-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JgTKZelGYRsw6QIbGLZtntibIvMCgCse7hfUm7OFdKgUYygrasWU9hDYnhtrWbws VcIsDCE+OUTHP850mSyNWg== 0000063917-96-000003.txt : 19960326 0000063917-96-000003.hdr.sgml : 19960326 ACCESSION NUMBER: 0000063917-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDONNELL DOUGLAS CORP CENTRAL INDEX KEY: 0000063917 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT [3721] IRS NUMBER: 430400674 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03685 FILM NUMBER: 96537888 BUSINESS ADDRESS: STREET 1: P O BOX 516 STREET 2: MCDONNELL BLVD AT AIRPORT RD CITY: ST LOUIS STATE: MO ZIP: 63166-0516 BUSINESS PHONE: 3142320232 FORMER COMPANY: FORMER CONFORMED NAME: MCDONNELL CO DATE OF NAME CHANGE: 19670601 10-K 1 FORM 10-K 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, 1995 -------------------------------------- or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------------------ -------------- Commission file number 1-3685 MCDONNELL DOUGLAS CORPORATION - ---------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Maryland 43-0400674 - ----------------------------- ----------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) Post Office Box 516, St. Louis, MO. 63166-0516 - ---------------------------------- ---------------- (Address of Principal Executive Offices) (Zip Code) 314-232-0232 -------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class On Which Registered - ---------------------------------------------------------------------- Common Stock, par value $1 per 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 --- --- 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 --- 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 29, 1996: $8.583 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 29, 1996: 110,952,425 shares DOCUMENTS INCORPORATED BY REFERENCE: Portions of the 1995 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 26, 1996 are incorporated by reference into Part III. Exhibit Index on Page 13 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 McDonnell Douglas). 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 and by Military Transport Aircraft, unincorporated operating divisions of the Company, which are 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, the Company's information systems business has been divested. In 1991, McDonnell Douglas 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, the Company sold all the outstanding stock of TeleCheck Services, Inc. and in 1993, 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 caption: "Military Aircraft, Missiles, Space, and Electronic Systems" and "Commercial Aircraft" on the Pullout Section appearing after page 20, "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 22 through 29 and "Selected Financial Data by Industry Segment" on page 30 of the Company's 1995 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 30 of the Company's 1995 Annual Report to Shareholders, which is incorporated herein by this reference. 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 27 through 29 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1995 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 price and product 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. The Company's strategy includes analyzing potential derivatives of the current product line, and developing those derivatives that are economically appropriate. 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 aerospace 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. 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 10-K Page 4 and flaps, are sometimes subcontracted to outside suppliers. The U.S. Government and commercial customers also furnish certain 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, 1995, the total employment of the Company, including subsidiaries, was 63,612. 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 29 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1995 Annual Report to Shareholders, which is incorporated herein by this reference. RESEARCH AND DEVELOPMENT A significant portion of the Company's business with the U.S. Government consists of research, development, test, and evaluation work, which are reflected as sales and costs in the Company's financial statements. Customer-sponsored research and development work amounted to approximately $1.227 billion in 1995, $1.393 billion in 1994, and $1.126 billion in 1993. Company-sponsored research and development and bid and proposal work, related to both commercial business and business with the U.S. Government, amounted to $311 million in 1995, $297 million in 1994, and $341 million in 1993. U.S. GOVERNMENT AND EXPORT SALES Although there are additional risks to the Company attendant to its non-U.S. operations and transactions, 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 operations and financial position have not been materially adversely affected by these additional risks in its non-U.S. operations and transactions. 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 military 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 18, "U.S. Government and Export Sales" on page 49 of the Company's 1995 Annual Report to Shareholders, which is incorporated herein by this reference. BACKLOG The Company's backlog of orders at December 31 follows: 1995 1994 Backlog % Backlog % -------- ----- ------- ----- (Dollars in millions) Firm backlog: Military aircraft $10,121 51.5 $ 8,340 47.6 Commercial aircraft 7,175 36.5 7,544 43.1 Missiles, space, and electronic systems 2,344 12.0 1,619 9.3 -------- ----- -------- ----- Total Firm Backlog $19,640 100.0 $17,503 100.0 ======== ===== ======== ===== Contingent backlog: Military aircraft $ 6,298 72.3 $ 8,597 73.3 Commercial aircraft 1,669 19.1 2,234 19.0 Missiles, space, and electronic systems 746 8.6 898 7.7 -------- ----- -------- ----- Total Contingent Backlog $ 8,713 100.0 $11,729 100.0 ======== ===== ======== ===== 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 29 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1995 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. 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 $5.2 billion at December 31, 1995, and $4.8 billion at December 31, 1994. 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, termination for convenience, and other government contracting risks, see "Business and Market Considerations - - Military Aerospace Business" on page 27 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1995 Annual Report to Shareholders, which is incorporated herein by this reference. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company at March 6, 1996, were as follows: EXECUTIVE AGE POSITIONS AND OFFICES HELD - ---------- --- --------------------------- William M. Austin 49 McDonnell Douglas Aerospace (MDA) Vice President/General Manager - Business Management since July 1993. MDC Vice President - Treasurer 1991-1993. Edward C. Bavaria 63 DAC Deputy President since May 1995. Self-employed consultant 1993-1995 (subsequent to retirement from General Electric Company). Vice President and General Manager - General Electric Company 1983-1993. Donald V. Black 54 DAC Senior Vice President - Marketing and Airline Financing since February 1996. DAC Vice President/General Manager - Airline Financing Group 1994-1995. MDFC Executive Vice President 1989-1994. Dean C. Borgman 54 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. Robert L. Brand 58 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 50 MDC Senior Vice President - Human Resources and Quality since May 1995. MDC Vice President - Human Resources 1995. Associate Administrator for Continual Improvement of National Aeronautics and Space Administration 1992-1995. Deputy Under Secretary of Defense -Total Quality Management 1990-1992. 10-K Page 7 John P. Capellupo* 61 MDA President since December 1994. MDC Executive Vice President 1992-1994. McDonnell Aircraft Company (MCAIR) President 1991-1992. DAC Deputy President 1990-1991. Michael J. Cave 35 DAC Vice President/General Manager - Business Operations and Chief Financial Officer since November 1995. MDA Vice President/General Manager - Business Management - C-17 Program 1995. MDA Vice President - Business Management 1994-1995. MDA General Manager - Business Program 1993-1994. MDA General Manager - Contracts and Pricing 1991-1993. Stanley Ebner 62 MDC Senior Vice President - Washington Operations since December 1994. Self- employed attorney, consultant, and writer 1990-1994. * Retiring, effective March 31, 1996. George G. Field 57 DAC Senior Vice President - Product Support since January 1996. MDA Vice President/General Manager - Integrated Product Definition and C-17 Deputy Program Manager 1994-1996. MDA Vice President/General Manager - C-17 Engineering and Test 1993-1994. MDA Vice President/General Manager - Government Programs - Product Development and Technology 1993-1994. DAC Vice President MD-12 Design and Technology 1992-1993. DAC Vice President - MD-11 1990-1992. Patrick J. Finneran Jr. 50 MDA Vice President/General Manager - Production Aircraft Programs since January 1995. MDA Vice President/ General Manager AV-8B 1992-1994. MCAIR General Manager AV-8B 1992. MCAIR Deputy General Manager AV-8B 1990-1992. Steven N. Frank 47 MDC Vice President, Associate General Counsel and Secretary since April 1994. MDC Vice President, Associate General Counsel and Assistant Secretary 1992- 1994. Partner of Peper, Martin, Jensen, Maichel & Hetlage 1988-1992. Thomas M. Gunn 52 MDC Senior Vice President - Business Development since May 1995. MDC Vice President/General Manager, Strategic Business and International Development 1994. MDC Vice President, Strategic Business Development 1993. MDC Vice President, Special Projects 1992. MDHC President 1990-1992. Frederick W. Hill 46 MDC Senior Vice President - Communications and Community Relations since May 1995. Vice President - Public Affairs, Westinghouse Electric Corporation 1993 - 1995. Executive Director - Government Affairs, Westinghouse Electric Corporation 1990-1993. Robert H. Hood Jr. 63 DAC President since January 1989. Leonard F. Impellizzeri 57 MDA Vice President/General Manager - Production Operations and General Services since August 1995. MDA Vice President/General Manager - F/A-18 A/B/C/D 1992 - 1995. DAC Vice President, Deputy General Manager - C-17 Program 1990-1992. 10-K Page 8 Donald R. Kozlowski 58 Military Transport Aircraft 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. Roger A. Krone 39 MDC Vice President - Treasurer since September 1995. MDA Division Director - Information Systems 1994-1995. MDC Director - Financial Planning 1992 - 1994. Program Manager - F-16 Israeli Programs, General Dynamics Corporation 1991-1992. F. Mark Kuhlmann 47 MDC Senior Vice President and General Counsel since March 1996. MDC Senior Vice President - Administration and General Counsel 1994-1996. 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 50 MDA President since March 1996. MDA Deputy President 1995-1996. MDC Executive Vice President and Chief Financial Officer 1992-1995. MDC Senior Vice President - Finance 1989-1992. John F. McDonnell 57 MDC Chairman of the Board since September 1994. MDC Chairman and Chief Executive Officer 1988-1994. Thomas J. Motherway 53 McDonnell Douglas Finance Corporation and McDonnell Douglas Realty Company President since January 1995. McDonnell Douglas Realty Company President 1991-1994. McDonnell Douglas Realty Company Assistant to President 1991. Willard P. Olson 56 MDA Senior Vice President - Space and Defense Systems since January 1995. MDA Vice President/General Manager - Space and Defense Systems 1994-1995. MDA Vice President/General Manager - Huntsville 1990-1994. Walter J. Orlowski 52 DAC Senior Vice President - MD-11, MD-80 and MD-90 Programs since January 1996. DAC Vice President/General Manager - Marketing and Business Development 1993-1996. DAC Vice President/General Manager - Development Programs 1992-1993. DAC Vice President/General Manager - MD-12 Program 1991-1992. James F. Palmer 46 MDC Senior Vice President and Chief Financial Officer since July 1995. MDC Vice President - Treasurer 1993-1995. MDA Vice President/General Manager - Business Management 1992-1993. MCAIR Chief Financial Officer 1991-1992. Partner of Ernst & Young LLP 1985-1991. 10-K Page 9 James B. Peterson 51 MDA Vice President/General Manager - Integrated Product Definition since September 1995. MDA Vice President/General Manager - Missiles and Aerospace Support 1995. MDA Vice President/General Manager - Cruise Missiles 1994-1995. MDA Vice President/ General Manager - Tomahawk Program 1993-1994. MDA Vice President and 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. James C. Restelli 54 MDA Vice President/General Manager - Missile Systems and Aerospace Support since September 1995. MDA Senior Vice President - Operations 1995. MDA Senior Vice President - Tactical Aircraft and Missile Systems 1992 - 1995. MDA Executive Vice President 1991-1992. MDA Vice President - Business Operations 1990 - 1991. Michael M. Sears 48 MDA Vice President/General Manager - F/A-18 since January 1994. MDA Vice President/General Manager - F/A-18E/F 1991-1994. MCAIR Vice President/ General Manager - New Aircraft Products Division 1990-1991. James M. Sinnett 56 MDA Senior Vice President - New Aircraft and Missile Products since December 1993. MDA Vice President/ General Manager - New Aircraft Products Division 1991-1993. MCAIR Vice President/General Manager - ATF 1990-1991. Harry C. Stonecipher 59 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. William L. Stowers 48 MDA Vice President/General Manager - Supplier Management and Procurement since October 1992. MDA Vice President - Procurement 1990-1992. Robert H. Trice Jr. 49 MDA Vice President/General Manager - Business Development since October 1992. MCAIR Vice President - Business Development 1991-1992. MCAIR Vice President - Program Development 1990-1991. John J. Van Gels 52 DAC Senior Vice President - Operations since February 1996. DAC Executive Vice President - Operations and Production Programs 1994-1996. DAC Vice President/General Manager - Production Programs 1993-1994. DAC Vice President/General Manager- MD-11 1992-1993. DAC Vice President/General Manager - Production Center Operations 1990-1992. John D. Wolf 51 DAC Senior Vice President - MD-95 since February 1996. DAC Executive Vice President - Development 1994-1996. DAC Executive Vice President 1991-1994. DAC Vice President/General Manager - MD-90/MD-80/DC-9 Programs 1989-1991. 10-K Page 10 All of the executive officers have been employees of the Company at least five years except Edward C. Bavaria, Laurie A. Broedling, Stanley Ebner, Steven N. Frank, Frederick W. Hill, Roger A. Krone, 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 incorporated by reference herein as Exhibit 10(i). ITEM 2. PROPERTIES At December 31, 1995 the Company's manufacturing, laboratory, office, and warehouse areas totaled 35.8 million square feet, of which 6.1 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. Reduced defense spending and reduced commercial aircraft orders over the past several years has resulted in downsizing of personnel and facility needs. As a result of the Company's downsizing, certain of the Company's facilities are held for sale and certain other facilities are currently underutilized. The Company's principal locations are in five states and Canada. Those in St. Louis, Missouri are chiefly devoted to military aircraft, 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. 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 39 of the Company's 1995 Annual Report to Shareholders, which is incorporated herein by this reference. See also Note 16, "Commitments and Contingencies" on page 48 of the Company's 1995 Annual Report to Shareholders and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Government Business Audits, Reviews, and Investigations," page 28, which are incorporated herein by this reference. McDonnell Douglas 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. For additional information, see "Environmental Expenditures" on page 29 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1995 Annual Report to Shareholders, which is incorporated herein by this reference. 10-K Page 11 A number of legal proceedings and claims are pending or have been asserted against the Company 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. The Company believes that the final outcome of such proceedings and claims will not have a material adverse effect on the Company's earnings, cash flow, or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1995. 10-K Page 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this item is included on pages 44, 45, 52, and 56 of the Company's 1995 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, 1995, consisting of the data under the captions "Summary of Operations" and "Balance Sheet Information" are included at page 52 of the Company's 1995 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 22 through 29 of the 1995 Annual Report to Shareholders, which is incorporated herein by this reference. In March 1996, Standard & Poor's raised its ratings of McDonnell Douglas and McDonnell Douglas Finance Corporation senior debt to A-minus from BBB. The rating agency also upgraded its rating on the MDFC subordinated debt to BBB-plus from BBB-minus. In March 1996, Duff & Phelps Credit Rating Co. raised its ratings of McDonnell Douglas and MDFC senior debt to A-minus from BBB-plus. The rating agency also upgraded its rating on the MDFC subordinated debt to BBB-plus from BBB-minus. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is included on pages 30 through 49, 51, and 56 of the 1995 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. 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 1996 pursuant to Regulation 14A, to be filed with the Commission within 120 days after the close of the fiscal year ended December 31, 1995, the text portion of which 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 1996, 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. 10-K Page 13 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 1995 Annual Report to Shareholders at the pages indicated, are incorporated herein by this reference: Report of Ernst & Young LLP, Independent Auditors, page 51. Consolidated Statement of Operations, years ended December 31, 1995, 1994, and 1993, page 31. Balance Sheet, December 31, 1995 and 1994, page 32. Consolidated Statement of Shareholders' Equity, years ended December 31, 1995, 1994, and 1993, page 34. Consolidated Statement of Cash Flows, years ended December 31, 1995, 1994, and 1993, page 35. Notes to Consolidated Financial Statements, pages 36 through 49. Selected Financial Data by Industry Segment, page 30. Quarterly Results of Operations, page 56. (a)2. LIST OF FINANCIAL STATEMENT SCHEDULES See Index to Financial Statement Schedules on page 19. 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 15 through 18. (b) REPORTS ON FORM 8-K FILED DURING THE FOURTH QUARTER OF 1995: Form 8-K/A filed on October 11, 1995, in response to Item 5. 10-K Page 14 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 25, 1996 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 March 25, 1996 - ------------------------ Harry C. Stonecipher Director, President & Chief Executive Officer (Principal Executive Officer) /s/ James F. Palmer March 25, 1996 - ------------------------- James F. Palmer Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Robert L. Brand March 25, 1996 - ------------------------- Robert L. Brand Vice President and Controller (Principal Accounting Officer) /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 /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 25, 1996 10-K Page 15 MCDONNELL DOUGLAS CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS EXHIBIT 3(a) Articles of Restatement of the Company's Charter, as filed June 13, 1994. - Incorporated by reference to Exhibit 4(b) to the Company's Registration 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 March 6, 1996. 4(a) Indenture dated as of September 1, 1985 between the Company and The Bank of New York as Successor Trustee to Citibank, N.A. - Incorporated by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-3, Commission File No. 33-36180, filed with the Commission on August 1, 1990. 4(b) First Supplemental Indenture dated as of July 1, 1986 between the Company and The Bank of New York as Successor Trustee to Citibank, N.A. - Incorporated by reference to Exhibit 4(b) to the Company's Registration Statement on Form S-3, Commission File No. 33-36180, filed with the Commission on August 1, 1990. 4(c) Second Supplemental Indenture dated as of April 2, 1992 between the Company and The Bank of New York as Successor Trustee to Citibank, N.A. - Incorporated by reference to Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 4(d) Agreement of Resignation, Appointment and Acceptance dated as of May 17, 1993 by and among the Company, Citibank, N.A., as Resigning Trustee, and The Bank of New York, as Successor Trustee. - Incorporated by reference to Exhibit 4(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 4(e) Form of 8-5/8% Notes due April 1, 1997. - Incorporated by reference to Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 4(f) Form of 9-1/4% Notes due April 1, 2002. - Incorporated by reference to Exhibit 4(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 4(g) Form of 9-3/4% Debentures due April 1, 2012. - Incorporated by reference to Exhibit 4(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 4(h) Form of 8-1/4% Notes due July 1, 2000. - Incorporated by reference to Exhibit 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 August 2, 1990 between the Company and First Chicago Trust Company of New York, which includes as Exhibit B thereto the form of Rights Certificate. - Incorporated by reference to Exhibits 1 and 2 to the Company's Report on Form 8-K filed with the Commission on August 6, 1990. 4(j) Amendment Number One to Rights Agreement, dated as of January 3, 1995. - Incorporated by reference to Exhibit 4(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10(a)* McDonnell Douglas Corporation Incentive Award Plan, as amended and restated as of July 20, 1990. - Incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. 10(b)* Incentive Compensation Program, as amended and restated as of March 2, 1992 under the McDonnell Douglas Corporation Incentive Award Plan. - Incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 10(c)* Long-Term Incentive Program, as amended and restated as of February 8, 1995 under the McDonnell Douglas Corporation Incentive Award Plan. - Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10(d)* McDonnell Douglas Corporation Senior Executive Performance Sharing Plan 10(e)* McDonnell Douglas Corporation Performance Sharing Plan, as amended and restated as of 5 March 1996. 10(f)* McDonnell Douglas Corporation Deferred Compensation Plan for Nonemployee Directors. - Incorporated by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10-K Page 17 10(g)* McDonnell Douglas Corporation 1995 Compensation Plan for Nonemployee Directors. 10(h)* McDonnell Douglas Corporation 1994 Performance and Equity Incentive Plan. - Incorporated by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-8, Commission File No. 33-56129, filed with the Commission on October 21, 1994. 10(i)* Employment Agreement between Harry C. Stonecipher and McDonnell Douglas Corporation, dated as of September 24, 1994, as amended as of March 25, 1995. 10(j)* Stock Option Agreement between Harry C. Stonecipher and McDonnell Douglas Corporation, dated as of September 24, 1994. 10(k)* Form of Termination Benefits Agreement between the Company and eight Executive Officers of the Company, dated as of March 15, 1996. 10(l)* Settlement Agreement and General and Special Release between the Company and John P. Capellupo, dated as of March 7, 1996. 10(m)* Form of Performance Accelerated Restricted Stock Award Agreement (Service-Based Vesting) - Incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10(n)* Form of Performance Accelerated Restricted Stock Award Agreement (Performance-Based Vesting) - Incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 11 Computation of earnings per share. 12 Computation of Ratio of Earnings to Fixed Charges. 10-K Page 18 13 Sections of 1995 McDonnell Douglas Corporation Annual Report to Shareholders appearing under the caption: "Military Aircraft, Missiles, Space, and Electronic Systems," "Commercial Aircraft," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Financial Data by Industry Segment," "Consolidated Statement of Operations," "Balance Sheet," "Consolidated Statement of Shareholders' Equity," "Consolidated Statement of Cash Flows," "Notes to Consolidated Financial Statements," "Report of Ernst & Young LLP, Independent Auditors," "Five-Year Consolidated Financial Summary," and "Supplemental Information." 21 Subsidiaries. 23 Consents of Independent Auditors regarding incorporation of their report included in the 1995 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. 27 Financial Data Schedule. * Represents management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. 10-K Page 19 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, 1995, are included herein: Report of Independent Auditors Schedule II Valuation and Qualifying Accounts 10-K Page 20 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of McDonnell Douglas Corporation and subsidiaries (MDC) as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated January 17, 1996 (incorporated by reference elsewhere in this Annual Report on Form 10-K). Our audits also included the financial statement schedule listed in item 14(a) of this Annual Report on Form 10-K. 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, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP St. Louis, Missouri January 17, 1996 10-K Page 21 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS McDonnell Douglas Corporation Years Ended December 31, 1995, 1994, and 1993 (Millions of Dollars) BALANCE CHARGED BALANCE AT TO CHARGED AT BEGINNING COSTS AND TO END OF EXPENSES OTHER DEDUCTIONS OF PERIOD ACCOUNTS PERIOD -------- ---------- -------- ---------- ------- Year Ended December 31, 1995: Allowance for commercial aircraft financing $10 $ 3 $ $ 1 $12 Allowance for uncollectible accounts 50 13 13 50 --- --- --- --- --- $60 $16 $ $14 $62 === === === === === 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 === === === === === NOTE: Amounts charged to other accounts are principally reclassifications. Deductions are principally the write off of uncollectible accounts. EX-3 2 BYLAWS Exhibit 3(b) BYLAWS of MCDONNELL DOUGLAS CORPORATION (as amended 6 March 1996) 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. 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 -1- 6 March 1996 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. (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 -2- 6 March 1996 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. -3- 6 March 1996 (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. -4- 6 March 1996 (2) For purposes of this Section 4 of Article III, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 4 of Article III, a shareholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 4 of Article III. Nothing in this Section 4 of Article III shall be deemed to affect any rights of shareholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 5. 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. -5- 6 March 1996 ARTICLE IV Directors ---------- Section 1. The business and affairs of the corporation shall be managed under the direction of the Board. All powers of the corporation shall be exercised by or under authority of the Board except as conferred on or reserved to the shareholders by law or by the charter or bylaws of the corporation. Section 2. The number of Directors of the corporation shall be thirteen (13) which number may be increased or decreased upon an affirmative vote of not less than 80% of the entire Board but shall never be less than three (3). Directors shall serve for three (3) years staggered terms, with approximately one-third (1/3) of the total number of Directors to be elected at each annual meeting of the shareholders. In case of a vacancy on the Board for any cause other than an increase in the number of Directors, an affirmative vote of a majority of the remaining Directors, even though less than a quorum, may elect a successor to hold office for the Director whose place shall be vacant until the next annual meeting of shareholders. A vote of not less than 80% of the entire Board shall be required to fill a vacancy on the Board which results from an increase in the number of Directors. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible. In no case will a decrease in the number of Directors shorten the term of any incumbent Director. A Director elected to fill a vacancy on the Board which results from an increase in the number of Directors shall hold office until the next annual meeting of shareholders and until such Director's successor shall have been elected and qualified. Notwithstanding any provision of law to the contrary, a Director may be removed with or without cause only by the affirmative vote of the holders of not less than 80% of all of the outstanding shares of the corporation entitled to vote at a meeting of shareholders called for such purpose. Section 3. The Board shall hold regular and special meetings at such place and time as it determines for the purpose of organization, election of certain Officers as specified in Article VI, and consideration of other business that may come before the meeting. Section 4. 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. -6- 6 March 1996 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. 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. -7- 6 March 1996 Members of the Audit Committee and the Nominating Committee shall be independent of management and free from any relationships that, in the opinion of the Board, would interfere with the exercise of independent judgment. In the absence of a member of a committee, the member or members thereof present at any meeting, whether or not he or they constitute a quorum, may appoint a Director to act in place of any such absent member, provided such appointed Director is otherwise qualified to be a member of such committee. All committees may have non-voting advisory members. Section 2. Powers. The committees, to the extent provided by these bylaws and by resolution of the Board, may exercise all powers of the Board between Board meetings except the power to vote themselves compensation, amend the bylaws, authorize or declare dividends or distributions on stock, issue stock other than in accordance with Section 2-411(b) of the Maryland General Corporation Law, recommend to shareholders any action requiring shareholders' approval, or to approve any merger or share exchange which does not require shareholder approval. 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 chief accounting officer, a tax officer, and one or more assistant vice presidents, assistant secretaries, and assistant treasurers (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 accounting officer. The Board shall elect the Chief Executive Officer, President, chief officer of DAC, chief officer of MDA, chief officer of Military Transport Aircraft, chief financial officer, chief law officer, chief accounting officer, chief communications officer, chief human resources officer, head of Washington Office operations, chief business development officer, Treasurer, and Secretary (hereinafter referred to as Elected Officers). -8- 6 March 1996 If the Board determines that the Chairman or any vice chairman of the Board shall be an officer 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 vice president in charge of a principal business unit, division or corporate-wide function (such as sales, administration, law or finance), and any other persons who perform similar policy-making functions for the corporation who are not Elected Officers (hereinafter referred to as Executive Officers). Either the Board or the Chief Executive Officer may appoint any other Officers (Officers other than Elected Officers or Executive Officers hereinafter referred to as Appointed Officers). 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 Executive Officer or 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 Executive Officers or 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 and Executive 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 Management Compensation and Succession Committee, or the Chief Executive Officer. 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. -9- 6 March 1996 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, Executive 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. 