994
Annual Report to Shareholders and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Government Business Audits,
Reviews and Investigations," page 30, which are incorporated herein by this
reference.
12
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 29 sites. Of these,
MDC believes that it has de minimis liability at 19 sites, including 14
sites at which it believes that it has no future liability. At eight of
the 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. At the two remaining sites, MDC
lacks sufficient information to determine its probable share or amount of
liability. 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 $42 million for
study and remediation expenditures at Superfund sites and MDC's current and
former operating sites, of which $27 million is accrued at December 31,
1994. Claims for recovery have not been netted against the disclosed
environmental liabilities. While ongoing litigation may eventually result
in recovery of costs expended at certain of the waste sites, any gain is
contingent upon a successful outcome and has not been accrued.
On August 2, 1994 MDC received notice of a complaint filed by the Long
Beach, California City Prosecutor against MDC in the Long Beach Municipal
Court arising out of a spill of jet fuel in March 1994 to the storm sewer
system at the Douglas Aircraft facility in Long Beach. This complaint
alleges violations of state law for: disposal of hazardous waste without a
permit; discharge of a water pollutant without providing the proper report;
discharging oil to marine waters; failure to immediately report the spill;
permitting petroleum to pass into waters of the state; and discharging a
substance deleterious to wildlife. The complaint seeks statutory
penalties. On December 24, 1994 a jet fuel spill to the storm sewer system
at the Douglas Aircraft facility in Long Beach occurred. The South Coast
Air Quality Management District has issued a notice of violation alleging
creation of a nuisance and failure to obtain a permit for an oil/water
separator involved in the spill. No penalty has been proposed. No charges
have been filed respecting the December 24 spill. Settlement negotiations
are in progress as to both events. Resolution of these matters is not
expected to have a materially adverse effect on MDC's financial position,
results of operations, or cash flow.
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, results of operations, or cash flow.
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.
13 Form 10-K Page 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 45, 46 and 55 of
the Company's 1994 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, 1994,
consisting of the data under the captions "Summary of Operations" and
"Balance Sheet Information" are included at page 54 of the Company's 1994
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 31 of the 1994 Annual Report
to Shareholders, and under the captions "Military Aircraft," "Commercial
Aircraft" and "Missiles, Space and Electronic Systems" on pages 4 through
19 of the 1994 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 32 through
53, and on page 56 of the 1994 Annual Report to Shareholders, which are
incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
This item is not applicable.
14
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
1995 pursuant to Regulation 14A, to be filed with the Commission within 120
days after the close of the fiscal year ended December 31, 1994, 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 1995, 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.
Form 10-K Page 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 1994 Annual
Report to Shareholders at the pages indicated, are incorporated
herein by this reference:
Report of Ernst & Young LLP, Independent Auditors, page 53.
Consolidated Statement of Operations, years ended December 31,
1994, 1993, and 1992, page 33.
Balance Sheet, December 31, 1994 and 1993, page 34.
Consolidated Statement of Shareholders' Equity, years ended
December 31, 1994, 1993, and 1992, page 36.
Consolidated Statement of Cash Flows, years ended December 31,
1994, 1993, and 1992, page 37.
Notes to Consolidated Financial Statements, pages 38 through 52.
Selected Financial Data by Industry Segment, page 32.
Quarterly Results of Operations, page 56.
15
(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 during the fourth quarter of 1994:
Form 8-K filed on November 3, 1994 in response to Item 5.
Form 8-K filed on December 12, 1994 in response to Item 5.
16 Form 10-K Page 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MCDONNELL DOUGLAS CORPORATION
(Registrant)
Date: March 27, 1995 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
--------- ------ -----
/s/ Harry C. Stonecipher Director, President & Chief March 27, 1995
------------------------ Executive Officer
Harry C. Stonecipher (Principal Executive Officer)
/s/ Herbert J. Lanese Executive Vice President and March 27, 1995
---------------------- Chief Financial Officer
Herbert J. Lanese (Principal Financial Officer)
/s/ Robert L. Brand Vice President and Controller March 27, 1995
--------------------- (Principal Accounting Officer)
Robert L. Brand
/s/ John F. McDonnell /s/ Kenneth M. Duberstein
---------------------------------- --------------------------------
John F. McDonnell, Director Kenneth M. Duberstein, Director
/s/ John H. Biggs /s/ William S. Kanaga
---------------------------------- --------------------------------
John H. Biggs, Director William S. Kanaga, Director
/s/ B.A. Bridgewater, Jr. /s/ James S. McDonnell III,
---------------------------------- --------------------------------
B.A. Bridgewater, Jr., Director James S. McDonnell III, Director
/s/ Beverly B. Byron /s/ George A. Schaefer
---------------------------------- --------------------------------
Beverly B. Byron, Director George A. Schaefer, Director
17
/s/ William E. Cornelius /s/ Ronald L. Thompson
---------------------------------- --------------------------------
William E. Cornelius, Director Ronald L. Thompson, Director
/s/ William H. Danforth /s/ P. Roy Vagelos
---------------------------------- --------------------------------
William H. Danforth, Director P. Roy Vagelos, Director
Date: March 27, 1995
18 Form 10-K Page 13
MCDONNELL DOUGLAS CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
3(a) Articles of Restatement of the Incorporated by reference to Exhibit
Company's Charter, as filed 4(b) to the Company's Registration
June 13, 1994. Statement on Form S-8, Commission
File No. 33-56129, filed with the
Commission on October 21, 1994.
3(b) Bylaws of the Company, as amended
October 28, 1994.
4(a) Indenture dated as of September 1, Incorporated by reference to Exhibit
1985 between the Company and The 4(a) to the Company's Registration
Bank of New York as Successor Statement on Form S-3, Commission
Trustee to Citibank, N.A. File No. 33-36180, filed with the
Commission on August 1, 1990.
4(b) First Supplemental Indenture dated Incorporated by reference to Exhibit
as of July 1, 1986 between the 4(b) to the Company's Registration
Company and The Bank of New York as Statement on Form S-3, Commission
Successor Trustee to Citibank, N.A. File No. 33-36180, filed with the
Commission on August 1, 1990.
4(c) Second Supplemental Indenture dated Incorporated by reference to Exhibit
as of April 2, 1992 between the 4(c) to the Company's Annual Report
Company and The Bank of New York as on Form 10-K for the year ended
Successor Trustee to Citibank, N.A. December 31, 1992.
4(d) Agreement of Resignation, Appoint- Incorporated by reference to Exhibit
ment and Acceptance dated as of 4(d) to the Company's Annual Report
May 17, 1993 by and among the on Form 10-K for the year ended
Company, Citibank, N.A., as December 31, 1993.
Resigning Trustee, and The Bank
of New York, as Successor Trustee.
4(e) Form of 8-5/8% Notes due Incorporated by reference to Exhibit
April 1, 1997. 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 Incorporated by reference to Exhibit
April 1, 2002. 4(g) to the Company's Annual Report
on Form 10-K for the year ended
December 31, 1992.
19
4(g) Form of 9-3/4% Debentures due Incorporated by reference to Exhibit
April 1, 2012. 4(h) to the Company's Annual Report on
Form 10-K for the year ended
December 31, 1992.
Form 10-K Page 14
4(h) Form of 8-1/4% Notes due Incorporated by reference to Exhibit
July 1, 2000. 4(h) to the Company's Annual Report on
Form 10-K for the year ended
December 31, 1993.
4(I) Rights Agreement dated as of Incorporated by reference to Exhibits
August 2, 1990 between the 1 and 2 to the Company's Report
Company and First Chicago Trust on Form 8-K filed with the
Company of New York, which includes Commission on August 6, 1990.
as Exhibit B thereto the form of
Rights Certificate.
4(j) Amendment Number One to Rights
Agreement, dated as of
January 3, 1995.
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 to Exhibit
Incentive Award Plan, as amended 10(b) to the Company's Annual Report
and restated as of July 20, 1990. on Form 10-K for the year ended
December 31, 1990.
10(b)* Incentive Compensation Program, Incorporated by reference to Exhibit
as amended and restated as of 10(b) to the Company's Annual Report
March 2, 1992 under the McDonnell on Form 10-K for the year ended
Douglas Corporation Incentive December 31, 1991.
Award Plan.
10(c)* Long-Term Incentive Program, as
amended and restated as of
February 8, 1995 under the
McDonnell Douglas Corporation
Incentive Award Plan.
20
10(d)* McDonnell Douglas Corporation
Performance Sharing Plan, as
amended and restated as of
February 8, 1995.
10(e)* McDonnell Douglas Corporation Incorporated by reference to Exhibit
Deferred Compensation Plan for 10(e) to the Company's Annual Report
Nonemployee Directors. on Form 10-K for the year ended
December 31, 1992.
10(f)* McDonnell Douglas Corporation Incorporated by reference to Exhibit
1994 Performance and Equity 4(a) to the Company's Registration
Incentive Plan. Statement on Form S-8, Commission File
No. 33-56129, filed with the
Commission on October 21, 1994.
Form 10-K Page 15
10(g)* Service Agreement between Incorporated by reference to Exhibit
Kenneth M. Duberstein and 10(f) to the Company's Annual Report
McDonnell Douglas Corporation, on Form 10-K for the year ended
amended as of June 1, 1993. December 31, 1993.
10(h)* Employment Agreement between
Harry C. Stonecipher and McDonnell
Douglas Corporation, dated as of
September 24, 1994.
10(I)* Form of Performance Accelerated
Restricted Stock Award Agreement
(Service-Based Vesting)
10(j)* Form of Performance Accelerated
Restricted Stock Award Agreement
(Performance-Based Vesting)
11 Computation of earnings per share.
13 1994 McDonnell Douglas Corporation
Annual Report to Shareholders,
excluding the "Financial Highlights,"
MDC Chairman/CEO's letter
"To All Shareholders and Teammates,"
"Community Involvement," and
"Directors and Executive Officers."
21 Subsidiaries.
23 Consents of Independent Auditors
regarding incorporation of their
report included in the 1994
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.
21
27 Financial Data Schedule
99 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.
22 Form 10-K Page 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, 1994
are included herein:
Report of Independent Auditors
Schedule II Valuation and Qualifying Accounts
Form 10-K Page 17
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of McDonnell Douglas
Corporation and subsidiaries (MDC) as of December 31, 1994 and 1993, and for
each of the three years in the period ended December 31, 1994, and have
issued our report thereon dated January 17, 1995 (incorporated by reference
elsewhere in this Annual Report on Form 10K). Our audits also included the
financial statement schedule listed in item 14(a) of this Annual Report on
Form 10K. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule 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.
/s/ Ernst & Young LLP
St. Louis, Missouri
January 17, 1995
23 Form 10-K Page 18
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
McDonnell Douglas Corporation
Years Ended December 31, 1994, 1993, and 1992
(Millions of dollars)
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, 1994:
Allowance for commercial
aircraft financing $20 $ $ $10 $10
Allowance for uncollectible
accounts 50 13 13 50
--- --- --- --- ---
$70 $13 $ $23 $60
=== === === === ===
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
=== === === === ===
NOTE: Amounts charged to other accounts are principally reclassifications.
Deductions are principally the write off of uncollectible accounts.
EX-3.B
2
BY-LAWS
1 Exhibit 3(b)
BYLAWS
of
MCDONNELL DOUGLAS CORPORATION
(as amended 28 October 1994)
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 "Corporate 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.
2
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 Chief Executive Officer, 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.
(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.
3
(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 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.
4
(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.
(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.
5
(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. The Chairman, or in his absence, the Chief Executive
Officer, or the President (in the order stated), or in their absence a
member of the Board selected by the members present, shall preside at
meetings of the shareholders. 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.
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.
6
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. At its last meeting before, or first meeting after, the
annual meeting of shareholders, the Board shall elect one of its members
to be Chairman. The Board may elect one or more Vice Chairmen of the
Board. The Chairman and the Vice Chairmen, if any, may but need not be
officers of or employed by the corporation. The Chairman, or in his
absence, the Chief Executive Officer, or the President (in the order
stated), or in their absence a member of the Board selected by the
members present, shall preside at meetings of the Board.
Section 5. 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 6. Special meetings of the Board may be called by the
Chairman, the Chief Executive Officer, the President, or upon written
request of two Directors, the Secretary.
7
Section 7. 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 notice, given personally, or by mail, telecommunications, or
telephone. Any Director may waive any notice required to be given by
these bylaws.
Section 8. 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 9. 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, a Nominating Committee, a Finance Committee, and a
Corporate Responsibility 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 and the Chief
Executive Officer shall be members 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.
8
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.
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
Chief Executive Officer, the President, the Secretary, and the
Treasurer, and may include the Chairman and one or more Vice Chairman 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, a Chief Financial Officer, a Controller, a Tax Officer, and
one or more Assistant Vice Presidents, Assistant Secretaries, Assistant
Treasurers, and Assistant Controllers (hereinafter referred to as
Officers). Any two offices may be held by the same person except the
President may not at the same time also be any form of Vice President,
Secretary, Treasurer or Controller. The Board shall elect the Chief
Executive Officer, 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
President or component President 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). If the Board determines that the
Chairman or any Vice Chairman of the Board shall be officers of the
corporation, the Board shall elect such person and that person shall be
an Elected Officer. Either the Board or the Chief Executive Officer may
appoint any other Officers (Officers other than Elected Officers
hereinafter referred to as Appointed Officers).
9
Section 2. The Chairman, the Vice Chairmen of the Board, if
any, the Chief Executive Officer and, if such person is not also the
Chief Executive Officer, the President, shall each be a member of the
Board. Any Officer may be a member of the Board. Any Officer may be
removed as an officer at any time by the Board in the manner provided by
law. Any Appointed Officer may be removed as an officer at any time by
either the Board or the Chief Executive Officer. A vacancy among the
Elected Officers shall be filled by the Board. A vacancy among the
Appointed Officers shall be filled by either the Board or the Chief
Executive Officer.
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 Chief Executive Officer, or the Management Compensation
and Succession Committee.
Section 5. The Chairman shall lead the Board in fulfilling its
responsibilities as set forth in Section 1 of Article IV and shall also
have such other powers and perform such other duties as may be assigned
by the Board.
Section 6. Each Vice Chairman of the Board shall, subject to the
power of the Board, be accountable to the Chairman and shall perform
such duties as may be assigned by the Board or the Chairman.
Section 7. The Chief Executive Officer shall, subject to the power
of the Board, be the senior officer of the corporation and shall have
general executive responsibility for the conduct of the business and
affairs of the corporation, including responsibility for the
implementation of policies of the corporation as determined by the
Board. The Chief Executive Officer shall also have such other powers
and perform such other duties as may be assigned by the Board.
Section 8. The President shall, subject to the power of the
Board, be accountable to the Chief Executive Officer. The President
shall have such powers and perform such duties as may be assigned by the
Board or the Chief Executive Officer. For the period of any absence or
disability of the Chief Executive Officer, the President shall perform
the duties and, subject to the bylaws, exercise the powers of the Chief
Executive Officer.
Section 9. The other 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 Chief Executive Officer, or the President.
10
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 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.
11
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 Chief Executive
Officer by the Board, shall be submitted for Board review and approval.
Section 2. The Chief Executive Officer can commit the
corporation in all transactions the approval of which is not reserved to
the Board in Section 1 above. The Chief Executive Officer 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 Chief Executive Officer 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.
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.
12
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) in connection 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.
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.J
3
AMENDMENT TO RIGHTS AGREEMENT
1 Exhibit 4(j)
AMENDMENT NUMBER ONE TO RIGHTS AGREEMENT
Reference is made to that certain Rights Agreement, dated as of
August 2, 1990, between MCDONNELL DOUGLAS CORPORATION, a Maryland
corporation (the "Company"), and FIRST CHICAGO TRUST COMPANY OF NEW YORK, a
New York corporation (the "Rights Agent").
W I T N E S S E T H
WHEREAS, on October 28, 1994, the Board of Directors of the
Company authorized and declared a 3-for-1 stock split (the "1994 Stock
Split") to be effected by the payment of a stock dividend of two shares of
the Company's common stock, $1.00 par value ("Common Stock"), on each
outstanding share of Common Stock at the close of business on December 2,
1994; and
WHEREAS, on October 28, 1994, the Board of Directors of the
Company authorized and directed the Company to amend the terms of the
Rights Agreement to (1) extend the Final Expiration Date (as defined in the
Rights Agreement) from August 2, 2000 to December 31, 2004; and (2) change
the Purchase Price (as defined in the Rights Agreement) from $200 to $125
after giving effect to the 1994 Stock Split; and
WHEREAS, the Company desires to make certain conforming changes
and certain other minor amendments to the Rights Agreement to help
eliminate certain ambiguities therein;
NOW, THEREFORE, in consideration of the premises and mutual
agreements herein set forth, the parties hereby agree that the Rights
Agreement is amended as follows:
1. Section 7(a) of the Rights Agreement is hereby amended by
deleting from the last sentence thereof the words "August 2,
2000" and inserting in its place the words "December 31, 2004".
The last sentence of Section 7(a) shall hereafter read as
follows: "The 'Final Expiration Date', as used in this
Agreement, shall be December 31, 2004".
2. Section 7(b) of the Rights Agreement is hereby amended by deleting
from the third line thereof the words "initially be $200" and
inserting in its place the words "be $125". Section 7(b) of the
Rights Agreement shall hereafter read in its entirety as follows:
"(b) The Purchase Price for each one one-hundredth of a share
of Preferred Stock pursuant to the exercise of a Right shall
be $125, shall be subject to adjustment from time to time as
provided in Sections 11 and 13 hereof and shall be payable
in lawful money of the United States of America in
accordance with paragraph (c) below."
2
3. Section 11(p) of the Rights Agreement is hereby amended by adding
the following sentence to the end thereof:
"Notwithstanding clause (y) in the first sentence of this
Section 11(p), the number of one one-hundredths of a share
of Preferred Stock purchasable after the three-for-one stock
split declared by the Board of Directors of the Company on
October 28, 1994, upon proper exercise of each Right, shall
continue to be one. The preceding sentence shall not
operate to eliminate the adjustment provided in clause (y)
in the first sentence of this Section 11(p) with respect to
any event described in such first sentence occurring after
such stock split."
4. Section 3(c) of the Rights Agreement is hereby amended such that
the first sentence of the legend set forth in such section shall
be amended to read in its entirety as follows:
"This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in a Rights Agreement
("Rights Agreement") dated as of August 2, 1990 and amended
as of January 3, 1995, between McDonnell Douglas Corporation
(the "Company") and First Chicago Trust Company of New York
(the "Rights Agent"), the terms of which are incorporated
herein by reference and a copy of which is on file at the
principal executive offices of the Company."
Notwithstanding the foregoing amendment, any certificate of
Common Stock, bearing the legend as previously set forth in the
Rights Agreement, issued prior to the date hereof, shall be valid
in all respects and shall represent the Rights in the same manner
and under the same circumstances as if the proper legend were
inscribed thereon, without any need or requirements for amendment
or change to any such certificate. Any certificate of Common
Stock, bearing the legend as previously set forth in the Rights
Agreement, issued following the date hereof and prior to the time
when certificates of Common Stock bearing the new legend become
available, shall also be valid in all respects and shall
represent the Rights in the same manner and under the same
circumstances as if the proper legend were inscribed thereon,
without any need or requirements for amendment or change to any
such certificate.
5. Exhibit B to the Rights Agreement is hereby amended such that the
first sentence shall read in its entirety as follows:
3
"This certifies that ___________________, or registered
assigns, is the registered owner of the number of Rights set
forth above, each of which entitles the owner thereof,
subject to the terms, provisions and conditions of the
Rights Agreement ("Rights Agreement") dated as of August 2,
1990 and amended as of January 3, 1995, between McDonnell
Douglas Corporation, a Maryland corporation (the "Company")
and First Chicago Trust Company of New York, a New York
corporation (the "Rights Agent"), to purchase from the
Company at any time after the Distribution Date (as such
term is defined in the Rights Agreement) and prior to 5:00
p.m. New York, New York time on the Expiration Date (as such
term is defined in the Rights Agreement) at the shareholder
services office of the Rights Agent, or its successor as
Rights Agent, one one-hundredth of a fully paid,
nonassessable share of the Series A Junior Participating
Preferred Stock, par value $1.00 per share ("Preferred
Stock"), of the Company, at a purchase price of [$125.00]
per one one-hundredth of a share (the "Purchase Price") upon
presentation and surrender of this Rights Certificate with
the Form of Election to Purchase duly executed."
6. (a) Section 11(b) of the Rights Agreement is hereby amended such
that the phrase "multiplied by the then number of one one-
hundredths of a share of Preferred Stock for which a Right is
then exercisable" shall be inserted after the first place the
phrase "Purchase Price" appears in such section.
(b) Section 11(c) of the Rights Agreement is hereby amended such
that the phrase "multiplied by the then number of one one-
hundredths of a share of Preferred Stock for which a Right is
then exercisable" shall be inserted after the first place the
phrase "Purchase Price" appears in such section.
(c) Section 13(a) of the Rights Agreement is hereby amended such
that the phrase "multiplied by the then number of one one-
hundredths of a share of Preferred Stock for which a Right is
then exercisable (or if a Section 11(b) Event has occurred prior
to the first occurrence of a Section 13 Event, multiplying the
number of such one one-hundredths of a share for which a Right
was exercisable immediately prior to the first occurrence of a
Section 11(b) Event by the Purchase Price in effect immediately
prior to such first occurrence)" shall be inserted after the
first place the phrase "Purchase Price" appears in such section.
7. Section 12 of the Rights Agreement is hereby amended such that
clause (c) in the first sentence thereof shall read in its
entirety as follows:
4
"(c) include a brief summary thereof in a mailing to each
holder of a Right Certificate in accordance with Section 26
hereof, or prior to the Distribution Date, disclose a brief
summary in a filing under the Securities Exchange Act of
1934, as amended."
In all other respects, the Rights Agreement shall remain
unchanged and continue in full force and effect in accordance with its
terms, as amended herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
Number One to Rights Agreement to be duly executed as of January 3, 1995.
Attest: MCDONNELL DOUGLAS CORPORATION
/s/ Arthur D. Jordan /s/ Steven N. Frank
--------------------------------------- -------------------------
Name: Arthur D. Jordan Name: Steven N. Frank
Title: Counsel and Assistant Secretary Title: Vice President,
Associate General Counsel
and Secretary
Attest: FIRST CHICAGO TRUST COMPANY OF
NEW YORK
/s/ Joanne Gorostiola /s/ Ralph Persico
--------------------------------------- ---------------------------------
Name: Joanne Gorostiola Name: Ralph Persico
Title: Assistant Vice President Title: Customer Service Officer
EX-10.C
4
LONG-TERM INCENTIVE PLAN
1 Exhibit 10(c)
LONG-TERM INCENTIVE PROGRAM
UNDER THE
MCDONNELL DOUGLAS CORPORATION
INCENTIVE AWARD PLAN
(Amended and Restated February 8, 1995)
1. PURPOSE.
This Long-Term Incentive Program (Program) is established
pursuant to the McDonnell Douglas Corporation (MDC) Incentive Award
Plan (Plan). The purpose of the Program is to reward selected
management employees for extraordinary performance in enhancing MDC
shareholder value over a period of years. This objective will be
accomplished by grant of Target Long-Term Incentive Awards (Target LTI
Awards), all or part of which may be earned based on the total return
on MDC common stock (MDC Stock) relative to the total return on the
common stock of companies in the MDC Peer Group (as defined in Section
2.5). The amount of each Target LTI Award will be based on a
consideration by the Management Compensation and Succession Committee
of the MDC Board of Directors (Committee) of the expected benefit to
MDC shareholders if targeted performance is achieved, the extent to
which the Participant is able to contribute to the success of MDC, the
reasonableness of the Participant's total compensation, compensation
practices within the applicable industry or market, and such other
factors as the Committee deems relevant.
2. DEFINITIONS.
Unless the context clearly indicates otherwise, the following
terms, when used in the Program, will have the meanings set forth in
this Section 2.
2.1. "Award Percent": The percentage of a Target LTI
Award which is earned.
