# **United States**

# **Securities and Exchange Commission**

**Washington, D.C.  20549**

 

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**Form 10-Q**

 

| **ý**                         | **Quarterly Report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                                                                                                                                           |
|------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                                                                                                                                                                                                                                   |
|                               | **For the quarterly period ended  March 31, 2003**                                                                                                                                                                                                                                                                                |
|                               |                                                                                                                                                                                                                                                                                                                                   |
| **OR**                             |
|                               |                                                                                                                                                                                                                                                                                                                                   |
| **o**                              | **Transition Report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                                                                                                                                          |
|                               |                                                                                                                                                                                                                                                                                                                                   |
|                               | **For the transition period from                          to                        ** |
|                               |                                                                                                                                                                                                                                                                                                                                   |
| **Commission File Number 0-10795** |

 

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| **Boeing  Capital Corporation**                                                     |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)                             |
|                                                                                |
| **Delaware**                                                                        |   | **95-2564584** |
| (State or other jurisdiction of  Incorporation or Organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |   |
| **500 Naches Ave., SW, 3rd  Floor ****•  Renton, Washington  98055** |
| (Address of principal executive offices)                                            |
|                                                                                |
| **(425) 393-2914**                                                                  |
| (Registrant’s telephone number, including  area code)                          |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  ý No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No  ý

 

Common shares outstanding at May 5,2003:  **50,000shares**

 

Registrant meets the conditions set forth inGeneral Instruction H(1)(a) and (b) to Form 10-Q and is therefore filing thisForm with the reduced disclosure format.

 

#  

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# **Table ofContents**

#  

| Part  I    | Financial  Information                                                                |
|------------|---------------------------------------------------------------------------------------|
|       |
| Item 1.    | Financial  Statements                                                                 |
|       | Consolidated Balance Sheets                                                           |
|       | Consolidated  Statements of Operations                                                |
|       | Consolidated  Statements of Shareholder’s Equity and Comprehensive Income (Loss) |
|       | Consolidated Statements  of Cash Flows                                                |
|       | Notes to Consolidated  Financial Statements                                           |
|       |
| Item 2.    | Management’s  Narrative Analysis of Results of Operations                        |
|       |
| Item 4.    | Controls  and Procedures                                                              |
|       |
| Part  II   | Other  Information                                                                    |
|       |
| Item 1.    | Legal Proceedings                                                                     |
|       |
| Item 5.    | Other Information                                                                     |
|       |
| Item 6.    | Exhibits and  Reports on Form 8-K                                                     |
|       |
| Signatures |

 

2

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# **Part I**

 

# **Item 1.****  Financial Statements**

**Boeing CapitalCorporation and Subsidiaries**

## **Consolidated Balance Sheets**

(Unaudited)

 
| **(Dollars in millions, except par  value)**                                                          |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
| ASSETS                                                                                                |   |                     |   |                        |   |
| Cash and  cash equivalents                                                                            |   | $                        | 683    |                        | $      | 686 |   |
| Receivables:                                                                                          |   |                     |   |                        |   |
| Financing  leases                                                                                     |   | 4,470                    |   | 4,550                       |   |
| Notes and  other receivables                                                                          |   | 2,924                    |   | 2,878                       |   |
|                                                                                                  |   | 7,394                    |   | 7,428                       |   |
| Allowance  for losses on receivables                                                                  |   | (391                     | )      | (260                        | )      |
|                                                                                                  |   | 7,003                    |   | 7,168                       |   |
|                                                                                                  |   |                     |   |                        |   |
| Equipment  under operating leases, net of accumulated depreciation                                    |   | 3,468                    |   | 3,506                       |   |
| Investments                                                                                           |   | 512                      |   | 517                         |   |
| Equipment  held for sale or re-lease, net of accumulated depreciation                                 |   | 357                      |   | 311                         |   |
| Other  assets                                                                                         |   | 327                      |   | 375                         |   |
|                                                                                                  |   | $                        | 12,350 |                        | $      | 12,563 |   |
|                                                                                                  |   |                     |   |                        |   |
| LIABILITIES  AND SHAREHOLDER’S EQUITY                                                            |   |                     |   |                        |   |
| Liabilities:                                                                                          |   |                     |   |                        |   |
| Accounts  payable and accrued expenses                                                                |   | $                        | 68     |                        | $      | 127 |   |
| Other  liabilities                                                                                    |   | 202                      |   | 220                         |   |
| Accounts  due to Boeing and BCSC                                                                      |   | 32                       |   | 22                          |   |
| Deferred  income taxes                                                                                |   | 1,011                    |   | 1,073                       |   |
| Debt:                                                                                                 |   |                     |   |                        |   |
| Senior                                                                                                |   | 9,331                    |   | 9,441                       |   |
| Subordinated                                                                                          |   | 24                       |   | 24                          |   |
|                                                                                                  |   | 10,668                   |   | 10,907                      |   |
|                                                                                                  |   |                     |   |                        |   |
| Commitments  and contingencies – Note 9                                                          |   |                     |   |                        |   |
|                                                                                                  |   |                     |   |                        |   |
| Shareholder’s  equity:                                                                           |   |                     |   |                        |   |
| Common  Stock – $100 par value; authorized 100,000 shares;  issued and outstanding 50,000 shares |   | 5                        |   | 5                           |   |
| Capital  in excess of par value                                                                       |   | 1,176                    |   | 1,090                       |   |
| Accumulated  other comprehensive loss, net of tax                                                     |   | (13                      | )      | (17                         | )      |
| Income  retained for growth                                                                           |   | 514                      |   | 578                         |   |
|                                                                                                  |   | 1,682                    |   | 1,656                       |   |
|                                                                                                  |   | $                        | 12,350 |                        | $      | 12,563 |   |

#  

# See Notes to Consolidated Financial Statements.

 

3

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# **Boeing Capital Corporation andSubsidiaries**

## **Consolidated Statements of Operations**

(Unaudited)

 
|                                                       |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------|--------|----------------------------------------|--------|
| **(Dollars in millions)**                                  |   | **2003**                               |   | **2002** |   |
| REVENUES                                                   |   |                                   |   |   |   |
| Finance  lease income                                      |   | $                                      | 77     |   | $ | 73 |   |
| Interest  income on notes receivable                       |   | 54                                     |   | 47 |   |
| Operating  lease income                                    |   | 125                                    |   | 94 |   |
| Investment  income                                         |   | 11                                     |   | 8 |   |
| Net gain  on disposal                                      |   | —                                 |   | 1 |   |
| Other                                                      |   | 16                                     |   | 5 |   |
|                                                       |   | 283                                    |   | 228 |   |
|                                                       |   |                                   |   |   |   |
| Equity in  loss from joint venture                         |   | (1                                     | )      | — |   |
|                                                       |   | 282                                    |   | 228 |   |
|                                                       |   |                                   |   |   |   |
| EXPENSES                                                   |   |                                   |   |   |   |
| Interest  expense                                          |   | 111                                    |   | 90 |   |
| Depreciation  expense                                      |   | 63                                     |   | 47 |   |
| Provision  for losses                                      |   | 140                                    |   | 8 |   |
| Operating  expenses                                        |   | 16                                     |   | 13 |   |
| Asset  impairment expense                                  |   | 42                                     |   | 1 |   |
| Other                                                      |   | 23                                     |   | 3 |   |
|                                                       |   | 395                                    |   | 162 |   |
|                                                       |   |                                   |   |   |   |
| Income  (loss) before provision (benefit) for income taxes |   | (113                                   | )      | 66 |   |
| Provision  (benefit) for income taxes                      |   | (49                                    | )      | 24 |   |
| Net  income (loss)                                         |   | $                                      | (64    | ) | $ | 42 |   |

 

See Notes to Consolidated Financial Statements.

 

4

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** **

**Boeing Capital Corporation and Subsidiaries**

Consolidated Statements of Shareholder’sEquity and Comprehensive Income (Loss)

(Unaudited)

 
| **(Dollars in millions except stated value)**             |   | **Preferred  Stock(1)** |       | **Common  Stock** |       | **Capital in****Excess of  Par Value** |       | **Accumulated  Other  Comprehensive   Income (Loss)** |      | **Income****Retained for  Growth** |   | **Comprehensive****Income (Loss)** |   |
|-----------------------------------------------------------|--------|-------------------------|------------|-------------------|------------|----------------------------------------|------------|-------------------------------------------------------|-----------|------------------------------------|--------|------------------------------------|--------|
| **Balance at  December 31, 2001**                         |   | **$**                   | **50**     | ** **        | **$**      | **5**                                  | ** ** | **$**                                                 | **804**   | ** **                         | **$**  | **(19**                            | **)**  | **$** | **531** | ** ** | **$** | **133** | ** ** |
| Preferred stock redemption                                |   | (50                     | )          | —            |       | —                                 |       | —                                                |      | —                             |   |                               |   |
| Capital contributions from  Boeing and BCSC(2)            |   | —                  |       | —            |       | 286                                    |       | —                                                |      | —                             |   |                               |   |
| Net income                                                |   | —                  |       | —            |       | —                                 |       | —                                                |      | 49                                 |   | $                                  | 49     |   |
| Cash dividend declared                                    |   | —                  |       | —            |       | —                                 |       | —                                                |      | (2                                 | )      | —                             |   |
| Unrealized  loss on derivative instruments, net of tax    |   | —                  |       | —            |       | —                                 |       | (2                                                    | )         | —                             |   | (2                                 | )      |
| Unrealized gain on  investments, net of tax of $3 million |   | —                  |       | —            |       | —                                 |       | 4                                                     |      | —                             |   | 4                                  |   |
| **Balance at  December 31, 2002**                    |   | **$**                   | **—** | ** **        | **$**      | **5**                                  | ** ** | **$**                                                 | **1,090** | ** **                         | **$**  | **(17**                            | **)**  | **$** | **578** | ** ** | **$** | **51** | ** ** |
| Capital  contributions from Boeing and BCSC(3)            |   | —                  |       | —            |       | 86                                     |       | —                                                |      | —                             |   |                               |   |
| Net loss                                                  |   | —                  |       | —            |       | —                                 |       | —                                                |      | (64                                | )      | $                                  | (64    | ) |
| Unrealized gain on  derivative instruments, net of tax    |   | —                  |       | —            |       | —                                 |       | 2                                                     |      | —                             |   | 2                                  |   |
| Unrealized gain on  investments, net of tax               |   | —                  |       | —            | ** ** | **—**                             |       | 2                                                     |      | —                             |   | 2                                  |   |
| **Balance at  March 31, 2003**                       |   | **$**                   | **—** | ** **        | **$**      | **5**                                  | ** ** | **$**                                                 | **1,176** | ** **                         | **$**  | **(13**                            | **)**  | **$** | **514** | ** ** | **$** | **(60** | **)** |