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, any assistant secretary, Treasurer, or any 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. -10- 6 March 1996 Section 3. The Board may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued which are alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. The Board may delegate to any Officer or Officers of the corporation the authority to issue such new certificate or certificates and the approval of the form and amount of such indemnity bond and the surety thereon. ARTICLE VIII Authorization of Corporate Commitments --------------------------------------- Section 1. Transactions requiring Board approval under Maryland law, the annual budget for purchase of capital facilities, the annual capital facilities lease budget, maximum amounts of long and short term borrowings, and authority to proceed with new product programs and other programs or transactions committing the corporation to financial exposure exceeding limits of authority delegated to the 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. -11- 6 March 1996 ARTICLE IX Limitation of Liability and Indemnification -------------------------------------------- Section 1. No Director or Officer of the corporation shall be liable to the corporation or its shareholders for money damages, except to the extent such limitation of liability for Directors or Officers, as the case may be, is not permitted under the Maryland General Corporation Law, as the same exists or may hereafter be amended. Any repeal or modification of the foregoing provisions of this Section 1 of Article IX shall not adversely affect any right or protection of a Director or Officer of the corporation existing hereunder with respect to any act or omission occurring prior to or at the time of such repeal or modification. Section 2. The corporation shall indemnify, and advance expenses (without a determination of entitlement to indemnification) to, each person who at any time is or has served as a Director of the corporation (including Directors who also serve or have served as Officers of the corporation) 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. -12- 6 March 1996 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. -13- 6 March 1996 EX-10 3 SENIOR EXECUTIVE PERFORMANCE SHARING PLAN 1 Exhibit 10(d) MCDONNELL DOUGLAS CORPORATION SENIOR EXECUTIVE PERFORMANCE SHARING PLAN I. Plan Purpose The McDonnell Douglas Corporation Senior Executive Performance Sharing Plan is intended to provide an annual incentive whereby a significant portion of the selected executive's compensation is based on his or her efforts in achieving specified performance objectives established for a given Year. The Plan is designed to attract, motivate and retain key executives on a competitive basis in which total cash compensation levels are closely linked with accomplishment of the Company's financial and strategic objectives. II. Eligibility and Participation Within the first 90 days of each Year, the Committee shall identify, in writing, the key employees who will participate in the Plan for such Year. Additions to the Plan during a Year shall be made only in the event of an unusual circumstance, such as a new hire or promotion. III. Individual Maximum Target Awards Individual maximum target awards shall be established by the Committee for eligible employees. Target awards will be paid only upon the achievement of specific performance goals established by the Committee, in writing, within the first 90 days of each Year (or, in the case of a new hire or promoted individual added to the Plan during a Year, before 25% of such individual's service for the Company for the performance period established for the individual has elapsed). Such performance goals will be based on one or more of the following performance-based criteria: return on assets, return on equity, return on capital, return on revenues, cash flow, additions to firm backlog as set forth each year in MDC's Annual Report to Shareholders, book value, McDonnell Douglas Corporation stock price performance, earnings per share of McDonnell Douglas Corporation stock, price earnings ratio, or total quality management score calculated generally in accordance with criteria and scoring procedures specified by the Malcolm Baldrige Foundation. Each of these performance criteria are to be specifically defined by the Committee on a Company-specific basis, business-unit basis or in comparison with peer group performance, and may include or exclude specified items of an unusual or nonrecurring nature. IV. Discretion to Decrease Award The Committee, in its discretion, may cancel or decrease an earned target award, but may not under any circumstances increase such award. V. Maximum Award Notwithstanding any other provision of this Plan, the maximum target award a Participant may earn and receive in a Year is $3,000,000. The Committee may, in its discretion, decrease this maximum, but may not, under any circumstances, increase this maximum. 2 VI. Payments Before any payments are made under the Plan, the Committee must certify in writing that the performance goals justifying the payment of Plan Compensation have been met. The distribution of Plan Compensation shall be made in cash by the end of March following the Year. VII. 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 Year, the amount earned shall be prorated and payment made by the end of March following the Year. If death, retirement, layoff or disability occurs after the close of a Year, but before payment is made, such event shall not affect calculations. VIII. 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. IX. 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. Assignments and Transfers. With the exception of transfer by beneficiary designation, 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. 3 X. 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. Code means the Internal Revenue Code of 1986, as amended. 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. The Committee shall consist of three or more members of the Board who are "outside directors" as defined in Code Section 162(m) and the regulations thereunder. Company means McDonnell Douglas Corporation (MDC) and its Subsidiaries and Joint Ventures. 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. 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). Participant means an eligible Company employee selected for plan participation in accordance with the procedures set forth in Section II. Plan means the McDonnell Douglas Corporation Senior Executive Performance Sharing Plan 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, as may be modified from time to time. Subsidiary means any corporation designated by the Committee in which the Company owns an equity interest. 4 XI. 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. XII. Plan Amendment and Termination The Committee may, in its sole and absolute discretion, amend, suspend or terminate the Plan at any time, with or without advance notice to Participants. Notwithstanding the foregoing, no amendment to the Plan shall be effective which would increase the maximum award payable under Section V, which would change the specified performance objectives for payment of awards under Section III, or which would modify the requirements as to eligibility for participation under Section II unless the stockholders of McDonnell Douglas Corporation shall have first approved such change. Under no circumstances may the Plan be amended to permit the Committee to increase the amount of the target award in contravention of the requirements of Section IV. XIII. Effective Date of the Plan This Plan shall be effective on the date it is approved by the shareholders of the Company which must occur within one year after approval by the Board. Any grant of Plan Compensation prior to the approval by the shareholders of the Company shall be void if such approval is not obtained. EX-10 4 PERFORMANCE SHARING PLAN 1 Exhibit 10(e) MCDONNELL DOUGLAS CORPORATION PERFORMANCE SHARING PLAN As Amended and Restated as of 5 March 1996 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 beneficiary designation, 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), Military Transport Aircraft 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 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 January 1, 1993. EX-10 5 COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS 1 Exhibit 10(g) MCDONNELL DOUGLAS CORPORATION 1995 Compensation Plan For Nonemployee Directors 1. Purpose. The purpose of the McDonnell Douglas Corporation 1995 Compensation Plan for Nonemployee Directors (the "Plan") is to promote the interests of the Company and its shareholders by basing a substantial part of the compensation of nonemployee members of the Board of Directors of the Company on the performance of the Company's capital stock and thereby reinforcing the mutuality of interest between such directors and the Company's shareholders. 2. Definitions. When used herein, the following terms shall have the following meanings: (a) "Administrator" means the officer or employee of the Company designated by the Committee from time to time to administer the provisions of this Plan, or, in the absence of any such designation, the Committee. (b) "Annual Board Retainer Units" means the number of Units calculated by dividing the dollar amount of annual board retainer compensation established annually by the Board by the average Fair Market Value during the 10 business day period beginning on the third business day after the Company's annual earnings press release in January. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Nominating Committee of the Company. (e) "Common Stock" means the common stock, $1.00 par value per share, of the Company. (f) "Company" means McDonnell Douglas Corporation. (g) "Effective Date" means April 1, 1995. (h) "Fair Market Value" means the closing price of a Share on the New York Stock Exchange on a given date or, in the absence of sales on a given date, the closing price on the New York Stock Exchange on the last day on which a sale occurred prior to such date. (i) "Meeting and Committee Fees" means such committee retainers and Board and committee attendance fees for Board and committee meetings to which a Participant shall be entitled by virtue of his or her service as a Director of the Company. (j) "Notice of Election" has the meaning set forth in Section 6(a). (k) "Participant" means any member of the Board who is eligible to participate in this Plan pursuant to Section 4. 2 (l) "Prime Rate" means the prime rate as published in The Wall Street Journal on a given date or, in the absence of a published rate on such date, the prime rate so published on the preceding business day or, in the absence of published rate on such date, the prime rate as conclusively determined by the Committee, in its discretion. (m) "Share" means a share of Common Stock. (n) "Subsidiary" means any corporation, other than the Company, in an unbroken chain of corporations beginning with the Company, if each of the corporations, other than the last corporation in the unbroken chain, owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the corporations in such chain. (o) "Units" means a unit, payable only in cash, designated in the accounting records of the Company as equivalent to one Share. (p) "Valuation Date" means the date of a Participant's death, or termination of service as a Director of the Company. 3. Administration. The Plan shall be administered by the Committee. A majority of the members of the Committee shall constitute a quorum. The Committee may act at a meeting, including a telephone meeting, by action of a majority of the members present, or without a meeting by unanimous written consent. The Committee may from time to time delegate the responsibility for administering the Plan to an officer or employee of the Company. Subject to the provisions of the Plan, the Committee shall have full power and authority to: (i) establish from time to time any guidelines deemed necessary or appropriate for the administration or interpretation of the Plan, construe and interpret the Plan, and make all determinations and take all other actions considered necessary or advisable for the administration of the Plan; (ii) cause records to be established relating to operation of the Plan; and (iii) cause the giving of appropriate instructions to the Company regarding payments to Participants. All decisions, actions and interpretations of the Committee shall be final, conclusive and binding upon all parties, including the successors and assigns of the Company. 4. Eligibility. Each Director of the Company who is not also an employee of the Company or any Subsidiary shall have the right to participate in this Plan, even if such Director is a member of the Committee. 3 5. Retainer and Meeting and Committee Fees. (a) Board Retainer Fees. The Company shall establish a bookkeeping account for each Participant and shall credit to such account: (i) in the case of a Participant who serves as a Director of the Company during an entire fiscal quarter, one-fourth of the Annual Board Retainer Units, effective as of the last day of such fiscal quarter; (ii) in the case of a Participant who ceases to serve as a Director of the Company during a fiscal quarter, a pro rata portion of one-fourth of the Annual Board Retainer Units based on the number of days of service during such quarter, effective as of the date of termination of service during such quarter; and (iii) in the case of a Participant who commences service as a Director of the Company during a fiscal quarter, a pro rata portion of one-fourth of the Annual Board Retainer Units based on the number of days of service during such quarter, effective as of the last day of such fiscal quarter. (b) Meeting and Committee Fees. Each Participant shall have the right to continue to receive Meeting and Committee Fees in cash, as provided from time to time by the Board, or, alternatively, to elect to defer the payment of all or any portion of the Meeting and Committee Fees to which such Director would otherwise be entitled, through the conversion of such Meeting and Committee Fees into Units. The Company shall credit to the Participant's account a number of full and fractional Units equal to the number of full and fractional Shares which could be purchased with such deferred Meeting and Committee Fees based on the Fair Market Value on the date such Fees would have been paid had there been no deferral. (c) Cash Dividends. The account of each Participant shall be credited with additional full and fractional Units equal in value to dividends which he or she would have received if such Participant had been the owner of a number of Shares equal to the number of Units in his or her account on the dividend record date. The price per share for converting dividends into such additional Units shall be the Fair Market Value as of the payment dates for such dividends. No such dividend credits shall be made on or after the applicable Valuation Date. No Participant shall be deemed to be the owner of any Shares pursuant to this Plan. (d) Adjustments. In the event there is any change in the outstanding Shares of the Company by reason of any stock split, stock dividend, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares or any similar transaction, the Unit account of a Participant shall be appropriately adjusted to reflect such action if such action consists of distribution of Company stock. If such action consists of any other distribution, the value of such distribution shall be converted to Units on the date of such distribution, as conclusively determined by the Committee, in its discretion. 4 6. Election. (a) Notice of Election. Each Participant who wishes either (x) to defer the payment of Meeting and Committee Fees through the conversion of such Fees into Units, or (y) to elect an optional installment method of payment, shall execute and deliver to the Administrator a "Notice of Election" in form reasonably acceptable to the Administrator. Such Notice shall provide, as applicable, (i) the percentage or amount of Meeting and Committee Fees, if any, to be deferred, (ii) the date such deferral is to commence, (iii) the manner of distribution, (iv) the beneficiary designations of the Participant, if any, and (v) such other matters as the Administrator shall reasonably specify. An election to defer payment of Meeting and Committee Fees shall be applicable only to Units or Meeting and Committee Fees earned by reason of services rendered in the calendar year beginning after the date of such Notice; provided, that an election in 1995 shall be applicable to any such Fees earned subsequent to the date of such election. An election for an optional installment method of payment must be made at least one year prior to the date of the payment to which the election relates. (b) Modification of Election. An election to defer Meeting and Committee Fees shall continue in effect until modified by a subsequent "Notice of Election," provided, however, that (i) every election to defer Meeting and Committee Fees shall be irrevocable as to Units earned prior to the date of modification and (ii) such election to defer may not be revoked and may not be changed more frequently than once per calendar year and then only to cease future deferrals or to change the level of future deferrals. Every election for an optional installment method shall be made not later than one year prior to the date Units become payable to the Participant pursuant to Section 7. Any such modification shall be made in writing to the Administrator and shall be effective upon the date stated therein. 7. Payment of Deferred Fees. (a) Lump Sum Payment. No Units shall be payable to a Participant until his or her death, or termination as a Director. Subject to Section 9 below, upon the earlier of these events, all such Units, together with any dividend accruals thereon, as hereafter provided, shall be payable in a single cash lump sum amount (with Units converted into cash equal to the Fair Market Value on the Valuation Date multiplied by the number of Units then being paid) to such Participant, or his or her beneficiary or estate, within thirty (30) days from the Valuation Date, unless the Participant shall have designated an optional installment payment in the Notice of Election (as provided in Paragraph (b) below), in which event the first such installment shall be paid within thirty (30) days of such date. 5 (b) Installment Payments. Installment payments will be made in approximately equal periodic installments over the period specified in the Notice of Election, which shall not exceed ten (10) years; provided, however, that no such installment method of distribution may be elected which will result in any regular installment being less than $500. In the event a Participant shall elect such installment method of distribution, interest will be credited on the undistributed sums, compounded and adjusted quarterly at the Prime Rate in effect on the last day of each fiscal quarter. Such interest shall accrue from the Valuation Date. 8. Designation of Beneficiary. Each Participant may designate one or more beneficiaries to receive all sums due to such Participant hereunder upon his or her death. Such beneficiary designation may be revoked or amended by such Participant, from time to time, by appropriate notice in writing delivered to the Administrator. In the absence of any beneficiary designation or in the event that the designated beneficiaries shall not be living at the time of death of the Participant, the account value on the date of death of the Participant shall be payable and delivered to the estate of such deceased Participant. 9. Death or Incapacity of Participant. (a) Death. Upon the death of a Participant while serving as a Director, a cash lump sum equal to the Fair Market Value on the date of death multiplied by the number of Units credited to his or her account on such date, plus any Units then due to the Director pursuant to Section 5 hereto, shall be paid to his or her designated beneficiary or estate, as provided herein. Upon the death of a Director who had previously terminated as a Director and had elected an installment method of distribution, all sums remaining undistributed shall be paid in one lump sum cash amount to his or her designated beneficiary or estate within 30 days of the date of death. (b) Incapacity. In the event that any person to whom Units are distributable under the terms of this Plan shall be unable to properly manage his or her own affairs by reason of incapacity, all amounts payable hereunder may be paid (at the time otherwise payable) to a duly appointed personal representative, conservator or guardian or to any person, firm or a corporation furnishing or providing support and maintenance to such distributee. The Company and its officers and employees shall be fully and completely exonerated from all liability to any distributee upon making payment in accordance with the terms of this paragraph. 6 10. Amendment and Termination. The Committee may at any time amend or terminate this Plan with respect to Units or Meeting and Committee Fees to be earned on or after the date of amendment or termination. No action of the Committee may permit anyone other than the Participants eligible under Section 4 to participate in the Plan or to withdraw the administration of the Plan from the Committee or the Administrator who has been designated by the Committee to administer the Plan. The Committee also reserves the exclusive right to terminate this Plan with respect to any individual Participant. If the Plan is terminated in whole or part, all amounts payable will be promptly distributed to the affected Participant in a lump sum cash amount, with interest or dividend equivalent accruals earned to date. 11. Miscellaneous. (a) Inalienability. No right or payment under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be null and void. No right or payment hereunder shall be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefit. If any Participant or beneficiary hereunder should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber or charge any right or payment hereunder, then such right or payment shall, in the discretion of the Committee, terminate. In such a case, the Company may hold or apply the same or any part thereof for the benefit of the Participant or beneficiary, his or her spouse, children or other dependents, or any of them, in such manner and in such proportion as the Committee shall determine, and its decision shall be final, conclusive and binding upon all persons involved. (b) Funding. This Plan is unfunded. Amounts due under this Plan at any time and from time to time shall be paid from the general funds of the Company. The Company shall be under no obligation to set aside funds to provide for amounts payable under this Plan. To the extent any person acquires a right to benefits payable hereunder, such right shall be no greater than that of an unsecured general creditor of the Company. Nothing contained in this Plan and no action taken pursuant hereto shall create or be construed to create a trust of any kind or fiduciary relationship between the Company or a Subsidiary and any Participant or beneficiary of any other person. (c) No Retention Rights. Nothing in this Plan shall give any Participant the right to be retained as a director of the Company or any Subsidiary, nor shall any provision of this Plan require any Participant to continue as a director of the Company or any Subsidiary or in any other capacity. 7 (d) Nature of Payments. The payments provided for herein are in addition to any payments to which a Participant may become entitled under any other benefit plan of the Company or any Subsidiary now in effect or as hereafter amended, and unless otherwise agreed to by the Participant, shall be in addition to any payments pursuant to any plans which may supersede any of such present plans, or any other benefit plan under which the Participant is entitled to benefits. (e) Duties of Participants. Nothing in this Plan is intended to subject any Participant to a higher standard of accountability to the Company or any Subsidiary than the standard of accountability to which any other director of such company is subject. (f) Governing Law. This Plan shall be construed in accordance with and governed by the laws of the State of Missouri. (g) Section 16. This Plan is intended to comply with the exemption contained in Rule 16a-1(c)(3), as amended from time to time and any successor provision thereto, under the Securities Exchange Act of 1934, as amended. Any provision of this Plan that is determined to conflict with such Rule so as to render Units or interests in this Plan "derivative securities" within the meaning of Rule 16a-1(c)(3), as amended from time to time or any successor provision thereto, shall be null and void. (h) Separability. In case any provision in this Plan shall be invalid, illegal or unenforceable, the validity, legality or unenforceability of the remaining provisions shall not in any way be affected or impaired thereby. (i) Construction. The Section and Paragraph headings are for convenience only and shall not affect the construction hereof. EX-10 6 STONECIPHER AMENDED EMPLOYMENT AGREEMENT 1 Exhibit 10(i) 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 Exhibit 10(i) (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 Exhibit 10(i) (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 Exhibit 10(i) (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 Exhibit 10(i) 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 Exhibit 10(i) (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 Exhibit 10(i) 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 Exhibit 10(i) 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 Exhibit 10(i) 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 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 Exhibit 10(i) 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 10(i) 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 Exhibit 10(i) 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.
14 Exhibit 10(i) March 25, 1995 Harry C. Stonecipher President & Chief Executive Officer McDonnell Douglas Corporation P.O. Box 516 St. Louis, Missouri 63144 Dear Harry: Pursuant to Section 3(b)(i) of the Employment Agreement entered into as of September 24, 1995 by and between you and McDonnell Douglas Corporation (the "Company"), you have received 180,000 shares of restricted shares of MDC stock, 42,000 of which will vest on March 31 of 1995, 1996 and 1997, and 54,000 of which will vest on March 31, 2002 (collectively the Service Based Restricted Shares). Effective immediately, the Service Based Restricted Shares will be converted to an equal number of MDC stock equivalents which will vest or be forfeited on the same terms as provided in the Employment Agreement, including Exhibit A thereto, for the Service Based Restricted Shares. This letter sets forth the terms of the conversion and other necessary modifications of the Employment Agreement. Unless specifically defined in this letter, capitalized terms in this letter shall have the same meaning ascribed to such terms in the Employment Agreement. Dividend equivalent payments on stock equivalents will be reinvested on MDC dividend payment dates into additional stock equivalents based on the closing price of MDC common stock on such dividend payment date. The stock equivalents will not have voting rights. The stock equivalents will be paid in cash only on the later of (i) vesting or (ii) your death, Disability or termination of employment, subject to the termination provisions of the Employment Agreement (such later date referred to hereinafter as the "Payment Date" and the Payment Date may not be the same for all stock equivalents). The value of each stock equivalent will be fixed at the closing price of a share of MDC common stock on the applicable Payment Date. Payment will be in a lump sum unless, at least one year prior to the applicable Payment Date, you make a one-time irrevocable election to receive the payment over a period of years. If the payment is lump sum, the Company will pay you or your beneficiary in cash (less withholding taxes) for your stock equivalents within 14 days of the applicable Payment Date. If you elect to receive installment payments, the value of your stock equivalents will be determined as of the applicable Payment Date. Payment will be made to you in cash in the number of equal annual installments that you select (less withholding taxes) within 14 days of the applicable Payment Date and each anniversary thereof. The unpaid amount will earn interest at a fixed rate of the then current prime rate as reported in The Wall Street Journal, compounded quarterly. The interest will be paid to you on the same date as the installment to which it relates is paid. 15 Exhibit 10(i) In addition, the following amendments are being made to the Employment Agreement: 1. Insert the following sentence after the first sentence of Section 3(c): Stock equivalents granted hereunder are granted outside the PEIP; however, Sections 3.3 ("Adjustments"), 19.2 ("Unfunded Status of the Plan"), 19.3 ("Designation of Beneficiary") and 19.4 ("Nontransferability") of the PEIP are incorporated herein and will govern the stock equivalents as if they were issued under the PEIP. Capitalized terms in such sections shall have the meaning ascribed to such terms in the PEIP. 2. Delete the entire first sentence of Section 9 and replace it with the following: So long as any restricted stock, stock equivalent or stock option grant provided for in Section 3(b) herein shall not be vested or shall not have been exercised, the vesting of such restricted shares or stock equivalents 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 or stock equivalents that vested or stock options exercised prior to the date of such breach. If you agree with the foregoing, please sign and return one copy of this letter, which shall constitute an amendment to your Employment Agreement with the Company. Very truly yours, /s/ Steven N. Frank Steven N. Frank Vice President, Associate General Counsel & Secretary ACCEPTED AND AGREED TO as of the date written above: /s/ Harry C. Stonecipher ________________________________ Harry C. Stonecipher EX-10 7 STONECIPHER STOCK OPTION AGREEMENT 1 Exhibit 10(j) STOCK OPTION AGREEMENT Agreement made as of the 24th day of September, 1994, by and between McDonnell Douglas Corporation (hereinafter called the "Company") and Harry C. Stonecipher, (hereinafter called the "Employee"). RECITALS A. The Company has agreed to employ Employee and Employee has agreed to serve as Chief Executive Officer and President of the Company pursuant to the terms and conditions of an Employment Agreement by and between them, dated as of September 24, 1994 (the "Employment Agreement"). B. As a significant part of his total compensation, the Company has agreed to provide and Employee has agreed to accept equity ownership opportunities to better match the interests of Employee with those of shareholders. C. Pursuant to the terms and conditions of the Employment Agreement, Company has agreed to provide and Employee has agreed to accept incentive compensation, the value of which will be based upon the value of the Company's common stock. D. Accordingly, the Company has agreed to grant to Employee an option to acquire shares of the Company's common stock subject, however, to certain restrictions. In consideration of the foregoing, and the mutual promises contained herein and in the Employment Agreement and the McDonnell Douglas Corporation 1994 Performance and Equity Incentive Plan (the "Plan"), the Company and Employee agree as follows: 1. Amount and Price of Option Shares. The Company hereby grants to Employee the option to purchase from the Company (the "Stock Options") from time to time, at $110.875 per share (the "Exercise Price"), up to 150,000 shares of the Company's $1.00 par value per share common stock (the "Option Shares"). 2. Agreement Subject to Employment Agreement and Plan. The Stock Options are subject to the terms and conditions of the Employment Agreement and the Plan, including but not limited to the Plan provisions regarding nontransferability and adjustments for recapitalization and other reasons. A copy of the Plan has been given to Employee and is incorporated herein by this reference. Unless otherwise indicated, capitalized terms in this Agreement shall have the same meaning ascribed to such terms in the Plan. 3. Exercisability of Stock Options. Subject to the provisions of Section 5 hereof, the Stock Options will become exercisable on the dates and in the amounts set forth below, and shall remain exercisable for ten years following such date: 2 Exhibit 10(j) Date Number of Option Shares ---------------- ------------------------ September 24, 1996 30,000 September 24, 1997 30,000 September 24, 1998 30,000 September 24, 1999 30,000 September 24, 2000 30,000 4. Exercise of Stock Options. The Stock Options may be exercised by delivering to the Plan Administrator from time to time a written notice signed by the Employee specifying the number of Option Shares the Employee then desires to purchase together with full payment therefor as provided in Section 12.1 of the Plan. Within five business days thereafter, the Company shall issue to Employee a certificate for the shares so purchased, less any shares withheld pursuant to Section 6 hereof. 5. Termination of Employment. Upon termination of the Employment Agreement for any reason, the vesting, forfeiture and exercisability of unexercised Stock Options shall be determined in accordance with the Employment Agreement, including without limitation Sections 6, 7, 8 and 9 thereof. 6. Withholding. At such time as share certificates are to be delivered to Employee in accordance with 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. 7. Investment Purpose. Employee represents that, in the event of the exercise by him of one or more of the Stock Options hereby granted, or any part thereof, he intends to purchase the shares acquired on such exercise for investment and not with a view to resale or other distribution; except that the Company, at its election, may waive or release this condition in the event the shares acquired on exercise of the option are registered under the Securities Act of 1933, or upon the happening of any other contingency which the Company shall determine warrants the waiver or release of this condition. Employee agrees that the certificates evidencing the shares acquired by him on exercise of all or any part of the Stock Options may bear a restrictive legend, if appropriate, indicating that the shares have not been registered under said Act and are subject to restrictions on the transfer thereof. 3 Exhibit 10(j) 8. 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 may exercise the options that are vested but unexercised at the time of his death in accordance with the terms of the Employment Agreement. 