2.2. "Closing Market Price": The composite closing price
of a share of stock as reported for New York Stock Exchange issues
in the Wall Street Journal or, if the New York Stock Exchange is
not the principal trading market for such stock, such other price
as may be determined by the Committee.
2.3. "Earned LTI Award": The portion of a Target LTI
Award which is earned based on the total return on MDC Stock
relative to the total return on common stock of companies in the
MDC Peer Group during the Performance Period.
2.4. "LTI Award" or "Long-Term Incentive Award": An
award granted pursuant to Section 4. Each LTI Award will be
identified by the year in which the applicable Performance Period
begins and the last full calendar year in such Performance Period
(e.g., The LTI Award for the Performance Period beginning in
February 1989 and ending in February 1993 will be identified as The
1989-92 LTI Award).
2
2.5. "MDC Peer Group": A group of companies designated
from time to time by the Committee, initially consisting of The
Boeing Company, General Dynamics Corporation, Lockheed Corporation,
Martin Marietta Corporation, Northrop Corporation, and Rockwell
International Corporation.
2.6. "Participant": A management employee selected by
the Committee to participate in the Program.
2.7. "Performance Period": The period, from 2 to 5
years, beginning on the last trading day of February of the first
year of the period and ending on the next to last trading day of
February of the last year of the period, as determined by the
Committee at the time each Target LTI Award is granted, over which
a Target LTI Award may be earned.
2.8. "Performance Share": A right to receive a share of
MDC Stock, or the cash value thereof, granted pursuant to Section 4.
2.9. "Target LTI Award": An LTI Award which is granted
contingent on MDC Stock yielding a total return superior to the
total return on common stock of the companies in the MDC Peer Group
during the Performance Period.
2.10. "Work Force Adjustment": A termination which is
not for cause but rather is due to a permanent or indefinite
reduction in the work force, including, but not limited to, the
elimination of a Participant's position as a result of facility
closure, discontinuance or relocation of operations, merger,
acquisition, reorganization or sale (includng the sale by MDC of a
business unit, division, product line or functionally related group
of assets).
3. ELIGIBILITY.
Any management employee of MDC or any of its subsidiaries may
participate in the Program if selected as a Participant by the
Committee. Members of the Committee and any other persons whose
participation in the Program would cause disqualification of the
Program or any other benefit plan intended to be qualified under
Securities and Exchange Commission Rule 16b-3 are ineligible to
participate in the Program. In order to participate in the Program,
each Participant must execute and deliver to MDC an "Acknowledgement by
Long-Term Incentive Program Participant" form as provided by MDC.
3
4. LONG-TERM INCENTIVE AWARDS.
4.1. Determination of Target LTI Awards.
The Committee will from time to time, generally in the
first quarter of each year, select Participants, grant Target LTI
Awards denominated in Performance Shares, and determine the
applicable Performance Periods. The Committee will grant each
Target LTI Award contingent on MDC Stock yielding a total return
superior to the total return on the common stock of companies in
the MDC Peer Group during the Performance Period, as specified in
Section 4.2. Target LTI Awards will be advisory only and the
Committee need not grant an Earned LTI Award to each Participant
for whom a Target LTI Award has been established.
4.2. Determination of Earned LTI Awards.
Within 2 months after the end of each Performance Period,
each Participant granted a Target LTI Award for that Performance
Period may be granted an Earned LTI Award ranging from 0% to 100%
of the Target LTI Award. The Award Percent will be based on the
compound total annual return (cash dividends, assumed to be
reinvested in MDC Stock, plus price appreciation or minus price
depreciation) on MDC Stock during the Performance Period relative
to the total return (calculated in a comparable manner) on the
common stock of companies in the MDC Peer Group. The price of MDC
Stock and the common stock of each of the companies in the MDC Peer
Group at the beginning of each Performance Period will be
determined based on the average Closing Market Price during the 10
trading days immediately preceding the Performance Period. The
price of MDC Stock and the common stock of each of the companies in
the MDC Peer Group at the end of each Performance Period will be
determined based on the average Closing Market Price during the
last 10 trading days of the Performance Period. The Award Percent
will be determined on the following basis:
(i) 5%, or such other percentage as may be determined by the
Committee at the time the Target LTI Award is granted,
for each percentage point that the compound total annual
return on MDC Stock exceeds the average of the compound
total annual returns on the common stocks of all of the
companies in the MDC Peer Group, plus
(ii) 5%, or such other percentage as may be determined by the
Committee at the time the Target LTI Award is granted,
for each percentage point that the compound total annual
return on MDC Stock exceeds the average of the three
highest compound total annual returns on the common
stocks of the companies in the MDC Peer Group, plus
4
(iii) 5%, or such other percentage as may be determined by the
Committee at the time the Target LTI Award is granted,
for each percentage point that the compound total annual
return on MDC Stock exceeds the highest compound total
annual return on the common stock of any MDC Peer Group
company.
The aggregate Award Percent may not exceed 100%.
Notwithstanding the foregoing, the Committee may
determine an Award Percent and grant and pay an Earned LTI Award
prior to the end of the applicable Performance Period to any
Participant for whom a Target LTI Award has been established
whenever warranted in the sole judgment of the Committee. In such
event, the Award Percent will be determined by the Committee based
on the portion of the Performance Period elapsed and the extent to
which, in the Committee's judgment, MDC Stock has yielded a total
return superior to the total return on the common stock of the
companies in the MDC Peer Group.
5. PAYMENT OF EARNED LTI AWARDS.
With respect to each LTI Award, the Committee will, within 2
months after the end of the Performance Period, determine the Award
Percent and the Earned LTI Award, if any, and make payment thereof in
shares of MDC Stock or in cash, at the Committee's discretion. If
payment is to be made in cash, the value of each Earned LTI Award will
be determined by multiplying the number of Performance Shares in the
Earned LTI Award (rounded up to the next whole number if the Earned LTI
Award includes a fractional Performance Share) by the average Closing
Market Price of a share of MDC Stock during the last 10 trading days of
the Performance Period. If payment is to be made in MDC Stock, the
Participant will receive one share of MDC Stock for each whole
Performance Share, or fraction thereof, in the Earned LTI Award. The
Committee shall direct that Earned LTI amounts that would not be
deductible because of the compensation cap of Internal Revenue Code
Section 162(m), or any successor provision, shall not be paid, but
instead shall be deferred to future calendar years under such terms and
conditions as the Committee shall determine.
6. TERMINATION OF EMPLOYMENT OR CHANGE IN WORK ASSIGNMENT.
Each Target LTI Award granted pursuant to the Program will be
prorated, unless the Committee determines that the Target LTI Award
should not be reduced, should be rescinded entirely, or should be
reduced in a manner other than a pro rata reduction, for any
Participant if:
5
(i) his employment by MDC or one of its subsidiaries
terminates by reason of death, retirement, or Work
Force Adjustment, or
(ii) his work assignment is altered to the extent he should
(as determined by the Committee) no longer continue as
a Participant.
If either of the above events occurs during the first year of the
Performance Period, the Target LTI Award generally will be rescinded in
its entirety.
No Earned LTI Award will be paid to any Participant whose
employment by MDC or one of its subsidiaries terminates prior to
payment thereof if termination occurs by reason other than death,
retirement, or Work Force Adjustment unless otherwise determined by the
Committee (in which event all or any portion of such Earned LTI Award
may be paid at the discretion of the Committee).
7. DESIGNATION OF BENEFICIARY.
A Participant may by written notice to the Committee designate a
beneficiary to receive any Earned LTI Award payable after his death.
8. ADMINISTRATION OF THE PROGRAM.
The Program is established pursuant to the Plan and is
subordinate in all respects to the terms thereof. Full power and
authority to construe, interpret, and administer the Program will be
vested in the Committee. The Committee will have final and ultimate
authority to make all determinations of matters involving the Program,
including determination of the extent to which a Target LTI Award is
earned based on the relative total return on MDC Stock. In the event
of mergers, acquisitions, divestitures, dissolutions, recapitali-
zations, leveraged buyouts, or changes in business operations or
activities of MDC or any of the companies comprising the MDC Peer
Group, the Committee may change the composition of the MDC Peer Group
retroactive to the beginning of the Performance Period or effective as
of any other date during the Performance Period, and may make
appropriate adjustments to the manner in which the Award Percent is to
be determined. All decisions of the Committee will be final and
binding upon all parties, including MDC and its shareholders and
employees.
The place of administration of the Program will be conclusively
deemed to be within the State of Missouri and the validity,
construction, interpretation, and administration of the Program and of
any determination or decision made hereunder, and the rights of any
person having or claiming to have any interest herein or hereunder,
will be governed by and determined solely in accordance with the laws
of the State of Missouri.
6
9. ADJUSTMENTS TO STOCK.
If shares of MDC Stock or the common stock of any MDC Peer Group
company are changed in number or class by reason of stock dividend,
split-up, combination, merger, consolidation, or recapitalization,
corresponding adjustments will be made in calculating the total return
on MDC Stock or on the common stock of the relevant MDC Peer Group
company and, in the case of a change in shares of MDC Stock, to
outstanding LTI Awards granted pursuant to the Program.
10. TRANSFER OR ASSIGNMENT.
With the exception of transfer by will or by the laws of descent
and distribution, LTI Awards may not be transferred or assigned. No
LTI Award may be made subject to any encumbrance, pledge, or charge of
any kind, except that a Participant may at any time designate a
beneficiary pursuant to Section 7.
11. NO CONTRACT OF EMPLOYMENT.
Nothing in the Program, nor any instrument executed pursuant
hereto, will confer upon any Participant the right to continue in the
employ of MDC or any of its subsidiaries or affect the right of MDC, or
any component thereof, to change any Participant's present or future
rate of compensation or work assignment or to terminate the employment
of any Participant with or without cause. No Participant or any other
person will have any contractual or other right under the Program or
any interest in any specific assets of MDC or any of its subsidiaries
by reason of an LTI Award made pursuant to the Program.
12. CONDITION TO ELIGIBILITY.
It is a continuing condition to eligibility to (i) hold any
Target LTI Award or (ii) be granted or paid any Earned LTI Award, that
a Participant not, directly or indirectly, either before or after
termination of employment, intentionally act in a manner contrary to
the best interests of MDC or any of its subsidiaries or affiliates. If
the Committee determines that a Participant has acted in such a manner,
such Participant will, unless and to the extent otherwise determined by
the Committee, no longer be eligible to (i) hold any Target LTI Award,
or (ii) be granted or paid any Earned LTI Award, as of and after the
date such determination is made, and any such Target LTI Award or
Earned LTI Award will expire as of the date of such determination. No
such determination will affect any Earned LTI Award paid prior to the
date thereof.
13. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PROGRAM.
The Committee may from time to time amend, suspend, or terminate
the Program.
14. EFFECTIVE DATE.
The Program, as amended and restated, is effective as of 8
February 1995.
EX-10.D
5
MDC PERFORMANCE SHARING PLAN
1 Exhibit 10(d)
MCDONNELL DOUGLAS CORPORATION
PERFORMANCE SHARING PLAN
As Amended and Restated
as of 8 February 1995
PLAN TEXT
I. Plan Purpose
The Performance Sharing Plan (PSP) of McDonnell Douglas
Corporation is intended to provide incentives and financial
rewards to the employees of the Company for their contribution to
improving the profitability of the Company.
II. Eligibility and Participation
Any person who is a free enterprise personnel (FEP) employee of
the Company and who is selected by the Committee, in its sole
discretion, may participate.
Part-year Participants shall be eligible for awards calculated pro
rata to the number of days employed during the Compensation Year.
III. Individual Target Awards
Individual PSP Target Awards shall be established by the Committee
for eligible employees. Target Awards will be paid for the
achievement of expected performance as defined by the Committee,
in its sole discretion.
For Participants with a change in compensation during the
Compensation Year, the Individual Target Award shall be prorated
according to the Individual Target Awards applicable during the
Year.
IV. Target Award Pools
Target PSP Award Pools shall be calculated for each of the
Company's Groups equal to the sum of all Individual Target Awards.
V. Award Pools
Separate PSP Award Pools shall be calculated by the Committee for
each Group based on Return on Net Assets, Cash Flow and TQMS
Improvement as the Committee shall determine, in its sole
discretion.
VI. Allocation of the Pools
Eligible employees shall receive a share of their Group's Award
Pool which bears the same relationship as their Individual Target
Award does to their Group's Target Award Pool, adjusted upward or
downward to reflect unit, sub-unit and individual performance.
2
VII. Payments
The distribution of Plan Compensation shall be made in cash by the
end of March following the Compensation Year. The Committee shall
direct that Plan Compensation that would not be deductible because
of the compensation cap of Internal Revenue Code Section 162(m),
or any successor provision, shall not be paid, but instead shall
be deferred to future calendar years under such terms and
conditions as the Committee shall determine.
VIII. Entitlements
General Rule: To receive compensation from this Plan, the
Participant must be an employee of the Company at the time of
payment of Plan Compensation as determined by the Committee, in
its sole discretion. Exceptions to this rule shall be made in the
cases of death, Retirement, Layoff, and Disability as described in
this Section. The Committee may also, in its sole discretion,
permit other exceptions to this rule.
Death, Retirement, Layoff and Disability. If a Participant dies,
retires, is laid off, or becomes disabled during the Compensation
Year, the amount earned shall be prorated and payment made by the
end of March following the Compensation Year. If death,
retirement, layoff or disability occurs after the close of a
Compensation Year, but before payment is made, such event shall
not affect calculations.
IX. Administration
The Committee is authorized and empowered to administer the Plan;
interpret the Plan; prescribe, amend and rescind rules relating to
the Plan; and determine the rights and obligations of Participants
under the Plan. The Committee may delegate certain of these
activities, and all other matters as it solely determines. All
decisions of the Committee shall be final and binding upon all
parties including the Company, its shareholders, and its
participants.
X. Miscellaneous
No Contract or Guarantee of Continued Employment. Eligibility to
participate in the Plan is not a guarantee of continued
employment. The Plan does not constitute a contract of employment
and the Company specifically reserves the right to terminate a
Participant's employment at any time with or without cause and
with or without notice or assigning a reason.
No Guarantee of Plan Compensation. Eligibility to participate in
this Plan does not guarantee the payment of Plan Compensation.
Participants who have accrued rights to Plan Compensation shall be
general creditors of the Company and shall not have any interest
in the income or assets of the Company.
3
Assignments and Transfers. With the exception of transfer by will
or by the laws of descent and distribution, rights under the Plan
may not be transferred or assigned.
Withholding Tax. The Company will deduct from all cash payments
due a Participant, taxes required by law to be withheld with
respect to such payments.
XI. Definitions
Except as otherwise specified or as the context may otherwise
require, the following terms have the meanings indicated below for
the purposes of this Plan:
Board means the Board of Directors of McDonnell Douglas
Corporation.
Committee means the Management Compensation and Succession
Committee of the Board or any such other Committee to which the
Board has delegated the responsibility for administering the Plan.
Cash Flow means pretax profits less the change in net assets (year-
end minus beginning) after adjustments for unusual accounting
items, as determined by the Committee, in its sole discretion.
Company means McDonnell Douglas Corporation (MDC) and its
Subsidiaries and Joint Ventures.
Compensation Year or Year means the fiscal year of the Company.
Disability means disability according to the terms of the Salaried
Long-Term Disability Insurance MDC-East Plan, the Salaried Long-
Term Insurance MDC-West Plan or the Long Term Disability Insurance
Plan for Salaried Employees, (MDHC) as may from time to time be
applicable with respect to the particular Participant.
Group means each of McDonnell Douglas Aerospace (MDA), Douglas
Aircraft Company (DAC) or Corporate Office.
Joint Venture means any partnership designated by the Committee
where the Company maintains 50% or more of the voting securities
of the venture or any such lesser percentage as the Committee may
determine, in its sole discretion.
Layoff means a termination which is not for cause but rather is
due to a permanent or indefinite reduction in the work force,
including, but not limited to, the elimination of a Participant's
position as a result of a facility closure, discontinuance or
relocation of operations, acquisition, reorganization or sale
(including the sale by the Company of a business unit, division,
product line or functionally related group of assets.)
4
Net Assets means average net assets after adjustments for unusual
accounting items, as determined by the Committee, in its sole
discretion.
Operating Income means earnings before interest, taxes and certain
corporate items, and after adjustments for unusual accounting
items, as determined by the Committee, in its sole discretion.
Participant means an eligible Company employee selected for plan
participation in accordance with the procedures set forth in
Section III.
Plan means the 1993 Performance Sharing Plan (PSP) as set forth
herein.
Plan Compensation means the amounts earned for the year as a
consequence of the Plan.
Retirement means retirement according to the terms of the Employee
Retirement Income Plan of McDonnell Douglas Corporation - Salaried
Plan or Defined Contribution Plan, as may be modified from time to
time.
Return on Net Assets (RONA) means Operating Income divided by Net
Assets.
Subsidiary means any corporation designated by the Committee in
which the Company owns an equity interest.
TQMS Improvement means betterment of the Group TQMS-IE scores as
measured through the Malcolm Baldrige National Quality Award
criteria.
XII. Governing Law
The Plan shall be construed, administered and governed in all
respects under and by the applicable internal laws of the State of
Missouri, without giving effect to the principles of conflicts of
law thereof.
XIII. Plan Amendment and Termination
The Company may, in its sole and absolute discretion, amend,
suspend or terminate the Plan at any time, with or without advance
notice to Participants.
XIV. Effective Date of the Plan
This Plan shall be effective as of February 8, 1995.
EX-10.H
6
H. C. STONECIPHER EMPLOYMENT AGREEMENT
1 Exhibit 10(h)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 24th day of
September, 1994 by and between McDonnell Douglas Corporation, a Maryland
corporation (the "Company"), and Harry C. Stonecipher ("Executive").
RECITALS
A. The Company desires to employ Executive as President and Chief
Executive Officer and for Executive to serve as a member of its Board of
Directors.
B. In return for the compensation, bonuses and other consideration
provided for herein, Executive has agreed to become President and Chief
Executive Officer and a member of the Board of Directors of the Company
pursuant to the terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the foregoing, and the
representations, warranties and covenants hereinafter, the parties hereto
agree as follows (the "Agreement"):
1. Employment. At all times during the Employment Period (as
hereinafter defined), Company shall employ Executive in the capacity of
President and Chief Executive Officer. In such capacity, Executive shall
devote his full time and professional efforts to such position, shall be
assigned and undertake only such duties and tasks as are appropriate for a
person in the position of President and Chief Executive Officer, and shall
exercise such authority over all of Company's operations and employees as
is customarily exercised by a President and Chief Executive Officer,
subject to the overall supervision of the Board of Directors of the Company
(the "Board").
2. Employment Period. The term of the Executive's employment
under this Agreement shall commence on September 24, 1994 (the
"Commencement Date") and shall expire, subject to earlier termination of
employment as hereinafter provided, on September 23, 1997 (the "Employment
Period"); provided, however, that on September 23, 1996 and each
anniversary of such date, the Employment Period shall automatically be
extended for an additional one year period unless prior thereto either
party has given written notice to the other that such party does not wish
to extend the term of this Agreement. Notwithstanding any other provision
of this Section 2, in no event shall the Employment Period extend beyond
May 16, 2001.
3. Compensation. Except as otherwise provided for herein,
throughout the Employment Period the Company shall pay or provide Executive
with the following, and Executive shall accept the same, as compensation
for the performance of his undertakings and the services to be rendered by
him throughout the Employment Period under this Agreement:
2
(a) Annual Compensation.
(i) Base Salary: $825,000 per year, to be reviewed
annually by the Management Compensation and Succession Committee
("Compensation Committee") of the Company's Board of Directors, but
Base Salary may not be reduced by the Compensation Committee to a rate
that is less than the highest rate Executive has attained on an
annualized basis unless such reduction is part of a general salary
reduction applied to members of the Company's senior management as a
group.
(ii) Annual Incentive Compensation: $575,000 target
incentive compensation for 1995 pursuant to the terms and conditions
of the Company's Performance Sharing Plan or any successor plan
(collectively "PSP"); this amount is guaranteed for 1995, payable in
1996 first quarter. Thereafter, the amount determined in accordance
with the terms and conditions of PSP as applied for other members of
senior management of the Company.
(iii) 1994 Signing Bonus: $750,000 to $1,000,000 with
the actual amount of this one-time signing bonus within these limits
to be determined by subtracting from the sum of $1,000,000, all other
forms of compensation payable by the Company to Executive in 1994,
which are includable for purposes of calculating Applicable Employee
Remuneration under Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code").
(b) Long Term Incentive Compensation.
(i) Years of Service based Restricted Stock: 60,000
shares of restricted stock with 42,000 shares granted effective as of
the Commencement Date and 18,000 shares granted no later than January
31, 1995 with vesting as follows:
(a) 14,000 shares of the 42,000 shares on March 31,
1995, and an additional 14,000 shares per year in
each of the first quarters of 1996 and 1997.
(b) the remaining 18,000 shares no later than the
end of the first quarter of 2002.
(ii) Performance based Restricted Stock: 40,000 shares
of performance based restricted stock to be granted in equal
installments of 10,000 shares no later than the end of the first
quarter of each of the following years: 1995, 1996, 1997 and 1998.
Vesting, performance periods and other criteria to be the same as
those set for the Chief Executive Officer's award in April 1994, or as
set by the Compensation Committee for other members of senior
management in accordance with the terms and conditions of the
Company's 1994 Performance and Equity Incentive Plan ("PEIP").
3
(iii) Stock Options: Options to purchase 150,000 shares
of the Company's common stock at the fair market value of the
Company's common stock on the Commencement Date, vesting and
exercisable as follows: 30,000 shares per year beginning on the
second anniversary of the Commencement Date, exercisable over a ten-
year period, continuing after Executive's retirement.
(c) All restricted stock and stock options shall be granted
and issued under the terms and conditions of the PEIP (including
agreements to be issued pursuant to the terms thereof), and
Executive's participation thereunder shall continue as long as such
plan remains in effect, with participation on the same basis as other
corporate officers in any future incentive compensation or other bonus
plan covering the Company's executive employees. Notwithstanding the
foregoing, the Long Term Incentive Compensation in Section 3(b) herein
is intended to be the total long term incentive compensation of
Executive during his employment with Company. Additional long term
incentive awards to Executive, if any, will be granted at the sole
discretion of the Compensation Committee. Executive shall also
participate in the Company's other employee benefit plans, policies,
practices and arrangements in which senior Company executives are
presently eligible to participate, or plans and arrangements
substituted therefor or in addition thereto, including without
limitation any defined benefit retirement plan, excess or
supplementary plan, profit sharing plan, savings plan, health and
dental plan, disability plan, survivor income and life insurance plan,
executive financial planning program, or other arrangement (PEIP and
such other benefit plans collectively hereinafter referred to as the
"Benefit Plans").
(d) Paid vacation of no less than four (4) weeks per year in
accordance with the Company's vacation policy as in effect from time
to time, and all paid holidays given by the Company to its executive
officers.
(e) All fringe benefits and perquisites including without
limitation the payment by the Company of initiation fees and dues for
one country club in accordance with the Company's policies presently
in effect.
(f) Moving and relocation expenses incurred by Executive to
move his residence to the world headquarters city of Company,
including third party relocation service for disposal of Executive's
current residence. Any pay-back provision contained in Company's
moving and relocation policy shall not apply to Executive unless he is
terminated for "Cause" as hereinafter defined. Executive shall
receive a lump sum payment in an amount sufficient to reimburse him
for income taxes payable by him as a result of such moving and
relocation expenses and the payment received under this paragraph.
4
(g) The Executive's entitlement to any other compensation or
benefits shall be determined in accordance with the terms and
conditions of this Agreement and the Benefit Plans and other
applicable programs, practices and arrangements then in effect, to the
extent that such plans, programs, practices and arrangements do not
conflict with the terms of this Agreement.