 

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(1)          Preferred stock has no par value; 100,000shares authorized: Series A; $5,000 stated value; no shares issued and outstandingat March 31, 2003 and December 31, 2002.

(2)          Balance represents $85 million of cashcontributions from Boeing and $201 million of non-cash contributions fromBoeing and BCSC.

(3)          Balance represents $84 million of cashcontributions from Boeing and $2 million of non-cash contributions from Boeingand BCSC.

 

See Notes to Consolidated Financial Statements.

 

5

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**Boeing Capital Corporation and Subsidiaries**

ConsolidatedStatements of Cash Flows

(Unaudited)

 
|                                                                                     |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
| **(Dollars in millions)**                                                                |   | **2003**                               |   | **2002** |   |
| OPERATING ACTIVITIES                                                                     |   |                                   |   |   |   |
| Net  income (loss)                                                                       |   | $                                      | (64    | ) | $ | 42 |   |
| Adjustments  to reconcile net income (loss) to net cash providedby operating activities: |   |                                   |   |   |   |
| Depreciation  and amortization expense                                                   |   | 64                                     |   | 48 |   |
| Net gain  on disposal                                                                    |   | —                                 |   | (1 | ) |
| Provision  for losses                                                                    |   | 140                                    |   | 8 |   |
| Non-cash  asset impairment and other charges                                             |   | 63                                     |   | 1 |   |
| Share-based  plans expense                                                               |   | 2                                      |   | 1 |   |
| Deferred  income taxes                                                                   |   | (55                                    | )      | 55 |   |
| Change in  assets and liabilities:                                                       |   |                                   |   |   |   |
| Accrued  interest                                                                        |   | (26                                    | )      | (54 | ) |
| Accounts  with Boeing and BCSC                                                           |   | 10                                     |   | 48 |   |
| Other  assets                                                                            |   | 14                                     |   | (38 | ) |
| Accounts  payable and accrued expenses                                                   |   | (59                                    | )      | (80 | ) |
| Other  liabilities                                                                       |   | (13                                    | )      | (8 | ) |
| Other,  net                                                                              |   | 4                                      |   | (1 | ) |
|                                                                                     |   | 80                                     |   | 21 |   |
| INVESTING  ACTIVITIES                                                                    |   |                                   |   |   |   |
| Net change  in short-term leases, notes and other receivables                            |   | 69                                     |   | 81 |   |
| Purchase  of investments                                                                 |   | —                                 |   | (257 | ) |
| Principal  reduction on held-to-maturity investments                                     |   | 19                                     |   | 1 |   |
| Purchase  of equipment for operating leases                                              |   | (158                                   | )      | (122 | ) |
| Proceeds  from disposition of equipment and receivables                                  |   | 4                                      |   | 22 |   |
| Collection  of leases, notes and other receivables                                       |   | 209                                    |   | 222 |   |
| Origination  of leases, notes and other receivables                                      |   | (217                                   | )      | (764 | ) |
|                                                                                     |   | (74                                    | )      | (817 | ) |
| FINANCING  ACTIVITIES                                                                    |   |                                   |   |   |   |
| Net  change in commercial paper and short-term bank debt                                 |   | (73                                    | )      | 317 |   |
| Proceeds  from issuance of debt                                                          |   | 46                                     |   | 418 |   |
| Repayment  of debt                                                                       |   | (66                                    | )      | (208 | ) |
| Capital  contributions from Boeing                                                       |   | 84                                     |   | — |   |
|                                                                                     |   | (9                                     | )      | 527 |   |
| Net  decrease in cash and cash equivalents                                               |   | (3                                     | )      | (269 | ) |
| Cash and  cash equivalents at beginning of year                                          |   | 686                                    |   | 400 |   |
| Cash and  cash equivalents at end of period                                              |   | $                                      | 683    |   | $ | 131 |   |

 

See Notes to Consolidated Financial Statements.

 

6

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**Boeing Capital Corporation and Subsidiaries**

Consolidated Statements of Cash Flows,continued

(Unaudited)

 
|                                               |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------|--------|----------------------------------------|--------|
| **(Dollars in millions)**                          |   | **2003**                               |   | **2002** |   |
| NON-CASH INVESTING AND FINANCING  ACTIVITIES:      |   |                                   |   |   |   |
| Transfer  of receivables                           |   | $                                      | — |   | $ | (110 | ) |
| Transfer  of accounts with Boeing and BCSC         |   | $                                      | — |   | $ | 137 |   |
| Assumption  of debt                                |   | $                                      | — |   | $ | 110 |   |
| Mark-to-market  for derivatives on underlying debt |   | $                                      | (19    | ) | $ | (29 | ) |
| Transfer  of financing assets from Boeing          |   | $                                      | — |   | $ | (242 | ) |
| Capital  contributions from Boeing and BCSC        |   | $                                      | 2      |   | $ | 106 |   |

 

See Notes to Consolidated Financial Statements.

 

7

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** **

**Boeing Capital Corporation and Subsidiaries**

###### Notes to Consolidated Financial Statements

March 31, 2003

(Unaudited)

 

Note 1 – General

 

Boeing Capital Corporation (the “Company”) is an indirect wholly ownedsubsidiary of The Boeing Company (“Boeing”). The accompanying unauditedconsolidated financial statements have been prepared by the Company inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. In the opinion of the Company, the accompanying consolidatedfinancial statements reflect all adjustments (consisting of normal recurringaccruals) that are necessary to present fairly the consolidated balance sheetsand the related consolidated statements of operations, shareholder’s equity andcomprehensive income (loss) and cash flows for the interim periods presented.Operating results for the three-month period ended March 31, 2003, are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2003. The statements should be read in conjunction with theNotes to the Consolidated Financial Statements included in the Company’s Form10-K for the year ended December 31, 2002, which contains the latest availableaudited consolidated financial statements and notes.

 

The Company’s primary operations include two principal financialreporting segments: Aircraft Financial Services and Commercial FinancialServices. The Company’s portfolio consists of financing leases, notes and otherreceivables, equipment under operating leases (net of accumulateddepreciation), investments and equipment held for sale or re-lease (net ofaccumulated depreciation).

 

Boeing Capital Services Corporation (“BCSC”) is a largely inactiveholding company, which owns 100% of the Company and is an indirect wholly ownedsubsidiary of Boeing.

 

Certain reclassifications of previously reported amounts have been madein the consolidated financial statements to conform to the 2003 presentation.

 

#### Note 2 – Standards Issued and Not Yet Implemented

 

In January 2003, the Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of VariableInterest Entities,” which clarifies the application of Accounting ResearchBulletin No. 51, “Consolidated Financial Statements,” relating toconsolidation of certain entities. FIN 46 requires identification of theCompany’s participation in variable interest entities (“VIEs”), which are definedas entities with a level of invested equity insufficient to fund futureactivities to operate on a stand-alone basis or whose equity holders lackcertain characteristics of a controlling financial interest. For an entityidentified as a VIE, FIN 46 sets forth a model to evaluate potentialconsolidation based on an assessment of which party to the VIE, if any, bears amajority of the exposure to the expected losses, or stands to gain from amajority of the expected returns. FIN 46 also sets forth certain disclosuresregarding interests in VIEs that are deemed significant, even if consolidationis not required. The provisions of FIN 46 are effective July 1, 2003for VIEs created on or before January 31, 2003, and immediately for VIEscreated after January 31, 2003. The Company is currently assessing theapplication of FIN 46. For further discussion, see Note 10.