9. Stock Options Not Incentive Stock Options. The Stock Options granted hereunder are not, and will not be treated as, incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and date set forth above. MCDONNELL DOUGLAS CORPORATION /s/ Janet R. Wittenauer By: __________________________________ /s/ Harry C. Stonecipher __________________________________ Employee EX-10 8 TERMINATION BENEFITS AGREEMENT 1 Exhibit 10(k) TERMINATION BENEFITS AGREEMENT THIS AGREEMENT, dated as of the ____ day of ___________, 199___, is by and between McDonnell Douglas Corporation, a Maryland corporation (hereinafter referred to as the "Company"), and ________________ (hereinafter the "Executive"). RECITALS: A. The Board of Directors of the Company (the "Board") considers it essential to the best interests of the Company and its shareholders that its key management personnel be encouraged to remain with the Company and its subsidiaries and to continue to devote full attention to the Company's business in the event that any third person expresses its intention to complete a possible business combination with the Company, or in taking any other action which could result in a change in control of the Company. In this connection, the Board recognizes that the possibility of a change in control and the uncertainty and questions which it may raise among management may result in the departure or distraction of key management personnel to the detriment of the Company and its shareholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of key members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from the possibility of a change in control of the Company. B. The Executive currently serves as a key executive of the Company and his or her services and knowledge are valuable to the Company in connection with the management of one or more of the Company's principal operating facilities, divisions, subsidiaries or functions. C. The Board believes the Executive has made and is expected to continue to make valuable contributions to the productivity and profitability of the Company and its subsidiaries. D. Should the Company receive any proposal from a third person concerning a possible business combination or any other action which could result in a change in control of the Company, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his or her position, and that the Company and the Board be able to receive and rely upon his or her advice, if so requested, as to the best interests of the Company and its shareholders without concern that he or she might be distracted by the personal uncertainties and risks created by such a proposal, and to encourage Executive's full attention and dedication to the Company. E. Should the Company receive any such proposal, in addition to the Executive's regular duties, the Executive may be called upon to assist in the assessment of such proposal, advise management and the Board as to whether such proposal would be in the best interests of the Company and its shareholders, and to take such other actions as the Board might determine to be necessary or appropriate. 2 TERMS AND CONDITIONS: NOW, THEREFORE, to assure the Company and its subsidiaries that it will have the continued, undivided attention, dedication and services of the Executive and the availability of the Executive's advice and counsel notwithstanding the possibility, threat or occurrence of a change in control of the Company, and to induce the Executive to remain in the employ of the Company and its subsidiaries, and for other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, the Company and the Executive agree as follows: (1) Change in Control ----------------- For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred upon (a) the acquisition at any time by a "person" or "group" (as that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (excluding, for this purpose, the Company or any subsidiary or any employee benefit plan of the Company or any subsidiary) of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of securities representing 20% or more of the combined voting power in the election of directors of the then- outstanding securities of the Company or any successor of the Company; (b) the termination of service as directors, for any reason other than death, disability or retirement from the Board in accordance with Resolution 706 of the Board, as it may be amended or superseded, during any period of two consecutive years or less, of individuals who at the beginning of such period constituted a majority of the Board, unless the election of or nomination for election of each new director during such period was approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of the period; (c) approval by the shareholders of the Company of liquidation of the Company or any sale or disposition, or series of related sales or dispositions, of 50% or more of the assets or earning power of the Company; or (d) approval by the shareholders of the Company and consummation of any merger or consolidation or statutory share exchange to which the Company is a party as a result of which the persons who were shareholders of the Company immediately prior to the effective date of the merger or consolidation or statutory share exchange shall have beneficial ownership of less than 50% of the combined voting power in the election of directors of the surviving corporation following the effective date of such merger or consolidation or statutory share exchange. A "Change in Control" shall not include any reduction in ownership of an affiliate of the Company so long as the entity continues to meet the definitions of those terms as contained in this Section. (2) Adjustment of Benefits upon Change in Control --------------------------------------------- (a) The Company agrees that its Management Compensation and Succession Committee or such other committee succeeding to such committee's responsibilities with respect to executive compensation (collectively, the "Compensation Committee") shall make such equitable adjustments to any performance targets contained in any awards under the 3 Company's Performance Sharing Plan (the "PSP") or Senior Executive Performance Sharing Plan (the "Senior Executive PSP") or any successor plan in which the Executive is a participant, as may be required to eliminate any negative effects from any transactions relating to a Change in Control (such as costs or expenses associated with the transaction or any related transaction, including, without limitation, any reorganizations, divestitures, recapitalizations or borrowings, or changes in targets or measures to reflect the disruption of the business, etc.), in order to preserve reward opportunities and performance objectives. (b) The Company agrees that in the case of a Change in Control, all restrictions and conditions applicable to any awards of restricted stock or stock options or other awards granted to the Executive under the Company's 1994 Performance and Equity Incentive Plan shall be deemed to have been satisfied as of the date the Change in Control occurs, and this Agreement shall be deemed to amend any agreements evidencing such awards to reflect this provision. 3. Termination Following Change in Control --------------------------------------- (a) If any of the events described in Section 1 hereof constituting a Change in Control of the Company shall have occurred, the Executive shall be entitled to the benefits set forth herein upon any termination by the Company of the Executive's employment with the Company and its subsidiaries within two years following a Change in Control for any reason except any of the following: (i) Termination by reason of the Executive's death, provided the Executive has not previously given a "Notice of Termination" pursuant to Section 4; (ii) Termination by reason of the Executive's "disability," provided the Executive has not previously given a "Notice of Termination" pursuant to Section 4. For the purposes of this Agreement, "disability" shall be defined as the Executive's inability by reason of illness or other physical or mental disability to perform the principal duties required by the position held by the Executive at the inception of such illness or disability for any consecutive 180-day period. A determination of "disability" shall be subject to the certification of a qualified medical doctor agreed to by the Company and the Executive or, in the Executive's incapacity to designate a doctor, the Executive's legal representative. If the Company and the Executive cannot agree on the designation of a doctor, each party shall nominate a qualified medical doctor and the two doctors shall select a third doctor; the third doctor shall make the determination as to "disability"; (iii) Termination by reason of retirement in accordance with and under the Company's Employee Retirement Income Plan -- Salaried Plan, or such of the Company's other salaried employee tax-qualified retirement plans in which the Executive participates (or any plans in substitution thereof) as in effect on the date of this Agreement (collectively, the "Retirement Plan"), provided the Executive has not previously given Notice of Termination pursuant to Section 4; or 4 (iv) Termination by the Company for "Cause". For purposes of this Agreement, "Cause" shall mean (A) any act or acts by the Executive constituting a felony under applicable law; (B) any act or acts of gross dishonesty or gross misconduct on the Executive's part which result or are intended to result directly or indirectly in gain or personal enrichment at the expense of the Company or its subsidiaries to which the Executive is not legally entitled; or (C) any material violation by the Executive of his or her obligations under this Agreement (other than any violation resulting from the Executive's incapacity due to physical or mental illness), which violation is demonstrably willful and deliberate on the Executive's part and which results in material damage to the business or reputation of the Company or its subsidiaries. Notwithstanding the foregoing, the employment of the Executive shall in no event be deemed to have been terminated by the Company for "Cause" if termination of his or her employment by the Company took place: (i) as the result of bad judgment or negligence on the part of the Executive other than gross negligence; (ii) because of an act or omission believed by the Executive in good faith to have been in or not opposed to the interests of the Company and its subsidiaries; (iii) for any act or omission in respect of which a determination could properly be made that the Executive met the applicable standard of conduct prescribed for indemnification or reimbursement or payment of expenses under the charter or bylaws of the Company or the laws of the state of incorporation of the Company, in each case as in effect at the time of such act or omission; (iv) as the result of an act or omission which occurred more than twelve calendar months prior to the Executive's having been given Notice of Termination (as defined below) for such act or omission unless the commission of such act or omission could not at the time of such commission or omission have been known to a member of the Board (other than the Executive, if he or she is then a member of the Board), in which case more than twelve calendar months from the date that the commission of such act or such omission was or could reasonably have been so known; or (v) as the result of a continuing course of action which commenced and was or could reasonably have been known to a member of the Board (other than the Executive) more than twelve calendar months prior to the Executive having been given Notice of Termination. (b) Notwithstanding any other provision of this Agreement, if a Change in Control occurs and if the Executive's employment with the Company and its subsidiaries is terminated by the Company less than six months prior to the date on which the Change in Control occurs, and if it is demonstrated by the Executive that such termination of employment by the Company (i) was at the request of a third party which has taken steps reasonably calculated to result in or effect the Change in Control or (ii) otherwise arose in connection with or in anticipation of the Change in Control, then for all purposes of this Agreement, such termination of employment shall be deemed to have occurred within two years following such Change in Control; provided, that the obligations contained in Section 4 to deliver a Notice of Termination shall not apply. 5 (c) The Company shall also provide the Executive with the benefits set forth herein upon any termination by the Executive of employment with the Company and its subsidiaries for Good Reason within two years after a Change in Control. Any failure by the Executive to give such notice to receive such benefits shall not be deemed to constitute a waiver or otherwise to affect adversely the rights of the Executive hereunder, provided the Executive gives notice to receive such benefits prior to the expiration of such two year period. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any one or more of the following events: (i) The assignment to the Executive of any duties inconsistent in any material adverse respect with his or her position, authority or responsibilities with the Company and its subsidiaries immediately prior to the Change in Control, or any other material adverse change in such position, including titles, authority, or responsibilities, as compared with the Executive's position immediately prior to the Change in Control; (ii) A reduction by the Company in the amount of the Executive's base salary or annual or long term incentive compensation paid or payable as compared to that which was paid or made available to Executive immediately prior to the Change in Control; or the failure of the Company to increase Executive's compensation each year by an amount which is substantially the same, on a percentage basis, as the average annual percentage increase in the base salaries of other executives of comparable status with the Company; (iii) The failure by the Company to continue to provide the Executive with substantially similar perquisites or benefits the Executive in the aggregate enjoyed under the Company's benefit programs, such as any of the Company's pension, savings, vacation, life insurance, medical, health and accident, or disability plans in which he or she was participating at the time of the Change in Control (or, alternatively, if such plans are amended, modified or discontinued, substantially similar equivalent benefits thereto in the aggregate); the taking of any action by the Company which would directly or indirectly cause such benefits to be no longer substantially equivalent in the aggregate to the benefits in effect at the time of the Change in Control; provided, that any amendment, modification or discontinuation of any plans or benefits referred to in this Subsection (iii) that generally affect substantially all domestic salaried employees of the Company shall not be deemed to constitute Good Reason; (iv) The Company's requiring the Executive to be based at any office or location more than 35 miles from that location at which he or she performed his or her services immediately prior to the Change in Control, except for travel reasonably required in the performance of the Executive's responsibilities to the extent substantially consistent with the Executive's business travel obligations prior to the Change in Control; (v) Any failure of the Company to obtain the assumption of the obligation to perform this Agreement by any successor as contemplated in Section 11 herein; or 6 (vi) Any breach by the Company of any of the provisions of this Agreement or any failure by the Company to carry out any of its obligations hereunder, in either case, for a period of five business days after receipt of written notice from the Executive and the failure by the Company to cure such breach or failure during such five business day period. 4. Notice of Termination --------------------- Any termination of the Executive's employment by the Company as contemplated by Subsection 3(a)(ii) or 3(a)(iv) or by the Executive as contemplated by Subsection 3(c) shall be communicated by written "Notice of Termination" to the other party hereto. Any "Notice of Termination" shall set forth (a) the effective date of termination, which shall not be less than 15 or more than 30 days after the date the Notice of Termination is delivered (the "Termination Date"); (b) the specific provision in this Agreement relied upon; and (c) in reasonable detail the facts and circumstances claimed to provide a basis for such termination. Notwithstanding the foregoing, if within fifteen (15) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a good faith dispute exists concerning the termination, the "Date of Termination" shall be the date on which the dispute is finally determined in accordance with the provisions of Section 18 hereof. In the case of any good faith dispute as to the Executive's entitlement to benefits under this Agreement resulting from any termination by the Company for which the Company does not deliver a Notice of Termination, the "Date of Termination" shall be the date on which the dispute is finally determined in accordance with the provisions of Section 18 hereof. Notwithstanding the pendency of any such dispute referred to in the two preceding sentences, the Company shall continue to pay the Executive his or her full compensation in effect when the notice giving rise to the dispute was given and continue the Executive as a participant in all compensation, benefits and perquisites in which he or she was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved, provided the Executive is willing to continue to provide full time services to the Company and its subsidiaries in substantially the same position, if so requested by the Company. Amounts paid under this Section shall be in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. If a final determination by the Panel (as defined in Section 18(c)(ii)) that Good Reason did not exist pursuant to Section 18(c)(v) is made in the case of a Notice of Termination by the Executive, the Executive shall have the sole right to nullify and void his or her Notice of Termination by delivering written notice of same to the Company within three (3) business days of the date of such final determination, unless the basis for the claim by the Executive of Good Reason is found by the Panel to have been manifestly unreasonable. If the parties do not dispute the Executive's entitlement to benefits hereunder, the "Date of Termination" shall be the Termination Date. 7 5. Termination Benefits -------------------- (a) Base Salary and Annual Incentive Compensation. Subject to the conditions set forth in Sections 3, 4, 8 and 10(c) hereof, the Company shall continue to pay the Executive (subject to any applicable payroll or other taxes required to be withheld) for a period (the "Continuation Period") terminating on the earlier of (x) [twenty-four (24)/thirty-six (36)] months following the date of the Change in Control, (y) the date on which the Executive reaches normal retirement age under the Retirement Plan, or (z) such date on which any of the contingencies under Section 10(c) shall occur, as follows: (i) The base salary of the Executive at the greater of the Executive's effective monthly base salary rate at the Termination Date or the Executive's effective monthly base salary rate immediately prior to the Change in Control, which amount shall be payable on a monthly basis; (ii) A monthly amount equal to (x) the greater of (1) the Executive's annualized target incentive compensation award relating to the monthly base salary in Section 5(a)(i) above or (2) the Executive's annual target incentive compensation award for the year prior to the Change in Control, multiplied by (y) the greater of the average percentage of the Executive's earned incentive compensation award to the Executive's annual target incentive compensation award for the three complete years prior to either (1) the Change in Control or (2) the Termination Date, in either case, under the Company's PSP or Senior Executive PSP, or any successor plan, and divided by (z) twelve (12), which amount shall be payable on a monthly basis; and (b) "Short Year" Annual Incentive Compensation. Subject to the conditions set forth in Sections 3, 4, 8 and 10(c) hereof, the Company shall pay the Executive (subject to any applicable payroll or other taxes required to be withheld) the product of (i) the amount determined in accordance with Section 5(a)(ii)(x) above, multiplied by (ii) the amount determined in accordance with Section 5(a)(ii)(y) above, multiplied by (iii) the ratio of the number of days that elapsed in such year prior to such Termination Date divided by 365; provided, that such "short year" annual incentive compensation shall be paid in cash in a lump sum on the Date of Termination. 6. Other Benefits -------------- Subject to the conditions set forth in Sections 3, 4, 8 and 10(c) hereof, the following benefits (subject to any applicable payroll or other taxes required to be withheld) shall be paid or provided to the Executive: (a) Health/Welfare Benefits ----------------------- (i) During the Continuation Period, the Company shall continue to keep in full force and effect all programs of medical, dental, vision, accident, disability, life insurance, including optional term life insurance, and other similar health or welfare programs with 8 respect to the Executive and his or her dependents with the same level of coverage, upon the same terms and otherwise to the same extent as such programs shall have been in effect immediately prior to the Termination Date (or, if more favorable to the Executive, immediately prior to the Change in Control), and the Company and the Executive shall share the costs of the continuation of such insurance coverage in the same proportion as such costs were shared immediately prior to the Termination Date (or, if more favorable to the Executive, immediately prior to the Change in Control) or, if the terms of such programs do not permit continued participation by the Executive (or if the Company otherwise determines it advisable to amend, modify or discontinue such programs for employees generally), the Company shall otherwise provide benefits substantially similar to and no less favorable to the Executive in terms of cost or benefits ("Equivalent Benefits") than he or she was entitled to receive at the end of the period of coverage, for the duration of the Continuation Period. (ii) If, at or prior to the end of the Continuation Period, the Executive has attained the earliest age for retirement under the Retirement Plan, without regard to any minimum period of service (the "Eligible Age"), he or she shall be entitled to be enrolled at that time or any time thereafter in the Company's retiree health program upon the same terms and conditions as if the Executive had remained employed during the Continuation Period, or if the terms of such program do not permit such enrollment, the Company shall provide Equivalent Benefits which include such retiree coverage. If, at or prior to the end of the Continuation Period, the Executive shall not have attained the Eligible Age, he or she shall be entitled to the foregoing benefits upon attainment of the Eligible Age. If, at the end of the Continuation Period, the Executive shall not have attained the Eligible Age, he or she will be given the same rights to health care continuation as if the health care continuation coverage rights under the Consolidated Omnibus Reconciliation Act of 1985, as amended or replaced ("COBRA"), would apply as of the end of such Continuation Period, such rights under COBRA to be determined as if the end of such Continuation Period were an event causing the Executive to lose coverage under the Company's health care plan on account of a termination of employment. (iii) All benefits which the Company is required by this Section 6(a) to provide, which will not be provided by the Company's programs described herein, shall be provided through the purchase of insurance unless the Executive is uninsurable. If the Executive is uninsurable, the Company will provide the benefits out of its general assets. (b) Retirement Benefits ------------------- (i) Subject to Section 6(b)(v), the Executive shall be deemed to be completely vested under the Company's Retirement Plan and any and all supplemental non-qualified plans (or any successor plans), in which Executive is a participant, which are in effect as of the date of the Change in Control (collectively, the "Plans"), regardless of the Executive's actual vesting service credit thereunder. 9 (ii) In addition, subject to Section 6(b)(v), he or she shall be deemed to have earned an additional service credit for service and benefit calculation purposes thereunder as if he or she had continued in the employ of the Company for the duration of the Continuation Period, and the rate of compensation which is used in the determination of the payment to the Executive under Section 5 shall be the rate of compensation used for benefit calculations with respect to such additional period, with the effect that benefits based on Salary Compensation and Average Monthly Salary (as such terms are defined in the Retirement Plan and as may be amended or replaced), shall reflect such additional years of service at such rates of compensation. (iii) In addition, the Executive shall receive all other benefits under the Plans that he or she would have received had he or she continued in the employ of the Company for the duration of the Continuation Period, including, without limitation, all ancillary benefits, such as early retirement, survivor rights and all other benefits at retirement. (iv) If the Executive has attained the Eligible Age as of the Termination Date, the Executive shall be entitled to elect retirement in lieu of deferred vested status under the Retirement Plan. If the Executive has not attained the Eligible Age as of the Termination Date, the Executive shall be entitled to elect retirement in lieu of deferred vested status under the Retirement Plan upon attainment of the Eligible Age, and for purposes of determining the adjustment, if any, to the Executive's accrued benefit under the eighty-five (85) point rule (if otherwise eligible under such rule) under the Retirement Plan, the Executive shall be credited with both age and years of service until the date he or she reaches the Eligible Age. (v) Any part of the foregoing retirement benefits which are otherwise required to be paid by a tax-qualified Plan but which cannot be paid through such Plan by reason of the laws and regulations applicable to such Plan, shall be paid by one or more supplemental non- qualified Plans or by the Company in accordance with such Plan or Plans. (vi) The payments calculated hereunder which are not actually paid by the Retirement Plan shall be paid thirty (30) days following the Date of Termination in a single lump sum cash payment (of equivalent actuarial value to the payment calculated hereunder using the same actuarial assumptions as are used in calculating benefits under the Retirement Plan but using the discount rate that would be used by the Company on the Date of Termination to determine the actuarial present value of projected benefit obligations). (c) Savings Plan Benefits --------------------- (i) Subject to Section 6(c)(iii), the Executive shall be deemed to be completely vested under the Company's Employee Savings Plan -- Salaried Plan and all excess or supplemental savings plans (or any successor plans) in effect as of the date of the Change in Control ("the Savings Plans") regardless of his or her actual vesting service credit on the Termination Date. 10 (ii) In addition, subject to Section 6(c)(iii), during the Continuation Period, he or she shall be entitled to an amount equal to the Company matching contributions (at the greater of the Company's rates in effect at the Termination Date or the date of the Change in Control) under the Savings Plans which would have accrued to the benefit of the Executive had he or she continued his or her participation in, and elected to continue to make the elective deferral or contributions under such Savings Plans at the same rate at which he or she was electing to make them at the time of the Termination Date. (iii) Any part of such Savings Plans benefits which are otherwise required to be paid by a tax-qualified Savings Plan but which cannot be paid through such Savings Plan by reason of the laws and regulations applicable to the Plan shall be paid by an excess or supplemental Savings Plan or by the Company in a lump sum cash payment on the Date of Termination. (d) Financial Planning ------------------ During the Continuation Period, the Company shall reimburse the Executive for costs associated with financial planning to the same extent as was customarily provided by the Company to senior executives prior to the Change in Control. (e) Executive Outplacement Counseling --------------------------------- During the Continuation Period, unless the Executive shall reach normal retirement age during the Continuation Period, the Executive may request in writing and the Company shall at its expense engage within a reasonable time following such written request an outplacement counseling service of national reputation to assist the Executive in obtaining employment. 7. Payment of Certain Costs ------------------------ Except as otherwise provided in Section 18(c)(v), if a dispute arises regarding a termination of the Executive or the interpretation or enforcement of this Agreement, subsequent to a Change in Control, all of the reasonable legal fees and expenses incurred by the Executive and all Arbitration Costs (as hereafter defined) in contesting any such termination or obtaining or enforcing all or part of any right or benefit provided for in this Agreement or in otherwise pursuing all or part of his or her claim will be paid by the Company, unless prohibited by law. The Company further agrees to pay pre-judgment interest on any money judgment obtained by the Executive calculated at the prime interest rate reported in "The Wall Street Journal" in effect from time to time from the date that payment to him or her should have been made under this Agreement. 11 8. Excise Tax Payments. ------------------- (a) Notwithstanding anything contained in this Agreement to the contrary, in the event that any payment (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended or replaced (the "Code")), or distribution to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his or her employment with the Company (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, interest and penalties collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all such taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments; provided, that the Executive shall not be entitled to receive any additional payment relating to any interest or penalties attributable to any action or omission by the Executive in bad faith. (b) An initial determination shall be made by an accounting firm mutually agreeable to the Company and the Executive and, if not agreed to within three days after the Date of Termination, a national independent accounting firm selected by the Executive (the "Accounting Firm"), as to whether a Gross-Up Payment is required pursuant to this Section 8 and the amount of such Gross-Up Payment. To permit the Accounting Firm to make the initial determination, the Company shall furnish the Accounting Firm with all information reasonably required for such firm to complete such determination as soon as practicable after the Date of Termination, but in no event more than fifteen (15) days thereafter. All fees, costs and expenses (including, but not limited to, the cost of retaining experts) of the Accounting Firm shall be borne by the Company and the Company shall pay such fees, costs and expenses as they become due. The Accounting Firm shall provide detailed supporting calculations, reasonably acceptable both to the Company and the Executive within thirty (30) days of the Date of Termination, if applicable, or such other time as requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax). The Gross-Up Payment, if any, as determined pursuant to this Section 8(b) shall be paid by the Company to the Executive within five (5) business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it shall furnish the Executive with an opinion reasonably satisfactory to the Executive that no Excise Tax will be imposed with respect to any such Payment or Payments. Any such initial determination by the Accounting Firm of the Gross-Up Payment shall be binding upon the Company and the Executive subject to the application of Section 8(c). 12 (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Overpayment') or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the tax liability of the Executive (whether in respect of the then current taxable year of the Executive or in respect of any prior taxable year of the Executive) will be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment. An Overpayment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed (or shall be reduced) upon a Payment or Payments with respect to which the Executive had previously received a Gross-Up Payment. A Final Determination shall be deemed to have occurred when (i) in the case of an Overpayment, the Executive has received from the applicable governmental taxing authority a refund of taxes or other reduction in his or her tax liability imposed as a result of a Payment or, in the case of an Underpayment, the Executive receives notice from a competent governmental authority that his or her tax liability imposed as a result of a Payment will be increased, and (ii) in the case of an Overpayment or an Underpayment, upon either (x) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (y) the statute of limitations with respect to the Executive's applicable tax return has expired. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall promptly pay to the Executive an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties imposed on the Underpayment (other than interest and penalties attributable to any action or omission by the Executive in bad faith). If an Overpayment occurs, the amount of the Overpayment shall be treated as a loan by the Company to the Executive and the Executive shall, within ten (10) business days of the occurrence of such Overpayment, pay the Company the amount of the Overpayment, without interest. (d) Notwithstanding anything contained in this Agreement to the contrary, in the event it is determined that an Excise Tax will be imposed on any Payment or Payments, the Company shall pay to the applicable governmental taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Payment or Payments. 9. Mitigation ---------- The Executive is not required to seek other employment or otherwise mitigate the amount of any payments to be made by the Company pursuant to this Agreement, and employment by the Executive will not reduce or otherwise affect any amounts or benefits due the Executive pursuant to this Agreement, except as otherwise provided in Section 10(c). 13 10. Continuing Obligations ---------------------- (a) Acknowledgements by the Executive ---------------------------------- The Executive hereby recognizes and acknowledges the following: (i) The Company and its subsidiaries (collectively, for purposes of this Section 10, the "Company") are engaged in, among other things, the business of researching, designing, developing, manufacturing, selling and distributing on a worldwide basis fighter and military transport aircraft, commercial aircraft, helicopters, missiles, satellite launch vehicles, and certain related and other businesses (the "Business"). (ii) In connection with the Business, the Company has expended a great deal of time, money and effort to develop and maintain the secrecy and confidentiality of substantial proprietary trade secret information and other confidential business information which, if misused or disclosed, could be very harmful to the Business and could cause the Company to lose its competitive edge in the marketplace. (iii) The Executive desires to become entitled to receive the benefits contemplated by this Agreement but which the Company would not make available to the Executive but for the Executive's signing and agreeing to abide by the terms of this Section 10. (iv) The Executive's position with the Company provides the Executive with access to certain of the Company's confidential and proprietary trade secret information and other confidential business information. (v) The Company compensates its employees to, among other things, develop and preserve goodwill with its customers on the Company's behalf and business information for the Company's ownership and use. (vi) If the Executive were to leave the Company, the Company in all fairness would need certain protection in order to ensure that the Executive does not appropriate and misuse any confidential information entrusted to the Executive during the course of the Executive's employment with the Company, or take any other action which could result in a loss of the Company's goodwill that was generated on the Company's behalf and at its expense, and, more generally, to prevent the Executive from having an unfair competitive advantage over the Company. 14 (b) Confidential Information. ------------------------ (i) The Executive agrees to keep secret and confidential, and not to use or disclose to any third parties, except as directly required for the Executive to perform the Executive's employment responsibilities for the Company, any of the Company's confidential and proprietary trade secret information or other confidential business information concerning the Business acquired by the Executive during the course of, or in connection with, the Executive's employment with the Company (and which was not known by the Executive prior to the Executive's being hired by the Company). The Company considers and treats as confidential (among other things) its engineering, design and technical data, computer software and programs, component sourcing and supply information, pricing policies, operational methods, strategic plans, internal financial information, research and development plans and activities, and business acquisition and expansion plans, and, except as provided herein, the Executive agrees to treat such information as secret and confidential so long as such information does not become generally known to the public through no fault or wrongful act of the Executive. (ii) The Executive acknowledges that any and all notes, records, sketches, computer diskettes and other documents obtained by or provided to the Executive, or otherwise made, produced or compiled during the course of the Executive's employment with the Company, which contain any such confidential Company information, regardless of the type of medium in which it is preserved, are the sole and exclusive property of the Company and shall be surrendered to the Company upon the Executive's termination of employment and on demand at any time by the Company. (c) Post-Termination Restrictions. ----------------------------- The Executive agrees that, at any time during the Continuation Period, the Company shall be entitled to discontinue any further payment, allocation, accrual or provision of any amounts or benefits required by Sections 5(a), 6(a)(i), 6(b)(ii), 6(d) and 6(e) (provided, that any such amounts or benefits theretofore allocated or accrued with respect to the portion of the Continuation Period preceding the occurrence of any of the contingencies set forth below shall be preserved), if the Executive on the Executive's own behalf or on behalf of any other person, firm, corporation or entity in the world: (i) provides any services for any of the Company's significant competitors, suppliers or customers or provides any general business, technical or strategic consulting or planning with respect to the Business for any such companies. The Executive recognizes that such companies could benefit greatly if they were to obtain the Company's confidential information. The Executive may request permission to provide services to or consult with any company that may be included in the category of the Company's significant competitors, suppliers or customers. The written denial or grant of such a request by the Company's President and CEO shall be conclusive and binding on the parties hereto. The grant of such a request will not be unreasonably withheld, and if this request is granted, the Executive will not be held in violation of this Section 10(d) for providing services to or consulting with such company in accordance with the terms of this request. 15 (ii) knowingly solicits, entices, induces, hires, employs or seeks to employ any salesperson, engineer, technician, manager or executive-level employee of the Company, who was employed by the Company during the Executive's last six (6) months of employment with the Company, to provide any services with respect to the Business; or (iii) materially breaches or violates Section 10(b) or any Company policy regarding confidentiality. (d) Acknowledgement Regarding Restrictions. The Executive recognizes and agrees that the provisions of this Section 10 are reasonable and enforceable because, among other things, (1) the Executive is receiving compensation under this Agreement and (2) there are many other areas in which, and companies for which, the Executive could work in view of the Executive's background, and this Section 10 therefore does not impose any undue hardship on the Executive. The Executive further recognizes and agrees that the provisions of this Section 10 are reasonable and enforceable in view of the Company's legitimate interests in protecting its confidential information and customer goodwill and the limitations contained therein on the duration and geographic scope of, and activities covered by, such provisions. (e) Breach. In the event of a breach of Section 10(b) or the occurrence of any of the contingencies under Section 10(c), the Company's sole remedy shall be the discontinuation of the payment, allocation, accrual or provision of any amounts or benefits as provided in Section 10(c). The Executive recognizes and agrees, however, that it is the intent of the parties that neither this Agreement nor any of its provisions shall be construed to adversely affect any rights or remedies that Company would have had, including, without limitation, the amount of any damages for which it could have sought recovery, had this Agreement not been entered into. Accordingly, the parties hereby agree that nothing stated in this Section 10 shall limit or otherwise affect the Company's right to seek legal or equitable remedies it may otherwise have, or the amount of damages for which it may seek recovery, in connection with matters covered by this Section 10 but which are not based on breach or violation of this Section 10 (including, without limitation, claims based on the breach of fiduciary or other duties of the Executive or any obligations of the Executive arising under any other contracts, agreements or understandings). Without limiting the generality of the foregoing, nothing in this Section 10 or any other provision of this Agreement shall limit or otherwise affect the Company's right to seek legal or equitable remedies it may otherwise have, or the amount of damages for which it may seek recovery, resulting from or arising out of statutory or common law or any Company policies relating to fiduciary duties, confidential information or trade secrets. Further, the Executive acknowledges and agrees that the fact that Subsection 10(c) is limited to the Continuation Period, and that the sole remedy of the Company hereunder is the discontinuation of benefits, shall not reduce or otherwise alter any other contractual or other legal obligations of the Executive during any period or circumstance, and shall not be construed as establishing a maximum limit on damages for which the Company may seek recovery. 16 11. Successors ---------- (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. For purposes of this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, beneficiaries, devises and legatees. If the Executive should die while any amounts are payable to him or her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, beneficiary or other designee or, if there be no such designee, to the Executive's estate. 12. Notices ------- For the purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given (i) on the date of delivery if delivered by hand, (ii) on the date of transmission, if delivered by confirmed facsimile, (iii) on the first business day following the date of deposit if delivered by guaranteed overnight delivery service, or (iv) on the third business day following the date delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: [To Be Provided] If to the Company: By Mail -------- McDonnell Douglas Corporation P.O. Box 516 St. Louis, Missouri 63166-0516 Attention: Chief Executive Officer By Personal Delivery or Facsimile --------------------------------- McDonnell Douglas Corporation World Headquarters Building Airport Road & McDonnell Blvd. St. Louis, Missouri 63134 Attention: Chief Executive Officer Facsimile: (314) 234-8296 17 with a copy to: By Mail -------- McDonnell Douglas Corporation P.O. Box 516 St. Louis, Missouri 63166-0516 Attention: General Counsel By Personal Delivery or Facsimile --------------------------------- McDonnell Douglas Corporation World Headquarters Building Airport Road & McDonnell Blvd. St. Louis, Missouri 63134 Attention: General Counsel Facsimile: (314) 233-7958 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 13. Governing Law ------------- The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Missouri, without regard to principles of conflicts of laws. 14. Miscellaneous ------------- No provisions of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. Section headings contained herein are for convenience of reference only and shall not affect the interpretation of this Agreement. 15. Counterparts ------------ This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which will constitute one and the same instrument. 16. Non-Assignability ----------------- This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, or transfer this Agreement or any rights or obligations hereunder, except as provided in Section 11. Without limiting the foregoing, the Executive's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by his or her will or trust or by the laws of descent or distribution, and in the event of any attempted assignment or transfer contrary to this paragraph the Company shall have no liability to pay any amount so attempted to be assigned or transferred. 18 17. Term of Agreement ----------------- This Agreement shall commence on the date hereof and shall continue in effect through December 31 of 1998; provided, however, that commencing on January 1 of 1998 and of each year thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice to the other party that it does not wish to extend this Agreement; provided further, if a Change in Control of the Company shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the month in which such Change in Control occurred; and, provided further, that if the Company shall become obligated to make any payments or provide any benefits pursuant to Section 5 or 6 hereof, this Agreement shall continue in effect indefinitely. 18. Arbitration ----------- (a) Scope; Initiation. Resolution of any and all disputes arising from or in connection with this Agreement, whether based on contract, tort, statute or otherwise, including disputes over arbitrability and disputes in connection with claims by third persons ("Disputes") shall be exclusively governed by and settled in accordance with the provisions of this Section 18. Either party to this Agreement (each a "Party" and together the "Parties") may commence proceedings hereunder by delivery of written notice providing a reasonable description of the Dispute to the other, including a reference to this Section (the "Dispute Notice"). (b) Negotiations Between Parties. The Parties shall first attempt in good faith to resolve promptly any Dispute by good faith negotiations. Not later than three (3) business days after delivery of the Dispute Notice, the Company shall appoint an executive to meet with the Executive or his or her representative at a reasonably acceptable time and place, and thereafter as such representatives deem reasonably necessary. The Parties shall exchange relevant non-privileged information and endeavor to resolve the Dispute. Prior to any such meeting, each Party or representative shall advise the other as to any other individuals who will attend such meeting. All negotiations pursuant to this Section 18(b) shall be confidential and shall be treated as compromise negotiations for purposes of Rule 408 of the Federal Rules of Evidence and similarly under other federal and state rules of evidence. (c) Binding Arbitration. The Parties hereby agree to submit all Disputes to arbitration under the following provisions, which arbitration shall be final and binding upon the Parties, their successors and assigns, and that the following provisions constitute a binding arbitration clause under applicable law. (i) Either Party may initiate arbitration of a Dispute by delivery of a demand therefor (the "Arbitration Demand") to the other Party not sooner than five (5) business days after the date of delivery of the Dispute Notice but at any time thereafter. 19 (ii) The arbitration shall be conducted in the County of St. Louis, Missouri, by three arbitrators (acting by majority vote, the "Panel") selected by agreement of the Parties not later than 10 days after delivery of the Arbitration Demand or, failing such agreement, appointed pursuant to the Commercial Arbitration Rules of the American Arbitration Association, as amended from time to time (the "AAA Rules"). If an arbitrator becomes unable to serve, his or her successor(s) shall be similarly selected or appointed. (iii) The arbitration shall be conducted pursuant to the Federal Arbitration Act and the Missouri Uniform Arbitration Act, such procedures as the Parties may agree or, in the absence of or failing such agreement, pursuant to the AAA Rules. Notwithstanding the foregoing: (w) each party shall be allowed to conduct discovery through written requests for information, document requests, requests for stipulations of fact, and depositions; (x) the nature and extent of such discovery shall be determined by the Panel, taking into account the needs of the Parties and the desirability of making discovery expeditious and cost-effective; (y) the Panel may issue orders to protect the confidentiality of information, to be disclosed in discovery; and (z) the Panel's discovery rulings may be enforced in any court of competent jurisdiction. (iv) All hearings shall be conducted on an expedited schedule, and all proceedings shall be confidential. Either Party may at its expense make a stenographic record thereof. (v) The Panel shall complete all hearings not later than twenty (20) days after selection or appointment, and shall make a final award not later than ten (10) days thereafter. The award shall be in writing and shall specify the factual and legal bases for the award, and shall include a determination as to whether any claim by the Executive of Good Reason was manifestly unreasonable for purposes of the second-to-last sentence of Section 4. Notwithstanding anything contained in Section 7, in circumstances where a Dispute has been asserted by the Executive or defended against by the Executive on grounds that the Panel deems manifestly unreasonable (whether related to a claim of Good Reason or otherwise), the Panel may assess all or part of the costs and expenses of the arbitration, including the Panel's fees and expenses and fees and expenses of experts and legal counsel ("Arbitration Costs"), against the Executive and may include in the award the Executive's and the Company's attorney's fees and expenses in connection with any and all proceedings under this Section 18. Notwithstanding the foregoing, in no event may the Panel award multiple, punitive or exemplary damages to either party. (d) Confidentiality - Notice. Each Party shall notify the other promptly, and in any event prior to disclosure to any third person, if it receives any request for access to confidential information or proceedings hereunder. 19. No Setoff --------- The Company shall have no right of setoff or counterclaim in respect of any claim, debt or obligation against any payment provided for in this Agreement. 20 20. Non-Exclusivity of Rights ------------------------- Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries or successors and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company or any of its subsidiaries or successors. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 21. No Guaranteed Employment ------------------------ The Executive and the Company acknowledge that this Agreement shall not confer upon the Executive any right to continued employment and shall not interfere with the right of the Company to terminate the employment of the Executive at any time. 22. Invalidity of Provisions ------------------------ In the event that any provision of this Agreement is adjudicated to be invalid or unenforceable under applicable law in any jurisdiction, the validity or enforceability of the remaining provisions thereof shall be unaffected as to such jurisdiction and such adjudication shall not affect the validity or enforceability of such provision in any other jurisdiction. To the extent that any provision of this Agreement, including, without limitation, Section 10 hereof, is adjudicated to be invalid or unenforceable because it is overbroad, that provision shall not be void but rather shall be limited to the extent required by applicable law and enforced as so limited. The parties expressly acknowledge and agree that this Section 22 is reasonable in view of the parties' respective interests. 23. Non-Waiver of Rights -------------------- The failure by the Company or the Executive to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other party of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement, or any part hereof, or the right of the Company or the Executive thereafter to enforce each and every provision in accordance with the terms of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first above set forth. PLEASE NOTE: BY SIGNING THIS TERMINATION BENEFITS AGREEMENT, THE EXECUTIVE IS HEREBY CERTIFYING THAT THE EXECUTIVE (A) HAS RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW AND STUDY BEFORE EXECUTING IT; (B) HAS READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C) HAS HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THE AGREEMENT TO ASK ANY QUESTIONS THE EXECUTIVE HAS ABOUT THE AGREEMENT AND HAS RECEIVED SATISFACTORY ANSWERS TO ALL SUCH QUESTIONS; AND (D) UNDERSTANDS THE EXECUTIVE'S RIGHTS AND OBLIGATIONS UNDER THE AGREEMENT. 21 THIS AGREEMENT IN SECTION 18 CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. MCDONNELL DOUGLAS CORPORATION By:_________________________________ EXECUTIVE: _______________________________________ EX-10 9 SETTLEMENT AGREEMENT 1 Exhibit 10(l) SETTLEMENT AGREEMENT AND GENERAL AND SPECIAL RELEASE 1. PARTIES. The parties to this Settlement Agreement and General and Special Release ("Agreement") are: (a) John P. Capellupo ("Capellupo"), and (b) McDonnell Douglas Corporation ("MDC"). 2. RECITALS. This Agreement is entered into to effectuate Capellupo's retirement from MDC, and the parties, through this Agreement, agree to fully and finally settle all claims, known and unknown, that either party may have against the other arising from Capellupo's relationship with MDC and MDC's relationship with Capellupo, including, but not limited to, claims relating to Capellupo's employment, his retirement and the terms and scope of monetary payments made by, or required to be made by, MDC to him. 3. CONTRACTUAL TERMS. In consideration of the terms and covenants of this Agreement, MDC agrees to permit, perform, allow or facilitate certain acts on Capellupo's behalf and to pay certain monies, all as more fully set out below: (a) From the date of the execution of this Agreement until and including March 31, 1996, Capellupo will continue in full-time employment at MDC; (b) At the close of business on March 31, 1996, Capellupo will retire from MDC; (c) Capellupo will receive a payment under MDC's Senior Executive Performance Sharing Plan ("PSP") of $524,100, subject to normal taxation and withholdings, which payment shall be in complete satisfaction of any award under PSP for the Plan Year 1995. Payment under this paragraph shall issue in accordance with MDC's normal PSP cycle on or about March 29, 1996; (d) Promptly following his retirement on March 31, 1996, Capellupo will receive a lump-sum payment for all accrued and unused vacation days, subject to normal taxation and withholding; (e) The number of restricted shares of MDC stock granted under the two Performance Accelerated Restricted Stock ("PARS") Agreements dated February 25, 1994, shall be reduced from 7,500 under each agreement to 5,625 shares under each agreement. Such reduced number of shares shall vest or be forfeited in accordance with the terms of the PARS Agreements as if Capellupo was still employed by MDC through the Performance Periods; (f) The number of restricted shares of MDC stock granted under the Performance Accelerated Restricted Stock ("PARS") Agreement dated March 20, 1995, shall be reduced from 18,000 to 7,500 shares. Such reduced number of shares shall vest or be forfeited in accordance with the terms of the PARS Agreement as if Capellupo was still employed by MDC through the Performance Periods; 2 (g) Capellupo's number of restricted shares of MDC Stock granted under the Performance Accelerated Restricted Stock Award Agreement dated February 1, 1996, shall be canceled in their entirety; (h) Subject to paragraph 3(j), the number of shares of MDC Stock awarded to Capellupo under the Long-Term Incentive Program ("LTIP") on April 6, 1993, shall remain at 18,000 shares. Capellupo's entitlement to receive an Earned LTIP Award with respect to said April 6, 1993, award shall be determined in accordance with the terms of the LTIP; (i) Capellupo will be awarded a Target Incentive Compensation Award ("TICA") of $235,000 for calendar year 1996. His Performance Adjusted TICA ("PAT") will be determined in accordance with the plan provisions in the first quarter of 1997. He will receive one-fourth (1/4) of said PAT on or before March 31, 1997. His annual base salary will remain at $400,000 until his retirement on March 31, 1996; (j) Any LTIP or PSP amounts that previously would have been paid to Capellupo but were deferred because they would not have been deductible due to the compensation cap of Internal Revenue Code Section 162(m), (the "162(m) Deferral"), together with additional amounts otherwise payable to him under paragraph 3(h) shall continue to be deferred (the "Total Deferral"). Subject to paragraph 5(c), one-half (1/2) of such amounts shall vest and be paid in cash to Capellupo on the last business day of March, 1998, and the balance shall vest and be paid in cash to him on the last business day of March, 1999. The deferred amounts related to the 162(m) Deferral will continue to earn interest at 11% until MDC pays the 1996 LTIP award in accordance with the LTIP. Thereafter, the Total Deferral will earn 7% interest compounded quarterly during the deferral period; and (k) Capellupo shall be entitled to receive other employee benefits in accordance with MDC's established plans, including the Employee Retirement Income Plan of MDC - Salaried Plan, the Supplemental Executive Retirement Income Plan, the Employee Savings Plan of MDC - Salaried Plan and the Supplemental Executive Savings Plan, all in accordance with the terms of such plans. 4. ADDITIONAL CONTRACTUAL TERMS & GENERAL AND SPECIAL RELEASE. In consideration of the terms and provisions of this Agreement, Capellupo, on behalf of himself and his related individuals and entities including, but not limited to, his successors, assigns, attorneys, representatives, and any and all other related individuals and entities, does hereby release and discharge MDC and its respective predecessors, successors, assigns, attorneys, affiliated components and corporations, and their officers, directors, agents and employees from any and all claims, liabilities, costs and expenses (including, but not limited to, attorney's fees), damages, actions and causes of action, of whatever 3 kind or nature arising out of acts or omissions occurring before the execution of this Agreement (collectively referred to as "claims"), including, without limitation, any statutory, civil or administrative claim, claims based on this Agreement, claims arising from rights under federal, state, and local laws prohibiting discrimination on any basis (including age discrimination and alleged violation of the Age Discrimination in Employment Act), and common law claims of any kind, including, but not limited to, contract, tort, and property rights claims including, but not limited to, breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with contract or current or prospective economic advantage, fraud, deceit, libel, slander, misrepresentation, defamation, infliction of emotional distress, and any other common law claim of any kind. Notwithstanding anything herein to the contrary, the Indemnification Agreement dated June 21, 1991, by and between MDC and Capellupo will survive this Agreement. The monies and other considerations outlined in paragraphs 3(a) through (k) herein, the sufficiencies of which are expressly acknowledged by Capellupo, are accepted by him in complete satisfaction of all claims, known or unknown, disputed or otherwise. In consideration of the terms and provisions of this Agreement, MDC, its successors, assigns, attorneys, representatives and any and all other related individuals and entities do hereby release and discharge Capellupo, and his respective predecessors, successors, assigns and attorneys from any and all claims, including, without limitation, any statutory, civil or administrative claim, claims based on, or arising out of, or related to the subject matter of the claims referred to in this Agreement, and common law claims of any kind, claims, including, but not limited to, breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with contract or current or prospective economic advantage, fraud, deceit, libel, slander, misrepresentation, defamation, infliction of emotional distress, and any other common law claim of any kind. 5. CONTINUING OBLIGATIONS. (a) Acknowledgements by Capellupo. Capellupo hereby acknowledges the following: (i) MDC is engaged in, among other things, the business of researching, designing, developing, manufacturing, selling and distributing on a worldwide basis fighter and military transport aircraft, commercial aircraft, helicopters, missiles, satellite launch vehicles, and certain related and other businesses (the "Business"). (ii) In connection with the Business, MDC has expended a great deal of time, money and effort to develop and maintain the secrecy and confidentiality of substantial proprietary trade secret information and other confidential business information which, if misused or disclosed, could be very harmful to the Business and could cause MDC to lose its competitive edge in the marketplace. 4 (iii) Capellupo desires to become entitled to receive the benefits contemplated by this Agreement but which MDC would not make available to him but for his signing and agreeing to abide by the terms of this Section 5. (iv) Capellupo recognizes and acknowledges that his position with MDC provides him with access to certain of MDC's confidential and proprietary trade secret information and other confidential business information. (v) MDC compensates its employees to, among other things, develop and preserve goodwill with its customers on MDC's behalf and business information for MDC's ownership and use. (vi) Capellupo recognizes and acknowledges that MDC in all fairness would need certain protection in order to ensure that Capellupo does not appropriate and misuse any confidential information entrusted to him during the course of his employment with MDC, or take any other action which could result in a loss of MDC's goodwill that was generated on MDC's behalf and at its expense, and, more generally, to prevent Capellupo from having an unfair competitive advantage over MDC. (b) Confidential Information. (i) Capellupo agrees to keep secret and confidential, and not to use or disclose to any third parties, any of MDC's confidential and proprietary trade secret information or other confidential business information concerning the Business acquired by Capellupo during the course of, or in connection with, his employment with MDC. MDC considers and treats as confidential (among other things) its engineering, design and technical data, computer software and programs, component sourcing and supply information, pricing policies, operational methods, strategic plans, internal financial information, research and development plans and activities, and business acquisition and expansion plans, and, except as provided herein, Capellupo agrees to treat such information as secret and confidential so long as such information does not become generally known to the public through no fault or wrongful act of Capellupo. (ii) Capellupo acknowledges that any and all notes, records, sketches, computer diskettes and other documents obtained by or provided to him, or otherwise made, produced or compiled during the course of his employment with MDC, which contain any such confidential MDC information, regardless of the type of medium in which it is preserved, are the sole and exclusive property of MDC and shall be surrendered to MDC upon his retirement. 