(h) If all or any portion of the payments and benefits
provided to Executive under this Agreement constitute "excess
parachute payments" within the meaning of Section 280G of the Code
that are subject to the tax imposed by Section 4999 of the Code (or
similar tax and/or assessment), the Company (or its successor) shall
make a single lump sum payment to Executive in an amount equal to the
amount necessary to place Executive in the same after-tax position as
he would have been in (taking into account any taxes which would be
payable on such amount including, but not limited to, income taxes)
had no such tax been imposed on such payments and benefits. The
determination of the amount payable to Executive hereunder shall
initially be made, at the Company's expense, by the independent
accounting firm employed by the Company immediately prior to the
occurrence of any change of control of the Company which will result
in the imposition of such tax. If, after such lump sum payment has
been made to Executive, it is determined (pursuant to final
regulations or published rulings of the Internal Revenue Service,
final judgment of a court of competent jurisdiction or otherwise) that
the amount of tax payable by Executive pursuant to Section 4999 of the
Code is greater than the amount of such tax as calculated by the
Company's independent accounting firm and reflected in the lump sum
payment made to Executive as aforesaid, then the Company (or its
successor) shall pay Executive an amount equal to the sum of (i) the
difference between the amount of such tax as initially determined by
such independent accounting firm hereunder and the amount of such tax
which is determined to be payable by Executive, (ii) any interest,
fines and penalties imposed on Executive by any taxing authority due
to any underpayment of such taxes by Executive, plus (iii) the amount
necessary to reimburse Executive for any income, excise or other taxes
which are payable by Executive with respect to the amounts specified
in (i) and (ii) above, and the reimbursement provided for by this
clause (iii).
4. Expenses. During the Employment Period, the Company shall
promptly pay or reimburse Executive for all reasonable out-of-pocket
expenses incurred by Executive in the performance of duties hereunder in
accordance with the Company's policies and procedures then in effect.
5. Conditions of Employment. Throughout the Employment Period,
(a) the Company shall not require or assign duties to Executive which would
require him to have the location of his principal business office or his
principal place of residence other than at the world headquarters of the
Company, (b) the Company shall not require or assign duties to Executive
which would require him to spend more than ninety (90) normal working days
away from his office during any consecutive twelve-month period, (c) the
Company shall provide an office to Executive, the location and furnishings
of which shall be equivalent to the offices provided to other members of
5
the Office of the Chairman of the Company on the date of this Agreement;
and (d) the Company shall provide secretarial services and other
administrative services to Executive which shall be equivalent to the
secretarial services and other administrative services provided to other
members of the Office of the Chairman of the Company on the date of this
Agreement.
6. Termination. In addition to the termination rights in Section
2 of this Agreement, this Agreement shall terminate upon the following
circumstances:
(a) At any time at the election of Company for Cause.
"Cause" for this purpose shall mean (i) Executive committing a
material breach of this Agreement or acts involving moral turpitude,
including fraud, dishonesty, disclosure of confidential information or
the commission of a felony, or direct and deliberate acts constituting
a material breach of his duty of loyalty to Company; (ii) Executive
willfully or continuously refusing to perform the material duties
reasonably assigned to him by the Board which are consistent with the
provisions of this Agreement; or (iii) the inability of Executive to
obtain and maintain appropriate United States security clearances.
(b) At any time at the election of Executive for Good Reason.
"Good Reason" for this purpose shall mean (i) a material breach of
this Agreement by the Company; (ii) the failure of the Executive to
continue to serve as a member of the Company's Board of Directors, or
removal from his position as President and Chief Executive Officer,
other than for Cause; (iii) the assignment to Executive of duties
which are reasonably deemed by Executive not to be appropriate for
someone in the position of President and Chief Executive Officer; (iv)
the Executive's responsibilities hereunder are reasonably deemed by
Executive to be substantially diminished, or any other person shall be
appointed by the Board or the shareholders of Company to a position
equal to or superior to the Executive's position; or (v) the Company
providing written notice to the Executive pursuant to Section 2 hereof
that it does not wish to extend the term of this Agreement.
(c) Executive's death or his being unable to render the
services required to be rendered by him during the Employment Period
for a period of one hundred eighty (180) days during any twelve-month
period ("Disability").
(d) In the event the Company or Executive intend to terminate
this Agreement for Cause or Good Reason, respectively, such
termination may only be accomplished upon compliance with the
following procedures:
(i) The party seeking to terminate the Agreement (the
"Notifying Party") shall provide the other (the "Defaulting Party")
with written notice of its or his belief that Cause or Good Reason, as
the case may be, exists. The parties shall for a period of 30 days
from the date of such notice attempt to resolve to their mutual
satisfaction whether or not Cause or Good Reason exists, and, if so,
the rights and obligations of the parties.
6
(ii) In the event the parties are unable to reach a
mutually acceptable resolution during such 30-day period, the
Notifying Party shall afford the Defaulting Party an additional thirty
(30) days or such longer period as the Notifying Party may determine
to cure the alleged breach.
(iii) In the event the Defaulting Party does not cure
the breach during such 30-day period, the Notifying Party shall be
required to institute an arbitration proceeding to determine whether
Cause or Good Reason, as the case may be, existed and has not been
cured. The arbitration will be conducted in the world headquarters
city of the Company and shall be conducted in accordance with the then
governing rules of the American Arbitration Association.
(iv) This Agreement shall be terminated as of the date
when the Notifying Party institutes an arbitration proceeding in
accordance with subsection (iii) preceding; provided, however, that in
the event Good Reason exists as a result of the application of Section
6(b)(v), no further employment services will be required or expected
of Executive and Executive and Company will coordinate the timing and
press releases of his departure. The sole decision of the arbitrator
in such proceeding shall be to determine whether Cause (if initiated
by Company) or Good Reason (if initiated by Executive) exists.
Thereafter, the obligations of the parties to each other shall be
determined by applying the decision of the arbitrator(s) in accordance
with Exhibit A hereto. In the event the Company does not prevail in
any such proceeding initiated by it for Cause, Executive's termination
shall be deemed to have occurred for Good Reason. In the event
Executive does not prevail in any such proceeding initiated by him for
Good Reason, Executive shall be considered as having voluntarily
terminated employment other than for Good Reason, and his rights under
this Agreement shall be determined as if he had been terminated by
Company for Cause.
(e) Upon expiration or termination of this Agreement under
Section 2 or Section 6 herein, Executive shall be entitled to receive
compensation and other benefits provided for herein in accordance with
Exhibit A hereto. The parties agree that, in the event of termination
by Executive for Good Reason under Section 6, such payments and
benefits shall be deemed to constitute liquidated damages for the
breach of this Agreement by Company.
(f) In the event it is determined by the arbitrator that
Executive has terminated this Agreement for Good Reason, Executive
shall be entitled to receive within 30 days of such determination the
net present value of annual Base Salary and targeted Annual Incentive
Compensation for the remainder of the Employment Period, with targeted
Annual Incentive Compensation being determined for this purpose based
upon the targeted Annual Incentive Compensation for the year of
termination and with net present value calculated by using an interest
rate discount factor of 6.5%. Notwithstanding the foregoing, in the
event the acceleration of any amount payable in accordance with the
preceding sentence would result in such amount not being deductible by
the Company under Section 162(m) of the Code, as currently in effect
7
or as may be hereafter amended, or under any regulations promulgated
thereunder, the non-deductible amount shall be deferred and be paid to
Executive as early as possible in the next year in which the
deductibility of his compensation is not subject to or would not
exceed the limitations of Section 162(m).
7. Covenant Not to Compete. Without the consent of the Company,
Executive shall not directly or indirectly at any time during the
Employment Period (without regard to (i) an earlier termination for Cause
or Good Reason as provided for in Section 6 herein, and (ii) any future
extensions under Section 2 herein; but subject to such longer period as
provided for in Section 9) undertake employment as an owner, director,
partner, officer, employee, affiliate or consultant with any business
entity directly engaged in the manufacture and/or sale of products
competitive with any material product or product line of the Company;
provided, however, that Executive shall not be deemed to have breached this
undertaking if his sole relation with such entity consists of his holding,
directly or indirectly, an equity interest in such entity not greater than
two percent (2%) of such entity's outstanding equity interest so long as
such holding does not exceed 10% of the liquid net worth of Executive. For
purposes hereof, the term "material product or product line of the Company"
shall mean any product or product line of the Company, the gross sales of
which during any calendar year during the five (5) year period preceding
the Executive's undertaking such employment were at least $50 million.
8. Disclosure of Confidential Information. Without the express
written consent of the Company, Executive shall not at any time (either
during or after the termination of this Agreement for any reason) disclose
to any other business entity proprietary or confidential information
concerning the Company or the Company's trade secrets of which Executive
has gained knowledge during his employment with the Company.
9. Effect of Breach of Sections 7 or 8. So long as any restricted
stock grant or stock option provided for in Section 3(b) herein shall not
be vested or shall not have been exercised, the vesting of such shares and
the exercise of such stock options shall each be subject to Executive's
full compliance with the terms and conditions of Section 7 (which shall
continue to apply for this purpose) and Section 8 herein; provided,
however, that any such breach will not have any effect on restricted stock
grants vested or stock options exercised prior to the date of such breach.
Executive further agrees that a breach of Sections 7 or 8 cannot adequately
be compensated by money damages and, therefore, Company shall be entitled,
in addition to any other right or remedy available to it (including, but
not limited to, an action for damages), to an injunction restraining such
breach or a threatened breach and to specific performance of either such
provision, and Executive hereby consents to the issuance of such injunction
and to the ordering of specific performance.
10. Legal Expenses. The Company shall pay to Executive all out-of-
pocket expenses, including reasonable attorneys' fees, incurred by
Executive in connection with any claim or legal action or proceeding
brought under or involving this Agreement, whether brought by Executive or
by or on behalf of the Company or by another party; provided, however, the
Company shall not be obligated to pay to Executive out-of-pocket expense,
8
including attorneys' fees, incurred by Executive in any claim or legal
action or proceeding involving Sections 6, 7, 8 or 9 of this Agreement if
Company prevails in such litigation or arbitration. Company agrees to
reimburse Executive for reasonable attorneys' fees and out-of-pocket
expenses in an amount not to exceed $15,000, which are incurred by him in
the negotiation and preparation of this Agreement.
11. Retirement Plans. Notwithstanding anything stated herein to
the contrary, the benefits and obligations payable to Executive under the
Employee Retirement Income Plan of McDonnell Douglas Corporation - Salaried
Plan ("Pension Plan"), the Supplemental Employee Retirement Income Plan of
McDonnell Douglas Corporation ("Supplemental Pension Plan"), and any other
retirement plan provided by the Company shall not be reduced, offset or
otherwise limited by the Executive's coverage or benefit entitlement
pursuant to any retirement plan provided by any former employer of the
Executive, except as provided in this Section 11. For the purposes of
calculating the Executive's benefits under the Company's retirement plans,
Executive will receive credit for twice as many years of service as he
actually works for the Company with the excess benefit above what the
Pension Plan provides to be paid through the Supplemental Pension Plan. In
addition, Company agrees to provide a supplemental pension payment in an
amount equal to the difference between (i) what Executive would have
received from his current employer had he stayed with such other company
through the end of the Employment Period, or the earlier termination date
of this Agreement if it is terminated by the Company for Cause or as a
result of Executive's death or disability (the "Calculation Period"), and
(ii) the pension payments he is actually entitled to receive from such
other company and the Company (determined without regard to this sentence).
The Calculation Period shall be increased by one year in the event this
Agreement expires on a scheduled expiration date, or if terminated by
Executive for Good Reason. In determining the amount of this supplemental
pension payment, in addition to amounts payable to Executive under the
Company's Pension Plan and Supplemental Pension Plan, the actuarial
equivalent of the value of the Company's matching contributions for
Executive's benefit under its Savings Plan and Supplemental Savings Plan
shall be included. For this purpose, the actuarial assumptions set forth
in the Pension Plan shall be used. In determining amounts which would have
been payable to Executive by his current employer, it will be assumed that
Executive's final average earnings under Executive's current employer's
retirement plans (as reflected in Executive's "Personal Statement of
Benefits" from his current employer dated April 14, 1994) increases at an
annual rate of 4% from January 1, 1995 to the end of the Calculation
Period. Such additional pension amounts payable to Executive shall be made
under the Supplemental Pension Plan.
12. No Mitigation. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise and no such payment shall be offset
or reduced by the amount of any compensation or benefits provided to the
Executive in any subsequent employment.
13. Notices. All notices required or permitted under this
Agreement shall be in writing, may be made by personal delivery or
facsimile transmission, effective on the day of such delivery or receipt of
such transmission, or may be mailed by registered or certified mail,
effective two (2) days after the date of mailing, addressed as follows:
9
to Company: McDonnell Douglas Corporation
Post Office Box 516, Mail Code 100-1240
St. Louis, Missouri 63166-0516
Attention: F. Mark Kuhlmann
Senior Vice President-Administration and
General Counsel
Facsimile number: (314) 777-1007
or such other person or address as designated
in writing to Executive
to Executive at his last known residence address or to such other
addresses as designated by him in writing to Company.
14. Successors. This Agreement may not be assigned by the Company
(other than by merger or operation of law) without the express written
consent of Executive, and the obligations of the Company provided for in
this Agreement shall be binding legal obligations of any successor to the
Company or the principal business of Company by purchase, merger,
consolidation, or otherwise. This Agreement may not be assigned by
Executive during his life, and upon his death will be binding upon and
inure to the benefit of his heirs, legatees and the legal representatives
of his estate.
15. Waiver, Modification and Interpretation. No provisions of
this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in a writing signed by Executive and
an appropriate officer of the Company empowered to sign same by the Board
of Directors of the Company. No waiver by either party at any time of any
breach by the party of, or compliance with, any condition or provision of
this Agreement to be performed by the other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same time or at
any prior to subsequent time. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the
State of Missouri; provided, however, that the corporate law of the state
of incorporation of the Company shall govern issues related to the issuance
of shares of the Company's common stock. Any action brought to enforce or
interpret this Agreement (other than an action arising under Section 6
herein, for which the arbitration procedures provided for therein shall
govern) shall be maintained in the State courts of Missouri or the U.S.
Federal District Court for the Eastern District of Missouri located in St.
Louis, Missouri. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
16. Headings. The headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation
of any provision of this Agreement.
17. Entire Agreement. This Agreement (together with the Exhibit
hereto) constitutes the entire agreement between the parties, supersedes in
all respects any prior agreement between Company and Executive and may not
be changed except by a writing duly executed and delivered by Company and
Executive in the same manner as this Agreement.
10
18. Counterparts. Company and Executive may execute this
Agreement in any number of counterparts, each of which shall be deemed to
be an original but all of which shall constitute but one instrument. In
proving this Agreement, it shall not be necessary to produce or account for
more than one such counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
McDONNELL DOUGLAS CORPORATION
/s/ John F. McDonnell
By: ------------------------------------
John F. McDonnell
Chairman of the Board
Executive:
/s/ Harry C. Stonecipher
By: ------------------------------------
Harry C. Stonecipher
11
EXHIBIT A
EFFECT OF CONTRACT TERMINATION
------------------------------
Reason for Termination
-----------------------
Type of Compensation/
Benefit Base Salary
---------------------------------------------------------------------------
Normal Expiration Date of Payable through Employment Period, as defined
Agreement or Renewal Period in contract (i.e., through end of first 3
years or renewal period).
By Executive for Receives Base Salary for remainder of Employ-
"Good Reason" ment Period, payable in accordance with
Section 6(f) of the Agreement.
By Employer for "Cause" Payable through date of early termination.
Death or Disability (as Payable through end of month in which death
defined in Agreement) or disability occurs.
Type of Compensation/
Benefit Annual Incentive Compensation
---------------------------------------------------------------------------
Normal Expiration Date of Payable through Employment Period; amount
Agreement or Renewal Period determined by Compensation Committee based
on Company's and Executive's performance.
By Executive for Receives targeted incentive compensation for
"Good Reason" remainder of Employment Period (based on
targeted incentive compensation for year of
termination), payable in accordance with
Section 6(f) of the Agreement.
By Employer for "Cause" Amount determined by Compensation Committee
in its sole discretion; would likely be zero.
Death or Disability (as Amount earned (determined by the Compensation
defined in Agreement) Committee based on Company's and Executive's
performance for the year in which death or
disability occurs) will be prorated.
12
Type of Compensation/
Benefit Restricted Stock: Years of Service Shares
---------------------------------------------------------------------------
Normal Expiration Date of Full number of shares without reduction;
Agreement or Renewal Period however, shares vesting in 2002 still subject
to non-compete, non-disclosure provisions
until vesting date.
By Executive for Full number of shares without reduction.
"Good Reason" Shares whose scheduled vesting date has not
occurred will remain subject to non-compete,
non-disclosure provisions until scheduled
vesting date(s).
By Employer for "Cause" Shares not vested as of date of early
termination would be forfeited.
Death or Disability (as Compensation Committee would determine
defined in Agreement) reduction, if any, to the number of
restricted shares; but the number will not
be less than a pro rata amount.
Type of Compensation/
Benefit Restricted Stock: Performance Shares
---------------------------------------------------------------------------
Normal Expiration Date of Pro rata adjustment for each grant to be
Agreement or Renewal Period based on a fraction determined by adding
or By Executive for one year to the number of years Executive
"Good Reason" employed (or would have been employed had
he been employed for remainder of Employment
Period) during the 6-year performance period
of such grant and dividing this sum by 6;
the number of shares vested or forfeited
for each grant would then be determined in
accordance with the performance factors and
other terms and conditions of the plan/
grants; receipt of shares remains subject to
non-compete, non-disclosure provisions until
shares are vested.
By Employer for "Cause" Shares not vested as of date of early
termination would be forfeited.
Death or Disability (as Compensation Committee would determine
defined in Agreement) reduction, if any, to the number of
restricted shares; but the number will
not be less than a pro rata amount.
Shares will then vest or be forfeited
in accordance with terms and conditions
of plan/grants.
13
Type of Compensation/
Benefit Stock Options
--------------------------------------------------------------------------
Normal Expiration Date of Options not vested within one year after end
Agreement or Renewal Period of Employment Period lapse/are cancelled;
options vested as of such date must be
exercised within three years, unless employ-
ment continued to May 16, 2001, in which
event vested options exercisable for
balance of 10-year term; vested but
unexercised options remain subject to non-
compete and non-disclosure provisions prior
to exercise date.
By Executive for Options not vested within one year after end
"Good Reason" of Employment Period lapse/are cancelled;
options scheduled to vest on or prior to that
time will vest as scheduled and must be
exercised within three years from that date;
vested but unexercised options remain subject
to non-compete and non-disclosure provisions
prior to exercise date.
By Employer for "Cause" Unexercised options as of termination date
lapse (whether or not vested).
Death or Disability (as Vested but unexercised options as of date of
defined in Agreement) death/disability remain exercisable for
three years from date of death or disability;
options not vested are cancelled.
Type of Compensation/ Other Employee Benefits
Benefit (including Health Insurance)
---------------------------------------------------------------------------
Normal Expiration Date of Continue through end of Employment Period,
Agreement or Renewal Period subject to legal and contractual rights in
plans to convert or extend coverages.
By Executive for Continue through end of Employment Period,
"Good Reason" subject to legal and contractual rights in
plans to convert or extend coverages.
By Employer for "Cause" Continue through date of early termination,
subject to legal and contractual rights in
plans to convert or extend coverages.
Death or Disability (as Continue through end of month in which death
defined in Agreement) or disability occurs, subject to legal and
contractual rights to convert or extend
coverages.
EX-10.I
7
PERFORMANCE ACCELERATED RESTRICTED STOCK AGMT.
1 Exhibit 10(i)
PERFORMANCE ACCELERATED
RESTRICTED STOCK AWARD AGREEMENT
(Service-Based Vesting)
Agreement made this _____ day of _____, 19__, by and between
McDonnell Douglas Corporation (hereinafter called the "Company") and
___________, (hereinafter called the "Employee").
RECITAL
The Employee is employed by the Company as _______________. The
Company desires to provide equity ownership opportunities and
performance-based incentives to better match the interests of officers
and key employees with those of shareholders. The Employee desires to
receive incentive compensation, the vesting of which will be contingent
upon Employee's continued service to the Company. Accordingly, the
Company has agreed to grant certain of its common shares of the Company
to the Employee subject, however, to certain restrictions.
In consideration of the mutual promises herein contained, the Company
and Employee agree as follows:
1. Agreement Subject to Plan. The Restricted Shares have been
granted under the McDonnell Douglas Corporation 1994 Performance
and Equity Incentive Plan (the "Plan"), a copy of which has been
given to Employee and is incorporated herein by this reference.
This Agreement including the grant of Restricted Shares hereunder
is subject to the terms, conditions and provisions of the Plan.
Unless otherwise indicated, capitalized terms in this Agreement
shall have the same meaning ascribed to such terms in the Plan.
2. Grant of Shares Subject to Restriction and Forfeiture. The
Company hereby grants to Employee _____ Shares (the "Restricted
Shares") subject to the restrictions and conditions contained
herein and in the Plan (collectively, the "Conditions").
Notwithstanding any other provision of this Agreement, if the
Committee determines that at any time prior to the date the
restrictions lapse in accordance with Section 5 hereof, either
before or after termination of employment, Employee has acted in a
manner contrary to the best interests of Company or any Affiliate,
Employee shall forfeit all Restricted Shares for which such
restrictions have not lapsed. As a condition precedent to the
effectiveness of this Agreement, Employee shall execute
appropriate blank stock powers with respect to the Restricted
Shares and deliver such stock powers to the administrator of the
Plan (the "Plan Administrator"). Within one month after the date
the Plan Administrator receives such stock powers, stock
certificates for the Restricted Shares shall be issued (with an
appropriate legend referring to the restrictions included in the
Conditions) and deposited, together with the stock powers with the
Plan Administrator. The Plan Administrator shall issue to the
Employee a receipt evidencing any stock certificates representing
2
the Restricted Shares registered in the Employee's name and held
by the Plan Administrator. The Employee shall be entitled to
delivery of such stock certificate(s) upon satisfaction of the
Conditions and only in accordance with Section 6 hereof. Employee
agrees that the Conditions shall apply to the Restricted Shares
and any shares or other securities which Employee may receive or
be entitled to receive as a result of the ownership of the
Restricted Shares whether the same are issued as a result of a
stock split, stock dividend, spin-off, split-up, spin-out,
recapitalization, merger, consolidation, reorganization,
combination or exchange of shares, or any other similar
transaction, or as a result of the merger or consolidation of the
Company, or sale of assets of the Company, or similar transaction.
3. Restrictions to Transfer. Employee hereby agrees that unless and
until the Conditions are satisfied or terminated as provided in
Section 5 herein, Employee will not sell, assign, transfer,
pledge, encumber or otherwise dispose of any of the Restricted
Shares (each a "Transfer") without the prior written consent of
the Committee, and any such Transfer without such consent shall be
null and void ab initio.
4. Shareholder Rights. Except for the Conditions, the Employee shall
have all rights and privileges of a stockholder of the Company as
to his or her Restricted Shares, including the right to receive
any dividends declared with respect to such Restricted Shares and
to exercise voting rights.
5. Lapse of Restrictions and Forfeiture of Shares. The Conditions
shall be satisfied and lapse and the Restricted Shares shall be
subject to forfeiture during a six year performance period (the
"Performance Period") as follows:
(a) Initial Performance Period. The Initial Performance Period
shall be the three Fiscal Year period beginning with the
Fiscal Year in which this Agreement is executed.
Restrictions shall be satisfied and lapse after the Initial
Performance Period in accordance with the following schedule:
RONA (as defined
in Section 5(c)) Percentage of Restricted
during Initial Shares upon which
Performance Period restrictions lapse
------------------ -----------------------
__.00% 0.00%
__.00% 25.00%
__.00% 50.00%
__.00% 75.00%
__.00% 100.00%
3
(b) Second Performance Period. The Second Performance Period
shall be the three Fiscal Year period immediately following
the Initial Performance Period. At the end of the Second
Performance Period, restrictions shall lapse on the total
number of Restricted Shares initially granted hereunder less
the number of Restricted Shares upon which restrictions
lapsed after the Initial Performance Period in accordance
with Section 5(a) of this Agreement.