 

8

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Note 3 – Portfolio Quality

 
| **(Dollars in millions)**                                                        |   | **March 31,****2003** |   | **December  31,****2002** |   |
|----------------------------------------------------------------------------------|--------|-----------------------|--------|---------------------------|--------|
| Receivables:                                                                     |   |                  |   |                      |   |
| Financing  leases                                                                |   | $                     | 4,470  |                      | $      | 4,550 |   |
| Notes and  other receivables                                                     |   | 2,924                 |   | 2,878                     |   |
|                                                                             |   | 7,394                 |   | 7,428                     |   |
|                                                                             |   |                  |   |                      |   |
| Equipment  under operating leases, net of accumulated depreciation               |   | 3,468                 |   | 3,506                     |   |
| Investments                                                                      |   | 512                   |   | 517                       |   |
| Equipment  held for sale or re-lease, net of accumulated depreciation            |   | 357                   |   | 311                       |   |
| Total  portfolio                                                                 |   | $                     | 11,731 |                      | $      | 11,762 |   |
|                                                                             |   |                  |   |                      |   |
| Non-performing  assets:                                                          |   |                  |   |                      |   |
| Nonaccrual  receivables                                                          |   | $                     | 602    |                      | $      | 171 |   |
| Non-performing  equipment under operating leases, net ofaccumulated depreciation |   | 118                   |   | 63                        |   |
| Equipment  held for sale or re-lease, net of accumulated depreciation            |   | 357                   |   | 311                       |   |
|                                                                             |   | $                     | 1,077  |                      | $      | 545 |   |
|                                                                             |   |                  |   |                      |   |
| Ratio of  nonaccrual receivables to total receivables                            |   | 8.1                   | %      | 2.3                       | %      |
| Ratio of  total non-performing assets to total portfolio                         |   | 9.2                   | %      | 4.6                       | %      |

 

The increases in the above ratios are primarily due to the bankruptcyfiling by Hawaiian Holding, Inc. (“Hawaiian”), as discussed further in Note 9.

 

The following table summarizes receivables and equipment underoperating leases with amounts greater than 90 days past due with income stillaccruing:

 
| **(Dollars in millions)**         |   | **March 31,****2003** |   | **December  31,****2002** |   |
|-----------------------------------|--------|-----------------------|--------|---------------------------|--------|
| Receivables                       |   | $                     | 49     | (1)                       | $      | 2 |   |
| Equipment  under operating leases |   | —                |   | 19                        |   |
|                              |   | $                     | 49     |                      | $      | 21 |   |

 

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(1)          Subsequentto March 31, 2003, this receivable was paid in full.

 

For the three months ended March 31, 2003, the Company did notreceive any cash from customers in 90 days past due and income accruing status.

 

9

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Note 4 – Allowance for Losseson Receivables

 
| **(Dollars in millions)**                                                                   |   | **March 31,  2003** |   | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
| Allowance for losses on receivables at  beginning of year                                   |   | $                        | 260    |                        | $      | 140 |   |
| Provision for losses                                                                        |   | 140                      |   | 136                         |   |
| Write-offs, net of recoveries                                                               |   | (9                       | )      | (18                         | )      |
| Allowance transferred from  Boeing and BCSC                                                 |   | —                   |   | 2                           |   |
| Allowance for losses on  receivables at end of period                                       |   | $                        | 391    |                        | $      | 260 |   |
|                                                                                        |   |                     |   |                        |   |
| Allowance as a percentage of  total receivables                                             |   | 5.3                      | %      | 3.5                         | %      |
| Net write-offs as a percentage  of average receivables                                      |   | 0.1                      | %      | 0.3                         | %      |
|                                                                                        |   |                     |   |                        |   |
| More than 90 days delinquent:                                                               |   |                     |   |                        |   |
| Amount of delinquent  installments                                                          |   | $                        | 6      |                        | $      | 15 |   |
| Total receivables related to  delinquent installments                                       |   | $                        | 87     |                        | $      | 50 |   |
| Total receivables related to  delinquent installments  as a percentage of total receivables |   | 1.2                      | %      | 0.7                         | %      |
| Total receivables due from  delinquent obligors                                             |   | $                        | 1,264  |                        | $      | 51 |   |
| Total receivables due from  delinquent obligors  as a percentage of total receivables       |   | 17.1                     | %      | 0.7                         | %      |

 

At March 31, 2003, UnitedAirlines, Inc. (“United”) represented $1.2 billion of the total receivablesportfolio. Of this amount, $19 million represented receivables that hadinstallments that were more than 90 days delinquent at March 31, 2003.During the first quarter of 2003, the Company received cash of $20 million fromUnited related to the United receivables, including $1 million related toreceivables more than 90 days delinquent. Additionally, the Company received $4million from Boeing during the quarter related to intercompany subsidyagreements attributable to the United receivables.

 

The Company’s portfolio at the end of the first quarter of 2003totaled $11.7 billion, of which $8.5 billion was related to Boeing products,primarily commercial aircraft. The continuing effects of the current airlineindustry downturn have caused significant reductions in commercial aircraftvalues. Older and/or out-of-production aircraft types have experienced the mostsignificant declines in value, while newer aircraft types have seen moremoderate declines. Published sources and recent market transactions indicatethat values for various aircraft types used as collateral in the Company’sportfolio remain depressed.  Aircraftvaluations could decline materially if significant numbers of aircraft,particularly types with relatively few operators, are idled on account offurther airline bankruptcies or restructurings.  At the same time, the credit ratings of many airlines,particularly in the United States, have continued to deteriorate. Each quarter,the Company reviews customer credit ratings, published historical creditdefault rates and third-party aircraft valuations as a basis to validate thereasonableness of the allowance for losses on receivables. The Companydetermined that an increase in the allowance for losses on receivables waswarranted in light of deteriorating customer credit ratings and liquidity, aswell as the decline in aircraft values. At the end of the first quarter of2003, the Company recorded an additional provision for losses of $130 millionto strengthen the allowance for losses on receivables. As a result of thisadjustment, the allowance at March 31, 2003 increased to 5.3% of totalreceivables, up from 3.5% at December 31, 2002. 

 

10

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Receivable Write-offs andRecoveries, by Segment:

 
| **(Dollars in millions)**      |   | **Three Months Ended  March 31,  2003** |   | **Year Ended  December 31,  2002** |   |
|--------------------------------|--------|-----------------------------------------|--------|------------------------------------|--------|
| Aircraft Financial Services:   |   |                                    |   |                               |   |
| Write-offs                     |   | $                                       | 5      |                               | $      | 7 |   |
| Recoveries                     |   | —                                  |   | —                             |   |
|                           |   | 5                                       |   | 7                                  |   |
|                           |   |                                    |   |                               |   |
| Commercial Financial Services: |   |                                    |   |                               |   |
| Write-offs                     |   | 4                                       |   | 12                                 |   |
| Recoveries                     |   | —                                  |   | (1                                 | )      |
|                           |   | 4                                       |   | 11                                 |   |
|                           |   | $                                       | 9      |                               | $      | 18 |   |

 

A specific receivable isreviewed for impairment when, based on current information and events, it isprobable that the Company will be unable to collect amounts due according tothe contractual terms of the receivable agreement. Factors considered inassessing uncollectibility include a customer’s extended delinquency, requestsfor restructuring and filings for bankruptcy. A specific impairment allowanceis provided based on the difference between the carrying value of the receivableand the estimated fair value of the related collateral.

 

The carrying amounts ofimpaired receivables are as follows:

 
| **(Dollars in millions)**                                   |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
| Impaired receivables with  specific impairment allowance(1) |   | $                        | 605    |                        | $      | 146 |   |
| Impaired receivables with no  specific allowance(2)         |   | 1,197                    |   | 1,221                       |   |
|                                                        |   | $                        | 1,802  |                        | $      | 1,367 |   |

 

----

(1)             At March 31, 2003 and December 31, 2002,impaired receivables of $605 million and $146 million, respectively, had aspecific impairment allowance for losses on receivables of $155 million and $50million, respectively.

(2)             Of the $1,197 million and $1,221 millionat March 31, 2003 and December 31, 2002, respectively, $1,094 million and$1,097 million, respectively, relate to the receivables from United for B-767sand B-777s. The Company believes that such aircraft represent adequatecollateral based, in part, on Boeing guarantees; therefore, no specific reservehas been established.

 

The allocation of the allowancefor losses on receivables between specific impairments and general purposes isas follows:

 
| **(Dollars in millions)**          |   | **March 31,  2003** |   | **December 31,  2002** |   |
|------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
| Allocated to specific reserves     |   | $                        | 155    |                        | 39.6   | % | $ | 50 |   | 19.2 | % |
| Allocated for general  purposes(1) |   | 236                      |   | 60.4                        |   | 210 |   | 80.8 |   |
|                               |   | $                        | 391    |                        | 100.0  | % | $ | 260 |   | 100.0 | % |

 

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(1)             The allocation for general purposesrepresents the Company’s best estimate of losses in the remaining receivablesconsidering delinquencies, loss experience, collateral, guarantees, risk ofindividual credits, historical default rates, results of periodic creditreviews and the general state of the economy and airline industry.

 

11

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At March 31, 2003, theCompany was the beneficiary under $2.8 billion of guarantees, principally fromBoeing, with respect to the portfolio relating to transactions totaling $4.1billion (35.0% of total Company portfolio), which mitigates the Company’s riskon the impaired receivables.

 

Actual results could differfrom estimates and values, and there can be no assurance that the allowance forlosses will be sufficient to cover losses on receivables.

 

Note 5 – Investments

 

The following table shows theimpact of investments accounted for pursuant to Statement of FinancialAccounting Standards (“SFAS”) No. 115, “Accounting for Certain Investmentsin Debt and Equity Securities.” Available-for-sale securities are recorded ininvestments at estimated fair value. Unrealized gains/losses ofavailable-for-sale securities are recorded in accumulated other comprehensiveincome/loss, net of tax; however, losses deemed other than temporary arerecorded as a reduction to investment income. Held-to-maturity securities arerecorded at amortized cost. The unrealized gains/losses of held-to-maturitysecurities are not recorded in the consolidated financial statements and areshown in the table below for informational purposes only; however, lossesdeemed other than temporary are recorded as a reduction to investment income.