5 (c) Post-Termination Restrictions. Capellupo agrees that, at any time prior to the vesting or forfeiture of all restricted stock under the PARS agreements pursuant to paragraphs 3(e) and (f) or the vesting of deferred compensation pursuant of paragraph 3(j), Capellupo shall forfeit all rights (1) to vesting or otherwise receiving any restricted stock under the PARS agreements pursuant to paragraphs 3(e) and (f) and (2) to vesting and receipt of deferred compensation pursuant to paragraph 3(j) if he, on his own behalf or on behalf of any other person, firm, corporation or entity in the world: (i) provides any services for any of MDC's significant competitors, suppliers or customers or provides any general business, technical or strategic consulting or planning with respect to the Business for any such companies. Capellupo recognizes that such companies could benefit greatly if they were to obtain MDC's confidential information. Capellupo may request permission to provide services to or consult with any company that may be included in the category of MDC's significant competitors, suppliers or customers. The written denial or grant of such a request by MDC's President and CEO shall be conclusive and binding on the parties hereto. The grant of such a request will not be unreasonably withheld, and if the request is granted, Capellupo will not be held in violation of this paragraph 5(c) for providing services to or consulting with such company in accordance with the terms of the request; (ii) knowingly solicits, entices, induces, hires, employs or seeks to employ any salesperson, engineer, technician, manager or executive-level employee of MDC, who was employed by MDC on March 31, 1996, to provide any services with respect to the Business; or (iii) breaches or violates paragraphs 5(b), (d) or (e) or any MDC policy regarding confidentiality. (d) Agreement to Refrain from Using Disparaging Comments. Capellupo shall indefinitely refrain, in writing and orally, from using examples or narrative which are derogatory of MDC, its present or former management, its policies or practices, etc. (e) Agreement re Cooperation. Capellupo agrees to readily and fully cooperate with MDC should it become necessary to develop factual bases to protect or defend MDC's business interests. As such, among other matters yet to be directed, Capellupo will attend: ceremonies on April 3, 1996, at which he will be presented the Nimitz Award; a Navy panel in Pensacola, Florida, on May 10, 1996; and the June 7-10, 1996 Gathering of Eagles. MDC shall pay for all expenses related to Capellupo's cooperation hereunder, including, but not limited to travel, lodging, and food. 6 (f) Acknowledgement Regarding Restrictions. Capellupo recognizes and agrees that the provisions of this Section 5 are reasonable and enforceable because, among other things, (1) he is receiving compensation under this Agreement and (2) there are many other areas in which, and companies for which, he could work in view of his background, and this paragraph 5 therefore does not impose any undue hardship on him. He further recognizes and agrees that the provisions of this paragraph 5 are reasonable and enforceable in view of MDC's legitimate interests in protecting its confidential information and customer goodwill and the limitations contained therein on the duration and geographic scope of, and activities covered by, such provisions. 6. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the parties hereto, and each of them. In the case of MDC, this Agreement is intended to release and inure to the benefit of MDC's affiliated components and corporations, their divisions and shareholders, officers, directors, agents, representatives, employees, and any and all other related individuals and entities, if any, individually as well as in the capacity indicated. 7. INTEGRATION. This Agreement constitutes a single, integrated written contract expressing the entire agreement of the parties to this Agreement concerning its subject matters. No covenants, agreements, or warranties of any kind, whether express or implied in law or fact, have been made by any party to this Agreement, except as specifically set forth in this Agreement. All prior and contemporaneous discussions and negotiations have been and are merged and integrated into, and are superseded by, this Agreement. 8. MODIFICATIONS. No modification, amendment or waiver of any of the provisions contained in this Agreement, or any future representation, promise, or condition in connection with the subject matter of this Agreement, shall be binding upon any party hereto unless made in writing and signed by such party or by a duly authorized officer or agent of such party. 9. SEVERABILITY. In the event that any provision of this Agreement should be held to be void, voidable, unlawful or for any reason unenforceable, the remaining portions of this Agreement shall remain in full force and effect. 10. NON-ASSIGNMENT OF CLAIMS. Capellupo and MDC each represent and warrant that he and it has not assigned or transferred any portion of the claims released herein to any other individual, firm, corporation, or other entity, and that no other individual, firm, corporation or other entity has any lien, claim or interest in any of such claims, including but not limited to, any claim or interest arising out of, related to or connected with the matters referenced herein. Capellupo and MDC each covenant and agree not to bring, induce, or assist, in any claim, action or proceeding of any kind or nature against the other party, directly or indirectly, regarding, connected with, arising out of, or relating to in any manner the matters released by this Agreement and to indemnify the other party from and against all liability of any kind relating in any way to the activities described in this paragraph. 7 11. MISCELLANEOUS TERMS. Each of the parties to this Agreement further represents, warrants, and agrees as follows: (a) Each of the parties has had the opportunity to review this Agreement and seek advice on the advisability of making the settlement provided for herein and executing this Agreement, including the opportunity to consult with the legal counsel of the party's choice. Capellupo acknowledges that he has been given the opportunity to consider settling the claims referenced herein, in accordance with the terms of this Agreement, for twenty-one (21) days, and that he may take as much of that time as he wants to consider the Agreement before signing it. Capellupo also acknowledges that he may revoke this agreement within seven (7) days of the date he signs it, and that if he does not revoke the Agreement within seven (7) days, the Agreement will be effective, binding and enforceable; (b) Each of the parties has read the Agreement carefully, knows and understands the contents thereof, and has made such investigation of the facts pertaining to the settlement and this Agreement and of all matters pertaining hereto as it deems necessary or desirable; (c) The terms of this Agreement are contractual and result from discussions between the parties; (d) Each party agrees that such party will not take any action which would interfere with the performance of this Agreement by any of the parties hereto or which would adversely affect the status of the rights provided for, or the claims surrendered, herein; and (e) In entering into this Agreement and the settlement provided for herein, the parties, and each of them, acknowledge that this Agreement is intended to be final and binding between MDC and Capellupo, and is further intended to be effective as a full and final accord and satisfaction between them. Each party relies on the finality of this Agreement as a material factor inducing that party's execution of this Agreement. 12. SETTLEMENT. The parties hereto acknowledge and covenant that this Agreement represents a settlement of disputed rights and claims and that by entering into this Agreement, no party hereto admits or acknowledges the existence of any liability or wrongdoing, all such liability being expressly denied. No provision of this Agreement, or of any related document, shall be construed as an admission or concession of liability, of any wrongdoing or of any preexisting liability. 8 13. CONFIDENTIALITY. Capellupo and MDC agree that the existence, fact, terms, or provisions of or information concerning this Agreement shall remain confidential and shall not be disclosed to the mass media or the press, or to any person, firm, corporation, or other entity (collectively referred to as "any person") with the sole and exclusive exceptions of: (a) as required by any governmental agency or court, or otherwise required by law, so long as the party being compelled to disclose provides the other party with written notice of such requirement fifteen (15) days prior to the required disclosure; (b) to Capellupo's attorney or accountant as may be required for the rendition of professional services, so long as any such attorney or accountant is informed of this confidentiality agreement prior to the disclosure of information protected by it and agrees to abide by its terms; (c) to a limited number of MDC employees tasked with implementation of the terms of the Agreement; (d) to a Court(s) of competent jurisdiction should either party be required to enforce any provisions hereunder or to sue for beach; and (e) to Capellupo's prospective employers on a very limited basis. In the unlikely event that Capellupo is requested or required to share the particulars of this Agreement with prospective employers, MDC shall be notified prior to any proposed disclosure and shall narrowly tailor and limit the scope of such communications. 14. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties hereto have approved and executed this Agreement on the date(s) specified below. /s/ John P. Capellupo - ------------------------------------ March 7, 1996 John P. Capellupo /s/ Harry C. Stonecipher - ------------------------------------ March 7, 1996 McDonnell Douglas Corporation By: Harry C. Stonecipher President & CEO EX-11 10 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 MCDONNELL DOUGLAS CORPORATION COMPUTATION OF EARNINGS PER SHARE (Dollars in Millions) Years Ended December 31 1995 1994 1993 ------ ------ ------ PRIMARY Weighted average shares outstanding 113,529,238 118,301,352 117,770,733 =========== =========== =========== Net earnings (loss): Earnings (loss) from continuing operations ($416) $598 $359 Discontinued operations, net of income taxes 37 ----------- ----------- ----------- ($416) $598 $396 =========== =========== =========== Earnings (loss) per share: Continuing operations ($3.66) $5.05 $3.06 Discontinued operations, net of income taxes .31 ----------- ----------- ----------- ($3.66) $5.05 $3.37 =========== =========== =========== Earnings per share computations are based upon the weighted average common shares outstanding during the year. Common stock equivalents (options) are not material. The computation of fully diluted earnings (loss) per share is the same as the primary computation. EX-12 11 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 MCDONNELL DOUGLAS CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) Years Ended December 31 --------------------------------------------- 1995 1994 1993 1992 1991 ------ ------ ------ ------ ----- EARNINGS Earnings (loss) from continuing operations before income taxes and cumulative effect of accounting change ($750) $920 $459 $1,086 $615 ADD: Interest expense 225 249 215 468 453 Interest factor in rents 32 35 39 57 66 Amortization of capitalized interest 1 1 1 2 2 ------ ------ ------ ------ ------ ($492) $1,205 $714 $1,613 $1,136 ====== ====== ====== ====== ====== FIXED CHARGES Interest expense $225 $249 $215 $468 $453 Capitalized interest 2 Interest factor in rents 32 35 39 57 66 ------ ------ ------ ------ ------ $257 $284 $256 $525 $519 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges (1.9X)(A) 4.2X 2.8X 3.1X 2.2X ====== ====== ====== ====== ====== (A) For the year ended December 31, 1995, earnings were inadequate to cover fixed charges. The amount of such deficiency for the period was $749 million. EX-13 12 ANNUAL REPORT TO SHAREHOLDERS [Company Pull-Out Section] MILITARY AIRCRAFT; MISSILES, SPACE, AND ELECTRONIC SYSTEMS McDonnell Douglas Aerospace is primarily the defense-related operating unit of the McDonnell Douglas Corporation. McDonnell Douglas Aerospace (Primary Locations) TACTICAL AIRCRAFT AND MISSILES St. Louis, Missouri Employees: 22,200 History: Founded as the McDonnell Aircraft Company in 1939 by James S. McDonnell. Markets Served: U.S. and international armed forces. Products/Services: F-15 Eagle dual-role fighter; multimission F/A-18 Hornet and Super Hornet (in development) strike fighters; AV-8B Harrier II Plus vertical/short takeoff and landing tactical aircraft; T-45 Training System; Harpoon and Standoff Land Attack Missiles; Joint Direct Attack Munition; ACES II ejection seat; training systems, technical support; research and development in aerospace structures, avionics, and systems. HELICOPTERS Mesa, Arizona Employees: 2,800 History: In 1984, McDonnell Douglas purchased Hughes Helicopters, which had been founded in 1934 by Howard R. Hughes Jr. Markets Served: U.S. and international armed forces; commercial light- helicopter operators; police forces and public-service providers, including air ambulance. Products/Services: AH-64A Apache and AH-64D Longbow Apache multirole combat helicopters; MD 500 and MD 600 series of light helicopters, featuring the NOTAR[TM] -- or no-tail-rotor -- system for anti-torque and directional control; MD Explorer twin-turbine helicopter with the NOTAR[TM] System. SPACE AND DEFENSE SYSTEMS Huntington Beach, California Employees: 11,200 worldwide (including 5,700 in Huntington Beach) History: Space and defense systems was formed from portions of the McDonnell and Douglas aircraft companies, which pioneered the development of U.S. space exploration. Markets Served: U.S. National Aeronautics and Space Administration (NASA); U.S. military services; international governments and space agencies; U.S. and international commercial-satellite manufacturers. Products/Services: Delta II launch vehicle; Delta III intermediate- class rocket (in development); International Space Station truss structure and major systems; payload integration; Mast Mounted Sight and Thermal Imaging Sensor System. [Company Pull-Out Section] C-17 PROGRAM Long Beach, California Employees: 8,400 History: Although the C-17 transport aircraft program now operates as a separate unit, the Globemaster III began as part of the Douglas Aircraft Company. Douglas had produced a number of other military transports, including the Globemaster I and II. Markets Served: U.S. armed forces. Potential for international armed forces and commercial heavy-cargo transport industry. Products/Services: C-17 Globemaster III transport aircraft. C-17 GLOBEMASTER III - -------------------- Cited as the most versatile airlifter in aviation history, the C-17 can fly long distances, land on short, unimproved runways close to the front lines, and deliver heavy cargo. The first U.S. Air Force C-17 squadron was declared operationally ready for service in January 1995. In the summer, the wide-body airlifter demonstrated unprecedented reliability, maintainability, and availability during a rigorous four-week evaluation. In November, the Department of Defense announced plans to procure 80 additional C-17s beyond the 40 for which it previously committed. Under a multiyear agreement, the government would pay at least $16.6 billion for the 80 aircraft. In December 1995, C-17s began a heavy schedule of missions to Bosnia-Herzegovina in support of the international peacekeeping effort there. McDonnell Douglas delivered six C-17s in 1995, when the aircraft was awarded aviation's prestigious Collier Trophy. A number of international customers have expressed interest in the Globemaster III. A commercial version, the MD-17, will address a niche market for the delivery of outsize cargo -- such as large pieces of oil rigs or construction equipment. Propulsion: Four Pratt & Whitney F117-PW-100 series turbofans, each producing 40,700 lb. of thrust and equipped with directed-flow thrust reversers that enable the C-17 to land on short runways and to back up while fully loaded. Dimensions: Length 174 ft. (53 m.); height 55 ft. (16.8 m.); wingspan 170 ft. (51.8 m.). Maximum Payload: 169,000 lb. (76,658 kg.) Crew: Two pilots, one loadmaster. [Company Pull-Out Section] F/A-18 HORNET - ------------- The F/A-18 is a multimission aircraft, known as a strike fighter. It is flown by the U.S. Navy/Marine Corps and the air forces of Canada, Australia, Spain, Kuwait, Finland, and Switzerland. It is the first tactical aircraft designed from its inception to carry out both air-to- air and air-to-ground missions, to operate reliably, and to be easy to maintain even during long periods flying from aircraft carriers in the corrosive environment at sea. Production began in 1977. The upgraded Night Strike F/A-18C/D, introduced in 1989, enables crews to fly and fight at night and in adverse weather, with improved survivability and the ability to deliver a greater range of precision-guided weapons. In 1995, McDonnell Douglas delivered 43 F/A-18C/Ds, including the first 7 of Finland's 64 Hornets. The first of 34 Swiss Hornets was delivered in January 1996. Malaysia will begin taking delivery of its eight Hornets in October 1996. In 1995, Thailand declared its interest to the U.S. government in procuring eight F/A-18s. Propulsion: In the F/A-18C/D, two General Electric F404-GE-402 engines, delivering 35,400 lb. of combined thrust (17,700 lb. each). Dimensions: Length 56 ft. (17.1 m.); height 15.3 ft. (4.7 m.); wingspan 40.4 ft. (12.3 m.). Maximum Payload: Up to 14,900 lb. (6,757 kg.) externally. Crew: One in F/A-18A and C; two in F/A-18B and D. F/A-18E/F SUPER HORNET - ---------------------- The F/A-18E/F Super Hornet will be the centerpiece of U.S. naval aviation as the 21st century unfolds. Now in development and testing, it is scheduled to enter operational service with the U.S. Navy in 2001. The Super Hornet adds greater range and payload-carrying ability, improves the Hornet's benchmark reliability and maintainability, and allows for the extensive integration of new systems and technologies. It also incorporates stealth and other features to improve survivability significantly. The first flight was in November 1995. The Navy began flight testing the first two developmental aircraft in early 1996. The Department of the Navy plans to purchase 1,000 aircraft -- at an estimated program cost of $89 billion -- through 2015. McDonnell Douglas is the prime contractor and Northrop Grumman the principal subcontractor for all versions of the F/A-18. Propulsion: Two General Electric F414 turbofan engines, producing 44,000 lb. of combined thrust (22,000 lb. each). Dimensions: Length 60.3 ft. (18.4 m.); height 16 ft. (4.9 m.); wingspan 44.9 ft. (13.7 m.). Maximum Payload: Up to 17,750 lb. (8,051 kg.) externally. Crew: One in F/A-18E; two in F/A-18F. [Company Pull-Out Section] AV-8B HARRIER II PLUS - --------------------- The AV-8B Harrier II -- a combat aircraft designed for vertical/short takeoffs and landings -- can operate where other fixed-wing aircraft cannot. McDonnell Douglas and British Aerospace jointly developed the Harrier II in the early 1980s for the U.S. Marine Corps and the British Royal Air Force. Designed to provide fast and effective interdiction and close air support to forces on the ground, it can hover and land in confined spaces. The radar-equipped Harrier II Plus configuration makes the aircraft even more accurate and versatile. Assembly of newly manufactured Harrier II Pluses by Spain and Italy -- partners with the United States in the development of this upgraded aircraft -- continues through the decade. Through the Marine Corps' remanufacturing program, 73 day-attack Harrier IIs now in the fleet are being converted to Harrier II Plus radar/night-attack aircraft. Remanufactured Harriers gain a new service life at two-thirds the cost of an all-new aircraft. The Harrier II Plus had three first-flight milestones in 1995 -- the first aircraft assembled by Alenia of Italy, the first aircraft assembled by Construcciones Aeronauticas S.A. (CASA) of Spain, and the U.S. Marine Corps' first remanufactured Harrier II Plus, assembled in the United States. Propulsion: One Rolls Royce F402-RR-408 turbofan engine, delivering 23,800 lb. of thrust. Dimensions: Length 47.8 ft. (14.6 m.); height 11.6 ft. (3.5 m.); wingspan 30.3 ft. (9.2 m.). Maximum Payload: 11,795 lb. (5,350 kg.) externally. Crew: One (two in TAV-8B trainer). F-15 EAGLE - ---------- The F-15 (A, B, C, and D versions) was originally designed for the U.S. Air Force as the world's premier air-superiority fighter. One of its latest versions, the F-15E Strike Eagle, added the capability for long-range, precision air-to-surface interdiction, making the Eagle the USAF's most capable fighter-bomber. It can operate around the clock and in any type of weather. F-15 production, which began in 1972, has been extended into 1999 by orders for 72 F-15S aircraft for Saudi Arabia and 25 F-15I aircraft for Israel. Four F-15S Eagles were delivered in 1995. The U.S. government is planning to procure six attrition replacement F-15Es for the U.S. Air Force in fiscal year 1996 and is providing advance procurement for six aircraft in fiscal year 1997. Propulsion: Two Pratt & Whitney F100-PW-100/220s (25,000 lb. thrust each) in F-15 C/D; two F-100-PW-220/229s (29,000 lb. thrust each) in F-15E. The General Electric F110-GE-129 (29,000 lb. thrust) is being qualified for future F-15 programs. Dimensions: Length 63.8 ft. (19.4 m.); height 18.6 ft. (5.7 m.); wingspan 42.8 ft. (13 m.). Maximum Payload: Up to 23,000 lb. (10,433 kg.) in F-15C/D; up to 19,000 lb. (8,618 kg.) in F-15E (with conformal fuel tanks). [Company Pull-Out Section] Crew: One in F-15A and C; one or two in F-15B and D trainers; two in tactical F-15E. T-45 TRAINING SYSTEM (T45TS) - --------------------------- The first totally integrated training system developed for and used by the U.S. Navy, the system includes the T-45A Goshawk training aircraft, advanced flight simulators, academics, computer-assisted instructional programs, a computerized training-integration system, and a contractor logistics support package. McDonnell Douglas and British Aerospace share production of the T-45A. Hughes Training Inc. is the principal subcontractor for the simulators. Training in the T45TS began in January 1994, with graduates of the first class earning their wings in October 1994. Plans call for about 200 T-45A Goshawks to be delivered to the Navy. Fifteen were delivered in 1995. The U.S. government plans to procure 12 in fiscal year 1996. Propulsion: One Rolls Royce F405-RR-401 Adour turbofan engine, producing 5,845 lb. of thrust. Dimensions: Length 39.3 ft. (12 m.); height 13.5 ft. (4.1 m.); wingspan 30.8 ft. (9.4 m.). Crew: Two -- one instructor and one student pilot. AH-64 APACHE - ------------- The U.S. Army's four-bladed AH-64 Apache is the newest and most advanced multimission helicopter in the U.S. inventory. The AH-64D Longbow Apache fires its weapons more accurately from longer ranges, fires more sophisticated weapons, and fights even more effectively than the AH-64A, day or night and in adverse weather. The Longbow Apache completed a three-month initial operational test and evaluation program in 1995. Beginning in mid-1996, U.S. Army AH-64As will be remanufactured into Longbow Apaches. Two international customers selected the Longbow Apache in 1995 -- the Netherlands, which will purchase 30 for its Royal Air Force, and the United Kingdom, which plans to order 67. McDonnell Douglas delivered 36 Apaches in 1995. Propulsion: Two General Electric T700-GE-701C turbine engines. Dimensions: Length 58.2 ft. (17.7 m.); Apache height 15.2 ft. (4.6 m.), Longbow Apache height 16.25 ft. (5 m.); main rotor diameter 48 ft. (14.6m.). Maximum Payload: Apache 9,950 lb. (4,510 kg.); Longbow Apache 10,570 lb. (4,795 kg.). Crew: One pilot and one co-pilot. [Company Pull-Out Section] MD 500 - ------- Descended from the U.S. Army's OH-6A Cayuse, MD 500 Series helicopters, including the MD 500E, the MD 530F and the MD 520N, are among the fastest, lightest, and most advanced light rotorcraft in service. Primarily considered civil helicopters, they also are available in military "Defender" configurations. The five-place MD 520N features the revolutionary NOTAR[TM] -- or no-tail-rotor -- anti-torque system, which makes it the quietest helicopter in the world and adds a greater margin of safety and noise reduction for pilots, passengers, and ground crews. The MD 500 Series features a five-bladed main rotor. McDonnell Douglas delivered 27 helicopters of this series in 1995. Propulsion: One Allison Model 250-C20R gas turbine.* Dimensions: Length 32.1 ft. (9.8 m.); height 9.7 ft. (2.9 m.); main rotor diameter 27.4 ft. (8.3 m.)* Useful Load: 2,364 lb. (1,072 kg.)* *All specifications are for the MD 520N. Engines, dimensions, and useful load vary from model to model. MD 600N - ------- The latest derivative to arise out of the MD 500 Series is the seven- to eight-place MD 600N. Its first year's production was sold out on the day it was introduced to prospective commercial customers in January 1995. The high-performance, large-cabin MD 600N features a six-bladed main rotor, the NOTAR[TM] anti-torque system, a more powerful engine, and a more powerful drive system. It offers lower operating costs, greater lifting capability, larger aft cabin, increased speed, lower noise, and enhanced safety. The first flight of the first production prototype aircraft took place in December 1995. A phase of rigorous testing is expected to lead to Federal Aviation Administration certification in 1996. First deliveries will follow immediately afterward. Propulsion: One Allison Model 250-C47 gas turbine. Dimensions: Length 36.9 ft. (11.2 m.); height 9.7 ft (2.9 m.); main rotor diameter 27.5 ft. (8.4 m.). Useful load: 2,750 lb. (1,247 kg.). [Company Pull-Out Section] MD EXPLORER - ------------ The MD Explorer is the first all-new commercial helicopter in its class to receive FAA certification in more than a decade. Twelve were delivered in 1995. The eight-place, twin-engine, five-bladed helicopter incorporates the NOTAR[TM] anti-torque system and is used in air-medical, corporate, utility, law-enforcement, offshore, and other roles. The MD Explorer is the first rotorcraft to combine several major new technologies: It uses the first all-composite, bearingless main rotor, flexbeam, and blade system; it is the first helicopter with composite materials making up a major portion of its primary structure; and it is the first commercial helicopter with a liquid-crystal instrument display system. A militarized version, the Military Explorer -- which made its debut at the 1995 Paris Air Show -- can be configured for utility, medevac, or troop-transport assignments. Propulsion: Two Pratt & Whitney 206A gas turbines. Dimensions: Length 38.8 ft. (11.8 m.); height 12 ft. (3.7 m.); main rotor diameter 33.8 ft. (10.3 m.). Useful Load: 3,635 lb. (1,649 kg.). DELTA II - -------- The Delta II medium rocket is the world's most reliable satellite launch vehicle. A continuously improved version of the Delta rockets that McDonnell Douglas has built and launched since 1960, the Delta II's lifetime success rate is greater than 95 percent. Dimensions: Height 125 ft. (38.1 m.); diameter 8 ft. (2.4 m.). Payload Capacity: 4,100 lb. (1,860 kg.) to geosynchronous transfer orbit. DELTA III - --------- McDonnell Douglas announced the development of Delta III -- the latest addition to the Delta family of launch vehicles -- in May 1995. An intermediate-class rocket that builds upon the Delta II's success, Delta III will deliver more than twice the lifting power. Its payload range is one for which customer needs are growing, with the greatest concentration of commercial and government satellites. Hughes Space and Communications International Inc. is the initial customer; the first launch is planned for 1998. Dimensions: Height 128.2 ft. (39.1 m.); upper-stage diameter 13.1 ft. (4 m.); lower-stage diameter 7.8 ft. (2.4 m.). Payload Capacity: 8,400 lb. (3,810 kg.) to geosynchronous transfer orbit. [Company Pull-Out Section] DELTA CLIPPER - ------------- The Delta Clipper-Experimental (DC-X) is a rapidly prototyped, single- stage, fully reusable rocket that takes off and lands vertically. In 1995, the DC-X completed a series of eight low-altitude flight tests, which confirmed that a single-stage rocket can fly successive missions with no more maintenance than that required by airplanes. In 1996, the vehicle is being modified for use as NASA's DC-XA (advanced) test bed. DC-XA flight tests, expected to begin in spring 1996, will enable early proof testing of selected critical components and structures technology for NASA's X-33 program -- the next step toward a fully orbital reusable launch vehicle that could replace the space shuttle. Dimensions: Height 40 ft. (12.2 m.); 13.5 ft. (4.1 m.) across base heat shield. SPACE STATION - -------------- As a major subcontractor on the International Space Station, McDonnell Douglas is developing and building five integrated truss segments, along with major systems. McDonnell Douglas also will provide other hardware and software elements, including the mobile transporter used to support assembly and operations on orbit, pressurized mating adapters used to dock the space shuttle to the station, and outfitting for pressurized nodes that connect laboratory and habitation modules. The space agencies of the United States (NASA), Europe, Canada, Japan, and Russia are participating in the program. The first two launches of hardware are planned for late 1997. HARPOON - ------- After more than 20 years of service, the AGM 84A/C/D Harpoon is still deployed as the U.S. Navy's primary anti-ship missile and has been ordered by 23 international customers. It can be launched from aircraft, surface ships, submarines, and land-based installations. STANDOFF LAND ATTACK MISSILES - ----------------------------- A derivative of the Harpoon, the AGM 84E Standoff Land Attack Missile (SLAM) is the U.S. Navy's only air-launched, precision-guided standoff missile system in production. In March 1995, the Navy awarded McDonnell Douglas a $91.6 million contract to develop the SLAM Expanded Response (SLAM ER). This retrofit program upgrades existing SLAMs for longer range, greater effectiveness, more resistance to jamming, and easier mission planning. [Company Pull-Out Section] JOINT DIRECT ATTACK MUNITION - ---------------------------- In October 1995, McDonnell Douglas won a $63 million U.S. Department of Defense competition for development of the Joint Direct Attack Munition (JDAM). Production orders could total about $4 billion over the next two decades. JDAM is a guidance kit that converts existing 1,000-pound and 2,000-pound unguided, free-falling bombs into precision-guided "smart" munitions that can autonomously strike targets in all weather conditions. JDAM also minimizes collateral damage while leaving strike aircraft crews less exposed to hostile fire. C4I SYSTEMS - ----------- McDonnell Douglas's command, control, communications, computers, and intelligence (C4I) work encompasses information warfare, airborne surveillance and detection, and maritime warfare systems. McDonnell Douglas's multisensored Thermal Imaging Sensor System (TISS) provides U.S. Navy surface ships with the capability to detect floating mines, speedboats, and swimmers in reduced visibility. The unit's Mast Mounted Sight, the precursor to TISS, is in operation on nearly 500 helicopters and ships worldwide. COMMERCIAL AIRCRAFT - ------------------- The Douglas Aircraft Company is the commercial aircraft component of the McDonnell Douglas Corporation. Douglas Aircraft Company Long Beach, California Employees: 11,000 History: Since its founding in 1920 by Donald W. Douglas, the company has delivered more than 45,000 airplanes, including the long line of Douglas Commercial (DC) and McDonnell Douglas (MD) models. In 1995, the Douglas Aircraft Company celebrated its 75th anniversary and commemorated the DC-3 airliner's 60th year of service. Markets Served: Passenger airlines and freight-shipping services. Products/Services: MD-11 wide-cabin trijet; MD-80 midsize twin jet; MD-90 advanced technology, midsize twin jet; MD-95 advanced technology twin jet (in development). [Company Pull-Out Section] MD-11 - ----- Nearly 150 of aviation's most advanced wide-cabin trijets have been delivered to customers around the world. Delivery began in 1990. The MD-11 is the only aircraft of its type available in four models -- passenger, all freighter, convertible freighter (which can be quickly reconfigured to carry either passengers or freight), and "combi" (which carries both passengers and freight on the main deck and additional freight below). Although outwardly similar to the DC-10, the MD-11 is larger and features advanced aerodynamics, propulsion, aircraft systems, cockpit systems, and interior design. These advances contribute to optimum performance and operating economy. Delivery of an extended-range version -- the MD-11ER for routes up to 8,280 statute mi. (13,323 km.) -- is scheduled to begin at the end of the first quarter of 1996. Engines: Three, with three available options -- General Electric CF6-80C2 at 61,500 lb. thrust each; Pratt & Whitney 4460 at 60,000 lb. thrust each; or Pratt & Whitney 4462 at 62,000 lb. thrust each. Dimensions: Length 200.8 ft. (61.2 m.); height 57.8 ft. (17.6 m.); wingspan 169.5 ft. (51.7 m.). Capacity: Passenger version -- 233 to 410, depending on seating configuration (300 nominal); freighter version -- 23,932 cubic ft. of cargo. Range: 4,550 to 8,280 statute mi., depending on model and total gross takeoff weight. MD-80 - ----- The MD-80 is a highly reliable twin jet. More than 1,100 have been delivered since it entered service in 1980. The MD-80 features commercial aviation's first digital flight-guidance system. It is available in five models -- the MD-81, MD-82, MD-83, MD-88, and the smaller MD-87. Engines: Two Pratt & Whitney JT8D-200s at 18,500 to 21,000 lb. of thrust each. Dimensions: Length 147.8 ft. (45 m.); height 29.6 ft. (9 m.); wingspan 107.8 ft. (32.9 m.). MD-87 length 130.4 ft. (39.7 m.). Capacity: 150 to 172 passengers. MD-87 capacity 130 to 139. Range: 1,500 to 3,260 statute mi. (2,414 to 5,245 km.), depending on model and configuration. [Company Pull-Out Section] MD-90 - ------ The MD-90 series of twin jets is a family of advanced midsize, medium-range airliners designed to be technically and economically competitive well into the 21st century. The aircraft entered revenue service in April 1995. The MD-90 is the quietest large commercial jetliner in the skies, with engines also designed for fuel efficiency and reduced exhaust emissions. Engines: Two International Aero Engines V2500s, delivering 25,000 lb. of thrust each. Dimensions: Length 152.6 ft. (46.5 m.); height 30.6 ft. (9.3 m.); wingspan 107.8 ft. (32.9 m.). Capacity: 153 to 172. Range: 2,400 to 3,205 statute mi. (3,862 to 5,169 km.), depending on model and configuration. MD-95 - ----- The MD-95 family of twin-jet airliners was launched in 1995 to serve the market for aircraft carrying about 100 passengers. ValuJet Airlines is the launch customer, and the first delivery is scheduled for 1999. The MD-95 is designed to operate economically on high-frequency, short- to medium-range routes such as those now flown by