(c) Calculations. Calculations for vesting and forfeiture of
Restricted Shares between specified percentages shall be
determined by linear interpolation. Each of the calculations
referred to in this Section 5 shall be rounded to the one-
hundredth of one percent (0.01%) or to the nearest whole
share, as appropriate. RONA shall be calculated by dividing
earnings before interest and taxes by average net assets, in
each such case adjusted for unusual accounting and
operational items (such as the adoption of a new accounting
standard, changes in accounting, deferred production credits,
and unusual or extraordinary settlements of program claims,
specifications and issues).
6. Delivery of Share Certificates. As soon as practicable and in no
event more than three months after the end of the Initial
Performance Period and the Second Performance Period, the
Committee shall calculate annualized RONA and the number of
Restricted Shares, if any, for which the restrictions have lapsed
in accordance with Section 5 hereof. The Committee shall promptly
thereafter instruct the Plan Administrator to deliver a stock
certificate(s) representing the number of shares for which
restrictions have lapsed (to the nearest full share and cash for
fractional shares, if any), free of the restrictions set forth in
Section 3.
7. Termination of Employment. In the event Employee retires on or
after reaching age 65, becomes Disabled or dies prior to the
vesting or forfeiture of all Restricted Shares granted hereunder
(each an "Involuntary Termination"), the total number of
Restricted Shares granted hereunder may be reduced or left
unchanged, at the sole discretion of the Committee, but the number
of Restricted Shares will not be reduced by more than 1.39% for
each full or partial month remaining in the Performance Period
after the Involuntary Termination. The number of Restricted
Shares as and to the extent so adjusted shall then vest or be
forfeited in accordance with the provisions of Section 5 hereof,
provided, however, if Employee dies prior to the vesting or
forfeiture of all Restricted Shares granted under this Agreement,
the Committee may, in its sole discretion, accelerate the vesting
4
of the Restricted Shares as and to the extent so adjusted. For
the purposes of this Section, "Disability" and "Disabled" means
disability according to the terms of the Salaried Long Term
Disability Insurance MDC-East Plan, the Salaried Long-Term
Disability Income Insurance MDC-West Plan or the Long Term
Disability Insurance Plan for Salaried Employees (MDHC), as may be
applicable from time to time to the Employee. If an Involuntary
Termination occurs after the Initial Performance Period or the
Second Performance Period has ended but before Shares have been
delivered in accordance with Section 6, such event shall not
affect calculations, and Shares will be delivered as soon as
practical thereafter. If Employee's employment by the Company
terminates for any reason other than an Involuntary Termination,
the number of Restricted Shares granted hereunder may be reduced,
rescinded or left unchanged, at the sole discretion of the
Committee. In no event, however, shall this Section cause
Employee to forfeit Restricted Shares which vested prior to the
date of Employee's termination, whether by Involuntary Termination
or otherwise.
8. Effect of Change of Control. In the event of a Change of Control,
all restrictions and conditions applicable to the Restricted
Shares will be deemed to have been satisfied as of the date the
Change of Control occurs.
9. Change of Duties. If in its sole discretion the Committee
determines that, subsequent to the date hereof, Employee's job
responsibilities have been significantly reduced, the Committee
may reduce the number of Restricted Shares granted hereunder.
10. Withholding. At such time as Share certificates are to be delivered
to Employee in accordance with Section 6 of this Agreement, the
Company shall satisfy the federal, state and local withholding
requirements with respect to such distribution. Such withholding
can be satisfied at the Company's option either by (i) the Company's
withholding of Shares or (ii) by requiring Employee's payment in
cash by providing a personal check in the required amount prior to
delivery of the Shares. Notwithstanding the foregoing, in the event
Employee is subject to Section 16 of the Exchange Act at the time of
such delivery, the Company shall withhold Shares in an amount equal
to Employee's estimated federal, state and local tax obligations,
plus any additional withholding requirements, related to such
delivery; provided the total withholding hereunder shall not be less
than the statutory minimum withholding amount.
11. Designation of Beneficiary. Employee may by written notice in form
reasonably acceptable to the Committee designate a beneficiary in
accordance with the terms and conditions of the Plan who will
receive Shares if and when Restrictions lapse if Employee has died
prior to the date(s) restrictions lapse.
5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and date set forth above.
MCDONNELL DOUGLAS CORPORATION
By: ---------------------------------
Plan Administrator
---------------------------------
Employee
EX-10.J
8
PERFORMANCE ACCELERATED RESTRICTED STOCK AGMT.
1 Exhibit 10(j)
PERFORMANCE ACCELERATED
RESTRICTED STOCK AWARD AGREEMENT
(Performance-Based Vesting)
Agreement made this _____ day of ____________, 19__, by and
between McDonnell Douglas Corporation (hereinafter called the
"Company") and ___________________, (hereinafter called the
"Employee").
RECITAL
The Employee is employed by the Company as _________________. The
Company desires to provide equity ownership opportunities and
performance-based incentives to better match the interests of officers
and key employees with those of shareholders. The Employee desires to
receive incentive compensation, the vesting of which will be contingent
upon the Company's achievement of certain financial goals. Accordingly,
the Company has agreed to grant certain of its common shares of the
Company to the Employee subject, however, to certain restrictions.
In consideration of the mutual promises herein contained, the Company
and Employee agree as follows:
1. Agreement Subject to Plan. The Restricted Shares have been
granted under the McDonnell Douglas Corporation 1994 Performance
and Equity Incentive Plan (the "Plan"), a copy of which has been
given to Employee and is incorporated herein by this reference.
This Agreement including the grant of Restricted Shares hereunder
is subject to the terms, conditions and provisions of the Plan.
Unless otherwise indicated, capitalized terms in this Agreement
shall have the same meaning ascribed to such terms in the Plan.
2. Grant of Shares Subject to Restriction and Forfeiture. The
Company hereby grants to Employee _____ Shares (the "Restricted
Shares") subject to the restrictions and conditions contained
herein and in the Plan (collectively, the "Conditions").
Notwithstanding any other provision of this Agreement, if the
Committee determines that at any time prior to the date the
restrictions lapse in accordance with Section 5 hereof, either
before or after termination of employment, Employee has acted in a
manner contrary to the best interests of Company or any Affiliate,
Employee shall forfeit all Restricted Shares for which such
restrictions have not lapsed. As a condition precedent to the
effectiveness of this Agreement, Employee shall execute
appropriate blank stock powers with respect to the Restricted
Shares and deliver such stock powers to the administrator of the
Plan (the "Plan Administrator"). Within one month after the date
the Plan Administrator receives such stock powers, stock
certificates for the Restricted Shares shall be issued (with an
appropriate legend referring to the restrictions included in the
Conditions) and deposited, together with the stock powers with the
Plan Administrator. The Plan Administrator shall issue to the
Employee a receipt evidencing any stock certificates representing
the Restricted Shares registered in the Employee's name and held
by the Plan Administrator. The Employee shall be entitled to
2
delivery of such stock certificate(s) upon satisfaction of the
Conditions and only in accordance with Section 6 hereof. Employee
agrees that the Conditions shall apply to the Restricted Shares
and any shares or other securities which Employee may receive or
be entitled to receive as a result of the ownership of the
Restricted Shares whether the same are issued as a result of a
stock split, stock dividend, spin-off, split-up, spin-out,
recapitalization, merger, consolidation, reorganization,
combination or exchange of shares, or any other similar
transaction, or as a result of the merger or consolidation of the
Company, or sale of assets of the Company, or similar transaction.
3. Restrictions to Transfer. Employee hereby agrees that unless and
until the Conditions are satisfied or terminated as provided in
Section 5 herein, Employee will not sell, assign, transfer,
pledge, encumber or otherwise dispose of any of the Restricted
Shares (each a "Transfer") without the prior written consent of
the Committee, and any such Transfer without such consent shall be
null and void ab initio.
4. Shareholder Rights. Except for the Conditions, the Employee shall
have all rights and privileges of a stockholder of the Company as
to his or her Restricted Shares, including the right to receive
any dividends declared with respect to such Restricted Shares and
to exercise voting rights.
5. Lapse of Restrictions and Forfeiture of Shares. Restrictions
shall be satisfied and lapse and the Restricted Shares shall be
subject to forfeiture during a six year performance period (the
"Performance Period") as follows:
(a) Initial Performance Period. The Initial Performance Period
shall be the three Fiscal Year period beginning with the
Fiscal Year in which this Agreement is executed.
Restrictions shall be satisfied and lapse after the Initial
Performance Period in accordance with the following schedule:
RONA (as defined Percentage of
in Section 5(c)) Restricted Shares
during Initial upon which
Performance Period restrictions lapse
---------------------------------------------
__.00% 0.00%
__.00% 25.00%
__.00% 50.00%
__.00% 75.00%
__.00% 100.00%
3
(b) Second Performance Period. The Second Performance Period
shall be the three Fiscal Year period immediately following
the Initial Performance Period. Restricted Shares shall be
forfeited after the Second Performance Period in accordance
with the following schedule:
RONA (as defined
in Section 5(c)) Forfeiture Percentage
during Second of Restricted Shares
Performance Period initially granted hereunder
------------------ -----------------------------
__.00% 100.00%
__.00% 87.50%
__.00% 75.00%
__.00% 62.50%
__.00% 50.00%
__.00% 37.50%
__.00% 25.00%
__.00% 12.50%
__.00% 0.00%
In no event, however, shall the number of Restricted Shares
forfeited after the Second Performance Period exceed the
total number of Restricted Shares initially granted hereunder
less the number of Restricted Shares upon which restrictions
lapsed after the Initial Performance Period in accordance
with Section 5(a) of this Agreement. Restrictions shall
lapse on all Restricted Shares not so forfeited.
(c) Calculations. Calculations for vesting and forfeiture of
Restricted Shares between specified percentages shall be
determined by linear interpolation. Each of the calculations
referred to in this Section 5 shall be rounded to the one-
hundredth of one percent (0.01%) or to the nearest whole
share, as appropriate. RONA shall be calculated by dividing
earnings before interest and taxes by average net assets, in
each such case adjusted for unusual accounting and
operational items (such as the adoption of a new accounting
standard, changes in accounting, deferred production credits,
and unusual or extraordinary settlements of program claims,
specifications and issues).
(d) Performance-Based Restrictions. The award of the Restricted
Shares is intended to provide a performance-based incentive.
Notwithstanding any other provision of the Plan or this
Agreement, the Committee does not have the discretion to
waive any of the performance-based restrictions contained in
this Agreement, and it may not accelerate the lapse of
restrictions other than in accordance with this Section or,
in the event Employee dies prior to the vesting or forfeiture
of all Restricted Shares granted hereunder, in accordance
with Section 7 of this Agreement. In the event of a Change
of Control, however, the lapse of restrictions will be
accelerated pursuant to Section 8 hereof.
4
6. Delivery of Share Certificates. As soon as practicable and in no
event more than three months after the end of the Initial
Performance Period and the Second Performance Period, the
Committee shall calculate annualized RONA and the number of
Restricted Shares, if any, for which the restrictions have lapsed
or should be forfeited in accordance with Section 5 hereof. The
Committee shall promptly thereafter instruct the Plan
Administrator to deliver a stock certificate(s) representing the
number of shares for which restrictions have lapsed (to the
nearest full share and cash for fractional shares, if any), free
of the restrictions set forth in Section 3.
7. Termination of Employment. In the event Employee retires on or
after reaching age 65, becomes Disabled or dies prior to the
vesting or forfeiture of all Restricted Shares granted hereunder
(each an "Involuntary Termination"), the total number of
Restricted Shares granted hereunder may be reduced or left
unchanged, at the sole discretion of the Committee, but the number
of Restricted Shares will not be reduced by more than 1.39% for
each full or partial month remaining in the Performance Period
after the Involuntary Termination. The number of Restricted
Shares as and to the extent so adjusted shall then vest or be
forfeited in accordance with the provisions of Section 5 hereof,
provided, however, if Employee dies prior to the vesting or
forfeiture of all Restricted Shares granted under this Agreement,
the Committee may, in its sole discretion, accelerate the vesting
of the Restricted Shares as and to the extent so adjusted. For
the purposes of this Section, "Disability" and "Disabled" means
disability according to the terms of the Salaried Long Term
Disability Insurance MDC-East Plan, the Salaried Long-Term
Disability Income Insurance MDC-West Plan or the Long Term
Disability Insurance Plan for Salaried Employees (MDHC), as may be
applicable from time to time to the Employee. If an Involuntary
Termination occurs after the Initial Performance Period or the
Second Performance Period has ended but before Shares have been
delivered in accordance with Section 6, such event shall not
affect calculations, and Shares will be delivered as soon as
practical thereafter. If Employee's employment by the Company
terminates for any reason other than an Involuntary Termination,
the number of Restricted Shares granted hereunder may be reduced,
rescinded or left unchanged, at the sole discretion of the
Committee. In no event, however, shall this Section cause
Employee to forfeit Restricted Shares which vested prior to the
date of Employee's termination, whether by Involuntary Termination
or otherwise.
8. Effect of Change of Control. In the event of a Change of Control,
all restrictions and conditions applicable to the Restricted
Shares will be deemed to have been satisfied as of the date the
Change of Control occurs.
9. Change of Duties. If in its sole discretion the Committee
determines that, subsequent to the date hereof, Employee's job
responsibilities have been significantly reduced, the Committee
may reduce the number of Restricted Shares granted hereunder.
5
10. Withholding. At such time as Share certificates are to be delivered
to Employee in accordance with Section 6 of this Agreement, the
Company shall satisfy the federal, state and local withholding
requirements with respect to such distribution. Such withholding
can be satisfied at the Company's option either by (i) the Company's
withholding of Shares or (ii) by requiring Employee's payment in
cash by providing a personal check in the required amount prior to
delivery of the Shares. Notwithstanding the foregoing, in the event
Employee is subject to Section 16 of the Exchange Act at the time of
such delivery, the Company shall withhold Shares in an amount equal
to Employee's estimated federal, state and local tax obligations,
plus any additional withholding requirements, related to such
delivery; provided the total withholding hereunder shall not be less
than the statutory minimum withholding amount.
11. Designation of Beneficiary. Employee may by written notice in form
reasonably acceptable to the Committee designate a beneficiary in
accordance with the terms and conditions of the Plan who will
receive Shares if and when Restrictions lapse if Employee has died
prior to the date(s) restrictions lapse.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and date set forth above.
MCDONNELL DOUGLAS CORPORATION
By: ------------------------------
Plan Administrator
-----------------------------
Employee
EX-11
9
COMPUTATION OF EARNINGS PER SHARE
Exhibit 11
MCDONNELL DOUGLAS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(Dollar amounts in millions, except share data)
Years Ended December 31 1994 1993 1992
---- ---- ----
PRIMARY
Weighted average shares
outstanding 118,301,352 117,770,733 116,518,995
=========== =========== ===========
Net earnings (loss):
Earnings from continuing
operations before cumulative
effect of accounting change $598 $359 $ 698
Discontinued operations,
net of income taxes 37 57
Cumulative effect of initial
application of new accounting
standard for postretirement
benefits (1,536)
------ ----- -------
Net earnings (loss) $598 $396 $(781)
====== ===== ========
Earnings (loss) per share:
Continuing operations $5.05 $3.06 $ 5.99
Discontinued operations,
net of income taxes .31 .49
Cumulative effect of accounting
change (13.18)
------ ------ -------
Primary earnings (loss) per
share $5.05 $3.37 $(6.70)
====== ====== =======
Earnings per share computations are based upon the weighted average
common shares outstanding during the period. Common stock equivalents
(options) are not material. Accordingly the computation of fully
diluted earnings per share is the same as the primary computation.
EX-13
10
ANNUAL REPORT TO SHAREHOLDERS
1 Exhibit 13
Annual Report Page 4
READY TO MOVE FORWARD
MILITARY AIRCRAFT
MDC's military aircraft business - the corporation's biggest business -
is thriving despite deep cuts in U.S. and world defense procurement
budgets.
Operating earnings were up 33% in 1994 (excluding the impact of a $450
million writeoff in the previous year) - setting a new record and
accounting for 66% of the corporation's total operating earnings. Revenues
were up 14% to a record amount - accounting for 59% of total corporate
revenues.
McDonnell Douglas has been gaining market share in the midst of an
industry shake-out which has seen the cancellation or postponement of many
defense programs. That reflects the great strength of a product line which
includes three front-line fighter aircraft, the world's leading attack
helicopter, the two newest trainer aircraft, and the newest and most
capable military transport aircraft. It also reflects a well-developed
strategy keyed to providing superior quality and enhanced capabilities at
an affordable price.
In addition to achieving excellent financial results in military
aircraft in 1994, McDonnell Douglas continued to build a solid base for
future success. It secured the leading competitive position for the
immediate future by being the prime contractor for 46 of the 55 fixed wing
aircraft - including all 28 fighters - ordered by the U.S. Government under
the FY 95 defense budget. It solidified a strong position through the turn
of the century by achieving important milestones in its three large
programs in development or early production (the F/A-18 E/F, the C-17, and
the T-45). Looking still further into the future, it made impressive
progress in winning a number of important government-funded R&D contracts
which will lead to the development and production of new generations of
military aircraft and strike weapons in the first part of the 21st century.
Annual Report Page 5
(Photo Omitted)
2 Annual Report Page 6
F/A-18 HORNET
The U.S. Government is now funding only two major fixed wing fighter
development programs: the McDonnell Douglas F/A-18 E/F and the Lockheed F-22.
The F/A-18 E/F - a structural upgrade of the F/A-18 Hornet - is
proceeding on budget and on schedule - and is well below its weight
specification. With a larger wing, a lengthened fuselage, and higher
thrust engines, the F/A-18 E/F is designed to perform the bulk of the U.S.
Navy's tactical aircraft missions well into the next century. It will have
up to 40% more range than earlier versions of the Hornet, combined with two
new weapon stations, improved survivability, and substantial capacity for
future growth. The new Hornet is central to the Navy's "Forward . . . From
the Sea" war-fighting doctrine - which has shifted the Navy's focus from
open-ocean warfare to regional and coastal operations.
The E/F program successfully completed its Critical Design Review in
June 1994, enabling the program to proceed on schedule toward final
assembly in May 1995 and first flight in December 1995. McDonnell Douglas
will design and build seven flight test aircraft and three ground test
articles. The first production aircraft will be delivered in 1999.
Meanwhile, McDonnell Douglas continues to produce C/D model F/A-18s
both for the U.S. Navy and international customers. Funds were allocated
for 24 F/A-18 C/Ds under the FY 95 U.S. defense budget. As a result of
earlier wins for C/D model F/A-18s in international competitions, McDonnell
Douglas will be delivering aircraft kits or fully assembled aircraft to
Switzerland, Finland, and Malaysia over the next several years.
C-17 GLOBEMASTER III
In 1994, McDonnell Douglas made great progress in demonstrating its
ability to deliver high quality airplanes on schedule, on specification,
and at a reduced cost:
- The corporation delivered eight more C-17s during the year, filling
the first operating squadron of 12 C-17s at Charleston AFB, South Carolina.
The last five aircraft were ahead of schedule.
- The C-17 successfully passed a series of tests during the year in
demonstrating its unique ability to deliver heavy firepower to small,
austere airfields anywhere in the world. The developmental portion of the
flight test program was completed in December 1994. The program passed
rigorous static and durability testing milestones.
- The C-17 further demonstrated its readiness to provide rapid
deployment of U.S. and allied forces by completing initial operational
missions to Saudi Arabia and Panama and by participating in several
overseas training deployments.
3
- Finally, McDonnell Douglas made progress in reducing unit production
costs. The C-17 program produced positive earnings in 1994.
Capping all these efforts, the C-17 program achieved a major milestone
in January 1995 when the C-17 squadron at Charleston AFB was cleared for
routine, worldwide operations.
Funds were allocated for another six C-17s (numbering from P-27
through P-32 in the production sequence) under the FY 95 Defense Budget.
The Department of Defense is expected to make a decision in November 1995
on whether to extend its total purchase of C-17s beyond the 40 aircraft it
is currently planning. The U.S. Government is considering a potential buy
of up to 120 aircraft.
T-45 TRAINING SYSTEM
The T-45 Training System (T45TS) achieved two significant milestones
in 1994. In July, the U.S. Navy recommended that the T45TS be approved for
fleet introduction following a comprehensive operational evaluation of the
naval undergraduate jet pilot training system. In October, the first class
of naval aviators trained on the T-45 Training System received their "Wings
of Gold" in a graduation ceremony. The FY 95 budget provides funds for a
further 12 T-45 aircraft, raising the total to 84 out of a total planned
buy of 174 to be delivered through the year 2003.
F-15 EAGLE
With the agreement by Israel in May 1994 to purchase 21 F-15s,
production of the world's premier combat aircraft - with a 96 to 0 record
in aerial combat and outstanding long-range bombing capability - will
extend through 1999. McDonnell Douglas anticipates additional sales to the
U.S. and foreign governments beyond current orders for more than 90 F-15s.
The only combat aircraft shortfall the U.S. Air Force will experience
in its force structure before 2010 is in aircraft to perform the long-
range, precision-strike interdiction mission. The company believes the F-
15E fighter-bomber - with proven precision-strike combat capability, day or
night, good weather or bad - is ideally suited for replacing the U.S. Air
Force's aging fleet of
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4 Annual Report Page 8
approximately 70 F-111s in the long-range interdiction role. No other
aircraft is so well equipped for performing the mission of conducting
precise, intensive bombing against distant targets.
AV-8B HARRIER II
McDonnell Douglas obtained funding for the remanufacture of four more
day-attack Harriers to the new Harrier II Plus configuration in the FY 95
defense budget, raising the total to eight. The remanufacturing program
will equip existing day-attack Harrier IIs with the APG-65 radar, night-
attack avionics, increased-thrust engines, new fuselages, and other new
systems. At two thirds the cost of all 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. McDonnell Douglas has also begun to deliver Harrier II Plus
aircraft to Italy. Spain will take delivery of its first Harrier II Plus
in 1996.
AH-64 APACHE & OTHER HELICOPTERS
McDonnell Douglas received an order in April from the U.S. Army for
the production of 20 additional AH-64A combat helicopters - 10 for the
Army's own requirements and 10 for the United Arab Emirates. Later in the
year, two other Middle Eastern nations announced pending orders for a total
of 28 Apaches. Taken together, these orders should sustain the Apache
production line into 1997, when the U.S. Army plans to begin a large
remanufacturing program for adding greater firepower and performance to its
entire fleet of nearly 800 Apache helicopters. The fully modernized
Apache, including advanced Longbow fire control radar, is able to detect
and classify more than 250 targets within 30 seconds, and to engage its
choice of targets from long distances and in virtually all weather
conditions. By the end of 1994, six AH-64D Longbow Apache prototypes had
completed more than 3,000 out of 3,500 planned flight test hours. The
Longbow Apache program is on schedule to complete flight testing in 1995.
In two European competitions, the Apache is vying with a French/German
helicopter that is still under development. One is for an order for 30
armed helicopters from the Netherlands and the other is for more than 90
helicopters from the United Kingdom. The U.K. competition includes other
helicopters in addition to the Apache and the French/German Tiger.
Governments, in both cases, are expected to select a winner in 1995.
MDC obtained certification in 1994 for the MD Explorer, a new twin-
engine, eight-place helicopter, and made deliveries to its first two
customers. The MD Explorer incorporates the company's exclusive NOTAR(R)
system for anti-torque and directional control. McDonnell Douglas
delivered 33 MD 500 series helicopters in 1994, up from 26 in 1993.
5
NEW R&D CONTRACTS
The corporation's share of a declining government-funded R&D market
increased substantially in 1994. McDonnell Douglas won a total of $840
million in government-funded R&D contracts in 1994 - up from $692 million
in 1993, and $669 million in 1992 - even though government spending on
defense- and aerospace-related R&D has been falling in recent years. The
bulk of the corporation's R&D contract wins involve advanced research in
high performance aircraft and missiles. In 1993 and 1994, McDonnell
Douglas succeeded in winning 90% of the R&D competitions that it bid upon
in that area.