 

Fair values for investmentsecurities are based on quoted market prices, where available. If quoted marketprices are not available, fair values are based on pricing models or quotedmarket prices of comparable instruments. The majority of the Company’ssecurities are illiquid non-traded securities; therefore, the fair values aregenerally based on pricing models. In order to use pricing models, the Companyrequests spread levels over certain benchmark interest rates from externalsources to use for calculations in the pricing models. Those spread levels overcertain benchmark interest rates are estimates based on similar publicsecurities, senior tranches in the transaction or other relevant pricinginformation. Using this methodology, the Company’s estimates of fair value forthe enhanced equipment trust certificates (“EETCs”) are less than its estimatesof the current value of the collateral supporting the EETCs.

 

12

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Available-for-sale andheld-to-maturity investments consisted of the following:

 
| **(Dollars in millions)**  |   | **Amortized****Cost** |   | **Gross  Unrealized  Gain** |   | **Gross  Unrealized  Loss** |   | **Estimated Fair  Value** |   |
|----------------------------|--------|-----------------------|--------|-----------------------------|--------|-----------------------------|--------|---------------------------|--------|
| **March 31, 2003**    |   |                  |   |                        |   |                        |   |                      |   |
| Available-for-Sale:        |   |                  |   |                        |   |                        |   |                      |   |
| Equity                     |   | $                     | 3      |                        | $      | 2                           |   | $                         | — |   | $ | 5 |   |
| Debt                       |   | 4                     |   | 1                           |   | —                      |   | 5                         |   |
| Held-to-Maturity:          |   |                  |   |                        |   |                        |   |                      |   |
| Debt(1)                    |   | 481                   | (2)    | —                      |   | (252                        | )      | 229                       |   |
|                       |   | $                     | 488    |                        | $      | 3                           |   | $                         | (252   | ) | $ | 239 |   |
|                       |   |                  |   |                        |   |                        |   |                      |   |
| **December 31, 2002** |   |                  |   |                        |   |                        |   |                      |   |
| Available-for-Sale:        |   |                  |   |                        |   |                        |   |                      |   |
| Equity                     |   | $                     | 3      |                        | $      | —                      |   | $                         | — |   | $ | 3 |   |
| Debt                       |   | 4                     |   | —                      |   | —                      |   | 4                         |   |
| Held-to-Maturity:          |   |                  |   |                        |   |                        |   |                      |   |
| Debt(1)                    |   | 490                   |   | —                      |   | (239                        | )      | 251                       |   |
|                       |   | $                     | 497    |                        | $      | —                      |   | $                         | (239   | ) | $ | 258 |   |

 

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(1)             Primarily consists of pass-through trustcertificates, commonly known as EETCs.

(2)             Related to the $481 million atMarch 31, 2003, the Company has $17 million in guarantees from Boeing and$7 million in guarantees from a third party.

 

At March 31, 2003 andDecember 31, 2002, available-for-sale and held-to-maturity investmentstotaled $491 million and $497 million, respectively, of which none wereconsidered investment grade securities.

 

At December 31, 2001, anavailable-for-sale security was transferred to held-to-maturity at its fairvalue with $20 million of unrealized loss recorded as a component ofaccumulated other comprehensive income/loss, net of tax. As of March 31,2003, $2 million of that $20 million unrealized loss was amortized fromaccumulated other comprehensive income/loss to investment income.

 

At July 1, 2002, twoavailable-for-sale securities were transferred to held-to-maturity at theirfair values with $6 million of net unrealized gain recorded as a component ofaccumulated other comprehensive income/loss, net of tax. At March 31,2003, $1 million of that $6 million net unrealized gain was amortized fromaccumulated other comprehensive income/loss to investment income.

 

At October 1, 2002, anavailable-for-sale security was transferred to held-to-maturity at its fairvalue, which was equal to its amortized cost.

 

At March 31, 2003,maturities of debt investments were as follows:

 
|                       |   | **Available-for-Sale** |   | **Held-to-Maturity**      |   |
|----------------------------|--------|------------------------|--------|---------------------------|--------|
| **(Dollars in millions)**  |   | **Amortized  Cost**    |   | **Estimated  Fair Value** |   | **Amortized  Cost** |   | **Estimated  Fair Value** |   |
| Due in less than one year  |   | $                      | — |                      | $      | — |   | $ | 15 |   | $ | 7 |   |
| Due from one to five years |   | 1                      |   | 1                         |   | 333 |   | 169 |   |
| Due from six to ten years  |   | —                 |   | —                    |   | 61 |   | 27 |   |
| Due after ten years        |   | 3                      |   | 4                         |   | 72 |   | 26 |   |
|                       |   | $                      | 4      |                      | $      | 5 |   | $ | 481 |   | $ | 229 |   |

 

13

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The Company also has a 50%partnership with American Trans Air Holdings Corp. (“ATA”) in BATALeasing, LLC with a carrying value of $20 million and $19 million atMarch 31, 2003 and December 31, 2002, respectively, which is recordedin investments on the consolidated balance sheets and accounted for under theequity method. The joint venture was established to convert 24 B-727 passengeraircraft to full cargo configuration and then re-lease such aircraft.

 

Note 6 – Impairment Review forEquipment Under Operating Leases and Held for Sale or Re-Lease

 

The Company reviews theseassets for potential impairment when events or circumstances indicate that thecarrying amount of these assets may not be recoverable. For the first quarterof 2003, the Company reviewed all aircraft and equipment held for sale or re-leaseand under operating leases maturing within two years or where known events mayindicate impairment. Assets under operating lease or held for re-lease areconsidered impaired when the expected undiscounted cash flow over the remaininguseful life is less than the book value. Various assumptions are used whendetermining the expected undiscounted cash flow, including expected futurelease rates, lease terms, end of economic life value of the aircraft orequipment, periods in which the asset may be held in preparation for afollow-on lease, maintenance costs, remarketing costs and the remainingeconomic life of the asset. Assets held for sale are stated at the lower ofcarrying amount or fair value less costs to sell.

 

When impairment is indicatedfor an asset, the amount of the impairment loss is the excess of the book valueover the fair value of the asset. For aircraft assets, the Company uses theaverage published value from multiple sources based on the type and age of theasset to determine the fair value. However, if the features or utilization ofthe aircraft varies significantly from the generic aircraft attributes coveredby outside publications, the Company applies judgment based on the attributesof the specific aircraft to determine fair value. For the three months endedMarch 31, 2003 and 2002, the Company recorded pre-tax non-cash chargestotaling $42 million and $1 million, respectively, to record impairments ofportfolio assets as a result of continued declines in market values and rentsfor aircraft.

 

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Note 7 – Debt and CreditAgreements

 
| **(Dollars in millions)**                                                                                            |   | **March 31,  2003** |   | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
| Senior debt:                                                                                                         |   |                     |   |                        |   |
| Commercial paper                                                                                                     |   | $                        | — |                        | $      | 73 |   |
| Variable rate (three-month LIBOR plus 0.6%)  note due 2012                                                           |   | 5                        |   | 5                           |   |
| 5.65% note due 2006                                                                                                  |   | 1,038                    |   | 1,041                       |   |
| 5.75% note due 2007                                                                                                  |   | 748                      |   | 748                         |   |
| 5.80% note due 2013                                                                                                  |   | 613                      |   | 617                         |   |
| 6.10% note due 2011                                                                                                  |   | 779                      |   | 781                         |   |
| 6.50% note due 2012                                                                                                  |   | 762                      |   | 766                         |   |
| 7.10% note due 2005                                                                                                  |   | 499                      |   | 499                         |   |
| 7.375% note due 2010                                                                                                 |   | 545                      |   | 549                         |   |
| 2.02% - 3.41% Euro medium-term note due  2004                                                                        |   | 60                       |   | 51                          |   |
| Non-recourse variable rate (one-month LIBOR  plus 1.1%) note due 2012                                                |   | 44                       |   | 44                          |   |
| 13.84% - 14.28% non-recourse notes due  through 2003, including a premium based on an imputed interest rate of 6.10% |   | 3                        |   | 6                           |   |
| 3.15% - 6.75% retail medium-term notes due  through 2017                                                             |   | 525                      |   | 487                         |   |
| 1.29% - 7.64% medium-term notes due through  2017                                                                    |   | 3,103                    |   | 3,113                       |   |
| 1.78% secured debt, proceeds of  securitization due through 2009                                                     |   | 259                      |   | 299                         |   |
| Capital lease obligations due through 2008                                                                           |   | 348                      |   | 362                         |   |
|                                                                                                                 |   | 9,331                    |   | 9,441                       |   |
|                                                                                                                 |   |                     |   |                        |   |
| Subordinated  debt:                                                                                                  |   |                     |   |                        |   |
| 8.31% medium-term note due 2004                                                                                      |   | 20                       |   | 20                          |   |
| Non-recourse variable rate note due 2012  (one-month LIBOR plus 2.46%)                                               |   | 4                        |   | 4                           |   |
|                                                                                                                 |   | 24                       |   | 24                          |   |
|                                                                                                                 |   | $                        | 9,355  |                        | $      | 9,465 |   |

 

OnFebruary 16, 2001, the Company filed a public shelf registration of $5 billionof debt securities with the Securities and Exchange Commission (“SEC”), whichwas declared effective on February 26, 2001. Effective October 31,2001, the Company allocated $1 billion to the Series XI medium-term noteprogram. Effective June 20, 2002, the remaining $750 million under the shelfregistration was allocated to this program. As of the filing date, an aggregateamount of $427 million remains available under the Series XI medium-termprogram for potential debt issuance.