hundreds of DC-9s and similar aircraft. Like all McDonnell Douglas twin jets, the MD-95 features popular five-across coach-class seating and incorporates an all-new interior, with illuminated handrails and larger overhead baggage racks. The two-person cockpit features advanced technology systems developed for the MD-90. The MD-95 also continues the environmental tradition of the MD-90 with reduced fuel consumption, reduced exhaust emissions, and significantly lower sound levels compared to similar-size aircraft now in service. Additional models -- including an extended-range version and a 127-passenger model -- are planned, with an 80-passenger commuter derivative under study. Engines: Two BMW/Rolls-Royce BR715s, delivering 18,500 to 21,000 lb. of thrust each. Dimensions: Length 124 ft. (37.8 m.); height 29.3 ft. (8.9 m.); wingspan 93.3 ft. (28.4 m.). Capacity: 106 (nominal D can vary depending on configuration). Range: 1,781 statute mi. (2,866 km.); 2,304 statute mi. (3,707 km.) for extended-range model with optional auxiliary fuel tanks. [Annual Report Page 22] 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 31, which are incorporated herein by this reference. Overview McDonnell Douglas (the Company) reported improved earnings for 1995, prior to the recognition of an accounting charge related to the MD-11 trijet program. The military aircraft segment again led the way with record operating earnings. Total revenues in 1995 increased 9 percent over 1994. Cash flow remained strong, and McDonnell Douglas finished 1995 with more cash than in any of the last 10 years. There were other significant accomplishments in 1995. After the C-17 Globemaster III passed a 30-day Reliability, Maintainability, and Availability Evaluation (RM&AE) with high marks, the U.S. Department of Defense announced plans to procure 80 more C-17s. The F/A-18 E/F completed its first flight, and the program continued on budget, on schedule, and below the weight specification. The Apache helicopter program received commitments from the Netherlands and the United Kingdom. A new 100-seat airliner, the MD-95, was launched with a 100- aircraft order (50 firm and 50 options)from ValuJet Airlines Inc. Results of Operations McDonnell Douglas revenues for 1995 were $14.332 billion, a 9 percent increase over 1994 revenues of $13.176 billion. The 1995 revenues were comparable with the 1993 level. The 1995 increase was associated with more commercial aircraft deliveries and increased military segment revenue. The 1994 decrease from 1993 resulted principally from fewer commercial aircraft deliveries and lower volume on the downsized Space Station and several missile and electronic systems programs. Excluding the effect of the accounting charge related to the MD-11 trijet, McDonnell Douglas had 1995 profit of $707 million, an 18 percent improvement over the 1994 earnings of $598 million. Military aircraft operating earnings were at a record level for 1995, surpassing the previous record year, 1994, by 28 percent. Earnings in 1993 totaled $396 million, and included gains from discontinued operations of $37 million and from a postretirement benefit curtailment of $43 million. Earnings in 1993 also included $158 million associated with successful resolution of tax issues and a $450 million pretax charge associated with the C-17 program. Military Aircraft Operating revenues in the military aircraft segment increased 5 percent in 1995, following a 14 percent increase in 1994. Higher volume in the F/A-18 program from production rate increases contributed to each year's increase. More activity on the F-15 program in 1995 and the C-17 program in 1994 also contributed to revenue growth. The military aircraft segment reported record operating earnings of $905 million in 1995. Improved earnings in the C-17 and F-15 programs led the way in 1995. Almost all of the C-17 activity in 1995 was associated with ongoing production lots, as relatively minor activity remained on the development and initial-production lots. The F-15 earnings improvement was principally a result of volume increases. Award fees on the C-17 and F/A-18 programs also contributed to the 1995 improvement. Operating margins in the segment exceeded 11 percent in 1995, compared with 9 percent in 1994. Operating earnings in this segment were $708 million in 1994 and $533 million in 1993, before the 1993 earnings amount was reduced by a pretax loss provision of $450 million on the C-17 program. The 1994 C-17 operating earnings were lower than in 1995, and included cost growth in the development and initial-production lots, reduced cost estimates associated with the 1993 omnibus settlement, and comparatively lower earnings on ongoing production lots. The 1993 charge of $450 million reflected the estimated impact of the C-17 omnibus settlement with the DOD and other increases in the estimated remaining cost on the development and initial-production contracts. For additional information regarding Government claims and inquiries on the C-17 program, see also "Government Business Audits, Reviews, and Investigations," page 28. Commercial Aircraft Operating revenues in the commercial aircraft segment increased 23 percent in 1995 after a 34 percent decline in 1994. Aircraft deliveries in 1995 exceeded the 1994 level, but were lower than deliveries in 1993. McDonnell Douglas delivered 18 MD-80 and 14 MD-90 twin jets in 1995, compared with 22 MD-80 twin jets in 1994 and 42 MD- 80 twin jets (including 8 under lease arrangements) in 1993. McDonnell Douglas delivered 18 trijets in 1995, compared with 17 in 1994, and 36 (including 3 under lease arrangements) in 1993. Current commercial aircraft production plans for 1996 anticipate MD-80/90 twin- jet [Annual Report Page 23] deliveries in the high 30s, with twice as many deliveries of MD-90 as MD-80s. MD-11 trijet deliveries in 1996 are expected to be in the low teens to mid teens. The commercial aircraft segment had operating earnings of $39 million in 1995, prior to a charge related to the MD-11 trijet, discussed below. That compares with operating earnings of $47 million in 1994 and $40 million in 1993. Prior to October 1, 1995, production and tooling costs for the MD-11 program were charged to cost of sales based on the estimated average unit cost for the program. The estimated average unit costs were based on cost estimates of a 301-aircraft program. The costs incurred per unit in excess of the estimated average unit cost were deferred, to be recovered by production and sale of lower-than-average- cost units. In applying the program-average method, the Company estimated (a) the number of units to be produced and sold in the program, (b) the rate at which the units were expected to be produced and sold and thus the period of time to accomplish that, and (c) selling prices, production costs, and the gross profit margin for the total program. The gross profit margin for the MD-11 was unchanged from 1993 through September 30, 1995. After deducting period costs, the MD-11 program operated at a loss during this period. Effective October 1, 1995, McDonnell Douglas changed its accounting for cost of sales on the MD-11 aircraft program from the program- average cost basis to the specific-unit cost basis. At the same time, the Company revalued MD-11 program support costs, which previously were included in inventories, consistent with the program-average cost concept. MD-11 program support costs are now allocated to current production. This change to the specific-unit costing method for the MD-11 program was made in recognition of production rates, existing order base, and length of time required to achieve program deliveries and thus, the resultant increased difficulty - which became apparent in the fourth quarter of 1995 - in making the estimates necessary under the program-average method of accounting. Because the effect of this change in accounting principle was inseparable from the effect of the change in accounting estimate, the change was accounted for as a change in estimate. As a result, the Company recorded a noncash charge to operations of $1,838 million in the 1995 fourth quarter. The $1,838 million MD-11 noncash charge included (a) net deferred production costs, which as of September 30, 1995, totaled $1,002 million; (b) a portion of unamortized tooling, which as of September 30, 1995, totaled $243 million; (c) estimates of costs to complete already delivered MD-11 aircraft, which as of September 30, 1995, had been deducted from deferred production costs to arrive at the net amount of $1,002 million; (d) certain sustaining engineering, planning, training, publication, and other MD-11 program support costs, which as of September 30, 1995, had been included in inventories; and (e) miscellaneous inventory and other MD-11 associated items. Operating earnings in the commercial aircraft segment, excluding the $1,838 million MD-11 charge, reflect MD-11 earnings on a program- average cost basis through September 30, 1995, and on a specific-unit cost basis for the last quarter of 1995. Profits from the MD-11 in the 1995 fourth quarter under the new method were offset in part by a write-off of MD-80 inventory amounts. Before period costs, MD-11 operating margins in 1996 are expected to be minimal. Increased per-unit support costs as determined under the revised allocation basis, coupled with certain deliveries expected to be accounted for as operating leases rather than sales, and with substantial price competition, are expected to produce near-term downward pressure on operating margins. Reduced development costs contributed to the segment's continued profitability in both 1995 and 1994. Development expenditures decreased $14 million in 1995 after a $27 million decrease in 1994. The lower costs in 1995 and 1994 principally related to a trend of reduced spending on the MD-90 twin jet, which received certification in the 1994 fourth quarter. Development costs are expected to increase in this segment during 1996, as activity on the recently launched MD-95 twin jet accelerates. Missiles, Space, and Electronic Systems Operating revenues in the missiles, space, and electronic systems segment remained constant in 1995, after declining 27 percent in 1994 from 1993 levels. Higher 1995 revenues in Space Station and Delta programs were offset by decreased volume in the higher-margin Tomahawk missile program. Decreased revenues in 1994 were attributable to lower volume on the downsized Space Station and several missile and electronic systems programs. Operating earnings in the missiles, space, and electronic systems segment were $198 million in 1995, down from $262 million in 1994, and down [Annual Report Page 24] from record 1993 earnings of $338 million. Increased spending on the Delta III, a launch vehicle under development, and increased costs related to the closing of a Florida missile facility contributed to lower earnings for 1995. The lower earnings in 1994 as compared with 1993 were driven by reduced volume. Operating margins in this segment were comparable in 1994 and 1993. The electronic systems programs' 1993 results included $70 million in pretax loss provisions recorded as a result of difficulties in several programs. In addition, 1993 earnings included a $20 million bonus earned for achieving 100 percent launch success on a Delta Global Positioning Satellite contract for the U.S. Air Force. Financial Services and Other Operating revenues in the financial services and other segment increased to $334 million in 1995, compared with $326 million in 1994 and $287 million in 1993. Operating earnings of the segment were $61 million in 1995, compared with $50 million in 1994 and $31 million in 1993. These 1995 operating earnings were at their highest level in the last five years. Operating earnings in this segment have grown in each of the last two years as a result of increased volume in selective markets. Operating earnings of the financial services and other segment are reduced by interest expense, an operating expense of that segment. Interest Expense Interest expense related to aerospace segments was $139 million in 1995, $141 million in 1994, and $224 million in 1993, after excluding from each year reversal of interest associated with the resolution of tax issues. Interest expense was reduced by $23 million in 1995, $10 million in 1994, and $135 million in 1993 associated with resolving these tax issues. The 1994 interest expense decrease from 1993 reflected lower debt levels. See Note 9, "Income Taxes," page 42. Interest expense in the financial services and other segment decreased 8 percent in 1995 and 6 percent in 1994 from prior year's levels. The decreases were a result of the refinancing of high coupon debt to lower rates. The Company settled certain state tax issues in 1995, resulting in net earnings of $35 million, of which $14 million ($23 million pretax) related to reductions in accrued interest. The Company 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 ($135 million pretax) related to reductions in accrued interest. Issues resolved in 1994 resulted in net earnings of $21 million, of which $6 million ($10 million pretax) related to reductions in accrued interest. See Note 9, "Income Taxes," page 42. Liquidity Debt and Credit Arrangements. McDonnell Douglas has in place a number of credit facilities with banks and other institutions. At December 31, 1995, the Company had a revolving credit agreement (RCA) under which it could borrow up to $1.75 billion through June 2000. The RCA was amended and restated during the second quarter of 1995. It now provides for a $500 million increase in the amount that may be borrowed and a two-year extension from the original July 1998 termination date. There were no amounts outstanding under the credit agreement at December 31, 1995. In 1992, McDonnell Douglas commenced an offering of up to $550 million aggregate principal amount of its medium-term notes pursuant to a shelf registration filed with the Securities and Exchange Commission (SEC). As of December 31, 1995, $198 million of securities registered under the shelf registration remain unissued. The Company also 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. As of December 31, 1995, no receivable interests were sold. See Note 3, "Accounts Receivable," page 38. Amounts available under the RCA, medium-term note program, and the receivables program discussed above may be used to meet cash requirements. The Company believes that it has sufficient sources of capital to meet anticipated needs. During 1995, rating agencies raised and/or affirmed their ratings of McDonnell Douglas and McDonnell Douglas Finance Corporation (MDFC) debt. Moody's Investors Service Inc. (Moody's) raised its ratings of McDonnell Douglas and MDFC senior debt to Baa-2 from Baa-3, and upgraded the short-term debt rating for commercial paper to Prime-2 from [Annual Report Page 25] Prime-3. Moody's also raised ratings on MDFC subordinated debt to Baa- 3 from Ba-2. MDFC short-term debt rating for commercial paper was upgraded to Prime-2 from Prime-3. Duff & Phelps Credit Rating Company raised its rating of McDonnell Douglas and MDFC senior debt to BBB+ from BBB. MDFC's subordinated debt was also raised to BBB from BBB-. Shareholder Initiatives. On October 28, 1994, the Company's Board of Directors authorized a stock repurchase plan that authorizes McDonnell Douglas to purchase up to 18 million shares, or about 15 percent of its then-outstanding common stock. Although funds are available under existing debt agreements, the Company intends to continue to use excess cash flow to fund the stock repurchase program and does not expect the program to affect negatively the Company's ability to fund capital spending, research and development, or acquisitions. Through December 31, 1995, the Company had acquired 7.1 million shares, or about 6 percent of its common stock, at a cost of $422 million. On January 26, 1996, the Company's Board of Directors authorized a 20 percent increase in the quarterly dividend and a two-for-one split of the common stock. The quarterly dividend was increased from 20 cents per share to 24 cents per share, payable on April 1, 1996, to shareholders of record on March 1, 1996. The stock split is subject to approval (at the annual meeting of shareholders on April 26, 1996) of an increase in the Company's authorized common stock from 200 million to 400 million shares with a par value of one dollar per share. If the increase in the number of authorized shares is approved, shareholders of record at the close of business on May 10, 1996, would be entitled to receive on May 31, 1996, an additional stock certificate representing one additional common share for each share of common stock held. Aerospace Cash & Cash Equivalents. Although aerospace debt remained steady at less than $1.3 billion, aerospace cash and cash equivalents increased to $784 million at December 31, 1995. This 1995 cash and cash equivalent balance exceeds the balance in any of the last 10 years. The increase in cash and cash equivalents in 1995 reflects strong cash flow from operations and also reflects receipts related to the 1993 C-17 omnibus settlement, even after cash was used to repurchase shares under the stock repurchase plan. Development Programs. In October 1995, McDonnell Douglas launched the MD-95, a 100-seat medium-range airliner. Initial deliveries of the MD-95 to ValuJet Airlines Inc. are scheduled in 1999. In addition, in May 1995, McDonnell Douglas announced the development of the Delta III, its newest expendable launch vehicle. The MD-95 twin jet and the Delta III launch vehicle will require investments in development, inventory, and tooling during the next several years, which the Company intends to fund with excess cash flow or from resources available under its existing credit agreements. Commercial Aircraft Financing. If difficulties recur in the commercial airline industry, airlines may decline deliveries of aircraft, request changes in delivery schedules, or default on contracts for firm orders. Aircraft delivery delays or defaults by commercial aircraft customers not anticipated by the Company 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 16, "Commitments and Contingencies," page 48, the Company also has outstanding guarantees of $615 million related to the marketing of commercial aircraft. The Company does not believe that the existence of such guarantees, after considering residual values, or delays or defaults by commercial aircraft customers, will have a material adverse effect upon its earnings, cash flow, or financial position. McDonnell Douglas has made lease, loan principal, and interest payments totaling $65 million and has tentatively agreed to make certain additional loan principal payments through January 1998 on behalf of Viacao Aerea Rio-Grandense, S.A. (Varig). In addition, Trans World Airlines Inc. (TWA), the Company's largest aircraft- leasing customer, completed a restructuring via a prepackaged reorganization plan confirmed by the U.S. Bankruptcy Court in August 1995. Neither unexpected delays in payments from Varig nor the effects of the TWA reorganization are expected to have a material adverse effect on earnings, cash flow, or financial position of the Company. See Note 16, "Commitments and Contingencies," page 48, for a further discussion of Varig and TWA. The Company, including MDFC, has also made offers totaling $1,642 million to arrange or provide financing for ordered but undelivered aircraft. The Company does not anticipate that the existence of such financing offers will have a material adverse effect on earnings, cash flow, or financial position. See also Note 16, "Commitments and Contingencies," page 48. [Annual Report Page 26] Capital Expenditures. The Company's capital expenditures were $143 million in 1995, $112 million in 1994, and $64 million in 1993. At December 31, 1995, the Company was not committed to the purchase of a significant amount of property, plant, and equipment. Capital expenditures are expected to exceed $200 million in 1996. Operations. Employment levels were reduced by 3 percent during 1995 to 63,612 as a result of continued consolidation and streamlining of the Company's government operations and reduced production on several major programs. Financial Services. Financial Services debt at December 31, 1995, was approximately $1.5 billion, up from approximately $1.3 billion at December 31, 1994. The increase in debt is consistent with the increased portfolio of MDFC. 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 runoff of its portfolio to fund its operations. During 1995, MDFC filed a shelf registration statement with the SEC providing for up to $750 million aggregate principal amount of debt securities. MDFC established a $500 million medium-term note program under this registration statement, and as of December 31, 1995, had issued $135 million of securities. During 1995, MDFS also initiated a medium-term note program under a private placement of up to $100 million aggregate principal amount. As of December 31, 1995, MDFS had issued $85 million of securities under the program. MDFC has available $120 million in uncommitted, short-term bank credit facilities whereby MDFC may borrow, at interest rates that are negotiated at the time of the borrowing, on such terms as MDFC and the participating banks may mutually agree. At December 31, 1995, borrowing under this credit facility totaled $10 million. 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 McDonnell Douglas is a major participant in both the government and commercial aerospace industries. McDonnell Douglas has a wide range of programs in production and development, and is the world's leading producer of military aircraft. McDonnell Douglas is one of the largest U.S. defense contractors and NASA prime contractors. It is one of the three principal manufacturers of large commercial transport aircraft outside the former Soviet Union. The programs and products that account for most of the Company's business volume are of a highly technical nature, comparatively few in number, and high in unit cost; they have traditionally had relatively long production lives. The Company'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 because of consolidations brought about by reduced defense spending. However, competition remains significant both in military and commercial programs. Reduced defense spending and reduced commercial aircraft orders resulted in the downsizing of McDonnell Douglas in the early 1990s. The Company reduced its capital expenditures from $396 million in 1990 to $64 million in 1993 and total employment from 132,960 at June 30, 1990 to 70,016 at December 31, 1993. Employment levels continued to decline in 1994 and in 1995 (63,612 at December 31, 1995), principally because of the continued consolidation and streamlining of government- program operations. Downsizing that began in 1990 has had and continues to have a negative impact on the use of the Company's facilities and capacity, as well as on labor costs due to inefficiencies caused by contractually required reassignment of workers as a result of layoffs at some facilities. McDonnell Douglas has closed several of its manufacturing facilities to streamline operations and create greater efficiencies. The Company also communicated its strategy to concentrate on its principal aerospace businesses and sold noncore business assets to implement this strategy. Beginning in 1994 and continuing through 1995, McDonnell Douglas has generated increased defense-related revenues. This trend is expected to continue into 1996. The Company increased capital expenditures and development funding in 1994 and 1995, and this trend [Annual Report Page 27] is also expected to continue into 1996. McDonnell Douglas believes that its strong military base, anchored by the C-17 and F/A-18 programs, positions the Company well in the current defense environment. Military Aerospace Business The Company's most significant customer in the military aircraft and in the missiles, space, and electronic systems segments is the U.S. Government. Certain foreign governments also purchase a significant share of the Company's aerospace products directly or through contracts for foreign military sales with U.S. Government agencies. 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 McDonnell Douglas invests in competitive programs still in the pre-development stage, some of which 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 (a) for its convenience whenever it believes that such termination would be in the best interest of the Government or (b) 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 remain at about the same level in 1996 as it was in 1995, based upon the FY 96 defense budget. In an era of shrinking or static 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 the Company's future revenues, earnings, and cash flow. However, any such impact could be mitigated by foreign sales and by programs to upgrade existing products. Certain foreign sales may require some portion of the production to be performed or completed in the purchasing country. McDonnell Douglas believes it is well positioned in this defense era; the DOD has indicated its commitment to several of the Company's relatively new programs and/or to pursuing significant modifications that will extend the duration of existing production lines. Because McDonnell Douglas is the largest producer of military aircraft, the extension of existing programs could have favorable competitive results. In light of the uncertainty regarding the changes in defense spending, reported financial information may not be indicative of the Company's future operating results. Production contracts awarded under the fiscal year 1996 budget will generally continue through 1998. Commercial Aircraft Business McDonnell Douglas is producing the MD-80 and MD-90 twin jets and MD- 11 trijet commercial aircraft, developing the MD-95 twin-jet commercial aircraft, and supporting commercial aircraft, spare parts, and related services. The commercial aircraft business is market sensitive, which causes disruptions in production and procurement and attendant costs. It also requires large investments to develop new aircraft or derivatives of existing aircraft. On October 19, 1995, McDonnell Douglas and ValuJet Airlines Inc. announced that an agreement had been reached on a 50-plane launch order for a new 100-seat airliner, the MD-95. The order is valued at more than $1 billion. In addition, ValuJet has options to purchase 50 more of the new twin-engine jets. The first MD-95 is expected to be delivered to ValuJet in 1999. A large number of commercial transport aircraft were ordered from 1988 through 1990 because of 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. From 1990 through 1994, as airlines dealt with falling profits, orders for all types of aircraft dramatically declined. Difficulties in the commercial aircraft industry have resulted and may again result in airlines declining 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, although the impact could [Annual Report Page 28] be mitigated by the Company's retention of progress payments on firm orders. Commercial aircraft order activity increased in 1995, with McDonnell Douglas receiving orders for 51 MD-80/90 twin jets, 50 MD-95 twin jets, and, excluding the debooking of 15 trijet orders, 9 MD-11 trijet firm orders. Seven of the nine MD-11 orders received in 1995 were for the freighter configuration of the trijet. The pace of MD-11 new bookings in 1995 was less than expected. As of December 31, 1995, McDonnell Douglas had firm orders for 141 MD-80/90 twin jets, 50 MD-95 twin jets, and 21 MD-11 trijets. The MD-11 firm backlog will deliver principally over the next two years. MD-11 deliveries are expected to be in the low teens to mid teens in 1996 and 1997, and certain of the deliveries are expected to be accounted for as operating leases. Current production rates assume additional aircraft sales and conversion of existing options to firm-order status for delivery during this period. Earnings and cash flow recorded on transactions accounted for as operating leases are minimal. See also "Backlog," page 29, for a discussion of certain risks related to commercial aircraft customers and "Commercial Aircraft," page 22, for a discussion of the status of commercial aircraft orders. Government Business Audits, Reviews, and Investigations McDonnell Douglas, 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 on presently known facts, the Company 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 the Company's earnings, cash flow, or 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 the Company 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 it broadened its inquiry to include the C-17 program and possibly other programs. The Company 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 the Company 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 Air Force and McDonnell Douglas personnel. The Company 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 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 McDonnell Douglas 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 the Company that exceeded permissible limits. In 1991, McDonnell Douglas and General Dynamics Corporation (the Team) filed a legal action to contest the U.S. Navy's termination for default on the A-12 contract. See Note 5, "Contracts in Process and Inventories," page 39. The Navy has agreed to continue to defer repayment of $1.334 billion alleged to be due with interest from January 7, 1991, from McDonnell Douglas and General Dynamics Corporation (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 [Annual Report Page 29] 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 McDonnell Douglas 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; and on December 19, 1995, a further order was issued that converts the Government termination of the A-12 contract for default to termination for convenience of the Government. A trial of all remaining issues, including damages due to the Team, is scheduled to commence in November 1996. See also Note 5, "Contracts in Process and Inventories," page 39. Environmental Expenditures The Company 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 its earnings, cash flow, or financial position. Compliance with such regulations has not had a material effect on the Company's earnings, cash flow, or the financial position. However, the Company's costs of complying with environmental regulations is increasing. McDonnell Douglas 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. The Company has been identified as a potentially responsible party (PRP) at 33 sites. Of these, McDonnell Douglas believes that it has de minimis liability at 21 sites, including 12 sites at which it believes that it has no future liability. At four of the sites at which the Company's liability is not considered to be de minimis, McDonnell Douglas lacks sufficient information to determine its probable share or amount of liability. At seven of the remaining eight sites at which the Company'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 that the parties will bear. In addition, the Company 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. McDonnell Douglas estimates total reasonably possible costs of approximately $53 million for study and remediation expenditures at Superfund sites and for the Company's current and former operating sites, of which $45 million was accrued at December 31, 1995. Because of uncertainty inherent in the estimation process, it is at least reasonably possible that actual costs will differ from estimates. Ongoing operating and maintenance costs on current operating sites and remediation expenditures on property held for sale are not included in the amounts. Claims for recovery have not been netted against these environmental liabilities. Receivables have been recorded from those insurance carriers with which environmental coverage has been agreed to; these total $12 million at December 31, 1995. Although ongoing litigation may eventually result in recovery of costs expended at certain of the waste sites, any gain is contingent on a successful outcome and has not been accrued. The Company believes that any amounts paid in excess of the accrued liability will not have a material effect on its earnings, cash flow, or financial position. Union Negotiations McDonnell Douglas has six union contracts that will expire in 1996, covering five bargaining units and 7,800 people in St. Louis, Missouri. Contract negotiations with these unions are expected to begin in late March or in April 1996. Backlog Several risk factors should be considered in evaluating the Company's firm backlog for commercial customers. Approximately 73 percent of the firm backlog for commercial aircraft is scheduled for delivery after 1996. If difficulties recur in the commercial airline industry, airlines may decline deliveries of aircraft, request changes in delivery schedules, or default on contracts for firm orders. Also, approximately 3 percent of the commercial aircraft backlog represents orders from leasing companies that may be at risk if not supported by firm contracts between such leasing companies and airlines. Orders from customers that 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" column in the table on page 30. Inflation The effects of inflation have not been significant to McDonnell Douglas 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. [Annual Report Page 30] SELECTED FINANCIAL DATA BY INDUSTRY SEGMENT The Company'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 day/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 McDonnell Douglas 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) Revenues December 31 or Years Then Ended 1995 1994 1993 --------- --------- --------- Military aircraft $ 8,158 $ 7,804 $ 6,852 Commercial aircraft 3,891 3,155 4,760 Missiles, space, and electronic systems 1,917 1,877 2,575 Financial services