In its R&D activities, McDonnell Douglas is focusing both on advanced
technologies and products and on advanced design and manufacturing
processes that will lead to improved product affordability. Two important
R&D contracts enable the company to apply best commercial practices to
military products.
Under these contracts, McDonnell Douglas is combining the use of new
structures and materials with new manufacturing and tooling techniques to
demonstrate the feasibility of achieving large reductions in cost and
weight of military aircraft.
McDonnell Douglas was one of several companies that won contracts in
1994 to proceed into concept development for the Joint Advanced Strike
Technology (JAST) program. The program seeks to develop high technology,
low cost fighter aircraft which would become operational about 2010.
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READY TO MOVE FORWARD
COMMERCIAL AIRCRAFT
McDonnell Douglas continued to make a profit in commercial aircraft in
1994 - despite large declines in aircraft deliveries and revenues caused by
depressed market conditions. And it continued to strengthen its underlying
competitive position in preparing for the next upturn in the commercial
aircraft market.
The last big surge in commercial airline orders began in 1983 and
extended through 1990. Since then, McDonnell Douglas and other commercial
aircraft producers have been working mainly from the backlogs they
accumulated in that period. Over the past two years, as backlogs have
dwindled, production rates have plummeted. Based on a return to
profitability by the world's airlines, there are encouraging signs that
orders for new commercial aircraft could begin to pick up in 1995 - leading
to a major upswing in production in the latter years of this decade.
Through the downturn, MDC has successfully concentrated on three main
goals:
- driving down costs
- improving quality
- upgrading and improving product lines.
LOWER COSTS; HIGHER QUALITY
McDonnell Douglas has substantially reduced assembly times and costs - in
the face of a steep decline in production rates. The corporation delivered
only 17 MD-11 trijets in 1994, compared with 36 in 1993 and 42 in 1992.
Even so, assembly hours per MD-11 were reduced by 21% in 1994 following a
35% reduction in 1993. Assembly hours per twin jet have also fallen,
though less rapidly, even with the addition of the new MD-90 to the twin
jet production line.
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7 Annual Report Page 12
Reductions in cost have been achieved through an insistence upon
increased quality and greater efficiency at all stages in the production
process from procurement through assembly and delivery. By working closely
with preferred suppliers, the company has cut the rejection rate of parts
by 50% since 1992. That, in turn, has enabled McDonnell Douglas to cut
lead times for many parts from weeks to days, which has led to reductions
in both inventory and rework, and to further progress in shortening span
times.
In addition, by redesigning complicated assemblies and subassemblies
for ease of manufacture and assembly, McDonnell Douglas is pursuing another
high-powered method of reducing costs and improving quality. To cite one
example: Through a redesign of MD-11 flap hinge fairings, which eliminated
the need for more than 5,000 parts, an integrated product team succeeded in
bringing about a 100 pound per aircraft weight reduction and a 700 hour
reduction in assembly time. What's more, the new fairings have resulted in
a 0.2% reduction in drag - another benefit that has been passed along to
customers. During 1994, work teams at MDC took on a total of 30 projects
of a similar nature, adding to the 17 started in 1993, when the redesign
program was begun.
SATISFYING CUSTOMERS
Several carriers initiated MD-11 service in 1994, including two of the
world's most prestigious airlines - Japan Airlines and KLM Royal Dutch
Airlines. By the end of 1994, a worldwide fleet of 129 MD-11s was in
service with 20 airlines, serving more than 100 cities around the world.
Carriers with fleets of five or more MD-11s include Alitalia, American
Airlines, China Eastern, Delta Air Lines, FedEx, Garuda Indonesia, Japan
Airlines, KLM, Korean Air, Swissair, and World Airways. The trijet has
performed extremely well in service, with a dispatch reliability exceeding
98% through most of 1994. MDC continued to extend the range and payload of
the MD-11 in 1994. With full passengers and baggage, newly delivered MD-
11s have a non-stop range of about 7,000 nautical miles, compared with
6,500 for the first MD-11s delivered in late 1990 and early 1991.
With 22 twin jet deliveries in 1994, a worldwide fleet of more than
1,100 MD-80s is in service with 56 operators. Airlines with fleets of more
than 50 MD-80s include Alitalia, American, Continental, Delta, and SAS. At
almost 99%, the dispatch reliability of the MD-80 is better than other
medium-range, medium-sized jetliners.
The relationship between McDonnell Douglas and Chinese airlines and
industry continued to grow. During the year the last MD-80 built in
Shanghai under a co-production agreement dating back to 1985 was delivered
to China Northern Airlines. At about the same time, McDonnell Douglas and
the People's Republic of China agreed to major amendments enlarging the
scope of the so-called "Trunkliner" agreement first announced in 1992. The
amendments provide for production of 20 MD-90s in the PRC and the direct
sale of a mix of MD-80s and MD-90s to Chinese airlines from MDC's Long
Beach, California, production line.
8
EXTENDING EXISTING PRODUCT LINES
As in military aircraft and in other businesses, McDonnell Douglas is
pursuing a strategy in commercial aircraft keyed to providing superior
quality and enhanced capabilities at the best market price.
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9 Annual Report Page 14
With the certification of the new MD-90 in 1994, the corporation is
able to offer airlines an advanced yet affordable twin jet which meets the
most stringent requirements in the coming decade for noise abatement and
environmental cleanliness. The MD-90 - the quietest big airliner in the
sky - features fuel efficient new engines, an all-digital cockpit, and a
long list of improvements in aircraft systems aimed at reducing airline
maintenance costs. MDC delivered the first MD-90 to Delta Air Lines in
February 1995.
McDonnell Douglas also took steps in 1994 to extend the MD-11 line by
making a new extended range version of the trijet available to airlines,
beginning in 1996. The MD-11ER will be able to provide non-stop service
with higher payloads on the world's longest routes, while providing lower
fuel and maintenance costs, reduced noise, and state-of-the-art navigation
and communication systems.
With the new MD-90 and the addition of an extended range MD-11,
McDonnell Douglas expects to expand and grow within the two important
segments of the overall commercial aircraft market that are now served by
MDC products. The MD-80/90 programs hold a 34% share of world firm backlog
in the medium-range, 150-seat market, competing against the Boeing 737-400,
737-800, and the Airbus A320. The MD-11 program holds a 24% market share
in the long-range, 300-seat category, competing against the Boeing 777B and
the Airbus A340. McDonnell Douglas has a 9% share of world firm backlog for
large jetliners of all types.
. . .AND PREPARING TO LAUNCH A BRAND-NEW JETLINER
In July 1994, McDonnell Douglas began to solicit airline orders for a
proposed 100-seat airplane, to serve airline routes with light traffic or
with frequent departures limiting the number of passengers on each flight.
The proposed plane involves a new approach to development and production
aimed at lowering costs, spreading risk, assuring early market access, and
capitalizing on the increased globalization within the aerospace industry.
In November 1994, MDC announced selection of a team of manufacturers,
including leading aerospace companies in the U.S., Europe, and Asia. If
the program goes ahead, a team of companies will produce the airplane with
MDC acting as program manager responsible for design, systems integration,
configuration, sales, flight test, delivery, and product support.
WORKING TOWARD ONE OVERRIDING OBJECTIVE
Through all of its activities, McDonnell Douglas is working toward one
overriding objective in commercial aircraft: to become the low-cost
producer of the highest quality aircraft available to airlines. That
underlies a continuing focus on finding new and innovative ways of reducing
costs in company-owned facilities. It underlies an ongoing search for
close relationships with highly valued suppliers. It underlies the use of
integrated work teams in redesigning aircraft assemblies and the flow of
work connected with those assemblies. And it underlies MDC's approach to
bringing new products to market.
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10 Annual Report Page 16
READY TO MOVE FORWARD
MISSILES, SPACE AND ELECTRONIC SYSTEMS
This segment had excellent earnings in 1994, with an operating return
on sales of 14%. That reflects steady improvements in productivity and
profit margins - sustained over several years - combined with strong
individual products. At the same time, however, revenues were down by 27%
from 1993 - reflecting reduced government spending in several areas and the
lack of across-the-board strength in missiles, space, and electronics
comparable to MDC's position in military aircraft.
SPACE
Both in the immediate future and the long term, McDonnell Douglas
sees clear opportunities for expanding its space transportation business,
based both on the outstanding success of the Delta II rocket and on MDC's
leadership in developing advanced technologies critical to new generations
of space-faring vehicles.
With the Delta II, McDonnell Douglas makes the world's most reliable
launch vehicle - and is a leader in medium class launch services (i.e.
lifting payloads of about 4,000 pounds into geosynchronous transfer orbit).
With three more successful launches in 1994, the Delta has had 49
consecutive successful launches, dating back to 1986, and 92 successes out
of the past 93 launches. In April 1994, the corporation signed a contract
valued in excess of $400 million with Motorola's Satellite Communications
Division for eight Delta II launches carrying five IRIDIUM TM/SM
telecommunications satellites each. The Iridium low-orbit satellite system
will allow subscribers to use pocket-sized wireless telephones to
communicate with virtually any other phone in the world. The contract with
Motorola is the largest ever for MDC as a provider of commercial satellite
launch services. At the end of 1994, the Delta II program had a backlog of
27 firm orders.
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Photo Omitted
11 Annual Report Page 18
McDonnell Douglas is considering new investments aimed at broadening
the launch vehicle product line - into both lighter and heavier payload
categories. In December 1994, MDC reached a teaming agreement with Orbital
Sciences Corp. - the leading small launch vehicle provider - to pursue
NASA's Medium Light Expendable Launch Vehicle Services program. NASA is
seeking to procure a new class of launch vehicles requiring less lifting
power than the Delta II but more than the rockets now used to place small
payloads into low-earth orbit. The program will support future Mars
Surveyor and Discovery programs by boosting lightweight scientific vehicles
into space.
The corporation is also considering an upgraded and more powerful
version of the Delta II - capable of putting payloads of 6,000-to-8,000
pounds into geosynchronous transfer orbit. That would enable the Delta to
enter whole new markets, including the placement of multiple satellites
into geosynchronous orbit in a single launch.
During 1994, McDonnell Douglas continued with hardware development for
the International Space Station Alpha program. As a major subcontractor,
McDonnell Douglas is responsible for five integrated truss segments, four
distributed systems, and other hardware and software packages.
Looking further ahead, McDonnell Douglas is well positioned to compete
for what could be the biggest next-generation program in space travel - the
development of a replacement for the aging Space Shuttle fleet, which would
provide greater access to space at a far more economic cost. While Space
Shuttle is carried into space by expendable rockets, a next-generation
replacement may involve reusable launch vehicles, which embody many of the
characteristics of airplanes - self-powered vehicles capable of making
frequent departures, without the vast supporting infrastructure required
for each Shuttle flight.
In November 1994, McDonnell Douglas and Boeing agreed to combine their
expertise in competing for the design and development of a next-generation
reusable launch vehicle, called the X-33, seen as a replacement for the
Shuttle. MDC and Boeing submitted a Phase I concept proposal to NASA in
February 1995. NASA is expected to select a single team or company in 1996
to design, manufacture and flight test the X-33. Other competitors are
likely to include Rockwell and Lockheed.
McDonnell Douglas is the only company in the world that has
successfully demonstrated a reusable rocket. In a series of flight tests
in 1993 and 1994, MDC's Delta Clipper Experimental - a true reusable rocket -
demonstrated vertical takeoff and landing, subsonic maneuverability, and
airplane-like supportability and maintainability. This program is now
moving into a new stage. In 1994, MDC and NASA signed a series of
cooperative agreements for integrating new materials and technologies in an
upgraded vehicle, called DC-XA. Though it will not be designed to go into
orbit, the DC-XA will reach altitudes of up to 9,000 feet and speeds of 250
miles per hour. It is expected to begin flights as early as mid-1996.
12
MISSILE SYSTEMS
MDC's missiles business is built around core competencies in guidance
and system integration, with two major product lines - Harpoon/SLAM
missiles and the Tomahawk cruise missile. McDonnell Douglas achieved
important breakthroughs in the first of those programs in 1994, while
experiencing disappointment in the second. The corporation also won an
important design contract which could lead to the establishment of a major
new production program.
McDonnell Douglas was disappointed when the U.S. Navy selected
GM/Hughes over MDC as the single-source supplier of Tomahawk missiles for
the years FY 94 to FY 98 and the development of the new Block IV Tomahawk.
McDonnell Douglas now expects to deliver its 1,647th and last Tomahawk
missile to the Navy in 1995.
Meanwhile, MDC's Harpoon-derived Standoff Land Attack Missile (SLAM)
has emerged as a major missile program for the future. In 1993 and again
in 1994, the U.S. Navy and DoD provided qualified support for an upgraded
or "Expanded Response" SLAM, known as SLAM ER, extending the missile's
range by more than 50% and providing other large improvements in
aerodynamics and striking power. In early 1995, following the cancellation
of a joint Navy/Air Force program for developing a new land-attack missile,
the U.S. Navy announced its choice of SLAM ER for replacing the new missile
in the land-attack role.
13 Annual Report Page 19
In addition, McDonnell Douglas is now pursuing possible solutions to
the continuing Air Force requirement for a precision, standoff missile.
The U.S. Navy's choice of SLAM ER as a primary land-attack weapon
strengthens MDC's position in the competition for the United Kingdom's
Conventionally Armed Stand Off Missile (CASOM) program. McDonnell Douglas
is entering a variant of SLAM ER in that competition in a proposal to be
submitted in 1995. The U.K. government is expected to award a contract in
1996. The program is valued at over $1 billion.
In the spring of 1994, McDonnell Douglas won one of two contracts from
the U.S. Air Force to design guidance systems for transforming unguided
bombs into highly accurate weapons. Under the Joint Direct Attack Munition
(JDAM) program, the Air Force is seeking to retrofit gravity bombs with
missile-like fins and guidance systems. DoD plans to buy approximately
74,000 JDAMs under a production program expected to continue well into the
next century with an estimated value of about $2 billion. In late 1995,
the Air Force is scheduled to choose between McDonnell Douglas and its
competitor, Martin Marietta, to proceed into full-scale engineering and
manufacturing.
ELECTRONICS
MDC's defense electronics systems business had its strongest financial
performance in five years as a result of downsizing, restructuring, and
good results from the remaining businesses.
McDonnell Douglas delivered another 53 Mast Mounted Sights to the U.S.
Army, National Guard, and Taiwan in 1994, bringing the total delivered to
420. The FY 95 U.S. defense budget includes funds for another 17 Sights.
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, or in inclement weather.
Other MDC-developed Command, Control, Communication and Intelligence
systems were delivered and successfully operated by U.S. or allied forces
in regional conflicts in 1994. MDC combat and targeting systems proposals
are being evaluated by the U.S. Navy and a number of allied governments.
14 Annual Report Page 20
COMPLEMENTARY BUSINESSES
MCDONNELL DOUGLAS FINANCE CORPORATION (MDFC)
Following three years of redirecting its business focus, MDFC achieved
solid results in 1994. It continued to improve profitability in its core
markets of aircraft and commercial equipment leasing. MDFC's improvement
during 1994 was confirmed by upgrades from major debt rating agencies.
In working with McDonnell Douglas commercial aircraft customers, MDFC
provided both long-term and short-term bridge financing for aircraft leased
or sold to Alitalia, Garuda, Indonesia, Japan Air Lines, ValuJet, and Varig.
In addition, MDFC assisted in arranging another $1 billion in third-party
financing for an additional 37 aircraft.
MDFC's commercial leasing operation wrote $92 million in new leases in
1994 - more than double 1993's volume - and ended the year with a portfolio
totaling $575 million. Included in the commercial portfolio are leases of
commuter aircraft and other large equipment items.
At year end, the entire MDFC portfolio totaled $1.8 billion, with
McDonnell Douglas-built aircraft accounting for 63% of the total.
MCDONNELL DOUGLAS REALTY COMPANY (MDRC)
MDRC manages a real estate portfolio totaling over four million square
feet on behalf of McDonnell Douglas, and provides consulting services to
various McDonnell Douglas units on the acquisition, disposal, or management
of real estate. MDRC had increased earnings in 1994, principally from the
sale of several properties in its commercial real estate portfolio. The
operations of MDRC and MDFC were combined in mid 1994 in Long Beach, and it is
anticipated that operating efficiencies resulting from this combination will
produce cost improvement savings for both companies.
MCDONNELL DOUGLAS TECHNICAL SERVICES COMPANY (MDTSC)
MDTSC, founded in 1989, continued its rapid growth in 1994. MDTSC's
pool of experienced and skilled workers (including many former
McDonnell Douglas employees) provided more than $100 million of temporary
professional services to McDonnell Douglas and commercial clients in 1994 - up
from $68 million in 1993. MDTSC services employers' needs in three
primary markets: engineering and manufacturing, information systems
development, and aircraft maintenance.
MCDONNELL DOUGLAS TRAVEL COMPANY (MDTC)
MDTC is a full service travel company that continues to serve both
MDC business travelers and outside commercial customers. Sales in 1994
were modestly lower than those of 1993. The largest single component of sales
remains service to McDonnell Douglas customers.
(Photo and graphs omitted.)
15 Annual Report Page 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 33,
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 4 and "Selected Financial Data by Industry Segment" at page 32, which
descriptions are also incorporated herein by this reference.
Overview
MDC completed 1994 at a strong pace, achieving records for the year in net
earnings and operating earnings. Highlights in 1994 included record revenues
and operating earnings in the military aircraft segment, continued
profitability in the commercial aircraft business in spite of reduced
deliveries, and continued significant cash flow, as evidenced by further debt
reduction and accumulation of cash. Cash flow from aerospace operations was
slightly less than one billion dollars for 1994, prior to being reduced by a
third quarter tax and interest payment of approximately $165 million related
to prior years' tax audit and by $85 million that was used by MDC to purchase
approximately 1.8 million shares of its common stock. Aerospace debt
decreased $353 million during 1994 after decreasing $1.142 billion during
1993. The year-end 1994 aerospace debt level fell to $1.272 billion, the
lowest in seven years. In addition, aerospace cash and cash equivalents
increased to $408 million at December 31, 1994, compared with $15 million at
the end of 1993. Earnings for 1994 were $5.05 per share, a 50% increase over
1993.
Results of Operations
MDC revenues decreased 9% in 1994 to $13.176 billion, down from $14.487
billion in 1993 and $17.365 billion in 1992. The 1994 decrease resulted
principally from reduced deliveries in the commercial aircraft segment and
lower volume on the downsized Space Station and several missile and
electronic systems programs. Revenues for the military aircraft segment were
at a record level in 1994, a 14% increase over the 1993 level. The 1993
decrease from 1992 resulted principally from reduced deliveries in the
commercial aircraft segment and lower volume in the F-15 program, and to a
lesser extent from the winding down of the Advanced Cruise Missile program
and reduced commercial space launches.
16
In spite of the revenue decrease, MDC's 1994 earnings increased to $598
million. That compares with 1993 earnings of $396 million and 1992 earnings
of $79 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 approximately $120 million higher in 1992
than in 1993 and 1994.
Military aircraft segment operating earnings were at a record level in
1994, and 33% better than 1993 even after excluding from 1993 the $450
million C-17 charge. Earnings in the commercial aircraft segment were
comparable in 1994 with 1993, and down from the 1992 level due to significant
reductions in MD-80 deliveries. Earnings in the missiles, space and
electronic systems segment were down from the record 1993 level, although the
return on sales increased in 1994 from the 1993 level. Both 1994 and 1993
return on sales more than doubled the 1992 rate of return.
Net earnings in 1993 and 1992 included gains from discontinued operations
of $37 million and $57 million, respectively. Earnings in 1994 and 1993
included $21 million and $158 million, respectively, associated with
successful resolution of issues with the IRS, partially 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.
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.
Military Aircraft
Operating revenues in the military aircraft segment increased 14% in 1994
after a 5% decrease in 1993. The 1994 increase was primarily attributed to
the F/A-18 and the C-17 programs. The 1993 decrease was largely due to
reduced volume in the F-15 program, partially offset by increased revenue in
the C-17 program.
17 Annual Report Page 25
The military aircraft segment reported record operating earnings of $708
million in 1994. Improved earnings in the F/A-18 program and current
production lots of the C-17 program, along with continued strong performance
in most other major programs contributed to the record results in 1994.
Operating earnings in this segment were $533 million in 1993 and $391 million
in 1992, prior to being reduced by pre-tax loss provisions of $450 million in
1993 and $383 million in 1992 on the C-17 program. During 1994, MDC
recognized cost growth in the development and initial production lots and at
the same time reduced cost estimates associated with the 1993 C-17 omnibus
settlement. Increased earnings recorded during 1994 in current production
lots, however, resulted in net positive earnings for the C-17 program. A
1993 charge of $450 million 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. Charges in 1992
reflected the estimated cost of strengthening the C-17 wing, which was
damaged during stress tests in October 1992, and other cost growth in test,
assembly and procurement. See Note 5, "Contracts in Process and
Inventories," page 41. For additional information regarding Government
claims and inquiries on the C-17 program, see also "Government Business
Audits, Reviews and Investigations," page 30.
While comparable in 1994 and 1993, pre-tax retiree health care costs in
this segment were $82 million higher in 1992, prior to the elimination or
reduction of company-paid health care for many current and future retirees.
Commercial Aircraft
Operating revenues in the commercial aircraft segment decreased 34% in
1994 after a 28% decline in 1993. The decrease in 1994 and 1993 revenues was
due to reduced aircraft deliveries. MDC delivered 22 MD-80 twin jets in
1994, as compared with 42 MD-80 twin jets (including eight under lease
arrangements) in 1993, and 84 in 1992. MDC delivered 17 trijets in 1994,
compared with 36 trijets (including three under lease arrangements) in 1993,
and 42 in 1992. Current commercial aircraft production plans for 1995
anticipate MD-80/90 twin jet deliveries in the low 30s, with slightly higher
deliveries of MD-80s compared to MD-90s. MD-11 trijet deliveries in 1995 are
expected to be in the high teens. Based on current orders and scheduled
delivery dates, MD-11 deliveries in the next few years will be lower than in
1995. MDC does and will continue to evaluate the production rate on the MD-
11 line consistent with the rate of existing and new orders, and will reduce
or increase the rate as appropriate.
18
The commercial aircraft segment reported operating earnings of $47 million
in 1994, comparable to the $40 million in 1993 and slightly less than half of
the $102 million in 1992. Earnings from the support of commercial aircraft,
sale of spare parts and related services were comparable in all three years.
Similar to revenues, reductions from the 1992 level of earnings were the
result of fewer MD-80 and MD-11 deliveries. The MD-11 program continues to
operate at a loss after deducting period costs, although the loss in 1994 was
lower than in 1993. 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
most of the aircraft delivered in 1994 and 1993 were less than program-
average costs. Deferred costs in total on the MD-11 program decreased $132
million in 1994, after decreasing $175 million in 1993. The 1994 decrease
occurred with less than half of the deliveries as compared to 1993. 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 41.
MDC periodically, and at least annually, reviews its assumptions as to the
size of the MD-11 pool, the estimated period over which the units will be
delivered and the estimated future costs and revenues associated with the
program. As part of this analysis during 1994, the estimated total cost to
complete the 301 aircraft in the pool reflected decreases related to
subcontractor costs, such as the cost of the MD-11 fuselage currently being
produced by a subcontractor but scheduled to be produced by MDC beginning in
early 1996, and production and assembly costs, where MDC continues to improve
efficiency in the production process from procurement through assembly and
delivery. However, these decreases were offset by increased cost related to
extending the period over which the 301 aircraft in the pool will be
delivered. In the aggregate, these changes had an offsetting impact and as a
result, there was no change in the costing percentage used by MDC on the
MD-11 program.