 

On February 22, 2002, theCompany filed a public shelf registration of $5 billion of debt securities withthe SEC, which was declared effective on March 4, 2002. The Company allocated$1 billion to establish a new retail medium-term note program involving thesale of notes with a minimum denomination of $1,000. As of the filing date, anaggregate amount of $3.9 billion (which includes $471 million of retailmedium-term notes) remains available for potential debt issuance.

 

On June 6, 2002, the Companyestablished a $1.5 billion Euro medium-term note program. As of the filingdate, an aggregate amount of $1.4 billion remains available for potential debtissuance.

 

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The provisions of various debtagreements require the Company to (a) limit the payment of cash dividends tothe extent that the Company’s consolidated assets would be less than 115% ofits consolidated liabilities (excluding deferred taxes) after dividend paymentsand (b) restrict the amount of liens on the Company’s property, other thanliens specifically excluded, to secure indebtedness such that those restrictedliens not exceed 15% of consolidated assets. At March 31, 2003, as well asduring the period, the Company was in compliance with these and all of itsvarious other debt covenants.

 

As of November 4, 2002, $500 millionof Boeing’s five-year revolving credit line expiring in 2005 was madeexclusively available to the Company. In addition, $1.5 billion of Boeing’s $3billion 364-day revolving credit line continues to be exclusively available tothe Company. At March 31, 2003, there were no amounts outstanding underthese agreements.

 

Note 8 – Derivative FinancialInstruments

 

The Company accounts forderivatives pursuant to SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended. This standard requires thatall derivative instruments be recognized in the financial statements andmeasured at fair value regardless of the purpose or intent for holding them.

 

The Company is exposed to avariety of market risks, including the effects of changes in interest rates andforeign currency exchange rates. These exposures are managed, in part, with theuse of derivatives. Interest rate swap and cross currency swap contracts areentered into with a number of major financial institutions. The Company generallydoes not require collateral or other security supporting derivative contractswith its counterparties as it believes it is unlikely that any of itscounterparties will be unable to perform under the terms of derivativefinancial instruments. The following is a summary of the Company’s riskmanagement strategies and the effect of these strategies on the consolidatedfinancial statements.

 

*Fair Value Hedges*

 

Interest rate swaps, underwhich the Company agrees to pay variable rates of interest, are designated asfair value hedges of fixed-rate debt. During the first quarter of 2003, theCompany also held forward-starting interest rate swap agreements to fix thecost of funding a firmly committed lease for which payment terms are determinedin advance of funding. This type of hedge relationship mitigates the changes infair value of the hedged portion of the firm commitment caused by changes ininterest rates. The net change in fair value of the swap and the hedged portionof the firm commitment is reported in earnings. At the end of the first quarterof 2003, the forward-starting interest rate swaps no longer qualified for fairvalue hedge accounting treatment and the Company recognized a pre-tax non-cashcharge of $21 million.

 

For thethree months ended March 31, 2003 and 2002, $2 million and $0.4 million,respectively, of gains related to the basis adjustment of certain terminatedinterest rate swaps were recorded in interest expense. For the three monthsended March 31, 2003 and 2002, $1 million of losses and $0.2 million ofgains, respectively, related to ineffectiveness due to the forward-startinginterest rate swaps were recorded in interest expense. During the next twelvemonths, the Company expects to amortize an $8 million gain from the amount recordedin the basis adjustment of certain terminated fair value hedge relationships tointerest expense.

 

16

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*Cash Flow Hedges*

 

Cash flow hedges used by theCompany include certain interest rate swaps and cross currency swaps. Interestrate swap and cross currency swap contracts under which the Company agrees topay fixed rates of interest are designated as cash flow hedges of variable-ratedebt obligations. In addition, cross currency swap contracts under which theCompany agrees to pay fixed functional currency rates of interest aredesignated as cash flow hedges of fixed non-functional currency debtobligations. As of March 31, 2003 and December 31, 2002, netunrecognized losses of $9 million ($6 million net of tax) and $11 million ($8million net of tax), respectively, were recorded in accumulated othercomprehensive income/loss associated with the Company’s cash flow hedgingtransactions.

 

For the three months endedMarch 31, 2003 and 2002, unrecognized losses (net of tax) included inaccumulated other comprehensive income/loss of $0.1 million and $0.1 million,respectively, were reclassified to interest expense. During the next twelvemonths, the Company expects to reclassify to interest expense a loss (net oftax) of $0.4 million from the amount recorded in accumulated othercomprehensive income/loss.

 

*Non-hedging Derivative Instruments*

 

The Company holds certaininterest exchange agreements and related interest rate swaps. The intent ofthese interest rate swaps is to economically hedge the exposures created by theinterest exchange agreements. However, since the exposures being hedged arederivative instruments, this relationship does not qualify for hedgeaccounting. As a result, changes in fair value of both instruments areimmediately recognized in income. For the three months ended March 31,2003 and 2002, the interest exchange agreements resulted in losses of $1million and $4 million, respectively, and the related interest rate swapsresulted in gains of $1 million and $3 million, respectively. For the threemonths ended March 31, 2003 and 2002, unrecognized losses (net of tax) of$0.2 million and $0.3 million, respectively, from accumulated othercomprehensive income/loss and gains of $1 million for both periods from thebasis adjustment to underlying liabilities were amortized to interest expense.During the next twelve months, the Company expects to amortize to interestexpense a $1 million loss (net of tax) from the amount recorded in accumulated othercomprehensive income/loss and a $2 million gain from the basis adjustment tounderlying liabilities.

 

During 2001, the Companyreceived a conversion option on notes and warrants in connection with a certainfinancing transaction. As of March 31, 2003 and December 31, 2002,the conversion features of certain convertible debt and warrants were reflectedin other assets at their combined fair values of $12 million and $4 million,respectively. The initial fair values of the conversion option on notes andwarrants were recorded as a discount to notes receivable of $20 million and arebeing amortized to other income. For the three months ended March 31, 2003and 2002, the Company amortized gains from the discount on notes receivable toother income of $0.3 million and $2 million, respectively. For the three monthsended March 31, 2003 and 2002, the conversion feature of the convertibledebt and warrants recorded in other assets had changes in fair value, resultingin an addition to other income of $7 million and a reduction to other income of$2 million, respectively.

 

Note 9 – Commitments andContingencies

 

*Litigation*

 

Various legal proceedings andclaims are pending or have been asserted against the Company, many of which arecovered by third parties, including insurance companies. The Company believesthat the final outcome of such proceedings and claims will not have a materialadverse effect on its earnings, cash flows or financial position.

 

17

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*Significant Customer Contingencies*

 

United accounted for $1.2billion (10.1%) of total Company portfolio at both March 31, 2003 andDecember 31, 2002. At March 31, 2003, the United portfolio was secured bysecurity interests in two B-767s and 13 B-777s and by an ownership and securityinterest in five B-757s. As of March 31, 2003, United was the Company’s secondlargest customer. United filed for Chapter 11 bankruptcy protection onDecember 9, 2002. On February 7, 2003, United agreed to perform underthe loan agreements securing the B-767s and B-777s bringing its payments underthose agreements current. As of April 10, 2003, United failed to makecertain principal and rental payments due in respect of certain of the aircraftincluding the B-757s. Discussions with United are continuing on a fullrestructuring of the various transactions. Future negotiations may result inchanges to the agreements in respect of the aircraft with United. Until Unitedemerges from bankruptcy or the Company takes possession of its collateral,United has the right to reject or abandon its transactions with the Company. Inthe event that future negotiations or proceedings result in the return of asubstantial number of aircraft, there could be a material adverse effect on theCompany’s earnings, cash flows or financial position at least until such timeas the aircraft are sold or redeployed for adequate consideration.

 

ATAaccounted for $604 million and $611 million (5.1% and 5.2%) oftotal Company portfolio at March 31,2003 and December 31, 2002, respectively. At March 31, 2003, the ATAportfolio primarily consisted of ten B-757s and an investment in ATA preferredstock with a face amount of $50 million, which is included in the portfolio atits carrying value. In November 2002, ATA received a loan of $168 millionadministered by the Airline Transportation Stabilization Board. ATA hasrequested that the Company restructure certain outstanding leases by deferringa portion of its rent payments for a limited period of time. The Company iscurrently in negotiations with ATA but has yet to reach a definitive agreement.

 

Hawaiian accounted for $546million and $479 million (4.7% and 4.1%) of total Company portfolio atMarch 31, 2003 and December 31, 2002, respectively. At March 31,2003, the Hawaiian portfolio primarily consisted of 13 B-717s and three B-767s.Hawaiian filed for Chapter 11 bankruptcy protection on March 21,2003. On March 31, 2003, the Company filed a motion seeking appointment ofan independent trustee to administer Hawaiian during bankruptcy. Subject tofinal documentation and bankruptcy court approval, the Company has agreed tothe terms under which it would release Hawaiian from its obligations to takedelivery of a new B-767 scheduled for delivery to Hawaiian in April 2003. The Companywill re-market that aircraft to another airline. Taking into account thespecific reserves allocated at the end of the first quarter of 2003 for theHawaiian receivables, the Company does not expect that its transactions withHawaiian will have a material adverse effect on the Company’s earnings, cashflow or financial position. In the event that future negotiations orproceedings result in the return of a substantial number of aircraft, therecould be a material adverse effect on the Company’s earnings, cash flows orfinancial position at least until such time as the aircraft are sold orredeployed for adequate consideration.