and other 334 326 287 --------- --------- --------- Operating revenues 14,300 13,162 14,474 Nonoperating - net 32 14 13 --------- --------- --------- $14,332 $13,176 $14,487 ========= ========= ========= (Millions of dollars) Earnings (Loss) December 31 or Years Then Ended 1995 1994 1993 --------- --------- --------- Military aircraft $ 905 $ 708 $ 83 Commercial aircraft (1,799) 47 40 Missiles, space, and electronic systems 198 262 338 Financial services and other 61 50 31 --------- --------- --------- Operating earnings (loss) (635) 1,067 492 Nonoperating - net 19 (3) (5) Discontinued operations 37 General corporate expenses (18) (13) (9) Postretirement benefit curtailment 70 Interest expense (116) (131) (89) Income taxes (benefit) 334 (322) (100) --------- --------- --------- $ (416) $ 598 $ 396 ========= ========= ========= (Millions of dollars) Firm Backlog (Unaudited)* December 31 or Years Then Ended 1995 1994 1993 --------- --------- --------- Military aircraft $10,121 $ 8,340 $ 7,997 Commercial aircraft 7,175 7,544 9,172 Missiles, space, and electronic systems 2,344 1,619 2,210 --------- --------- --------- $19,640 $17,503 $19,379 ========= ========= ========= (Millions of dollars) Assets* December 31 or Years Then Ended 1995 1994 1993 --------- --------- --------- Military aircraft $ 3,678 $ 3,860 $ 3,715 Commercial aircraft 2,480 4,559 4,561 Missiles, space, and electronic systems 1,081 1,175 1,330 Financial services and other 2,306 2,160 2,340 --------- --------- --------- 9,545 11,754 11,946 Corporate 921 462 80 -------- -------- -------- $10,466 $12,216 $12,026 ========= ========= ========= * Amounts as of December 31 Property, Plant, and (Millions of dollars) Equipment Acquired December 31 or Years Then Ended 1995 1994 1993 --------- --------- --------- Military aircraft $ 76 $ 88 $ 23 Commercial aircraft 16 17 1 Missiles, space, and electronic systems 40 4 38 Financial services and other 1 2 --------- --------- --------- 133 111 62 Corporate 10 1 2 --------- --------- --------- $ 143 $ 112 $ 64 ========= ========= ========= (Millions of dollars) Depreciation and Amortization December 31 or Years Then Ended 1995 1994 1993 ------- ------- ------- Military aircraft $ 120 $ 123 $ 149 Commercial aircraft 46 53 70 Missiles, space, and electronic systems 43 43 48 Financial services and other 56 55 49 --------- --------- --------- 265 274 316 Corporate 8 5 7 --------- --------- --------- $ 273 $ 279 $ 323 ========= ========= ========= [Annual Report Page 31] CONSOLIDATED STATEMENT OF OPERATIONS (Millions of dollars, except share data) Years Ended December 31 1995 1994 1993 -------- -------- -------- Revenues $14,332 $13,176 $14,487 Costs and expenses Cost of products, services, and rentals 12,027 11,026 12,822 MD-11 accounting charge 1,838 General and administrative expenses 681 684 720 Research and development 311 297 341 Postretirement benefit curtailment (70) Interest expense Aerospace segments 116 131 89 Financial services and other segment 109 118 126 -------- -------- -------- Total costs and expenses 15,082 12,256 14,028 -------- -------- -------- Earnings (Loss) from Continuing Operations before Income Taxes (750) 920 459 Income taxes (benefit) (334) 322 100 -------- -------- -------- Earnings (Loss) from Continuing Operations (416) 598 359 Discontinued operations, net of income taxes 37 -------- -------- -------- Net Earnings (Loss) $ (416) $ 598 $ 396 ======== ======== ======== Earnings (Loss) per Share Continuing operations $ (3.66) $ 5.05 $ 3.06 Discontinued operations .31 -------- -------- -------- $ (3.66) $ 5.05 $ 3.37 ======== ======== ======== Dividends Declared per Share $ .80 $ .55 $ .47 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. [Annual Report Page 32] BALANCE SHEET (Millions of dollars and shares) McDonnell Douglas Corporation and Consolidated Subsidiaries ---------------------------- December 31 1995 1994 --------- --------- Assets Cash and cash equivalents $ 797 $ 421 Accounts receivable 821 772 Finance receivables and property on lease 2,347 2,087 Contracts in process and inventories 3,421 5,806 Prepaid income taxes Property, plant, and equipment 1,471 1,597 Investment in Financial Services Other assets 1,609 1,533 --------- --------- Total Assets $ 10,466 $ 12,216 ========= ========= Liabilities And Shareholders' Equity Liabilities Accounts payable and accrued expenses $ 2,284 $ 2,485 Accrued retiree benefits 1,205 1,298 Income taxes 3 723 Advances and billings in excess of related costs 1,147 1,200 Notes payable and long-term debt Aerospace segments 1,251 1,272 Financial services and other segment 1,469 1,297 --------- --------- 7,359 8,275 Minority interest 66 69 Shareholders' equity Preferred stock - none issued Common stock - issued and outstanding 1995, 111.8 shares; 1994, 116.7 shares 112 117 Additional capital 191 Retained earnings 2,947 3,576 Unearned compensation (18) (12) --------- --------- 3,041 3,872 --------- --------- Total Liabilities and Shareholders' Equity $ 10,466 $ 12,216 ========= ========= The accompanying notes are an integral part of the financial statements. [Annual Report Page 33] MDC Aerospace Financial Services ---------------------- ---------------------- 1995 1994 1995 1994 --------- --------- --------- --------- $ 784 $ 408 $ 13 $ 13 934 916 2 1 165 152 2,182 1,935 3,421 5,806 315 1,358 1,441 113 156 331 313 1,527 1,420 82 113 --------- --------- --------- --------- $ 8,835 $ 10,456 $ 2,392 $ 2,218 ========= ========= ========= ========= $ 2,183 $ 2,382 $ 216 $ 248 1,205 1,298 424 318 299 1,111 1,162 36 38 1,229 1,249 22 23 1,469 1,297 --------- --------- --------- --------- 5,728 6,515 2,061 1,905 66 69 112 117 191 238 238 2,947 3,576 93 75 (18) (12) --------- --------- --------- --------- 3,041 3,872 331 313 --------- --------- --------- --------- $ 8,835 $ 10,456 $ 2,392 $ 2,218 ========= ========= ========= ========= 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. [Annual Report Page 34]
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Millions of dollars) Years Ended December 31 1995 1994 1993 -------- -------- -------- Common Stock Beginning balance $ 117 $ 118 $ 118 Shares purchased (5) (2) Employee stock awards and options 1 -------- -------- -------- 112 117 118 Additional Capital Beginning balance 191 256 248 Shares purchased (209) (90) Employee stock awards and options 18 25 6 Shares issued to employee savings plans 2 -------- -------- -------- 191 256 Retained Earnings Beginning balance 3,576 3,043 2,702 Net earnings (loss) (416) 598 396 Shares purchased (123) Dividends declared (90) (65) (55) -------- -------- -------- 2,947 3,576 3,043 Translation of Foreign Currency Statements (4) Unearned Compensation Beginning balance (12) (36) ESOP shares allocated to employees 36 Unamortized restricted stock compensation (17) (17) Compensation amortized 11 5 -------- -------- -------- (18) (12) -------- -------- -------- Shareholders' Equity $ 3,041 $ 3,872 $ 3,413 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
[Annual Report Page 35]
CONSOLIDATED STATEMENT OF CASH FLOWS (Millions of dollars) Years Ended December 31 1995 1994 1993 -------- -------- -------- Operating Activities Earnings (loss)from continuing operations $ (416) $ 598 $ 359 Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by operating activities Depreciation of property, plant, and equipment 196 213 258 Depreciation of rental equipment 58 51 50 Amortization of intangible and other assets 19 15 15 Gain on sale of assets (26) (44) Pension income (165) (132) (138) Postretirement benefit curtailment (70) Change in operating assets and liabilities Accounts receivable (49) (217) 40 Finance receivables and property on lease (200) 133 (521) Contracts in process and inventories 547 (32) 1,445 MD-11 accounting charge 1,838 Accounts payable and accrued expenses (186) 285 (802) Income taxes (720) 149 (5) Advances and billings in excess of related costs (53) (51) (112) -------- -------- ------- Net Cash Provided by Operating Activities 869 986 475 Investing Activities Property, plant, and equipment acquired (143) (112) (64) Finance receivables and property on lease (104) 84 414 Proceeds from sale of discontinued business 181 Proceeds from sale of assets 25 24 32 Other, including discontinued operations 9 62 11 -------- -------- -------- Net Cash Provided (Used) by Investing Activities (213) 58 574
Years Ended December 31 1995 1994 1993 (Continued) -------- -------- -------- Financing Activities Net change in borrowings (maturities 90 days or less) (103) 50 (830) Debt having maturities more than 90 days New borrowings 695 450 681 Repayments (441) (1,069) (954) Minority interest (3) (3) 72 Payments from ESOP 36 Proceeds of stock options exercised 1 3 5 Common shares purchased (337) (85) Dividends paid (92) (55) (55) -------- -------- -------- Net Cash Used by Financing Activities (280) (709) (1,045) -------- -------- -------- Increase in Cash and Cash Equivalents 376 335 4 Cash and cash equivalents at beginning of year 421 86 82 -------- -------- -------- Cash and cash equivalents at end of year $ 797 $ 421 $ 86 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
[Annual Report Page 36] McDonnell Douglas Corporation Notes To Consolidated Financial Statements December 31, 1995 (Millions of dollars, except share data) 1. Accounting Policies Basis of Presentation The consolidated financial statements comprise the accounts of McDonnell Douglas Corporation and its subsidiaries, including McDonnell Douglas Financial Services Corporation (MDFS), which is the parent company of McDonnell Douglas Finance Corporation (MDFC). In consolidation, all significant intercompany balances and transactions are eliminated. The consolidating balance sheet represents the sum of all affiliates - companies that McDonnell Douglas Corporation directly or indirectly controls 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 all of its subsidiaries other than MDFS and McDonnell Douglas Realty Company (MDRC). Those two 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 McDonnell Douglas. McDonnell Douglas Corporation and Consolidated Subsidiaries. This represents the consolidation of McDonnell Douglas Corporation and all its subsidiaries (the Company). Nature of Operations McDonnell Douglas is a major participant in both the government and commercial aerospace industries. The Company has a wide range of programs in production and development, and it is the world's leading producer of military aircraft. The Company is one of the largest U.S. defense contractors and NASA prime contractors. The Company is one of the three principal manufacturers of large commercial transport aircraft outside the former Soviet Union. The programs and products that account for most of McDonnell Douglas's business volume are of a highly technical nature, comparatively few in number, and high in unit cost; they have traditionally had relatively long production lives. McDonnell Douglas's aerospace segments compete in an industry composed of a few major competitors and a limited number of customers. McDonnell Douglas's most significant customer in the military aircraft and in the missiles, space, and electronic systems segments is the U.S. Government. Certain foreign governments also purchase a significant share of the Company's aerospace products directly or through contracts for foreign military sales with U.S. Government agencies. The commercial aircraft business is market sensitive, which causes disruptions in production and procurement and attendant costs. It also requires large investments to develop new aircraft or derivatives of existing aircraft. Through MDFS, McDonnell Douglas is engaged in aircraft financing and commercial equipment leasing. MDRC is a full-service developer and property manager in the commercial real estate market, as well as for McDonnell Douglas's aerospace business. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 that 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 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. 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 [Annual Report Page 37] 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. As described in Note 5, "Contracts in Process and Inventories," effective October 1, 1995, McDonnell Douglas changed its accounting for the MD-11 aircraft program such that cost of sales is determined on a specific-unit cost method. Prior to October 1, 1995, cost of sales of the MD-11 aircraft program was determined on a program- average cost method, and it was computed as a percentage of the sales price of the aircraft. Under the program-average cost method, the percentage was 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 was achieved by deferring or accelerating a portion of the average unit cost on each unit delivered. Revenues, costs, and earnings on government contracts and commercial aircraft programs are based, in part, on estimates. Because of uncertainties inherent in the estimation process as it relates to long- term contracts, it is at least reasonably possible that actual earnings will differ from estimates. Under the prior MD-11 program- average cost method of accounting, such adjustments were made prospectively. 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) by 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 represent incurred costs plus estimated earnings (unbilled revenues), 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 at the lower of cost (principally specific unit) or market. 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 that approximates market. Finance Receivables and Property on Lease Rental equipment subject to operating leases is stated at cost; it 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 3 to 10 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 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 the Company. The Company 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. [Annual Report Page 38] Minority Interest Minority interest represents the limited partner's equity interest in a real estate venture. McDonnell Douglas is the general partner. It contributed land, buildings, and improvements to the partnership. At December 31, 1995, McDonnell Douglas's participation in the partnership was approximately 51 percent. 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 $5 million in 1995, $32 million in 1994, and $27 million in 1993 for risk-sharing funds received from vendors and subcontractors participating in the development of commercial aircraft. Some amounts may be repayable under certain circumstances. Environmental Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that extend the life, increase the capacity, or mitigate or prevent environmental contamination are capitalized. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Estimated liabilities are not discounted to present value. See also Note 16, "Commitments and Contingencies." 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. Common Stock-Based Compensation McDonnell Douglas accounts for stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations. 2. Discontinued Operations In March 1993, the Company sold its remaining McDonnell Douglas Information Systems International business, effective January 1, 1993. The gain on disposal of the discontinued business was $37 million in 1993, net of income taxes of $25 million. 3. Accounts Receivable Accounts receivable consisted of the following: December 31 1995 1994 ------ ------ MDC Aerospace U.S. Government - primarily from long-term contracts Billed $ 361 $ 395 Unbilled 322 302 ------ ------ 683 697 Commercial and other governments 136 74 Financial Services 2 1 ------ ------ $ 821 $ 772 ====== ====== MDC Aerospace also had net receivables from Financial Services of $115 million and $145 million at December 31, 1995 and 1994, respectively. Unbilled receivables at December 31, 1995, include unbillable amounts of $188 million. Unbillable amounts include the estimated sales value of items delivered or other work performed that lacks contractual documentation to permit billing. Approximately $71 million of the 1995 unbilled amount is not expected to be collected within one year. McDonnell Douglas 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. The Company acts as an agent for the purchaser by performing record-keeping and collection functions. No receivable interests were sold as of December 31, 1995. At December 31, 1994, accounts receivable were net of $35 million, representing receivable interests sold. [Annual Report Page 39] 4. Finance Receivables and Property on Lease Finance and lease receivables and property on lease consisted of the following: December 31 1995 1994 -------- -------- Financial Services Investment in finance leases Minimum lease payments $ 1,800 $ 1,477 Residual values 322 266 Unearned income (801) (651) -------- -------- 1,321 1,092 Notes receivable 271 368 Allowances for doubtful receivables (42) (41) Investment in operating leases, net of accumulated depreciation of $172 in 1995, $147 in 1994 568 463 Property held for sale or lease 64 53 -------- -------- 2,182 1,935 MDC Aerospace 165 152 -------- -------- $ 2,347 $ 2,087 ======== ======== 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 consisted of the following at December 31, 1995: Principal Payments and Installments Minimum Rentals ------------------ --------------- 1996 $ 403 $104 1997 231 88 1998 192 81 1999 211 68 2000 164 47 After 2000 870 71 Concentration of Credit Risk Financial Services financing and leasing portfolio, excluding $135 million at December 31, 1995, and $128 million at December 31, 1994, of MDRC, consisted of the following: December 31 1995 1994 --------------- --------------- Commercial aircraft financing McDonnell Douglas aircraft financing $1,286 62.8% $1,141 63.1% Other commercial aircraft financing 194 9.5% 207 11.5% ------ ------ ------ ------ 1,480 72.3% 1,348 74.6% Commercial equipment leasing 567 27.7% 459 25.4% ------ ------ ------ ------ Total portfolio $2,047 100.0% $1,807 100.0% ====== ====== ====== ====== The single largest commercial aircraft financing customer accounted for $282 million (13.8 percent of total portfolio) in 1995 and $288 million (15.9 percent of total portfolio) in 1994. The five largest accounted for $921 million (45.0 percent) and $743 million (41.1 percent) in 1995 and 1994, respectively. There were no significant concentrations by customer in Financial Services' portfolio for commercial equipment leasing. Financial Services generally holds title to all leased equipment. It 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 consisted of the following: December 31 1995 1994 -------- -------- Government contracts in process $ 5,451 $ 5,548 Commercial products in process 1,936 4,127 Material and spare parts 634 710 Progress payments to subcontractors 1,185 1,438 Progress payments received (5,785) (6,017) -------- -------- $ 3,421 $ 5,806 ======== ======== Substantially all government contracts in process (less applicable progress payments received) represent unbilled revenue and revenue that is currently not billable. The U.S. Navy on January 7, 1991, notified McDonnell Douglas 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, to assert its rights to convert the termination to one for "the convenience of the Government," and to 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 remain in force until the dispute as to the type of termination is resolved by the pending litigation in the U.S. Court of Federal Claims or negotiated settlement, subject to review by the U.S. Government annually on December 1, to determine if there has been a substantial change in the financial condition of either 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; and on December 19, 1995, a further order was issued that converts the Government's termination of the A-12 contract for default to termination for convenience of the Government. A trial of all remaining issues, including damages due to the Team, is scheduled to commence in November 1996. [Annual Report Page 40] At December 31, 1995, Contracts in Process and Inventories included approximately $573 million of recorded costs on the A-12 contract, against which the Company has established a loss provision of $350 million. The amount of the provision, which was established in 1990, was based on the Company'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 was a range of reasonably possible results on termination for convenience, and that it was prudent to provide for what the Company believed was the upper range of possible loss on termination for convenience, namely $350 million. In the Company'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, 1995, as a result of a termination of the contract for the convenience of the Government. The Company 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 the Company are the same as if the termination had been issued for the convenience of the Government, and that, subject to prevailing that the termination is properly one for the convenience of the Government, the probable claims adjustments are not less than $250 million. In 1984, the Company entered into a full-scale development letter contract, containing a not-to-exceed price for the T-45 Training System that included the conversion of the land-based British Hawk aircraft with minimal change into a carrier-capable U.S. 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. The Company advised the Navy that incorporation of the requested improvements into the aircraft configuration would entitle it to additional compensation. The Company proceeded with the improvements, and its 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, 1995, Contracts in Process and Inventories included costs for the related contracts of $165 million. Realization of the majority of this amount is dependent on the Company's recovery on claims filed with respect to the improvements. The Company 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. The Company 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. The Company's belief as to expected claims recovery is supported by an opinion of outside counsel provided to the Company that there are reasonable factual and legal bases for the current claims against the Navy and that, based on the Company's labor and cost accounting records and computations, it is probable that McDonnell Douglas will recover in excess of $225 million on the claims. Additionally, if the Company were not to recover a portion of the claims amount related to work for which a subcontractor is responsible, the Company, 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 $156 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 Acquisition began a review of the C-17 program in an effort to resolve outstanding issues and to make recommendations regarding the C-17's future. The Department of Defense (DOD), in conjunction with the DAB, submitted a proposal to the Company in December 1993 for a business settlement of a variety of issues concerning the C-17 program. During the fourth quarter of 1993, the Company recorded a $450 million pretax charge associated with the business settlement and cost growth on the development and initial-production contracts. In January 1994, the Company and the DOD agreed to such a settlement. [Annual Report Page 41] Prior to October 1, 1995, MD-11 production and tooling costs were charged to cost of sales based on the estimated average unit cost for the program. The estimated average unit costs were based on cost estimates of a 301-aircraft program. The costs incurred per unit in excess of the estimated average unit cost were deferred, to be recovered by production and sale of lower-than-average cost units. In applying the program-average method, the Company estimated (a) the number of units to be produced and sold in the program, (b) the rate at which the units were expected to be produced and sold, and thus the period of time to accomplish that, and (c) selling prices, production costs, and the gross profit margin for the total program. Effective October 1, 1995, McDonnell Douglas changed its accounting for cost of sales on the MD-11 aircraft program from the program- average cost basis to the specific-unit cost basis. At the same time, McDonnell Douglas revalued MD-11 program support costs previously valued in inventories consistent with the program-average cost concept. MD-11 program support costs are now allocated to current production. This change to the specific-unit costing method for the MD-11 program was made in recognition of production rates, existing order base, and length of time required to achieve program deliveries, and thus, the resultant increased difficulty - which became apparent in the fourth quarter of 1995 - in making the estimates necessary under the program-average method of accounting. Because the effect of this change in accounting principle was inseparable from the effect of the change in accounting estimate, the change was accounted for as a change in estimate. As a result, McDonnell Douglas recorded a noncash charge to operations of $1,838 million in the fourth quarter of 1995. The effect of the charge was to decrease 1995 net earnings by $1,123 million, or $9.90 per share. The $1,838 million MD-11 noncash charge included (a) net deferred production costs, which as of September 30, 1995, totaled $1,002 million; (b) a portion of unamortized tooling, which as of September 30, 1995, totaled $243 million; (c) estimates of costs to complete already delivered MD-11 aircraft, which as of September 30, 1995, had been deducted from deferred production costs to arrive at the net amount of $1,002 million; (d) certain sustaining engineering, planning, training, publication, and other MD-11 program support costs, which as of September 30, 1995, had been included in inventories; and (e) miscellaneous inventory and other MD-11 associated items. 6. Property, Plant, and Equipment The major categories of properties consisted of the following: December 31 1995 1994 -------- -------- MDC Aerospace Land $ 91 $ 92 Buildings and fixtures 1,647 1,630 Machinery and equipment 2,161 2,243 Accumulated depreciation (2,541) (2,524) -------- -------- 1,358 1,441 Financial Services - net 113 156 -------- -------- $ 1,471 $ 1,597 ======== ======== 7. Other Assets Other assets consisted of the following: December 31 1995 1994 -------- -------- MDC Aerospace Prepaid pension asset* $ 1,267 $ 1,198 Prepaid expenses 69 69 Intangible assets 55 44 Other 136 109 -------- -------- 1,527 1,420 Financial Services 82 113 -------- -------- $ 1,609 $ 1,533 *See Note 14 ======== ======== 8. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following: December 31 1995 1994 -------- -------- MDC Aerospace Accounts and drafts payable $ 1,065 $ 1,171 Accrued expenses 783 891 Employee compensation 335 320 -------- -------- 2,183 2,382 Financial Services 101 103 -------- -------- $ 2,284 $ 2,485 ======== ======== Financial Services also had net accounts payable to MDC Aerospace of $115 million and $145 million as of December 31, 1995 and 1994, respectively. [Annual Report Page 42] 9. Income Taxes Income taxes consisted of the following: December 31 1995 1994 ------ ------ Financial Services Current tax assets $ (6) $ (1) Deferred tax liabilities 324 300 ------ ------ Net tax liability 318 299 MDC Aerospace Current tax liabilities 62 71 Deferred tax liabilities (assets) (377) 353 ------ ------ Net tax liability(asset) (315) 424 ------- ------ $ 3 $ 723 ======= ====== Tax effects of temporary differences that gave rise to the deferred tax liability (asset) consisted of the following: December 31 1995 1994 ------ ------ Financial Services Deferred tax assets Bad debts $ (42) $ (12) Other (14) (22) Deferred tax liabilities Leased assets 371 314 Other 9 20 ------- ------- Net deferred tax liabilities 324 300 MDC Aerospace Deferred tax assets Retiree medical (453) (485) Long-term contracts (269) Other (300) (258) Deferred tax liabilities Pension plan 478 453 Long-term contracts 452 Other 167 191 ------- ------- Net deferred tax liabilities (assets) (377) 353 ------- ------- Net deferred tax liability (asset) $ (53) $ 653 ======= ======= The Company's income tax provision (benefit) consisted of the following: Years Ended December 31 1995 1994 1993 ------ ------ ------ U.S. federal Current $ 289 $ 115 $ 120 Deferred (546) 151 (50) ------ ------ ------ (257) 266 70 State Current 33 20 26 Deferred (112) 33 1 ------ ------ ------ (79) 53 27 Foreign 2 3 3 ------ ------ ------ Income tax provision (benefit) $ (334) $ 322 $ 100 ====== ====== ====== Reconciliation of the pro forma income tax provision (benefit) computed by applying the U.S. federal statutory rate of 35 percent to the recorded income tax provision follows: Years Ended December 31 1995 1994 1993 ------ ------ ------ Pro forma income tax provision (benefit) computed at the statutory U.S. federal income tax rate $ (262) $ 322 $ 161 State income tax provision (benefit) net of effect on pro forma U.S. federal tax (31) 34 18 Increase (decrease) in taxes resulting from: Export tax-exempt income (10) (8) (7) Federal tax-rate change 13 Executive life insurance (16) (12) (11) Settlement of tax issues (21) (15) (75) Other - net 6 1 1 ------ ------ ------ Income tax provision (benefit) $(334) $ 322 $ 100 ====== ====== ====== Pretax earnings from foreign subsidiaries included in continuing operations, but excluding the operations of McDonnell Douglas Foreign Sales Corporation, were $4 million in 1995, $2 million in 1994, and $3 million in 1993. 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 $121 million of undistributed earnings of foreign subsidiaries. The Company settled certain state tax issues in 1995, which resulted in net earnings of $35 million, of which $14 million was related to reductions in accrued interest and $21 million was related to tax reductions. The Company 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 was related to reductions in accrued interest. Issues resolved in 1994 resulted in net earnings of $21 million, of which $6 million was related to reductions in accrued interest. McDonnell Douglas filed with the IRS refund claims dating back to 1986, in which the Company is seeking to recover additional research- and-development tax credits it believes it is due in relation to several of its government fixed-price development programs. McDonnell Douglas has not recorded these credits as the claims are under review by the IRS. Should the Company prevail, the credits earned will increase income. [Annual Report Page 43] 10. Debt and Credit Arrangements Consolidated debt consisted of the following classifications: Current December 31 Interest Rate 1995 1994 ------------- -------- -------- Short-term debt Financial Services 6.05% $ 10 $ 103 Long-term debt MDC Aerospace Senior debt securities, due 1997 through 2012 8.3%- 9.8% 1,145 1,145 Senior medium-term notes, due through 1997 6.0%- 8.1% 75 101 Other debt, due through 2005 7.3%-11.5% 9 3 -------- -------- Total MDC Aerospace long-term debt 1,229 1,249 Financial Services Senior debt securities, due through 2011 3.9%-10.3% 217 311 Senior medium-term notes, due through 2005 5.3%-13.6% 867 701 Subordinated notes, due through 2004 6.1%-12.4% 120 88 Other notes, due through 2017 6.5%-10.0% 7 12 Other debt, due through 2003 8.7%-10.4% 22 23 Capital lease obligations, due through 2007 248 82 -------- -------- Total Financial Services long-term debt 1,481 1,217 -------- -------- Total long-term debt 2,710 2,466 -------- -------- Total debt $ 2,720 $ 2,569 ======== ======== The aggregate amount of long-term debt at December 31, 1995, maturing by calendar year for 1996 to 2000, was as follows: MDC Aerospace Financial Services ------------- ------------------ 1996 $ 56 $ 200 1997 270 190 1998 1 218 1999 1 186 2000 201 204 The weighted average interest rate on short-term borrowings outstanding at December 31, 1995 and 1994, was 6.05 percent and 6.55 percent, respectively. MDC Aerospace Credit Agreements At December 31, 1995, MDC Aerospace had a revolving credit agreement (RCA) under which MDC Aerospace may borrow up to $1.75 billion through June 2000. The RCA was amended and restated during the second quarter of 1995 to provide for a $500 million increase in the amount that may be borrowed and a two-year extension from the original July 1998 termination date. 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, 1995. In 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, 1995, MDC Aerospace had issued $152 million of medium- term notes, of which $75 million is currently outstanding. During 1993, MDC Aerospace issued $200 million of 8.25 percent senior debt securities due on July 1, 2000. As of December 31, 1995, $198 million of securities registered under the shelf registration remain unissued. Senior debt securities totaling $1,145 million, including the $200 million mentioned above, were outstanding at December 31, 1995. The notes were issued in 1992 and 1993 with interest rates of 8.3 percent to 9.8 percent and maturities from 1997 to 2012. Financial Services Credit Agreements At December 31, 1995, MDFS and MDFC had a joint revolving credit agreement under which MDFC might borrow a maximum of $220 million, reduced by MDFS borrowings under this same agreement. By terms of this agreement, which expires in August 1999, MDFS may 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 were no outstanding borrowings under this agreement at December 31, 1995. Commercial paper, when outstanding, is fully supported by unused commitments under this agreement. The provisions of various credit and debt agreements require MDFC to maintain a minimum net worth, restrict indebtedness, and limit MDFC's cash dividends and other distributions. During 1995, MDFC filed a shelf registration statement with the Securities and Exchange Commission relating to up to $750 million aggregate principal amount of debt securities. MDFC established a $500 million medium-term note program under this registration statement, and as of December 31, 1995, had issued $135 million of securities. During July 1995, MDFS initiated a medium-term note program under a private placement of up to $100 million aggregate principal amount. As of December 31, 1995, MDFS had issued $85 million of securities under the program. [Annual Report Page 44] MDFC has available $120 million in uncommitted, short-term bank credit facilities whereby MDFC may borrow, at interest rates that are negotiated at the time of the borrowing, upon such terms as MDFC and the participating banks may mutually agree. At December 31, 1995, borrowings under this credit facility totaled $10 million. MDFC's senior debt at December 31, 1995, includes $72 million secured by equipment that had a carrying value of $98 million. MDRC's debt of $29 million at December 31, 1995, was secured by indentures of mortgage and deeds of trust on MDRC's interest in real estate developments that had a carrying value of $61 million. 