Reduced development costs contributed to the segment's continued profit-
ability in both 1994 and 1993. Development expenditures decreased $27 million
in 1994 after an $111 million decrease in 1993. The lower costs in 1994
19 Annual Report Page 26
principally related to reduced spending on the MD-90 twin jet, which received
certification in the 1994 fourth quarter, and the MD-11 trijet products. MD-
90 development costs were reduced by $32 million in 1994, $27 million in 1993
and $5 million in 1992, received from risk sharing subcontractors. Operating
earnings for the commercial aircraft segment included charges in 1994 related
to several items associated with the twin jet program that more than offset
the proceeds from the risk sharing customers. Operating earnings 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 commercial customer, and other items.
Missiles, Space and Electronic Systems
Operating revenues in the missiles, space and electronic systems segment
decreased 27% in 1994, after declining 19% in 1993 as compared with 1992.
Decreased revenues in 1994 were attributable to lower volume on the downsized
Space Station and several missile and electronic systems programs. Decreased
revenues in 1993 were primarily as a result of the winding down of the
Advanced Cruise Missile program, which was terminated by the customer 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 earnings of the missiles, space and electronic systems segment
were $262 million in 1994, down from record 1993 earnings of $338 million.
Operating earnings for this segment were $191 million in 1992. Although
earnings were lower in 1994, the return on sales increased in 1994 from the
1993 level. Both 1994 and 1993 return on sales more than doubled the 1992
return, due to the realization of lower costs in missile programs brought
about by an MDC-wide organizational restructuring in the fourth quarter of
1992 and overall improved contract performance. The electronic systems
programs' 1993 results included $70 million in pre-tax loss provisions
recorded as a result of difficulties in several electronic systems programs.
In addition, 1993 earnings included a $20 million bonus earned for achieving
100% launch success on a Delta Global Positioning Satellite contract for the
Air Force. The electronic systems 1992 results included $38 million in pre-
tax loss provisions on the Air Force Defense Support Program, a program
terminated for convenience of the government during 1993. While comparable
in 1994 and 1993, pre-tax retiree health care costs in this segment were $52
million higher in 1992, prior to the elimination or reduction of company-paid
health care for many current and future retirees.
Financial Services and Other
Operating revenues in the financial services and other segment increased
to $326 million in 1994 compared with $287 million in 1993 and $352 million
in 1992.
20
Operating earnings of the segment were $50 million in 1994 as compared
with $31 million in 1993 and $20 million in 1992. The 1994 operating
earnings included a $20 million pre-tax gain from a sale of property by
McDonnell Douglas Realty Company. Gains on sale and release of equipment,
including aircraft, were $11 million in 1994 as compared with $24 million in
1993 and $37 million in 1992. Operating earnings of the financial services
and other segment have been reduced by interest expense, an operating expense
of that segment.
Interest Expense
Interest expense related to aerospace segments was $141 million in 1994,
down from $224 million in 1993, after excluding from 1994 the reversal of $10
million and from 1993 the reversal of $135 million of previously accrued
Internal Revenue Service (IRS) settlement related interest expense.
Aerospace interest expense was $309 million in 1992. The interest expense
decrease reflects lower debt levels in both years and reduced interest rates
in 1993. See Note 10, "Income Taxes," page 44.
Interest expense in the financial services and other segment decreased 6%
in 1994 and 21% in 1993. 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.
MDC settled certain accounting method and tax credit issues with the IRS
in 1993 and 1994 in connection with the IRS' audit of the years 1986 through
1989. The resolution of these issues resulted in net earnings of $158
million in 1993, of which $83 million ($135 million pre-tax) related to
reductions in accrued interest. Issues resolved in 1994 resulted in net
earnings of $21 million, of which $6 million related to reductions in accrued
interest. Upon substantial completion of the 1986-1989 audit in August 1994,
MDC made a tax and interest payment to the IRS of approximately $165 million.
See Note 10, "Income Taxes," page 44.
21 Annual Report Page 27
Discontinued Operations
Earnings from discontinued operations were $37 million in 1993 and $57
million in 1992. The 1993 discontinued operations represent 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. and the 1992 operations related to 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.
Debt and Credit Arrangements. MDC has in place a number of credit
facilities with banks and other institutions. At December 31, 1994, MDC had
a revolving credit agreement under which MDC could borrow up to $1.25 billion
through July 1998. There were no amounts outstanding under the credit
agreement at December 31, 1994.
In August 1992, MDC commenced an offering of up to $550 million aggregate
principal amount of its medium-term notes pursuant to a shelf registration
filed with the SEC. As of December 31, 1994, $218 million of securities
registered under the shelf registration remain unissued.
MDC has an 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. Under
the agreement, participation interests in new receivables are 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. MDC acts as an agent for the
purchaser by performing record keeping and collection functions. At
December 31, 1994, accounts receivable are net of $35 million representing
receivable interests sold. See Note 3, "Accounts Receivable," page 40.
During 1994, rating agencies raised and/or affirmed their ratings of MDC
and McDonnell Douglas Finance Corporation (MDFC) debt. Moody's Investors
Service Inc. (Moody's) raised its ratings of MDC's senior debt to Baa-3 from
Ba-2, and upgraded the short-term debt rating for commercial paper to Prime-3
from Not Prime. Moody's also raised ratings on MDFC's senior debt to Baa-3
from Ba-1 and MDFC's subordinated debt to Ba-2 from Ba-3. Standard and
Poor's raised its rating on the commercial paper of MDC and MDFC to A-2 from
A-3. Standard and Poor's also affirmed MDC's and MDFC's senior long-term
debt credit rating at BBB, MDFC's subordinated debt credit rating at BBB-,
and MDFC's medium-term notes credit rating at BBB. Duff & Phelps Credit
Rating Company raised its rating of MDC's senior debt to BBB from BBB-.
MDFC's previous ratings of BBB and BBB- on its senior unsecured debt and
subordinated debt, respectively, were unchanged by this action.
22
Shareholder Initiatives. On October 28, 1994, MDC's Board of Directors
authorized an increase in the quarterly dividend, a three for one stock
split, and a stock repurchase plan. The quarterly dividend was increased
from 12 cents per share to 20 cents per share payable on January 3, 1995, to
shareholders of record on December 2, 1994. The stock split was implemented
by a stock dividend of two shares for each share outstanding to shareholders
of record on December 2, 1994, distributable on January 3, 1995. The stock
repurchase plan authorizes MDC to purchase up to 18 million shares, or about
15 percent of MDC's common stock. Although funds are available under
existing credit agreements, MDC intends to use excess cash flow to finance
the stock repurchase program and does not expect the program to affect
negatively MDC's ability to fund capital spending, research and development,
or acquisitions. The Board of Directors also amended MDC's stock rights plan
by adjusting the purchase price of each right to $125 and extending the term
of the plan to December 31, 2004.
C-17 Settlement. During January 1994, MDC reached a settlement with the
DoD which covered a range of issues related to the C-17 military aircraft
program. During the third quarter of 1994, the C-17 settlement was given
Congressional approval as provided for in the FY 95 defense authorization and
appropriations bills. MDC and the Air Force executed modifications to
implement the settlement in February 1995. The settlement is not expected to
have any significant adverse cash impact and is expected to have a positive
cash impact during the first quarter of 1995.
Commercial Aircraft Financing. Difficulties in the commercial airline
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 $387 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 cash flow or financial position.
23 Annual Report Page 28
MDC has also made offers totaling $649 million to lease aircraft scheduled
for delivery during 1995 to 1998. Although earnings, cash flows, and
financial position could be adversely impacted, MDC does not anticipate that
the existence of such lease offers will have a material adverse effect on
earnings, cash flow or financial position. See also Note 4, "Finance
Receivables and Property on Lease," page 40, for additional details regarding
concentration of credit risk.
MDC's outstanding guarantees include approximately $125 million related to
MD-11s operated by a foreign carrier. During March 1994, this carrier
notified its aircraft lenders and lessors that it was temporarily suspending
payments pending a restructuring of its financial obligations, and requested
a "standstill" agreement to protect itself from default remedies for sixty
days. MDC has made and will continue through the first half of 1995 to make
lease payments on behalf of the carrier. These payments are not expected to
have a significant adverse effect on MDC's earnings, cash flow or financial
position. MDC and the carrier have tentatively negotiated a repayment
schedule calling for payments to begin later in 1995.
During October 1994, Trans World Airlines, Inc. (TWA), MDC's largest
aircraft leasing customer, proposed a restructuring plan relating to its
indebtedness and leasehold obligations to its creditors. As part of its
overall plan, TWA requested MDC to defer six months of lease and other
payments. TWA and MDC have reached agreement in principle to defer payments
for a period of six months. Under the proposed agreement, deferred amounts
will be repaid to MDC over a two year period beginning in April 1995. While
the ultimate outcome of the proposed restructuring plan is dependent upon
factors beyond the control of MDC, it is not expected to be materially
adverse to MDC.
Capital Expenditures. MDC's capital expenditures were $112 million in
1994, $64 million in 1993, and $217 million in 1992. At December 31, 1994,
MDC was not committed to the purchase of a significant amount of property,
plant and equipment. Capital expenditures are expected to increase in 1995,
but still remain lower than the 1992 level.
Asset Sales. In 1993, MDC closed the sale of its Visual Simulation
Systems (VSS) business unit and the sale of its remaining information
technology business, MDISI.
Operations. Employment levels were reduced 6% during 1994 to 65,760 as a
result of continued consolidation and streamlining of MDC's government
aerospace companies, and reduced production on several major programs.
Financial Services. Financial Services debt on December 31, 1994, was
approximately $1.3 billion, down from approximately $1.6 billion at December 31,
1993. McDonnell Douglas Financial Services Corporation (MDFS), through
its MDFC subsidiary, has traditionally obtained cash from operating
activities, placements of debt, issuances of commercial paper and the normal
run-off of its portfolio to fund its operations. In June 1993, MDFC
commenced an offering of up to $250 million of its General Term Notes and
subsequently commenced offerings of up to an aggregate of $399 million of its
medium-term notes. As of December 31, 1994, approximately $91 million
associated with the June 1993 offering and $310 million associated with the
medium-term notes offerings had been sold.
24
MDFC has also used, and in the future anticipates using, cash provided by
operations, commercial paper borrowings, borrowings under bank credit lines
and unsecured term borrowings as its primary sources of funding. MDFC
anticipates using proceeds from the issuance of additional public debt to
fund future growth.
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. MDC is one of the
largest U.S. defense contractors and 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 $112
million in 1994 and total employment from 132,960 at June 30, 1990 to 65,760
at December 31, 1994.
25 Annual Report Page 29
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 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 sold 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 in January 1993; and in March 1993
sold its remaining information technology business, MDISI, to a group of
investors in the United Kingdom. See also Note 2, "Discontinued Operations,"
page 40, and Note 7, "Outsourcing of Information Technology Operations,"
page 43.
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. and worldwide defense budgets, and changes in
Government policies, including weapons export 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.
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 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.
Defense spending by the U.S. Government, which has declined in recent
years, is expected to be relatively flat during 1995 based upon the FY 95
defense budget. In an era of shrinking defense budgets, military customers
are more constrained in their ability to support new development programs.
Declines in new development programs can have a negative impact on defense
contractors. Additionally, 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
26
to be completed in the purchasing country. MDC is well positioned in this
declining defense era. As the largest producer of military aircraft, the
extension of existing programs can have favorable competitive results. 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 95 budget will generally continue
through 1997.
Commercial Aircraft Business
MDC is currently engaged in production of the MD-80 and MD-90 twin jets
and MD-11 trijet commercial aircraft, and support of commercial aircraft,
spare parts and related services. 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 commercial
aircraft 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 31, for a discussion of certain
risks related to commercial aircraft customers and "Commercial Aircraft,"
page 25, for a discussion of the status of commercial aircraft orders.
In July 1994, MDC began to solicit airline orders for a new 100-seat,
medium range twin jet, called the MD-95, proposed to serve airline needs on
routes with relatively light traffic or
27 Annual Report Page 30
where demand for frequent departures limits the number of passengers on each
flight. The proposed plane will involve a team of companies to produce the
plane, and thus share the risks, with MDC acting as the program manager
responsible for systems integration, configuration, sales, and product
support. Formal launch of the MD-95 is subject to meeting certain launch
criteria, including receipt of sufficient orders from airline and leasing
company customers.
Over the past few years, MDC has explored the feasibility of strategic
alliances with organizations around the world. A variation of this strategy
is the utilization of risk-sharing subcontractors, similar to that proposed
on the MD-95 discussed above.
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 these 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.
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 IG. 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
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. 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.
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. During 1994, the C-17
settlement was given Congressional approval in the FY 95 defense
authorization and appropriations bills. MDC and the Air Force executed
contract modifications to implement the settlement in February 1995. See
also Note 5, "Contracts in Process and Inventories," page 41.
In 1991, MDC and General Dynamics Corporation (GD) filed a legal action to
contest the Navy's termination for default on the A-12 contract. See Note 5,
"Contracts in Process and Inventories," page 41. The Navy has agreed to
continue to defer repayment of $1.334 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 remains 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
29 Annual Report Page 31
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. On December 9, 1994, the U.S. Court of
Federal Claims ordered the January 7, 1991 decision terminating the contract
for default vacated because that decision was not properly made. A trial of
all remaining issues related to the termination is scheduled to commence in
late 1995.
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.
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, cash flow or the
financial position 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 29 sites. Of these, MDC believes that
it has de minimis liability at 19 sites, including 14 sites at which it
believes that it has no future liability. At eight of the 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. At the two remaining sites, MDC lacks sufficient
information to determine its probable share or amount of liability. 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 $42 million
for study and remediation expenditures at Superfund sites and for MDC's
current and former operating sites, of which $27 million is accrued at
December 31, 1994. Claims for recovery have not been netted against the
disclosed environmental liabilities. While ongoing litigation may eventually
result in recovery of costs expended at certain of the waste sites, any gain
is contingent upon a successful outcome and has not been accrued.
30
MDC believes any amounts paid in excess of the accrued liability will not
have a material effect on its financial position, results of operations,
liquidity or cash flow.
Union Negotiations
MDC has union contracts with the United Aerospace Workers in Long Beach,
California and various other locations which expire in the second quarter of
1995, and with the International Association of Machinists and Aerospace
Workers in Huntington Beach, Long Beach, and Torrance, California and various
other unions which expire in the fourth quarter of 1995. New contract
negotiations are underway.
Backlog
Several risk factors should be considered in evaluating MDC's firm backlog
for commercial customers. Approximately 64% of the firm backlog for
commercial aircraft is scheduled for delivery after 1995. Difficulties in
the commercial airline industry 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
19% 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, and purchase options and announced orders for which
definitive contracts have not been executed are excluded from firm backlog.
See also "Firm Backlog," page 32.
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.
31 Annual Report Page 32
SELECTED FINANCAL DATA BY INDUSTRY SEGMENT
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, military
transport aircraft, training systems, 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 missiles, satellite launching
vehicles, space station design and development, space shuttle payload
integration, lasers, ballistic missile defense systems, and defense
electronic components and systems.
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.
(Millions of dollars)
Years Ended December 31 1994 1993 1992
--------- --------- ---------
Revenues
Military aircraft $ 7,804 $ 6,852 $ 7,238
Commercial aircraft 3,155 4,760 6,595
Missiles, space and electronic
systems 1,877 2,575 3,169
Financial services and other 326 287 352
--------- --------- ---------
Operating revenues 13,162 14,474 17,354
Non-operating income 14 13 11
--------- --------- ---------
$13,176 $14,487 $17,365
========= ========= =========
32
Years Ended December 31 1994 1993 1992
--------- --------- ---------
Earnings
Military aircraft $ 708 $ 83 $ 8
Commercial aircraft 47 40 102
Missiles, space and electronic
systems 262 338 191
Financial services and other 50 31 20
--------- --------- ---------
Operating earnings from
continuing operations 1,067 492 321
Non-operating items - net (3) (5) (4)
Discontinued operations - 37 57
General corporate expenses (13) (9) (12)
Postretirement benefit curtailment - 70 1,090
Interest expense (131) (89) (309)
Income taxes (322) (100) (388)
Cumulative effect of accounting
change - - (1,536)
--------- --------- ---------
$ 598 $ 396 $ (781)
========= ========= =========
December 31 1994 1993 1992
--------- --------- ---------
Firm Backlog (Unaudited)*
Military aircraft $ 8,340 $ 7,997 $ 7,619
Commercial aircraft 7,544 9,172 13,364
Missiles, space and electronic
systems 1,619 2,210 3,069
--------- --------- ---------
$17,503 $19,379 $24,052
========= ========= =========
* Amounts as of December 31.
33
December 31 1994 1993 1992
--------- --------- ---------
Assets*
Military aircraft $ 3,860 $ 3,715 $ 3,960
Commercial aircraft 4,559 4,561 5,850
Missiles, space and electronic
systems 1,175 1,330 1,524
Financial services and other 2,160 2,340 2,222
--------- --------- ---------
Continuing operations 11,754 11,946 13,556
Corporate 462 80 133
Discontinued operations - - 92
--------- --------- ---------
$12,216 $12,026 $13,781
========= ========= =========
Years Ended December 31 1994 1993 1992
--------- --------- ---------
Property, Plant and Equipment
Acquired
Military aircraft $ 88 $ 23 $ 70
Commercial aircraft 17 1 29
Missiles, space and electronic
systems 4 38 116
Financial services and other 2 - 2
--------- --------- ---------
Continuing operations 111 62 217
Corporate 1 2 -
--------- --------- ---------
$ 112 $ 64 $ 217
========= ========= =========
Years Ended December 31 1994 1993 1992
--------- --------- ---------
Depreciation and Amortization
Military aircraft $ 123 $ 149 $ 191
Commercial aircraft 53 70 89
Missiles, space and electronic
systems 43 48 102
Financial services and other 55 49 71
--------- --------- ---------
Continuing operations 274 316 453
Corporate 5 7 12
--------- --------- ---------
$ 279 $ 323 $ 465
========= ========= =========
* Amounts as of December 31.
34 Annual Report Page 33
CONSOLIDATED STATEMENT OF OPERATIONS
(Millions of dollars, except share data)
Years Ended December 31 1994 1993 1992
-------- -------- --------
Revenues $13,176 $14,487 $17,365
Costs and expenses:
Cost of products, services and rentals 11,026 12,822 15,567
General and administrative expenses 684 720 825
Research and development 297 341 509
Postretirement benefit curtailment - (70) (1,090)
Interest expense:
Aerospace segments 131 89 309
Financial services and other segment 118 126 159
-------- -------- --------
Total Costs and Expenses 12,256 14,028 16,279
-------- -------- --------
Earnings From Continuing Operations
Before Income Taxes And Cumulative
Effect Of Accounting Change 920 459 1,086
Income taxes 322 100 388
-------- -------- --------
Earnings From Continuing Operations
Before Cumulative Effect Of
Accounting Change 598 359 698
Discontinued operations, net of income
taxes - 37 57
-------- -------- --------
Earnings Before Cumulative Effect
Of Accounting Change 598 396 755
Cumulative effect of initial application
of new accounting standard for
postretirement benefits - - (1,536)
-------- -------- --------
Net Earnings (Loss) $ 598 $ 396 $ (781)
======== ======== ========
Earnings (Loss) Per Share:
Continuing operations $ 5.05 $ 3.06 $ 5.99
Discontinued operations - .31 .49
Cumulative effect of accounting change - - (13.18)
-------- -------- --------
$ 5.05 $ 3.37 $( 6.70)
======== ======== ========
Dividends Declared Per Share $ .55 $ .47 $ .47
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
35 Annual Report Page 34
BALANCE SHEET
(Millions of dollars and shares)
McDonnell Douglas Corporation
and Consolidated Subsidiaries
-----------------------------
December 31 1994 1993
--------- ---------
Assets
Cash and cash equivalents $ 421 $ 86
Accounts receivable 772 555
Finance receivables and property on lease 2,087 2,357
Contracts in process and inventories 5,806 5,774
Property, plant and equipment 1,597 1,750
Investment in Financial Services - -
Other assets 1,533 1,504
--------- ---------
Total Assets $ 12,216 $ 12,026
========= =========
Liabilities And Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 2,485 $ 2,190
Accrued retiree benefits 1,298 1,388
Income taxes 723 574
Advances and billings in excess of related
costs 1,200 1,251
Notes payable and long-term debt:
Aerospace segments 1,272 1,625
Financial services and other segment 1,297 1,513
--------- ---------
8,275 8,541
Minority Interest 69 72
Shareholders' Equity:
Preferred Stock - none issued
Common Stock - issued and outstanding:
1994, 116.7 shares; 1993, 118.0 shares 117 118
Additional capital 191 256
Retained earnings 3,576 3,043
Translation of foreign currency statements - (4)
Unearned compensation (12) -
--------- ---------
3,872 3,413
--------- ---------
Total Liabilities and Shareholders' Equity $ 12,216 $ 12,026
========= =========
The accompanying notes are an integral part of the financial statements.
36 Annual Report Page 35
MDC Aerospace Financial Services
---------------------- ----------------------
1994 1993 1994 1993
--------- --------- --------- ---------
$ 408 $ 15 $ 13 $ 71
916 616 1 2
152 334 1,935 2,023
5,806 5,774 - -
1,441 1,584 156 166
313 290 - -
1,420 1,360 113 144
--------- --------- --------- ---------
$ 10,456 $ 9,973 $ 2,218 $ 2,406
========= ========= ========= =========
$ 2,382 $ 2,094 $ 248 $ 134
1,298 1,388 - -
424 265 299 309
1,162 1,221 38 30
1,249 1,520 23 105
- - 1,297 1,538
--------- --------- --------- ---------
6,515 6,488 1,905 2,116
69 72 - -
117 118 - -
191 256 238 238
3,576 3,043 75 56
- (4) - (4)
(12) - - -
--------- --------- --------- ---------
3,872 3,413 313 290
--------- --------- --------- ---------
$ 10,456 $ 9,973 $ 2,218 $ 2,406
========= ========= ========= =========
As used on this page, "MDC Aerospace" means the basis of consolidation as
described in Note 1 to the financial statements; "Financial Services" means
McDonnell Douglas Financial Services Corporation and all of its affiliates
and associated companies and McDonnell Douglas Realty Company. Transactions
between MDC Aerospace and Financial Services have been eliminated from the
"McDonnell Douglas Corporation and Consolidated Subsidiaries" columns.
37 Annual Report Page 36
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Millions of dollars)
Years Ended December 31 1994 1993 1992
-------- -------- --------
Common Stock
Beginning balance $ 118 $ 118 $ 116
Shares purchased (2) - -
Employee stock awards and options 1 - -
Shares issued to employee savings plans - - 2
------- ------- ------
117 118 118
Additional Capital
Beginning balance 256 248 209
Shares purchased (90) - -
Employee stock awards and options 25 6 2
Shares issued to employee savings plans - 2 37
------- ------- -------
191 256 248
Retained Earnings
Beginning balance 3,043 2,702 3,538
Net earnings (loss) 598 396 (781)
Dividends declared (65) (55) (55)
------- ------- ------
3,576 3,043 2,702
Translation Of Foreign Currency Statements - (4) (10)
Unearned Compensation
Beginning balance - (36) -
Prepayment of future employee benefits - - (50)
ESOP shares allocated to employees - 36 14
Unamortized restricted stock compensation (17) - -
Compensation amortized 5 - -
------- ------- -------
(12) - (36)
------- ------- -------
Shareholders' Equity $ 3,872 $ 3,413 $ 3,022
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
38 Annual Report Page 37
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
Years Ended December 31 1994 1993 1992
-------- -------- --------
Operating Activities
Earnings from continuing operations before
cumulative effect of accounting change $ 598 $ 359 $ 698
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 213 258 353
Depreciation of rental equipment 51 50 58
Amortization of intangible and other
assets 15 15 54
Gain on sale of assets (26) (44) -
Pension income (132) (138) (107)
Postretirement benefit curtailment - (70) (1,090)
Non-cash retiree health care costs 7 20 133
Change in operating assets and
liabilities:
Accounts receivable (217) 40 97
Finance receivables and property on
lease 133 (521) (316)
Contracts in process and inventories (32) 1,445 43
Accounts payable and accrued expenses 278 (822) (22)
Income taxes 149 (5) 217
Advances and billings in excess of
related costs (51) (112) (703)
Discontinued operations - - (2)
-------- ------- ------
Net Cash Provided (Used) By
Operating Activities 986 475 (587)
Investing Activities
Property, plant and equipment acquired (112) (64) (217)
Finance receivables and property on lease 84 414 529
Proceeds from sale of discontinued businesses - 181 70
Proceeds from sale of assets 24 32 173
Other, including discontinued operations 62 11 (51)
------- ------- -------
Net Cash Provided By Investing
Activities 58 574 504
39
Years Ended December 31 1994 1993 1992
(Continued) -------- -------- --------
Financing Activities
Net change in borrowings (maturities
90 days or less) 50 (830) 574
Debt having maturities more than 90 days:
New borrowings 450 681 1,461
Repayments (1,069) (954) (2,009)
Minority interest (3) 72 -
Payments from (to) ESOP - net - 36 (36)
Proceeds of stock options exercised 3 5 -
Common shares purchased (85) - -
Dividends paid (55) (55) (54)
------- ------- -------
Net Cash Used By Financing
Activities (709) (1,045) (64)
------- ------- -------
Increase (Decrease) In Cash And
Cash Equivalents 335 4 (147)
Cash and cash equivalents at
beginning of year 86 82 229
------- ------- -------
Cash and cash equivalents at end
of year $ 421 $ 86 $ 82
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
40 Annual Report Page 38
McDonnell Douglas Corporation
Notes To Consolidated Financial Statements
December 31, 1994
(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 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.