 

American Airlines, Inc.(“American”) accounted for $512 million and $381 million (4.4% and 3.2%) oftotal Company portfolio at March 31, 2003 and December 31, 2002,respectively. At March 31, 2003, the American portfolio consisted ofleases of two B-757s, three B-767s, 39 MD-83s, four MD-82s and subordinateddebt in one B-777. The Company financed three B-767s during the first quarterof 2003. In addition, Boeing has a commitment to provide backstop loanfinancing for six remaining B-767 deliveries and two B-777 aircraft in themaximum amount of $434 million. The backstop loan financing for the finaldelivery payments that may be exercised on individual deliveries at the optionof American is secured by the delivered aircraft. As of March 31, 2003,American exercised the option for delivery financing on the fourth B-767aircraft, which the Company financed in April 2003.  Subsequent to March 31, 2003, American exercised the optionfor delivery financing on the fifth and sixth B-767 and the first B-777. TheCompany believes that such delivery payment loans are adequatelycollateralized.

 

18

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Aspart of American’s internal restructuring and cost reduction initiatives,American has approached its labor unions, aircraft lessors, lenders andsuppliers for cost reductions. The Company has recently been requested toreduce lease rates on certain American leases. The Company is in discussionswith American in respect of a proposed restructuring. In the event that futurenegotiations or proceedings result in the return of a substantial number ofaircraft, there could be a material adverse effect on the Company’s earnings,cash flows or financial position at least until such time as the aircraft aresold or redeployed for adequate consideration.

 

Viacao Aerea Rio-Grandense(“VARIG”) accounted for $448 million and $452 million (3.8% and 3.8%) of totalCompany portfolio at March 31, 2003 and December 31, 2002,respectively. At March 31, 2003, the VARIG portfolio consisted of twoB-737s and nine MD-11s. VARIG has defaulted on its obligations under leaseswith the Company in recent years, which has resulted in deferrals andrestructurings some of which are still ongoing. Boeing has provided the Companywith first loss deficiency and partial lease rental guarantees coveringapproximately $339 million of the VARIG obligations. Taking into account these guarantees,the Company does not expect the VARIG transactions, including the impact of anyrestructurings, to have a material adverse effect on the Company’s earnings,cash flows or financial position.

 

The Company has reviewed itsobligations due from its customers for collectibility and has establishedspecific or general allowances as deemed necessary by the Company. A number ofthe Company’s customers, including several of its larger customers, haverequested a restructuring of their transactions with the Company. While theCompany has not reached agreement on any restructuring requests that would havea material adverse impact on the Company’s earnings, cash flows or financialposition, there can be no assurance that such requests, negotiations or defaults(including bankruptcies) by the Company’s customers will not have a materialadverse impact on the Company’s earnings, cash flows or financial position.

 

*Commitments*

 

AtMarch 31, 2003, the Company had commitments to provide leasing and otherfinancing totaling $565 million. Based on historical experience,the Company anticipates that not all of these commitments will be utilized.However, if all commitments were to be funded, up to $250 million may be fundedin less than one year and an additional $315 million may be funded in one tothree years.

 

Boeing and BCSC had unfundedcommercial aircraft financing commitments at March 31, 2003 of anadditional $5.2 billion. Based on historical experience, the Companyanticipates that not all of these commitments will be utilized. However, if allcommitments were to be funded, up to $1.1 billion may be funded in less thanone year and an additional $4.1 billion may be funded in one to three years. Itis expected that the Company will ultimately fund a portion of suchcommitments. Certain of those funded may be subject to receiving such creditenhancements or other guarantee support from Boeing as the Company may requirein order to meet its underwriting and investment criteria.

 

In conjunction with prior assetdispositions and certain guarantees, at March 31, 2003, the Company wassubject to maximum guarantor obligations of $143 million; however, $7 millionof such amount has been indemnified by Boeing and is included in the amountsguaranteed by Boeing. Guarantor obligations are primarily comprised of residualvalue and other guarantees provided by the Company. Losses, if any, related tosuch exposure, net of collateral, are not expected to be significant to theCompany.

 

19

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Note 10 – Off-Balance SheetArrangements

 

The Company is a party tocertain off-balance sheet arrangements, including certain guarantorobligations and variable interests in unconsolidated entities.

 

*Guarantor Obligations*

 

The following table providesquantitative data regarding the Company’s third party guarantees. The maximumpotential payment amounts represent a “worst-case scenario,” and do notnecessarily reflect results expected by the Company. Estimated proceeds fromcollateral and recourse represent the anticipated values of assets the Companycould liquidate or receive from other parties to offset its payments underguarantees. The carrying amount of liabilities recorded on the consolidatedbalance sheets reflects the Company’s best estimate of future payments it maybe required to make as part of fulfilling its guarantor obligations.

 
| **(Dollars  in millions)** |   | **Maximum  Potential  Payments** |   | **Estimated  Proceeds  From  Collateral/Recourse** |   | **Carrying  Amount of  Liabilities(2)** |   |
|----------------------------|--------|----------------------------------|--------|----------------------------------------------------|--------|-----------------------------------------|--------|
| **March 31, 2003**         |   |                             |   |                                               |   |                                    |   |
| Residual value guarantees  |   | $                                | 111    |                                               | $      | 111                                     |   | $ | 4 |   |
| Credit guarantees          |   | 25                               |   | 25                                                 |   | —                                  |   |
| Deficiency guarantees(1)   |   | 7                                |   | —                                             |   | —                                  |   |
|                       |   | $                                | 143    |                                               | $      | 136                                     |   | $ | 4 |   |
|                       |   |                             |   |                                               |   |                                    |   |
| **December 31, 2002**      |   |                             |   |                                               |   |                                    |   |
| Residual value guarantees  |   | $                                | 90     |                                               | $      | 90                                      |   | $ | 1 |   |
| Credit guarantees          |   | 25                               |   | 25                                                 |   | —                                  |   |
| Deficiency guarantees(1)   |   | 7                                |   | —                                             |   | —                                  |   |
|                       |   | $                                | 122    |                                               | $      | 115                                     |   | $ | 1 |   |

 

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(1)             This amount is indemnified by Boeing.

(2)             Amounts included in other liabilities.

 

The Company has issued variousresidual value guarantees. Under these arrangements, the Company is obligatedto make payments to a guaranteed party in the event the related aircraft orequipment fair values fall below a specified amount at a future point in time.These obligations are collateralized principally by commercial aircraft, andexpire within the next 13 years.

 

The Company has issued creditand deficiency guarantees. Under these arrangements, the Company is obligatedto make payments to a guaranteed party in the event that payments are not madeby the original debtor or lessee. Current outstanding credit and deficiencyguarantees expire within the next nine years.

 

20

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*Material Variable Interests in Unconsolidated Entities*

 

Airlines regularly utilize aspecial purpose entity (“SPE”) called a Pass Through Trust to finance aircraft.The Pass Through Trust enables the airline to aggregate a large number ofaircraft secured notes into one trust vehicle, facilitating the issuance oflarger bonds called pass-through certificates. The most common form ofpass-through certificates issued by airlines are EETCs. EETCs provide investorswith tranched rights to cash flows from a financial instrument, as well as acollateral position in the related asset. While the underlying classes ofequipment notes vary by maturity and/or coupon depending upon tenor or level ofsubordination of the specific equipment notes and their corresponding claim onthe aircraft, the basic function of the Pass Through Trust in an EETC remains:to passively hold separate debt investments to enhance liquidity for investors,who in turn pass this liquidity benefit directly to the airline in the form ofa lower coupon and/or greater debt capacity. The Company participates inseveral EETCs as an investor.

 

The Company is a subordinatedlender to SPEs that are utilized by the airlines, lenders and loan guarantors(e.g. Export-Import Bank of the United States). The Company also utilizes otherSPEs that are fully consolidated in the Company’s financial statements. BothSPE arrangements are utilized to isolate individual transactions for legalliability, perfect security interests from the perspective of the Company and athird-party lender in certain leveraged lease transactions and realizecertain income and sales tax benefits.

 

The Company iscurrently assessing the application of FIN 46 as it relates to its variableinterests in certain pass-through certificate arrangements, such asequipment trust certificates (“ETCs”) and EETCs. While the Company is currentlynot required to consolidate the full amount of the SPEs that it lends to, andthe ETCs and EETCs in the Trusts in which it has invested, it is unable todefinitively conclude at this time whether consolidation or disclosure will berequired for these investments upon full adoption of FIN 46. The Company’sreceivables from SPEs and investment in ETCs and EETCs aggregated $664 millionat March 31, 2003, which represents the Company’s maximum exposure toeconomic loss.  Accounting losses, ifany, from period to period could differ. Such differences, if any, have not been determined.  During the three months ended March 31,2003, the Company recorded revenues of $13 million and had cash inflows of $34million relating to these investments. At March 31, 2003, the VIEs (notes,ETCs and EETCs) in which the Company has invested had total assets ofapproximately $5.8 billion and related debt (which is non-recourse to theCompany) of approximately $5.1 billion.