11. Fair Values of Financial Instruments McDonnell Douglas uses derivative financial instruments to manage well- defined foreign exchange subcontract price risks and foreign currency denominated debt risks, and on a selective basis to reduce the impact of interest-rate fluctuations on certain debt instruments. McDonnell Douglas does not trade in derivatives for speculative purposes. At December 31, 1995, the notional amount of forward exchange contracts denominated in currencies of major industrial countries was $105 million. The term of the currency derivatives varies, but the longest is three years. MDFC has interest-rate swap agreements that have effectively fixed interest rates on $40 million of variable rate notes. At December 31, 1995, the fixed rates payable under these agreements range from 5.51 percent to 6.65 percent with terms expiring through 2000. MDFC also entered into a series of swap agreements that resulted in reduced fixed interest rates on $168 million of capital lease obligations. At December 31, 1995, the fixed rate payable under these agreements range from 6.65 percent to 6.89 percent with terms expiring in 2007. The interest-rate differential to be received or paid is recognized over the lives of the agreements as an adjustment to MDFC's interest expense. At December 31, 1995, unrealized gains and losses on foreign exchange contracts and swap agreements 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, the Company 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. Notes receivable: Fair values for variable rate notes that reprice frequently and with no significant change in credit risk are based on carrying values. The fair values of fixed rate notes are estimated in discounted cash flow analyses, with the use of interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Short-and long-term debt: Carrying amounts of borrowings under the short-term revolving credit agreements approximate their fair value. The fair values of long-term debt, excluding capital lease obligations, are estimated with the use of 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, 1995 ----------------- Cash and cash equivalents $ 784 $ 784 $ 13 $ 13 Notes receivable 67 67 265 273 Short-term notes payable 10 10 Long-term debt 1,229 1,404 1,233 1,302 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 12. Common and Preferred Shares The authorized common stock of McDonnell Douglas is 200 million shares, each of $1.00 par value. The following table summarizes changes in shares outstanding for the periods presented: Common Shares Outstanding ------------- Balance January 1, 1994 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 Shares repurchased (5,215,100) Employee stock awards and options 302,548 ------------- Balance December 31, 1995 111,823,739 ============= In October 1994, the McDonnell Douglas 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 [Annual Report Page 45] 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 reflect the stock split. The Board of Directors also approved a stock repurchase plan in October 1994. The plan authorizes the Company 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 are treated as authorized but unissued shares, and they remain available for use to meet the Company's current and future common stock requirements for its benefit plans and for other corporate purposes. Through December 31, 1995, the Company had acquired 7.1 million shares in connection with this stock repurchase plan. In January 1996, the McDonnell Douglas Board of Directors authorized a two-for-one split of the common stock. The stock split is subject to approval (at the April 1996 annual meeting of shareholders) of an increase in the Company's authorized common stock to 400 million shares. References to number of shares, per share amounts, stock option data, and market prices of common stock do not reflect these proposed changes, since these changes have not been finalized. At December 31, 1995, a total of 6,285,648 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 were reserved for contributions to the Company's savings plans. At December 31, 1995, there are 10 million shares, $1.00 par value, preferred stock authorized for issuance; however, none had 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 the Company one one-hundredth of a share of a new series of preferred stock. The Rights are exercisable only (a) after a person or group has acquired or obtained the right to acquire 20 percent or more of the Company's common stock or (b) the commencement of a tender offer or exchange offer, for 20 percent or more of the voting power of the Company. 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 the Company at a price of 1 cent per Right at any time until 10 business days after the acquisition of 20 percent of the Company's common stock. The Board of Directors of the Company retains a broad ability to amend or supplement the Rights. If any person or group acquires 20 percent of the Company'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 the Company is acquired, each Right may be exercised to purchase the number of shares of common stock of the surviving or purchasing company that at the time of such transaction would have a market value of two times the Purchase Price. 13. Stock-Option and Incentive Plans In April 1994, the Company's shareholders approved the 1994 Performance and Equity Incentive Plan (PEIP). Under the PEIP, 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. As of December 31, 1995, a total of 640,310 restricted shares of McDonnell Douglas 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 under the Incentive Award Plan (IA Plan) approved by shareholders in 1986 in the form of stock, nonqualified stock options, and incentive stock options remain outstanding. Options to purchase the McDonnell Douglas common stock have been granted under the Company's compensation plans. A summary of options for McDonnell Douglas common stock follows: Years Ended December 31 1995 1994 -------- -------- Granted under the PEIP Plan Number of shares 20,000 450,000 Price per share $49 $37 Exercised under the IA Plan Number of shares 68,305 123,324 Price per share $13-$21 $13-$30 December 31 1995 1994 -------- -------- Outstanding Number of shares 557,393 605,646 Price per share $13-$49 $13-$37 Exercisable Number of shares 92,393 155,646 Price per share $13-$49 $13-$21 McDonnell Douglas has a Long-Term Incentive Program (the LTIP) adopted under the IA Plan. Participants in LTIP were selected by a committee [Annual Report Page 46] of the Board of Directors. Awards earned are payable in either cash or stock. Earned awards are achieved when McDonnell Douglas common stock yields a return superior to a peer group of companies during a five-year period. The Company had accrued $19 million for LTIP at December 31, 1995. No awards have been granted under LTIP since 1993 and no further awards will be granted. 14. Retirement Plans Most employees of the Company are participants in defined benefit pension plans, including several multiemployer and foreign plans. In addition, the Company 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 the benefits the Internal Revenue Code permits companies to offer under the defined benefit pension plans. Benefits for salaried plans are based primarily on salary and years of service, whereas benefits for hourly plans are generally based on a fixed dollar amount per year of service. The Company measures pension cost and makes contributions to its pension plans based according to independent actuarial valuations. The projected unit credit actuarial cost method is used to determine pension cost for financial accounting purposes and, beginning in 1996, to determine funding levels and pension cost allocable to government contracts consistent with the provisions of Statement of Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for Pensions." Funding levels and pension cost allocable to government contracts were previously determined by the entry-age normal actuarial cost method. The assets of the plans consist principally of marketable fixed income and equity securities. At December 31, 1995, the plans held $11 million of the Company's medium-term notes and $35 million of its senior debt securities with varying interest rates and maturity dates, as well as 81,000 shares of McDonnell Douglas 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 1995 1994 1993 -------- -------- -------- Discount rate January 1 8.25% 7.5% 9.0% December 31 7.5% 8.25% 7.5% Average rates of increase in compensation based upon age - salaried plans January 1 5.0% 5.0% 6.0% December 31 4.5% 5.0% 5.0% Expected return on plan assets 9.3% 9.3% 9.3% Components of periodic pension expense (income) for the significant domestic pension plans include the following: Years Ended December 31 1995 1994 1993 -------- ------ ------ Service cost for the year $ 91 $ 119 $ 100 Interest cost on pension benefit obligations 305 278 266 Return on plan assets Actual (1,285) (64) (426) Deferred gain (loss) 791 (403) (13) Net amortization (67) (62) (65) -------- ------ ------ Domestic plans $ (165) $(132) $(138) ======== ====== ====== Foreign and other plans $ 4 $ 6 $ 7 ======== ====== ====== An analysis of the funded status of the significant pension plans follows: December 31 1995 1994 -------- -------- Actuarial present value of accumulated benefit obligations Vested $ 4,002 $ 3,028 Nonvested 276 254 -------- -------- Accumulated benefit obligation 4,278 3,282 Additional amounts related to projected future salary increases 355 298 -------- -------- Projected benefit obligation 4,633 3,580 Plan assets, at fair value 6,140 5,091 -------- -------- Excess of plan assets 1,507 1,511 Items not yet recognized in earnings Unrecognized net transition asset (418) (490) Unrecognized prior service cost 657 338 Deferred net gain (490) (172) -------- -------- Domestic plans 1,256 1,187 Foreign plans 11 11 -------- -------- Prepaid pension asset $ 1,267 $ 1,198 ======== ======== During 1995, the Company amended its significant domestic pension plans to provide increases to pension benefits for current and future non-union retirees. The increases become effective December 1, 1996. These amendments will affect most nonunion retirees, including those who sued and threatened to sue the Company when a retiree health care trust was established in 1992. A settlement resolving these matters has been reached and has been approved by the trial court. Effective January 1, 1993, the Company amended its significant domestic pension plans to provide a supplemental pension benefit to nonunion 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. The Company 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. The Company has no intention of terminating any of its pension plans. However, if a qualified defined benefit pension plan is terminated and all accrued [Annual Report Page 47] 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). In such a case, the following consequences would ensue. First, a nondeductible 20 percent to 50 percent excise tax on the gross amount of the reversion is imposed. Second, the U.S. Department of Defense and other Government contracting agencies have issued a regulation that indicates that the Government is entitled to its equitable share, to the extent that the Government participated in pension costs through its contracts with the Company. Third, any amount that the employer then retains is treated as taxable income. In addition to the defined benefit pension plans, the Company provides eligible employees the opportunity to participate in savings plans that permit both pretax 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 the Company's common stock. In most cases, the Company matches a portion of the employee's contribution with contributions to the McDonnell Douglas Common Stock fund in the plans. Generally, the Company's contributions are vested after five years of service. The Company's contributions to the savings plans during 1995 and 1994 totaled $78 million and $73 million, respectively, and during 1993 totaled $59 million, of which $1 million was contributed in McDonnell Douglas common stock. In addition to the above plans, the Company 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. The Company'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. The Company and certain of its domestic subsidiaries previously provided health care coverage similar to the above for its nonunion retirees. On October 8, 1992, effective January 1, 1993, McDonnell Douglas terminated company-paid retiree health care for both current and future nonunion retirees and their dependents and survivors and replaced it with a new arrangement funded entirely by participant contributions. At the same time, the Company amended its existing pension plans to provide a supplemental pension benefit to current and future nonunion 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, the Company recorded a curtailment gain of $70 million, reflecting a similar arrangement negotiated with the Southern California Professional Engineering Association for employees who retire after July 1, 1993. During 1993, McDonnell Douglas 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 three-year union contract. The contract includes a provision requiring employees who retire after 1993 to pay one-third of the cost of their retiree health care. An analysis of the accrued retiree benefits follows: December 31 1995 1994 -------- -------- Accumulated postretirement benefit obligation Retirees $ 753 $ 795 Active participants fully eligible to retire 126 121 Other active participants 122 107 -------- -------- Accumulated postretirement benefit obligation 1,001 1,023 Items not yet recognized in earnings Unrecognized prior service gain 200 194 Deferred net loss (92) (112) -------- -------- Accrued retiree health care liability 1,109 1,105 Liability for pension supplement 96 193 -------- -------- Accrued retiree benefits $ 1,205 $ 1,298 ======== ======== Components of periodic postretirement benefit expense, exclusive of the curtailment gain in 1993, include the following: Years Ended December 31 1995 1994 1993 ------ ------ ------ Service cost for the year $ 7 $ 9 $ 13 Interest cost on accumulated post- retirement benefit obligations 78 77 80 Net amortization (17) (10) (11) ------ ------ ------ $ 68 $ 76 $ 82 ====== ====== ====== Assumptions used in determining periodic postretirement benefit costs and the actuarial present value of benefit obligations were as follows: Years Ended December 31 1995 1994 1993 ------ ------ ----- Discount rate January 1 8.25% 7.5% 9.0% December 31 7.5% 8.25% 7.5% Health care cost trend rate Preferred provider non-medicare* 10.3% 10.2% 11.0% Point of service non-medicare* 8.0% Medicare* 8.9% 8.5% 9.0% HMO premiums 5.0% 6.0% 6.5% * Decreasing to 5.5% after 2003 [Annual Report Page 48] Increasing the health care cost trend rates by one percentage point would result in an 8.1 percent increase in the sum of the service and interest cost components of periodic postretirement benefit cost and an 8.4 percent increase in the accumulated postretirement benefit obligation at December 31, 1995. 15. Leased Properties Rental expense for leased properties was $61 million in 1995, $79 million in 1994, and $96 million in 1993. These expenses, substantially all minimum rentals, are net of sublease income. The Company has negotiated noncancelable sublease agreements on certain of its facilities and equipment totaling $54 million during the next several years. Minimum rental payments under operating leases with initial or remaining terms of one year or more aggregated $180 million at December 31, 1995. Payments, net of sublease amounts, due during the next several years were: 1996, $36 million; 1997, $21 million; 1998, $15 million; 1999, $11 million; and 2000, $11 million. In 1995, the Company purchased $360 million in data processing services from an unaffiliated company pursuant to an outsourcing of its information-technology operations in 1992. During the remaining seven-year term of the outsourcing agreement, data processing service payments are expected to aggregate approximately $2 billion. 16. 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, 1995, the Company had made offers of this nature to customers totaling $1,525 million related to aircraft on order or under option scheduled for delivery through the year 2002 and had made guarantees and other commitments totaling $615 million on delivered aircraft. MDFS also had commitments to provide leasing and other financing in the aggregate amount of $117 million at December 31, 1995. The Company does not expect these offers or commitments to have a significant adverse effect on its earnings, cash flow, or financial position. The Company's outstanding guarantees include amounts related to MD-11s operated by Viacao Aerea Rio-Grandense, S.A. (Varig). During 1994, Varig notified its aircraft lenders and lessors that it was temporarily suspending payments pending a restructuring of its financial obligations. The Company made lease, loan, and interest payments totaling $65 million on behalf of Varig in 1994 and 1995. The Company and Varig negotiated a repayment schedule, and the first payment by Varig was received in October 1995. In January 1996, the Company tentatively agreed to pay certain loan principal payments on behalf of Varig from January 1996 through January 1998. The Company and Varig negotiated a repayment schedule, with the first payment by Varig to begin in 1998. These restructurings and payments have not had and are not expected to have a significant adverse effect on the Company's earnings, cash flow, or financial position. During October 1994, Trans World Airlines Inc. (TWA), the Company's largest aircraft-leasing customer, completed a restructuring of its indebtedness and leasehold obligations to its creditors via a prepackaged reorganization plan confirmed by the U.S. Bankruptcy Court in August 1995. As part of the reorganization plan, the Company agreed to defer six months of lease and other payments. The plan calls for TWA to pay deferred amounts to the Company over a 28-month period that commenced in April 1995. The reorganization plan is not expected to have a significant adverse effect on the Company's earnings, cash flow, or financial position. The Company 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. The Company has been identified as a potentially responsible party (PRP) at 33 sites. Of these, the Company believes that it has de minimis liability at 21 sites, including 12 sites at which it believes that it has no future liability. At four of the sites where the Company's liability is not considered to be de minimis, the Company lacks sufficient information to determine its probable share or amount of liability. At seven of the remaining eight sites at which the Company's liability is not considered to be de minimis, either final or interim cost sharing agreements have been effected between the cooperating PRPs, although such agreements do not fix the amount of cleanup costs which the parties will bear. In addition, the Company 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. [Annual Report Page 49] At December 31, 1995, the accrued liability for study and remediation expenditures at Superfund sites and for the Company's current and former operating sites was $45 million. Because of uncertainty inherent in the estimation process, it is at least reasonably possible that actual costs will differ from estimates. Ongoing operating and maintenance costs on current operating sites and remediation expenditures on property held for sale are not included in this amount. Claims for recovery have not been netted against the environmental liabilities. Receivables have been recorded from those insurance carriers with which environmental coverage has been agreed to; these totaled $12 million at December 31, 1995. While ongoing litigation may eventually result in additional recovery of costs expended at certain of the waste sites, any gain is contingent on a successful outcome and has not been accrued. The Company believes any amounts paid in excess of the accrued liability will not have a material effect on its earnings, cash flow, or financial position. A number of legal proceedings and claims are pending or have been asserted against the Company, including legal proceedings and claims relating to alleged injuries to persons associated with the disposal of hazardous substances. A substantial portion of such legal proceedings and claims is covered by insurance. The Company believes that the final outcome of such proceedings and claims will not have a material adverse effect on its earnings, cash flow, or financial position. The Company has six union contracts that expire in 1996, covering five bargaining units and 7,800 people in St. Louis, Missouri. Contract negotiations with these unions are expected to begin in late March or in April 1996. See Note 5, "Contracts in Process and Inventories," for a discussion of certain risks on fixed-price development contracts. 17. Operations of MDFS The condensed financial data presented below have been summarized from the audited consolidated financial statements of MDFS: Years Ended December 31 1995 1994 1993 ------ ------ ------ Earned income $ 194 $ 190 $ 201 Costs and expenses 136 154 166 Net earnings 37 25 13 Dividends 26 25 18. 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 $9.621 billion in 1995, $9.229 billion in 1994, and $9.052 billion in 1993. No other single customer accounted for 10 percent or more of consolidated revenues in 1995, 1994, or 1993. 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 1995 1994 1993 ------- ------- ------- North America $ 35 $ 58 $ 38 Central and South America 224 25 309 Western Europe 2,186 2,161 978 Eastern Europe and Asia 1,531 1,032 973 Africa and the Middle East 1,098 703 965 The South Pacific 173 256 142 ------- ------- ------- $ 5,247 $ 4,235 $ 3,405 ======= ======= ======= 19. Future Accounting and Reporting Requirements SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was issued in March 1995. SFAS No. 121, which is effective beginning in 1996, addresses accounting for the impairment of long-lived assets to be disposed of or that will be held and used in operations. The impact of the Company's adoption of this standard is not expected to be material. SFAS No. 123, "Accounting for Stock Based Compensation," was issued in October 1995. SFAS No. 123, which is effective beginning in 1996, establishes financial accounting and reporting standards for stock- based employee compensation plans. The Company will comply with this standard in 1996. It is currently determining which alternatives available within the standard will be adopted. 20. Supplementary Payment Information Years Ended December 31 1995 1994 1993 ------- ------- ------- Interest paid $ 265 $ 313 $ 314 Income taxes paid 354 162 84 21. Business Segment Reporting Selected financial data By industry segment is presented on page 30. [Annual Report Page 50] 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 McDonnell Douglas at December 31, 1995 and 1994, and the consolidated results of its operations for the years ended December 31, 1995, 1994 and 1993. 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. McDonnell Douglas and its consolidated subsidiaries maintain accounting systems and related internal controls that, 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 the Company'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 nonemployee 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/ J. F. Palmer Senior Vice President and Chief Financial Officer January 17, 1996 [Annual Report Page 51] 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, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, 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, 1995 in conformity with generally accepted accounting principles. As discussed in Notes 1 and 5 to the consolidated financial statements, in 1995 MDC changed its method of accounting for the MD-11 commercial aircraft program. /s/ Ernst & Young LLP St. Louis, Missouri January 17, 1996 [Annual Report Page 52]
Five-Year Consolidated Financial Summary - ------------------------------------------------------------------------------------------ (Dollar amounts in millions, except per share data) - ------------------------------------------------------------------------------------------ December 31 or Years Then Ended 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------ Summary of Operations Revenues by industry segment Military aircraft $ 8,158 $ 7,804 $ 6,852 $ 7,238 $ 7,795 Commercial aircraft 3,891 3,155 4,760 6,595 6,752 Missiles, space, and electronic systems 1,917 1,877 2,575 3,169 2,979 Financial services and other 334 326 287 352 519 ------------------------------------------------------ Operating revenues 14,300 13,162 14,474 17,354 18,045 Earnings (loss) from continuing operations (416) (a) 598 359 698 (b) 357 Per share (3.66) (a) 5.05 3.06 5.99 (b) 3.11 Net earnings (loss) (4.16) (a) 598 396 (781)(c) 423 Per share (3.66) (a) 5.05 3.37 (6.70)(c) 3.68 As a percentage of revenues 4.5% 2.7% 2.3% As a percentage of beginning equity 17.5% 13.1% 12.0% Research and development 311 297 341 509 429 Interest expense Aerospace segments 116 131 89 309 232 Financial services and other segment 109 118 126 159 221 Income taxes (benefit) (334) 322 100 388 258 Cash dividends declared 90 65 55 55 53 Per share .80 .55 .47 .47 .47 - --------------------------------------------------------------------------------------------- Balance Sheet Information Cash and cash equivalents $ 797 $ 421 $ 86 $ 82 $ 229 Receivables and property on lease 3,168 2,859 2,912 2,866 3,234 Contracts in process and inventories 3,421 5,806 5,774 7,230 7,273 Property, plant, and equipment 1,471 1,597 1,750 1,991 2,307 Total assets 10,466 12,216 12,026 13,781 14,601 Notes payable and long-term debt Aerospace segments 1,251 1,272 1,625 2,767 2,324 Financial services and other segment 1,469 1,297 1,513 1,474 1,891 Shareholders' equity 3,041 3,872 3,413 3,022 3,877 Per share 27.19 33.17 28.93 25.70 33.66 Debt-to-equity ratios Aerospace segments .46 .36 .52 1.01 .66 Financial services and other segment 4.44 4.14 5.22 5.42 5.25 - --------------------------------------------------------------------------------------------
Five-Year Consolidated Financial Summary (cont.) - ---------------------------------------------------------------------------------------------- (Dollar amounts in millions, except per share data) - ---------------------------------------------------------------------------------------------- December 31 or Years Then Ended 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------- General Information Shares outstanding (in millions) 111.8 116.7 118.0 117.6 115.2 Shareholders of record 23,582 24,479 28,513 34,124 35,039 Personnel 63,612 65,760 70,016 87,377 109,123 Salaries and wages $ 3,347 $ 3,238 $ 3,464 $ 4,258 $ 4,905 Firm backlog $19,640 $17,503 $19,379 $24,052 $ 30,448 Total backlog $28,353 $29,232 $35,698 $41,806 $ 42,577
(a) Includes a charge of $1.123 billion ($9.90 per share) related to the MD-11 commercial aircraft. (b) Includes a gain of $676 million ($5.80 per share) from a postretirement benefit curtailment relating to SFAS No. 106. (c) 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. Total backlog includes firm backlog plus (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. 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 leases are excluded from backlog. [Annual Report Page 56] Supplemental Information Quarterly Common Stock Prices and Dividends The range of market prices for a share of McDonnell Douglas Common Stock is shown below, by quarters for 1995 and 1994. Prices are as reported in the consolidated transaction reporting system. 1995 Quarter High Low -------- ------- -------- 1st $58 $46 1/2 2nd 78 3/4 55 3/4 3rd 86 1/8 75 5/8 4th 92 1/8 76 1/2 1994 Quarter High Low -------- ------- -------- 1st $40 7/8 $34 1/8 2nd 41 5/8 34 7/8 3rd 40 36 5/8 4th 48 5/8 38 1/8 Cash dividends of $.20 a share were declared for each of the quarters in 1995 and for the fourth quarter in 1994. Cash dividends of $.12 a share were declared for each of the first three quarters in 1994. The number of holders of McDonnell Douglas Common Stock at January 31, 1996, was 23,525. Shareholder Information Both the McDonnell Douglas Corporation and the McDonnell Finance Corporation file Forms 10-K and 10-Q with the Securities and Exchange Commission. Shareholders may obtain copies of these reports, and of McDonnell Douglas's Annual Report to Shareholders, by writing or calling: Shareholder Services Mail Code 100-1240 McDonnell Douglas Corporation P.O. Box 516 St. Louis, MO 63166-0516 (800) 233-8193 A recorded summary of quarterly financial results is also available through the toll-free number shortly after release of the results. 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 (800) 446-2617 Investor Relations Securities analysts should contact: Investor Relations Mail code 100-1320 McDonnell Douglas Corporation P.O. Box 516 St. Louis, MO 63166-0516 (314) 232-6358 Corporate Public Relations Members of the news media should contact: Corporate Communications Mail Code 100-1195 McDonnell Douglas Corporation P.O. Box 516 St. Louis, MO 63166-0516 (314) 233-8957 McDonnell Douglas issues its news releases through PR Newswire. Faxed copies of news releases are available at no charge. To get them, call Company News On-Call at 1-800-758-5804. This electronic system requests a six-digit code (543287) and allows callers to choose from a menu of McDonnell Douglas news releases. The requested release will be faxed within minutes of the inquiry. This service is available 24 hours a day, 7 days a week. The On-Call information is also posted on the Internet's World Wide Web at http://www.prnewswire.com. Other Reports McDonnell Douglas's 1995 safety, health, and environmental affairs report summarizes the corporation's progress in preventing pollution, recycling waste, conserving energy, and protecting employee health and safety. To obtain a copy, contact: Safety, Health, and Environmental Affairs Mail Code 100-1210 McDonnell Douglas Corporation P.O. Box 516 St. Louis, MO 63166-0516 (314) 233-9469 The 1995 community relations report summarizes the charitable and philanthropic activities of McDonnell Douglas and its employees. A copy may be requested from: Community Relations Mail Code 100-1530 McDonnell Douglas Corporation P.O. Box 516 St. Louis, MO 63166-0516 (314) 233-8264 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." Quarterly Results of Operations The tables below present unaudited quarterly financial information for the years ended December 31, 1995 and 1994. Gross margin is net of interest expense of the financial services and other segment. The sum of the 1995 quarterly earnings per share does not equal the 1995 annual earnings per share. This is because of a combination of two factors. First, the number of shares outstanding decreased each quarter, and second, the MD-11 accounting charge had a significant impact on fourth-quarter earnings. (Dollar amounts in millions, except per share data) 1995 Quarter 1st 2nd 3rd 4th - ------- -------- -------- -------- ------- Revenues $ 3,333 $ 3,922 $ 3,346 $ 3,731 Gross margin 512 558 536 (1,248)* Net earnings (loss) 159 169 192 (936)* Earnings (loss) per share 1.38 1.48 1.70 (8.35)* 1994 Quarter 1st 2nd 3rd 4th - ------- -------- -------- -------- ------- Revenues $ 2,953 $ 3,250 $ 3,461 $ 3,512 Gross margin 501 508 482 541 Net earnings 134 138 161 165 Earnings per share 1.13 1.17 1.36 1.39 *Includes MD-11 accounting charge of $1,838 million ($1,123 million after-tax) or $10.03 per share. EX-21 13 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 14 CONSENTS OF INDEPENDENT AUDITORS Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference of our report dated January 17, 1996 on the consolidated financial statements and schedule 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, 1995 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 Number 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 Number 33-50057 (filed August 23, 1993) on Form S-8, Employee Investment Plan of McDonnell Douglas Corporation - Hourly West Plan. - - Registration Statement File Number 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 21, 1996 Exhibit 23 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, 1996, included in the 1995 Annual Report to Shareholders of McDonnell Douglas Corporation and subsidiaries. /s/ Ernst & Young LLP St. Louis, Missouri March 21, 1996 EX-27 15 FINANCIAL DATA SCHEDULE
5 McDonnell Douglas Corporation Financial Data Schedule (FDS) December 31, 1995 0000063917 MCDONNELL DOUGLAS CORPORATION 1,000,000 12-MOS DEC-31-1995 DEC-31-1995 797 0 821 0 3,421 0 4,045 2,574 10,466 0 2,720 0 0 112 2,929 10,466 13,964 14,332 13,974 15,082 0 0 116 (750) (334) (416) 0 0 0 (416) (3.66) (3.66) (1) MORTGAGES AND SIMILAR DEBT
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