The consolidating balance sheet represents the adding together of all
affiliates - companies that McDonnell Douglas Corporation directly or
indirectly controls, either through majority ownership or otherwise.
Financial data and related measurements are presented in the following
categories:
MDC Aerospace. This represents the consolidation of McDonnell
Douglas Corporation and its subsidiaries other than MDFS and
McDonnell Douglas Realty Company (MDRC), which are presented on a
one-line basis as Investment in Financial Services.
Financial Services. This represents the consolidation of MDFS and
its subsidiaries and MDRC, both wholly-owned subsidiaries of MDC.
McDonnell Douglas Corporation and Consolidated Subsidiaries. This
represents the consolidation of McDonnell Douglas Corporation and
all its subsidiaries (MDC).
Stock Split
In October 1994 the MDC Board of Directors authorized a three-for-one stock
split to be implemented by a stock dividend of two shares for each share
outstanding to shareholders of record on December 2, 1994, payable on
January 3, 1995. Shareholders' equity has been restated to give retroactive
recognition to the stock split for all periods presented by reclassifying
from additional capital to common stock the par value of the additional
shares arising from the split. In addition, all references to number of
shares, per share amounts, stock option data, and market prices of common
stock have been restated to reflect the stock split.
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.
41
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) in accordance with
Statement of Position 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts" (SOP 81-1). 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 and MD-90
aircraft programs are 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. A constant gross margin is achieved
by deferring or accelerating a portion of the average unit cost on each unit
delivered.
Program accounting has been developed in practice as a method of accounting
for the costs of certain products manufactured for delivery under production
type contracts. This method, with origins prior to the issuance of SOP 81-1,
42 Annual Report Page 39
is used by a limited number of companies within the airframe industry to
account for revenues and costs associated with long-term programs. MDC's
use of program accounting began with the DC-10, the trijet predecessor of
the MD-11, and continues to be used for the MD-11. MDC does not use program
accounting for its twin jet line, which had its origin prior to MDC's
adoption of the program method. Estimated revenues and cost of sales and
period of delivery associated with forecasted orders are an integral
component of program accounting, and the ability to reasonably estimate
those amounts is a requirement for the use of program accounting. The
percentage-of-completion method, associated with SOP 81-1 and utilized for
government contracts, generally includes only existing orders.
Revenues, costs and earnings on government contracts and commercial aircraft
programs are determined, in part, based on estimates. Adjustments of such
estimates under program accounting are made prospectively, while such
adjustments on government contracts 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 as soon as they are evident.
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.
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.
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.
43
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.
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.
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 federal and most state income taxes.
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, 1994, MDC's
participation in the partnership was approximately 52%.
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. All such costs are expensed as incurred.
Research and development expense has been reduced by $32 million in 1994,
$27 million in 1993 and $6 million in 1992 for risk-sharing funds received
from vendors and subcontractors participating in the development of
commercial aircraft. Some amounts may be repayable under certain
circumstances.
44 Annual Report Page 40
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.
2. Discontinued Operations
Over a several year period which concluded in 1993, MDC divested its
information systems business. 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 McDonnell Douglas Information Systems
International (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, net of income
taxes of $25 million and $23 million, respectively. Net earnings of the
discontinued operations in 1992 were $20 million on revenues of $316
million.
3. Accounts Receivable
Accounts receivable consist of the following:
December 31 1994 1993
---- ----
MDC Aerospace
U.S. Government - primarily from
long-term contracts:
Billed $395 $187
Unbilled 302 273
---- ----
697 460
Commercial and other governments 74 93
Financial Services 1 2
---- ----
$772 $555
==== ====
MDC Aerospace also had net receivables from Financial Services of $145
million and $63 million (including a note receivable of $25 million) at
December 31, 1994 and 1993, respectively.
45
Unbilled receivables at December 31, 1994 include unbillable amounts of $190
million. Unbillable amounts include the estimated sales value of items
delivered or other work performed which lack contractual documentation to
permit billing. Approximately $105 million of the 1994 unbilled amount is
not expected to be collected within one year.
MDC has an 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. Under the agreement,
participation interests in new receivables are 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. MDC acts as an agent for the purchaser by
performing record keeping and collection functions. At December 31, 1994
and 1993, accounts receivable are net of $35 million and $100 million,
respectively, representing receivable interests sold.
4. Finance Receivables and Property on Lease
Finance and lease receivables and property on lease consist of the
following:
December 31 1994 1993
------- -------
Financial Services
Sales-type and direct financing leases:
Minimum lease payments $1,477 $1,676
Residual values 266 313
Unearned income (651) (793)
------- -------
1,092 1,196
Notes receivable 368 301
Allowances for doubtful receivables (41) (35)
Investment in operating leases, net of
accumulated depreciation of $147 in
1994, $136 in 1993 463 482
Property held for sale or lease 53 79
-------- --------
1,935 2,023
MDC Aerospace 152 334
-------- --------
$2,087 $2,357
======= =======
46
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 for Financial Services consist of the
following at December 31, 1994:
Principal Payments
and Installments Minimum Rentals
------------------ ---------------
1995 $349 $81
1996 220 67
1997 189 61
1998 171 55
1999 160 44
After 1999 756 26
47 Annual Report Page 41
Concentration of Credit Risk
Financial Services' financing and leasing portfolio, excluding $128 million
at December 31, 1994 and $160 million at December 31, 1993 of MDRC, consists
of the following:
December 31 1994 1993
--------------- ---------------
Commercial aircraft financing:
MDC commercial jet transports
on lease $1,141 63.1% $1,048 56.3%
Other commercial aircraft
on lease 207 11.5% 217 11.6%
------ ------ ------ ------
1,348 74.6% 1,265 67.9%
Other commercial and industrial
financing 459 25.4% 598 32.1%
------ ------ ------ ------
Total Portfolio $1,807 100.0% $1,863 100.0%
====== ====== ====== ======
The single largest commercial aircraft financing customer accounted for $288
million (15.9% of total portfolio) in 1994 and $276 million (14.8% of total
portfolio) in 1993. The five largest accounted for $743 million (41.1%) and
$726 million (39.0%) in 1994 and 1993, respectively.
There were no significant concentrations by customer in Financial Services'
other commercial and industrial financing portfolio.
Financial Services holds title to all leased equipment and generally has a
perfected security interest in the assets financed through note and loan
arrangements.
5. Contracts in Process and Inventories
Contracts in process and inventories consist of the following:
December 31 1994 1993
MDC Aerospace -------- --------
Government contracts in process $ 5,548 $ 6,347
Commercial products in process 4,127 4,005
Material and spare parts 710 873
Progress payments to subcontractors 1,438 1,362
Progress payments received (6,017) (6,813)
-------- --------
$ 5,806 $ 5,774
======== ========
Substantially all government contracts in process (less applicable progress
payments received) represent unbilled revenue and revenue which is currently
not billable.
48
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 $1.334 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 remains 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. On December 9, 1994, the U.S. Court of Federal Claims
ordered the January 7, 1991 decision terminating the contract for default
vacated because that decision was not properly made. A trial of all
remaining issues related to the termination is scheduled to commence in late
1995.
At December 31, 1994, Contracts in Process and Inventories include
approximately $562 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, was based on MDC's belief that
the termination for default would be converted to a termination for
convenience, that the Team will establish a minimum of $250 million in
claims adjustments, 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, 1994, as a result of a 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 was contrary to law and fact, 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 sustaining that the termination is
properly one for the convenience of the Government, the probable claims
adjustments are not less than $250 million.
49 Annual Report Page 42
In 1984, MDC entered into a full scale development letter contract,
containing a not-to-exceed price, for the T-45 Training System which
included the conversion of the land-based British Hawk aircraft with minimal
change into a carrier-capable Navy aircraft, designated the T-45A. 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,
1994, Contracts in Process and Inventories include costs for the related
contracts of $165 million. Realization of this amount is dependent in part
on (i) costs to complete these contracts not exceeding present estimates and
(ii) realization of expected amounts of recovery on claims filed with
respect to the improvements. 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. 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 subcontractor
would be legally liable for such costs. If revenue from such claims is not
realized, a loss provision of approximately $153 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. 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.
50
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. During 1994, the C-17
settlement was given Congressional approval in the FY 95 defense
authorization and appropriations bills. MDC and the Air Force executed
contract modifications to implement the settlement in February 1995.
During the fourth quarter of 1993, MDC recorded a $450 million pre-tax
charge associated with the business settlement arranged with the DoD and
cost growth on the development and initial production contracts. Based upon
further definition and pricing of issues in the settlement during 1994, MDC
reduced cost estimates associated with the settlement. However, these
reductions were more than offset as MDC recognized additional cost growth
for work then being completed and yet to be completed in the development and
initial production lots, resulting in part from the settlement. The flight
test program under the development contract was completed in December 1994
and all initial production aircraft have been delivered.
At December 31, 1994, Contracts in Process and Inventories include incurred
costs totaling $371 million for the fixed price type contracts for
development and first ten initial production C-17 military transport
aircraft for the Air Force. Contracts in Process and Inventories include
$208 million of claims revenues expected to be collected as part of the
settlement.
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
51 Annual Report Page 43
ended December 31, 1992, MDC recorded loss provisions totaling $383 million,
which represented the amount by which estimated costs on the combined
contracts, excluding general and administrative costs and other period
costs, exceeded estimated revenues on the combined contracts.
The Air Force continues to reduce payments to MDC under the C-17 contracts,
largely due to the DoD projecting production costs at completion on the full-
scale engineering development (FSED) and initial production aircraft in
excess of MDC's estimates at completion and due to work remaining on
delivered aircraft. In addition, during 1992 the Air Force questioned MDC's
segregation of certain C-17 engineering costs between FSED and production
lots. As required in the settlement, MDC and the Defense Plant
Representative Office reached agreement on the charging methodology to be
used in the future and on impacts of the implementation of the new
methodology. Pending contractual implementation of the business settlement,
for progress payment purposes the Air Force reclassified to FSED a
substantial portion of sustaining engineering costs applied by MDC to
production lots. As of December 31, 1994, the Air Force had withheld
approximately $286 million from MDC's progress payment requests on the C-17
contracts. The portion of this amount associated with the sustaining
engineering reclassification was $54 million, and was included in the
provision for the C-17 business settlement.
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. Since
inception and based upon current projections, MDC believes use of 301
aircraft in the program is appropriate. 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, 1994, includes net deferred production
costs of $1.202 billion and unamortized tooling of $247 million. These
amounts are to be applied to the remainder of the 301 aircraft pool.
Commercial products in process for the MD-11 programs at December 31, 1993
and 1992, included net deferred production costs of $1.324 billion and
$1.468 billion, respectively, and unamortized tooling of $257 million and
$288 million, respectively. Under the current costing percentage, an
estimated $1.0 billion of current and future deferred costs will be
recovered from firm orders received after December 31, 1994. This amount is
relatively unchanged in the three year period ended December 31, 1994.
MDC delivered 17, 36, and 42 trijets in 1994, 1993, and 1992 respectively.
As of December 31, 1994, MDC had delivered 129 MD-11 aircraft and has 45
aircraft on firm order. In addition, MDC had 85 options and reserves
representing potential future orders for the MD-11. Total orders,
representing deliveries plus undelivered firm orders, have been static
during the last three years. MDC periodically, and at least annually,
reviews its assumptions as to the size of the pool, the estimated period
over which the units will be delivered and the estimated future costs and
revenues associated with the program. The percent used to charge cost of
sales has remained constant since 1992, as cost increases related to
extending the estimated delivery period were offset by operational
efficiencies. The estimate of future cost and revenues
52
were revised in the second quarter of 1992 resulting in an increase of
approximately 4% of the airplane sale price to the percent used to charge
cost of sales. Currently, estimated proceeds from the undelivered aircraft
in the pool exceed the production and tooling costs in inventory at December
31, 1994, 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.
6. Property, Plant and Equipment
The major categories of properties consist of the following:
December 31, 1994 1994 1993
MDC Aerospace -------- --------
Land $ 92 $ 92
Buildings and fixtures 1,630 1,641
Machinery and equipment 2,243 2,421
Accumulated depreciation (2,524) (2,570)
-------- --------
1,441 1,584
Financial Services, net 156 166
-------- --------
$ 1,597 $ 1,750
======== ========
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 provides data processing services to MDC under the
agreement. Service payments are expected to aggregate approximately $2.3
billion over the remaining eight year term of the agreement.
53 Annual Report Page 44
8. Other Assets
Other assets consist of the following:
December 31 1994 1993
MDC Aerospace -------- --------
Prepaid pension asset $ 1,198 $ 1,161
Prepaid expenses 69 49
Intangible assets 44 38
Other 109 112
-------- --------
1,420 1,360
Financial Services 113 144
-------- --------
$ 1,533 $ 1,504
======== ========
9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
December 31 1994 1993
-------- --------
MDC Aerospace
Accounts and drafts payable $ 1,171 $ 769
Accrued expenses 891 1,036
Employee compensation 320 289
-------- --------
2,382 2,094
Financial Services 103 96
-------- --------
$ 2,485 $ 2,190
======== ========
Financial Services also had net accounts payable to MDC Aerospace of $145
million and $38 million as of December 31, 1994 and 1993, respectively.
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.
54
Income taxes consist of the following:
December 31 1994 1993
------ ------
Current:
MDC Aerospace $ 71 $ 178
Financial Services (1) 30
------ ------
70 208
Deferred:
MDC Aerospace 353 87
Financial Services 300 279
------ ------
653 366
------ ------
$ 723 $ 574
======= =======
Tax effects of temporary differences that gave rise to the deferred tax
liability consist of the following:
December 31 1994 1993
------ ------
MDC Aerospace
Deferred tax assets:
Retiree medical $ (485) $ (513)
Other (258) (176)
------- -------
(743) (689)
Deferred tax liabilities:
Pension plan 453 441
Long-term contracts 452 290
Other 191 45
------- -------
1,096 776
Financial Services
Deferred tax assets:
Bad debts (12) (70)
Other (22) (48)
------- -------
(34) (118)
Deferred tax liabilities:
Leased assets 314 286
Other 20 111
------- -------
334 397
------- -------
Net deferred tax liability $ 653 $ 366
======= =======
55
MDC's income tax provision consists of the following:
Years Ended December 31 1994 1993 1992
------ ------ ------
U.S. federal:
Current $ 115 $ 120 $(117)
Deferred 151 (50) 434
------ ------ ------
266 70 317
State:
Current 20 26 -
Deferred 33 1 63
------ ------ ------
53 27 63
Foreign 3 3 8
------ ------ ------
Income tax provision $ 322 $ 100 $ 388
====== ====== ======
56 Annual Report Page 45
Reconciliation of the pro forma income tax provision, computed by applying
the U.S. federal statutory rate of 35% in 1994 and 1993, and 34% in 1992, to
the recorded income tax provision follows:
Years Ended December 31 1994 1993 1992
------ ------ ------
Pro forma income tax provision
computed at the statutory U.S.
federal income tax rate $ 322 $ 161 $ 369
State income tax provision
net of effect on pro forma
U.S. federal tax 34 18 41
Increase (decrease) in taxes
resulting from:
Export tax-exempt income (8) (7) (15)
Federal tax rate change - 13 -
IRS federal settlement (15) (75) -
Executive life insurance (12) (11) (6)
Other - net 1 1 (1)
------ ------ ------
Income tax provision $ 322 $ 100 $ 388
====== ====== ======
Pre-tax earnings from foreign subsidiaries included in continuing
operations, but excluding the operations of McDonnell Douglas Foreign Sales
Corporation, were $2 million in 1994, $3 million in 1993 and $13 million in
1992. 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 $120 million of undistributed earnings
of foreign subsidiaries.
MDC settled certain accounting method and tax credit issues with the
Internal Revenue Service (IRS) in 1993 and 1994 in connection with the IRS'
audit of the years 1986 through 1989. The resolution of these issues
resulted in net earnings of $158 million in 1993, of which $83 million
related to reductions in accrued interest. Issues resolved in 1994 resulted
in a $15 million federal tax benefit.
57
11. Debt and Credit Arrangements
Consolidated debt consists of the following classifications at December 31:
Current
Interest Rate 1994 1993
------------- -------- --------
Short-Term Debt
MDC Aerospace $ - $ 91
Financial Services 6.55% 103 203
-------- --------
Total short-term debt 103 294
Long-Term Debt
MDC Aerospace
Senior debt securities,
due through 2012 8.3%-9.8% 1,145 1,295
Senior medium-term notes,
due through 1996 6.0%-7.4% 101 132
Other debt, due through 2000 8.0%-11.5% 3 2
-------- --------
Total MDC Aerospace long-term debt 1,249 1,429
Financial Services
Senior debt securities,
due through 2011 3.9%-10.3% 393 421
Senior medium-term notes,
due through 2005 4.6%-13.6% 701 737
Subordinated notes,
due through 2004 8.3%-12.4% 88 78
Other notes, due through 2017 5.0%-10.0% 12 74
Other debt, due through 2003 8.7%-10.4% 23 105
-------- --------
Total Financial Services long-term debt 1,217 1,415
-------- --------
Total long-term debt 2,466 2,844
-------- --------
Total debt $ 2,569 $ 3,138
======== ========
The aggregate amount of long-term debt at December 31, 1994 maturing by
calendar year for 1995 to 1999 is as follows:
MDC Aerospace Financial Services
------------- ------------------
1995 $ 47 $276
1996 55 137
1997 250 137
1998 - 195
1999 - 124
The weighted average interest rate on short-term borrowings outstanding at
December 31, 1994 and 1993 was 6.55% and 4.84%, respectively.
58 Annual Report Page 46
MDC Aerospace Credit Agreements
At December 31, 1994, MDC Aerospace has a revolving credit agreement (RCA)
under which MDC Aerospace may borrow up to $1.25 billion through July 1998.
Under the credit agreement, the interest rate, at the option of MDC
Aerospace, is a floating rate generally based on a defined prime rate, a
fixed rate related to the London interbank offered rate (LIBOR), or as
quoted under a competitive bid. A fee is charged on the amount of the
commitment. The agreement contains restrictive covenants including but not
limited to net worth (as defined), indebtedness, subsidiary indebtedness,
customer financing, interest coverage and liens. There are no amounts
outstanding under the credit agreement at December 31, 1994.
In August 1992, MDC Aerospace 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, 1994, MDC
Aerospace has issued $132 million of medium-term notes, of which $101
million is currently outstanding. During 1993, MDC Aerospace issued $200
million of 8.25% senior debt securities due on July 1, 2000. As of December
31, 1994, $218 million of securities registered under the shelf registration
remain unissued.
Financial Services Credit Agreements
At December 31, 1994, MDFS and MDFC have a joint revolving credit agreement
under which MDFC may borrow a maximum of $220 million, reduced by MDFS
borrowings under this same agreement. This agreement, which became
effective during September 1994, expires in September 1998. By terms of
this agreement, MDFS can borrow no more than $16 million. The interest
rate, at the option of MDFC or MDFS, 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, 1994.
Commercial paper of $103 million outstanding at December 31, 1994 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.
In June 1993, MDFC commenced an offering of up to $250 million of its
General Term Notes and subsequently commenced offerings of up to an
aggregate of $399 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, 1994, MDFC has issued pursuant to
such offerings $91 million of General Term Notes at rates ranging from 5.0%
to 8.4% due in 1995 through 2011, $140 million of senior medium-term notes
at fixed rates ranging from 4.6% to 6.8% due in 1995 through 1998, $150
million of senior medium-term notes due in 1995 through 1999 at floating
rates based on LIBOR and reset quarterly, and $20 million of subordinated
medium-term notes at a fixed rate of 8.3% due in 2004. As of December 31,
1994, $248 million of securities registered under the shelf registration
remain unissued.
59
MDFC's senior debt at December 31, 1994 includes $85 million secured by
equipment having a carrying value of $104 million. MDRC's debt of $35
million at December 31, 1994 is secured by indentures of mortgage and deeds
of trust on MDRC's interest in real estate developments having a carrying
value of $80 million.
12. Fair Values of Financial Instruments
MDC has limited involvement with derivative financial instruments and does
not use them for trading purposes. Derivatives are used to manage well-
defined foreign exchange subcontract price risks as well as foreign currency
denominated debt risks.
At December 31, 1994, the notional amount of forward exchange contracts
denominated in currencies of major industrial countries is $110 million.
The term of the currency derivatives varies, but the longest is three years.
At December 31, 1994, such deferred unrealized gains and losses were not
material. Because of the off balance sheet nature of these derivative
instruments, counterparty failure would result in recognition of such gains
and losses. However, MDC anticipates that counterparties will fully satisfy
their obligations under the contracts.
The following methods and assumptions were used in estimating the fair value
disclosures of financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
60 Annual Report Page 47
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.
The carrying amounts and fair values of financial instruments are as
follows:
MDC Aerospace Financial Services
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
December 31, 1994
-----------------
Cash and cash
equivalents $ 408 $ 408 $ 13 $ 13
Notes receivable 37 30 358 346
Short-term notes
payable - - 103 103
Long-term debt 1,249 1,281 1,135 1,162
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 1,429 1,580 1,326 1,439
13. Common and Preferred Shares
The authorized common stock of MDC is 200 million shares, each of $1.00 par
value. The following table summarizes changes in shares outstanding for the
periods presented.
61
Common Shares
Outstanding
-------------
Balance January 1, 1993 117,570,657
Employee stock awards and options 356,043
Shares issued to employee savings plans 45,024
Other 10,986
-------------
Balance December 31, 1993 117,982,710
Shares repurchased (1,955,400)
Employee stock awards and options 706,497
Other 2,484
-------------
Balance December 31, 1994 116,736,291
=============
In October 1994, the MDC Board of Directors authorized a three-for-one stock
split to be implemented by a stock dividend of two shares for each share
outstanding to shareholders of record on December 2, 1994, payable on
January 3, 1995. All references to number of shares, per share amounts,
stock option data, and market prices of common stock have been restated to
reflect the stock split.
The Board of Directors also approved a stock repurchase plan. The plan
authorizes MDC to purchase up to 18 million shares from time to time in the
open market, through privately negotiated transactions, or self-tender
offers. Repurchased common shares will be treated as authorized but
unissued shares and remain available for use to meet MDC's current and
future common stock requirements for its benefit plans and for other
corporate purposes.
At December 31, 1994, a total of 6,599,942 shares of authorized and unissued
common stock are reserved for issuance of stock awards and options granted
or authorized to be granted. Also, 11,926,821 shares are reserved for
contributions to MDC's savings plans. At December 31, 1994, 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. The
Rights are exercisable only (i) after 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. In conjunction with the 1994 stock split,
the Board of Directors authorized the adjustment of the exercise price to
$125 and an extension of the expiration date to December 31, 2004. The
Rights 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.