 

Note 11 – SegmentInformation

 

The Company’sprimary operations at March 31, 2003 included two principal financialreporting segments: Aircraft Financial Services and Commercial FinancialServices. Currently, Aircraft Financial Services is active in providing leaseand debt financing to domestic and international airlines. Commercial FinancialServices provides lease and loan financing to a broad range of commercial andindustrial customers. Other is comprised of Space and Defense FinancialServices.

 

21

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The Company evaluates theperformance of its reporting segments based on results of operations.Information about the Company’s operations in its different financial reportingsegments is summarized as follows:

 
|                                                        |   | **Three Months Ended  March 31,** |   |
|-------------------------------------------------------------|--------|----------------------------------------|--------|
| **(Dollars in millions)**                                   |   | **2003**                               |   | **2002** |   |
| Revenues:                                                   |   |                                   |   |   |   |
| Aircraft Financial Services                                 |   | $                                      | 220    |   | $ | 170 |   |
| Commercial Financial Services                               |   | 59                                     |   | 57 |   |
| Other                                                       |   | 4                                      |   | 1 |   |
|                                                        |   | $                                      | 283    |   | $ | 228 |   |
|                                                        |   |                                   |   |   |   |
| Interest expense (allocated):                               |   |                                   |   |   |   |
| Aircraft Financial Services                                 |   | $                                      | 88     |   | $ | 68 |   |
| Commercial Financial Services                               |   | 22                                     |   | 22 |   |
| Other                                                       |   | 1                                      |   | — |   |
|                                                        |   | $                                      | 111    |   | $ | 90 |   |
|                                                        |   |                                   |   |   |   |
| Depreciation expense:                                       |   |                                   |   |   |   |
| Aircraft Financial Services                                 |   | $                                      | 50     |   | $ | 35 |   |
| Commercial Financial Services                               |   | 12                                     |   | 12 |   |
| Other                                                       |   | 1                                      |   | — |   |
|                                                        |   | $                                      | 63     |   | $ | 47 |   |
|                                                        |   |                                   |   |   |   |
| Income (loss) before provision  (benefit) for income taxes: |   |                                   |   |   |   |
| Aircraft Financial Services                                 |   | $                                      | (127   | ) | $ | 52 |   |
| Commercial Financial Services                               |   | 13                                     |   | 14 |   |
| Other                                                       |   | 1                                      |   | — |   |
|                                                        |   | $                                      | (113   | ) | $ | 66 |   |

 

Theportfolio assets by segment were as follows:

 
| **(Dollars in millions)**                                             |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-----------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
| Aircraft Financial Services:                                          |   |                |   |                   |   |
| Financing leases                                                      |   | $                   | 3,630  |                   | $      | 3,670 |   |
| Notes and other receivables                                           |   | 2,026               |   | 1,964                  |   |
| Equipment under operating  leases, net of accumulated depreciation    |   | 2,667               |   | 2,672                  |   |
| Investments                                                           |   | 512                 |   | 517                    |   |
| Equipment held for sale or re-lease,  net of accumulated depreciation |   | 312                 |   | 288                    |   |
|                                                                  |   | 9,147               |   | 9,111                  |   |
|                                                                  |   |                |   |                   |   |
| Commercial Financial Services:                                        |   |                |   |                   |   |
| Financing leases                                                      |   | 840                 |   | 880                    |   |
| Notes and other receivables                                           |   | 859                 |   | 875                    |   |
| Equipment under operating  leases, net of accumulated depreciation    |   | 740                 |   | 760                    |   |
| Equipment held for sale or  re-lease, net of accumulated depreciation |   | 45                  |   | 23                     |   |
|                                                                  |   | 2,484               |   | 2,538                  |   |
| Other                                                                 |   | 100                 |   | 113                    |   |
|                                                                  |   | $                   | 11,731 |                   | $      | 11,762 |   |

 

22

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Thetotal assets by segment were as follows:

 
| **(Dollars in millions)**     |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------|--------|---------------------|--------|------------------------|--------|
| Aircraft Financial Services   |   | $                   | 9,607  |                   | $      | 9,761 |   |
| Commercial Financial Services |   | 2,630               |   | 2,678                  |   |
| Other                         |   | 113                 |   | 124                    |   |
|                          |   | $                   | 12,350 |                   | $      | 12,563 |   |

 

Includedin the portfolio balances above are $340 million and $378 million atMarch 31, 2003 and December 31 2002, respectively, of investments inentities engaged in financing accounted for under the equity method.

 

Note 12 – Transactions withBoeing

 

TheCompany entered into certain transactions with Boeing in the form ofintercompany guarantees and other subsidies.

 

Intercompany guaranteesprimarily relate to residual value guarantees, first loss deficiency guaranteesand rental guarantees. At March 31, 2003, the Company was the beneficiary under$2.8 billion of guarantees from Boeing. The Company recorded the followingactivity under the intercompany guarantee agreements:

 
|                                                                      |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------------|--------|------------------------------------|--------|
| **(Dollars in millions)**                                                 |   | **2003**                           |   | **2002** |   |
| Guarantee payments applied to income                                      |   | $                                  | 19     |   | $ | 5 |   |
| Guarantee payments applied to reduce net  asset value of related aircraft |   | 4                                  |   | 3 |   |
|                                                                      |   | 23                                 |   | 8 |   |
| Fees                                                                      |   | (1                                 | )      | (1 | ) |
| Net guarantee payments received by the  Company                           |   | $                                  | 22     |   | $ | 7 |   |

 

For a period of time, Boeinghas agreed to provide interest rate subsidies, non-guarantee concessions andrental payments on restructured third party leases. For the three months endedMarch 31, 2003 and 2002, the Company recognized income of $14 million and $9million, respectively, under such subsidies.

 

Additionally, as provided forunder the terms of the intercompany guarantee agreements, Boeing recordedcharges of $58 million and $11 million, respectively, for the three monthsended March 31, 2003 and 2002, related to asset impairments, accruedexpenses and adjustments to its allowance for losses on receivables in theCompany’s portfolio.

 

For the three months endedMarch 31, 2003 and 2002, the Company recorded revenues from Boeing,exclusive of guarantees and subsidies, of $9 million and $5 million,respectively.

 

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**Item 2****.  Management’sNarrative Analysis of Results of Operations**

 

Forward Looking Information IsSubject to Risk and Uncertainty

 

Fromtime to time, the Company may make certain statements that contain projectionsor “forward-looking” information (as defined in the Private SecuritiesLitigation Reform Act of 1995) that involve risk and uncertainty. The words“aim”, “plan”, “likely”, “believe”, “expect”, “anticipate”, “intend”,“estimate”, “will”, “should”, “could”, “may”, and other expressions thatindicate future events and trends identify forward-looking statements. Thesestatements are not guaranties of future performance and involve risks,uncertainties and assumptions that are difficult to predict. Forward-lookingstatements are based upon assumptions as to future events that may not prove tobe accurate. Actual outcomes and results may differ materially from what isexpressed or forecasted in these forward-looking statements. As a result, thesestatements speak only as of the date they were made and the Company undertakesno obligation to publicly update or revise any forward-looking statements. Certain statements in this Form 10-Q, andparticularly in the Notes to Consolidated Financial Statements in Item 1 ofPart I, Item 2 of Part I, Item 1 of Part II, and Item 5 of Part II may containforward-looking information. The subject matter of such statements may include,but not be limited to wars, the effects of the September 11, 2001terrorist attacks or future terrorist threats or attacks, the impact on theCompany of strategic decisions of Boeing, the level of new financingopportunities made available to the Company by Boeing, future earnings, costs,expenditures, losses, liquidity, residual values and various business environmenttrends including the state of the economy, in general, and the airlineindustry, in particular. In addition to those contained herein, forward-lookingstatements and projections may be made by the Company orally or in writingincluding, but not limited to, various sections of the Company’s filings withthe Securities and Exchange Commission under the Securities Act of 1933 and theSecurities Exchange Act of 1934.

 

Actualresults and trends in the future may differ materially from projectionsdepending on a variety of factors including, but not limited to, the Company’srelationship with Boeing, as well as strategic decisions of Boeing relating tothe Company, the effects of the September 11, 2001 terrorist attacks orfuture terrorist threats or attacks and their continuing impact on the airlineindustry, wars, the capitalequipment requirements of United States domestic and foreign businesses,general economic conditions, and in particular, economic conditions in theairline industry, capital availability and cost, changes in laws and taxbenefits, the tax position of Boeing (including the applicability of thealternative minimum tax), competition from other financial institutions, theCompany’s successful execution of internal operating plans, defaults or bankruptciesby customers (especially airlines), adverse developments in the value ofcollateral or owned assets (especially aircraft), regulatory uncertainties andlegal proceedings.

 

ConsolidatedResults of Operations

 

Overview

 

The Company’s net loss was $64 million for the three months endedMarch 31, 2003 compared with net income of $42 million for the same periodin 2002, a decrease of $106 million. During the first quarter of 2003, theCompany recorded pre-tax non-cash charges of $193 million (see breakdown ofcomponents in the following paragraph) in response to the much-publicizeddeterioration in the credit worthiness of its airline customers, airlinebankruptcy filings and the continued decline in commercial aircraft and generalequipment asset values.