62 Annual Report Page 48
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.
14. Stock Option and Incentive Plans
In April 1994, MDC's shareholders approved the 1994 Performance and Equity
Incentive Plan (PEIP Plan). Under the PEIP Plan, 5,700,000 shares were
authorized for issuance or sale in connection with stock options, stock
appreciation rights, restricted stock, performance shares, and other stock-
based awards. Options may be granted to officers and employees at an
exercise price of no less than the fair market value of the shares on the
date of grant. In addition, as of December 31, 1994, 439,260 restricted
shares of MDC common stock had been granted. Compensation related to these
restricted shares is being amortized to expense over periods of three to
five years, depending on the award. Unearned compensation is reflected as a
component of shareholders' equity.
Awards granted prior to approval of the PEIP Plan under the Incentive Award
Plan (IA Plan) approved by shareholders in 1986 in the form of stock, non-
qualified stock options, incentive stock options or stock appreciation
rights remain outstanding.
Options to purchase MDC common stock have been granted under MDC's incentive
compensation and option plans. A summary of options for MDC common stock
follows:
Years Ended December 31 1994 1993
-------- --------
Granted under the PEIP Plan:
Number of shares 450,000 -
Price per share $37 -
Granted under the IA Plan:
Number of shares - 56,769
Price per share - $19
Exercised:
Number of shares 123,324 304,659
Price per share $13-$30 $13-$21
December 31 1994 1993
-------- --------
Outstanding:
Number of shares 605,646 321,888
Price per share $13-$37 $13-$30
Exercisable:
Number of shares 155,646 266,892
Price per share $13-$21 $13-$30
63
At December 31, 1994, a total of 9,342 stock appreciation rights are
outstanding and exercisable at $19 per right.
MDC has a Long-Term Incentive Program (LTIP) adopted under the IA Plan.
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 two to five years.
At December 31, 1994 MDC has accrued $15 million for LTIP. No awards have
been granted under LTIP since 1993.
15. Retirement Plans
Substantially all employees of MDC 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.
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, 1994, the plans hold $23 million of
MDC's medium-term notes and $35 million of MDC's senior debt securities with
varying interest rates and maturity dates, and 107,700 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 1994 1993 1992
-------- -------- --------
Discount rate:
January 1 7.5% 9.0% 9.0%
December 31 8.25% 7.5% 9.0%
Average rates of increase in
compensation based upon age -
salaried plans:
January 1 5.0% 6.0% 6.7%
December 31 5.0% 5.0% 6.7%
Expected return on plan assets 9.3% 9.3% 9.3%
64 Annual Report Page 49
Components of periodic pension expense (income) for the significant domestic
plans include the following:
Years Ended December 31 1994 1993 1992
------ ------ ------
Service cost for the year $ 119 $ 100 $ 126
Interest cost on pension
benefit obligations 278 266 246
Return on plan assets:
Actual (64) (426) (512)
Deferred gain (loss) (403) (13) 93
Net amortization (62) (65) (59)
------ ------ ------
Domestic plans $(132) $(138) $(106)
====== ====== ======
Foreign and other plans $ 6 $ 7 $ 7
====== ====== ======
An analysis of the funded status of the significant domestic pension plans
follows:
December 31 1994 1993
-------- --------
Actuarial present value of accumulated
benefit obligations:
Vested $ 3,028 $ 3,191
Non-vested 254 272
-------- --------
Accumulated benefit obligation 3,282 3,463
Additional amounts related to projected
future salary increases 298 343
-------- --------
Projected benefit obligation 3,580 3,806
Plan assets, at fair value 5,091 5,260
-------- --------
Excess of plan assets 1,511 1,454
Items not yet recognized in earnings:
Unrecognized net transition asset (490) (563)
Unrecognized prior service cost 338 446
Deferred net gain (172) (186)
-------- --------
1,187 1,151
Foreign plans 11 10
-------- --------
Prepaid pension asset $ 1,198 $ 1,161
======== ========
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.
65
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.
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 in the plans. Generally, MDC's contributions are vested after
five years of service. MDC's contributions to the savings plans during 1994
totaled $73 million, during 1993 totaled $59 million of which $1 million was
the market value of 45,024 shares of MDC common stock contributed, and
during 1992 totaled $94 million of which $39 million was the market value of
2,299,365 shares of MDC common stock contributed.
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, such 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, maintenance of benefits with
other plans, Medicare carve-out, and a maximum lifetime benefit per covered
individual.
66 Annual Report Page 50
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.
During 1993, MDC and the International Association of Machinists and
Aerospace Workers (IAMAW) in St. Louis, Missouri and 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. 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).
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 1993,
reflecting a similar arrangement negotiated with the Southern California
Professional Engineering Association for employees retiring after July 1,
1993.
67
An analysis of the accrued retiree benefits follows:
December 31 1994 1993
-------- --------
Accumulated postretirement benefit
obligation:
Retirees $ 795 $ 790
Active participants fully eligible
to retire 121 130
Other active participants 107 149
-------- --------
Accumulated postretirement benefit
obligation 1,023 1,069
Items not yet recognized in earnings:
Unrecognized prior service gain 194 205
Deferred net loss (112) (175)
-------- --------
Accrued retiree health care liability 1,105 1,099
Liability for pension supplement 193 289
-------- --------
Accrued retiree benefits $ 1,298 $ 1,388
======== ========
Components of periodic postretirement benefit expense, exclusive of the
curtailment gains in 1993 and 1992, include the following:
Years Ended December 31 1994 1993 1992
------ ------ ------
Service cost for the year $ 9 $ 13 $ 74
Interest cost on accumulated post-
retirement benefit obligations 77 80 189
Net amortization (10) (11) -
------ ------ ------
$ 76 $ 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 1994 1993 1992
------ ------ ------
Discount rate:
January 1 7.5% 9.0% 9.0%
December 31 8.25% 7.5% 9.0%
Health care cost trend rate:*
Non-medicare 10.2% 11.0% 15.0%
Medicare 8.5% 9.0% 9.0%
HMO premiums 6.0% 6.5% 9.0%
* Decreasing to 5.8% 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, 1994.
68 Annual Report Page 51
16. Leased Properties
Rental expense for leased properties was $95 million in 1994, $106 million
in 1993 and $155 million in 1992. These expenses, substantially all minimum
rentals, are net of sublease income. MDC has negotiated noncancelable
sublease agreements on certain of its facilities and equipment totaling $8
million during the next several years. Minimum rental payments under
operating leases with initial or remaining terms of one year or more at
December 31, 1994, aggregated $243 million, and payments, net of sublease
amounts, due during the next several years are: 1995, $65 million; 1996, $54
million; 1997, $40 million; 1998, $24 million and 1999, $16 million.
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,
1994, $387 million in guarantees are outstanding on delivered aircraft. As
of December 31, 1994, MDC had made offers totaling $649 million to lease
aircraft scheduled to be delivered during 1995 to 1998 and had made offers
totaling $63 million to accept notes in payment for aircraft or 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 $98 million at December 31, 1994.
MDC's outstanding guarantees include approximately $125 million related to
MD-11s operated by a foreign carrier. During March 1994, this carrier
notified its aircraft lenders and lessors that it was temporarily suspending
payments pending a restructuring of its financial obligations and requested
a "standstill" agreement to protect itself from default remedies for sixty
days. MDC has made and will continue through the first half of 1995 to make
lease payments on behalf of the carrier. These payments are not expected to
have a significant adverse effect on MDC's cash flow or financial position.
MDC and the carrier have tentatively negotiated a repayment schedule calling
for payments to begin later in 1995.
During October 1994, Trans World Airlines, Inc. (TWA), MDC's largest
aircraft leasing customer, proposed a restructuring plan relating to its
indebtedness and leasehold obligations to its creditors. As part of its
overall plan, TWA requested MDC to defer six months of lease and other
payments. TWA and MDC have reached agreement in principle to defer payments
for a period of six months. Under the proposed agreement, deferred amounts
will be repaid to MDC over a two year period beginning in April 1995. While
the ultimate outcome of the proposed restructuring plan is dependent upon
factors beyond the control of MDC, it is not expected to be materially
adverse to MDC.
69
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 29 sites. Of these, MDC believes
that it has de minimis liability at 19 sites, including 14 sites at which it
believes that it has no future liability. At eight of the 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. At the two remaining sites, MDC lacks sufficient
information to determine its probable share or amount of liability. 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, 1994, the accrued liability for environmental cleanup
matters at Superfund sites and for MDC's current and former operating sites
was $27 million. Claims for recovery have not been netted against the
disclosed environmental liabilities. While ongoing litigation may
eventually result in recovery of costs expended at certain of the waste
sites, any gain is contingent upon a successful outcome and has not been
accrued.
MDC believes any amounts paid in excess of the accrued liability will not
have a material effect on its financial position, results of operations,
liquidity or cash flow.
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,
results of operations, liquidity or cash flow.
See Note 5, "Contracts in Process and Inventories," for a discussion of
certain risks on fixed price development contracts.
70 Annual Report Page 52
18. Operations of MDFS
The condensed financial data presented below have been summarized from the
audited consolidated financial statements of MDFS.
Years Ended December 31 1994 1993 1992
------ ------ ------
Earned income $ 190 $ 201 $ 256
Costs and expenses 154 166 222
Cumulative effect of accounting
change - - (2)
Net earnings 13 13 23
Dividends and other distributions 25 - 103
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 $9.229 billion in 1994, $9.052 billion in 1993, and
$9.286 billion in 1992. No other single customer accounted for 10% or more
of consolidated revenues in 1994, 1993, or 1992.
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 1994 1993 1992
------- ------- -------
North America $ 59 $ 41 $ 43
South America 24 306 348
Europe 2,176 1,000 2,195
Asia/Pacific 1,288 1,114 1,561
Mideast/Africa 688 944 836
------- ------- -------
$ 4,235 $ 3,405 $ 4,983
======= ======= =======
20. Supplementary Payment Information
Years Ended December 31 1994 1993 1992
------- ------- -------
Interest paid $ 313 $ 314 $ 446
Income taxes paid 162 84 158
21. Business Segment Reporting
Selected Financial Data By Industry Segment is presented on page 32.
71 Annual Report Page 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, 1994 and 1993, and
the consolidated results of its operations for the years ended December 31,
1994, 1993 and 1992.
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.
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/ H. C. Stonecipher
President and Chief Executive Officer
/s/ H. J. Lanese
Executive Vice President and Chief Financial Officer
January 17, 1995
72
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
McDonnell Douglas Corporation
We have audited the accompanying balance sheet (including the consolidating
data for MDC Aerospace and Financial Services) of McDonnell Douglas
Corporation and consolidated subsidiaries (MDC) as of December 31, 1994 and
1993, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1994. 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 financial position of McDonnell Douglas
Corporation and consolidated subsidiaries at December 31, 1994 and 1993, and
the consolidated results of MDC's operations and MDC's cash flows for each
of the three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles.
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 LLP
St. Louis, Missouri
January 17, 1995
Selected Financial Data by Industry Segment is presented on page 32.
73 Annual Report Page 54
Ten Year Consolidated Financial Summary
------------------------------------------------------------------------------------------------------
(Dollar amounts in millions, except per share data)
------------------------------------------------------------------------------------------------------
December 31 or Years Then Ended 1994 1993 1992 1991 1990 1989
------------------------------------------------------------------------------------------------------
Summary of Operations
Revenues by industry segment:
Military aircraft $ 7,804 $ 6,852 $ 7,238 $ 7,795 $ 7,707 $ 7,484
Commercial aircraft 3,155 4,760 6,595 6,752 3,935 3,151
Missiles, space and
electronic systems 1,877 2,575 3,169 2,979 3,188 2,761
Financial services and other 326 287 352 519 658 534
----------------------------------------------------------------
Operating revenues 13,162 14,474 17,354 18,045 15,488 13,930
Earnings (loss) from
continuing operations 598 359 698 (a) 357 258 (c) (30)
Per share 5.05 3.06 5.99 (a) 3.11 2.24 (c) (.26)
Net earnings (loss) 598 396 (781)(b) 423 306 (c) 219(d)
Per share 5.05 3.37 (6.70)(b) 3.68 2.66 (c) 1.91(d)
As a % of revenues 4.5% 2.7% 2.3% 2.0% 1.6%
As a % of beginning equity 17.5% 13.1% 12.0% 9.3% 6.9%
Research and development 297 341 509 429 565 571
Interest expense:
Aerospace segments 131 89 309 232 343 335
Financial services and
other segment 118 126 159 221 233 198
Income taxes (benefit) 322 100 388 258 108 (92)
Cash dividends declared 65 55 55 53 108 108
Per share .55 .47 .47 .47 .94 .94
-------------------------------------------------------------------------------------------------------
Balance Sheet Information
Cash and cash equivalents $ 421 $ 86 $ 82 $ 229 $ 226 $ 119
Receivables and property on lease 2,859 2,912 2,866 3,234 4,144 4,372
Contracts in process and
inventories 5,806 5,774 7,230 7,273 6,175 5,103
Property, plant and equipment 1,597 1,750 1,991 2,307 2,446 2,474
Total assets 12,216 12,026 13,781 14,601 14,692 13,160
Notes payable and long-term debt:
Aerospace segments 1,272 1,625 2,767 2,324 2,944 2,558
Financial services and
other segment 1,297 1,513 1,474 1,891 2,614 2,338
Shareholders' equity 3,872 3,413 3,022 3,877 3,514 3,287
Per share 33.17 28.93 25.70 33.66 30.57 28.63
Debt-to-equity ratios:
Aerospace segments .36 .52 1.01 .66 .95 .87
Financial services and other segment 4.14 5.22 5.42 5.25 6.55 6.82
-------------------------------------------------------------------------------------------------------
74
Ten Year Consolidated Financial Summary (cont.)
-------------------------------------------------------------------------------------------------------
(Dollar amounts in millions, except per share data)
-------------------------------------------------------------------------------------------------------
December 31 or Years Then Ended 1994 1993 1992 1991 1990 1989
-------------------------------------------------------------------------------------------------------
General Information
Shares outstanding (in millions) 116.7 118.0 117.6 115.2 114.8 114.8
Shareholders of record 24,479 28,513 34,124 35,039 37,662 33,237
Personnel 65,760 70,016 87,377 109,123 121,190 127,926
Salaries and wages $ 3,238 $ 3,464 $ 4,258 $ 4,905 $ 5,300 $ 4,969
Firm backlog $17,503 $19,379 $24,052 $ 30,448 $ 36,544 $ 32,531
Total backlog $29,332 $35,698 $41,806 $ 42,577 $ 52,770 $ 50,230
(a) Includes a gain of $676 million ($5.80 per share) from a
postretirement benefit curtailment relating to SFAS No. 106.
(b) Includes a net charge of $860 million ($7.38 per share) related to the
initial adoption and subsequent curtailment gain associated with SFAS
No. 106.
(c) Includes $376 million earnings ($3.27 per share) from pension
settlement.
(d) Includes earnings from the cumulative effect of an accounting change of
$179 million ($1.56 per share)
75 Annual Report Page 55
Ten Year Consolidated Financial Summary
---------------------------------------------------------------------------------
(Dollar amounts in millions, except per share data)
---------------------------------------------------------------------------------
December 31 or Years Then Ended 1988 1987 1986 1985
---------------------------------------------------------------------------------
Summary of Operations
Revenues by industry segment:
Military aircraft $ 7,426 $ 7,144 $ 7,049 $ 6,930
Commercial aircraft 3,499 2,728 2,493 1,903
Missiles, space and
electronic systems 2,390 2,176 2,040 1,681
Financial services and other 465 387 317 242
------------------------------------------
Operating revenues 13,780 12,435 11,899 10,756
Earnings (loss) from
continuing operations 407 347 312 398
Per share 3.54 2.87 2.58 3.30
Net earnings (loss) 350 313 277 346
Per share 3.04 2.58 2.29 2.87
As a % of revenues 2.5% 2.5% 2.3% 3.2%
As a % of beginning equity 11.8% 11.0% 10.5% 14.8%
Research and development 520 567 449 376
Interest expense:
Aerospace segments 173 109 95 89
Financial services and
other segment 145 113 105 99
Income taxes (benefit) 184 164 242 257
Cash dividends declared 98 94 84 74
Per share .85 .77 .69 .61
---------------------------------------------------------------------------------
Balance Sheet Information
Cash and cash equivalents $ 107 $ 67 $ 85 $ 83
Receivables and property on lease 3,745 3,227 2,999 2,638
Contracts in process and
inventories 4,207 3,673 3,154 2,925
Property, plant and equipment 2,242 2,002 1,700 1,350
Total assets 11,562 10,327 9,233 8,318
Notes payable and long-term debt:
Aerospace segments 1,840 1,596 927 936
Financial services and
other segment 1,770 1,464 1,096 899
Shareholders' equity 3,186 2,970 2,845 2,635
Per share 27.81 25.57 23.38 21.78
Debt-to-equity ratios:
Aerospace segments .64 .59 .35 .38
Financial services and other segment 5.92 5.25 4.72 5.08
---------------------------------------------------------------------------------
76
Ten Year Consolidated Financial Summary (cont.)
---------------------------------------------------------------------------------
(Dollar amounts in millions, except per share data)
---------------------------------------------------------------------------------
December 31 or Years Then Ended 1988 1987 1986 1985
--------------------------------------------------------------------------------
General Information
Shares outstanding (in millions) 114.6 116.1 121.7 121.0
Shareholders of record 34,310 35,354 37,525 38,959
Personnel 121,421 112,400 105,696 97,067
Salaries and wages $ 4,399 $ 3,913 $ 3,561 $ 3,057
Firm backlog $ 26,351 $ 18,890 $ 16,512 $ 16,585
Total backlog $ 40,492 $ 33,102 $ 28,419 $ 23,914
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.
77
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 1994 and 1993. Prices are as reported in
the consolidated transaction reporting system. Stock prices and cash
dividends are restated to reflect the three-for-one stock split.
------------------------------------------------------------
1994 1993
Quarter High Low High Low
------------------------------------------------------------
1st $40-7/8 $34-1/8 $22-5/8 $ 16
2nd 41-5/8 34-7/8 24-7/8 18-1/8
3rd 40 36-5/8 30-1/4 22-1/2
4th 48-5/8 38-1/8 39-1/2 29-3/8
Cash dividends of $.12 a share were declared for each of the first three
quarters in 1994 and for each quarter in 1993. A cash dividend of $.20
a share was declared in the fourth quarter of 1994. The number of
holders of MDC Common Stock at January 31, 1995 was 24,654.
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 calling 1-800-233-8193 or 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 of New York
Attn: Shareholder Relations Department
P.O. Box 2500
Jersey City, NJ 07303-2500
(201) 324-0498
Stock Exchanges
McDonnell Douglas Corporation's Common Stock is listed on the New
York and Pacific Stock Exchanges (ticker symbol MD) and is traded on
these and other exchanges. It is commonly abbreviated in market reports
as "McDnD".
78 Annual Report Page 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, 1994 and 1993. Gross margin is net of
interest expense of the financial services and other segment.
1994
--------------------------------------------------------------
Quarter 1st 2nd 3rd 4th
--------------------------------------------------------------
Revenues $2,953 $3,250 $3,461 $3,512
Gross margin 501 508 482 541
Earnings (loss) from
continuing operations 134 138 161 165
Net earnings (loss) 134 138 161 165
Earnings (loss) per share* 1.13 1.17 1.36 1.39
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* 1.84 1.44 1.21 (1.12)
*Restated to reflect three-for-one stock split.
79
ANNUAL REPORT APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OF THE
COMPANY'S 1994 ANNUAL REPORT
Annual Report Page 4
(Photo: An MDC technician at work at MDC's "Phantom Works" advanced research
and development facility.)
(Quote: In addition to achieving excellent financial results in military
aircraft, MDC continued to build a solid base for future success.)
(Chart: Two bar graphs depicting the five-year history of Military Aircraft
Segment Revenues and Operating Earnings.)
Annual Report Page 5
(Full-page photo: Seven C-17s stationed at Charleston AFB, South Carolina.)
Annual Report Page 6
(Top photo: T-45A Goshawk)
(Bottom photo: F-15E Eagle)
Annual Report Page 7
(Full-page photo: Three F/A-18s in flight.)
Annual Report Page 8
(Top photo: AV-8B Harrier II Plus)
(Bottom photo: MD Explorer)
Annual Report Page 9
(Full-page photo: Four AH-64 Apaches flying in formation.)
Annual Report Page 10
(Photo: Two members of the flight crew in the cockpit of an MD-11 preparing
for flight.)
(Quote: MDC has substantially reduced assembly times and cost - in the face
of a steep decline in production rates.)
(Chart: Two bar graphs depicting the five-year history of Commercial
Aircraft Segment Revenues and Operating Earnings.)
Annual Report Page 11
(Full-page photo: An MD-80 and an MD-11 waiting in line for take-off.)
80
Annual Report Page 12
(Photo: MD-90 Twin Jet)
(Chart: A bar graph depicting the thirty-five year history of Net World
Commercial Aircraft Orders in dollars, and a line graph depicting the
thirty-five year history of World Airline Traffic in revenue passenger
kilometers.)
Annual Report Page 13
(Full-page photo: The nose of an MD-80 shown in front of the tails of
two DC-10s.)
Annual Report Page 14
(Photo: MD-80 Twin Jet)
(Chart: Two bar charts depicting the five-year history of Commercial
Aircraft Market Share of Boeing, Airbus, MDC and Other for Seats
Delivered and Firm Backlog.)
Annual Report Page 15
(Full-page photo: An MD-11 Trijet taking off from Lambert Airport in
St. Louis, Missouri.)
Annual Report Page 20
(Photo: An MDTSC employee discusses progress on the MD-11.)
(Chart: Two bar charts depicting the five-year history of Complementary
Businesses Segment Revenues and Operating Earnings.)
EX-21
11
SUBSIDIARIES
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 (4) 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.
(4) A consolidated subsidiary of McDonnell Douglas Corporation.
EX-23
12
CONSENTS OF INDEPENDENT AUDITORS
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference of our report dated January 17,
1995 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, 1994 in the following filings:
- Registration Statement File Number 33-56129 (filed October 21, 1994) on
Form S-8, McDonnell Douglas Corporation 1994 Performance and Equity
Incentive Plan.
- 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 LLP
St. Louis, Missouri
March 27, 1995
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 17, 1995, included in the 1994 Annual Report to Shareholders of
McDonnell Douglas Corporation and subsidiaries.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 27, 1995
EX-27
13
FINANCIAL DATA SCHEDULE
5
0000063917
MCDONNELL DOUGLAS CORPORATION
1,000,000
12-MOS
DEC-31-1994
DEC-31-1994
421
0
772
0
5,806
0
4,156
2,559
12,216
0
0
117
0
0
3,755
12,216
12,803
13,176
11,144
12,256
0
0
249
920
322
598
0
0
0
598
5.05
0
(1) PP&E includes MDC Aerospace of $3,965 and Financial Services of $191.
(2) Depreciation includes MDC Aerospace of $2,524 and Financial Services
of $35.
EX-99
14
RATIO OF EARNINGS TO FIXED CHARGES
Exhibit 99
MCDONNELL DOUGLAS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Millions of dollars)
Years Ended December 31
-------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
EARNINGS
Earnings from continuing
operations before income taxes
and cumulative effect of
accounting change $920 $459 $1,086 $615 $366
ADD: Interest expense 249 215 468 453 576
Interest factor in rents 35 39 57 66 64
Amortization of capitalized
interest 1 1 2 2 2
------ ------ ------ ------ ------
$1,205 $714 $1,613 $1,136 $1,008
====== ====== ====== ====== ======
FIXED CHARGES
Interest expense $249 $215 $468 $453 $576
Capitalized interest 2
Interest factor in rents 35 39 57 66 64
------ ------ ------ ------ ------
$284 $256 $525 $519 $640
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 4.2X 2.8X 3.1X 2.2X 1.6X
====== ====== ====== ====== ======