 

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The pre-tax non-cash charges of $193 million consist of:

 

•                       A pre-tax provision for losses of $130 million to increase andstrengthen the allowance for losses on receivables,

•                       A $42 million pre-tax impairment loss primarily attributable tovaluations of certain aircraft under operating lease and equipment held forsale or re-lease, and

•                       A $21 million pre-tax charge for thewrite-off of forward-starting interest rate swaps that no longer qualified forfair value hedge accounting treatment.

 

The Company’s portfolio at March 31, 2003totaled $11.7 billion, which is essentially unchanged from December 31, 2002,compared with $10.4 billion at March 31, 2002. New business volume of $2.6billion, offset by portfolio runoff, was responsible for the increase in theportfolio between March 31, 2002 and March 31, 2003. New businessvolume is expected to decrease through 2003 as compared to 2002 as a result ofreduced demand for commercial aircraft deliveries.

 

Results of Operations

 

*Financing revenues*(revenue from financing leases, notes andother receivables and equipment under operating leases) were as follows:
|                                |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------|--------|-----------------------------------------|--------|
| **(Dollars in millions)**           |   | **2003**                                |   | **2002** |   |
| Finance lease income                |   | $                                       | 77     |   | $ | 73 |   |
| Interest income on notes receivable |   | 54                                      |   | 47 |   |
| Operating lease income              |   | 125                                     |   | 94 |   |
|                                |   | $                                       | 256    |   | $ | 214 |   |

 

Financingrevenues**for the three monthsended March 31, 2003 were $256 million compared with $214 million for the sameperiod in 2002, an increase of $42 million (19.6%). New business volume andportfolio transfers from Boeing, partially offset by lower interest ratesreflective of the current interest rate environment, was responsible for theincrease in revenue.

 

*Investment income*for the three months ended March 31, 2003 was $11 million compared with$8 million for the same period in 2002, an increase of $3 million (37.5%). Thiswas primarily due to growth in the investment portfolio by $40 million betweenthe first quarter of 2002 and 2003.

 

*Other income*for thethree months ended March 31, 2003 was $16 million compared with $5 million forthe same period in 2002, an increase of $11 million (220.0%). Higher realizedgains on derivatives and fee income were primarily responsible for the increasein 2003.

 

*Interest expense* for the three months ended March 31, 2003 was $111 million comparedwith $90 million for the same period in 2002, an increase of $21 million(23.3%). Higher debt associated with the growth in the portfolio, offset bylower effective interest rates, was primarily responsible for the increase.

 

*Depreciation expense* (on equipment under operating leases and equipment held for re-lease)for the three months ended March 31, 2003 was $63 million compared with $47million for the same period in 2002, an increase of $16 million (34.0%). Growthin depreciable assets was primarily responsible for the increase.

 

*Provision for losses* for the three months ended March 31, 2003 was $140 million comparedwith $8 million for the same period in 2002, an increase of $132 million. Theprovision for losses was comprised of a general provision and an additionalprovision. The general provision, which primarily relates to the

 

25

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growth in the receivables portfolio, was $10 million for the threemonths ended March 31, 2003 compared with $8 million for the same periodin 2002. The additional provision was $130 million for the three months endedMarch 31, 2003 and reflects the deterioration in the credit worthiness ofthe Company’s airline customers, airline bankruptcy filings and the continueddecline in commercial aircraft and general equipment asset values. Theprovision for losses maintains the allowance for losses on receivables at alevel deemed by the Company to be adequate to cover anticipated losses.

 

*Operating expenses*, which consists of general and administrative expenses, for the threemonths ended March 31, 2003 was $16 million compared with $13 million forthe same period in 2002, an increase of $3 million (23.1%). Higheradministrative and staffing costs and Boeing overhead allocation expenses wereprimarily responsible for the increase in operating expenses.

 

*Asset impairment expense* for the three months ended March 31, 2003 was $42 million comparedwith $1 million for the same period in 2002, an increase of $41 million. The$42 million impairment loss for the three months ended March 31, 2003 resultedfrom deteriorated aircraft values and reduced estimated cash flows foroperating lease assets.

 

*Other expenses* for the three months ended March 31, 2003 was $23 million compared with$3 million for the same period in 2002, an increase of $20 million. Theincrease was primarily attributable to a $21 million write-off of forward-starting interest rateswaps that no longer qualified for fair value hedge accountingtreatment, which was slightly offset by a decrease of $1 million inaircraft maintenance and storage expenses and $1 million in interest onsecurity deposits.

 

*Provision (benefit) for income taxes* for the three months ended March 31, 2003 was ($49.0) million comparedwith $24 million for the same period in 2002, a decrease of $73 million. Thepre-tax loss recorded for the three months ended March 31, 2003 was principallyresponsible for the benefit for income taxes.

 

Business Environment and Trends

 

The domestic airline industry lost an estimated $11 billion during 2002and initial estimates of first quarter 2003 domestic airline traffic indicatesubstantial declines from already depressed levels. The conflict in Iraq,continuing concerns about terrorism and Sudden Acute Respiratory Syndrome(“SARS”) are negatively impacting air travel. Most major airlines arerestructuring by reducing flights, parking aircraft and implementing costsavings initiatives, including attempting to renegotiate current laborcontracts and lease and financing agreements, in an attempt to generateacceptable profit margins.

 

The continuingdownturn in the airline industry and the resulting decline in the collateralvalues of aircraft and airline credit ratings, as well as additional bankruptcyfilings by certain airline customers included in the Company’s portfolio wereprimarily responsible for the Company recognizing non-cash charges in thefirst quarter of 2003 to strengthen the allowance for losses on receivables andrecognize impairments on certain assets. Any additional impacts may bedependent upon the duration of the current economic and airline industrydecline, or any significant defaults, repossessions or restructurings at a timewhen depressed aircraft values and lease rates make it difficult to sell orredeploy such aircraft. Aircraft valuations could decline materially ifsignificant numbers of aircraft, particularly types with relatively fewoperators, are idled on account of further airline bankruptcies orrestructurings.

 

At March 31, 2003, the Company had $357 million of assets that were heldfor sale or re-lease, of which $76 million were identified with a firm contractto sell or place on lease. Additionally, approximately $309 million of theCompany’s total portfolio is currently scheduled to come off lease during thenext twelve months and become subject to replacement into the market. Theinability to place or sell such assets of the portfolio into revenue-generatingservice could pose a potential risk to results of operations should some ofthese assets be deemed to be impaired.

 

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Capital Resources and Liquidity

 

The Company has significantliquidity requirements and sources. The Company believes that, absent a severeor prolonged economic downturn resulting in defaults materially in excess ofthose anticipated, receipts from the portfolio, together with the committedcredit facilities, are expected to cover expenses and debt payments when due.If cash provided by operations, issuance of commercial paper, borrowings underbank credit lines, term borrowings and securitizations does not provide thenecessary liquidity, the Company would be required to restrict its new businessvolume, unless it obtained access to other sources of capital at rates thatallow for a reasonable return on new business.

 

During the first quarter of2003, the Company issued $46 million in new senior debt, primarily to financenew business. The Company also relies on the issuance of commercial paper as ashort-term funding source. During the first quarter of 2003, the Company’soutstanding commercial paper balances ranged from zero to $73 million, with aweighted average effective interest rate of 1.6% and a daily averageoutstanding balance for the period of $13 million. The Company had nocommercial paper borrowings outstanding at March 31, 2003.

 

The Company’s assets and liabilities expose the Company to interestrate risk to the extent that those assets and liabilities are not exactlymatched according to currency or maturity and repricing characteristics. Thetypes and terms of borrowing and hedging instruments that are available to theCompany in the market and possible changes in asset terms limit the Company’sability to match assets and liabilities. The Company attempts to keep thismismatch risk small, partly through the use of interest rate and currencyswaps, and does not believe it is materially exposed to gains or losses due tointerest rate or currency changes.

 

Financing-relatedinterest expense for the three months ended March 31, 2003 was $111million, compared with $90 million for the same period in 2002. Leverage(debt-to-equity ratio) at March 31, 2003 was 5.6-to-1, as compared with5.7-to-1 at the end of 2002 and 5.2-to-1 at March 31, 2002.

 

Segment Operations

 

TheCompany provides financial services through two primary reporting segments:Aircraft Financial Services and Commercial Financial Services. Other iscomprised of Space and Defense Financial Services. The determination ofsegments is based upon the Company’s internal organization. TheCompany evaluates the performance of its reporting segments based on results ofoperations.

 

AircraftFinancial Services provides financing to buy or lease commercial airplanes andrepresented 78.0% of the Company’s total portfolio at March 31, 2003. Servicesprovided by Aircraft Financial Services extend to new and used Boeing andnon-Boeing airplanes. Aircraft Financial Services also assists Boeingcommercial aircraft customers in arranging financing. At March 31, 2003, theCompany owned 327 commercial aircraft and had partial ownership or securityinterest in an additional 214 aircraft, including those owned in jointventures, EETC and other investment transactions.

 

CommercialFinancial Services’ portfolio encompasses multiple industries and a wide rangeof equipment, including executive aircraft, ocean-going vessels, machine tools,shipping containers, printing presses, paper and cardboard manufacturingequipment and a wide variety of other industrial and manufacturing equipment.Commercial Financial Services represented 21.2% of the Company’s totalportfolio at March 31, 2003.

 

Space andDefense Financial Services provides lease and loan financing and advisoryservices for military-related products and commercial space systems. Thisportfolio represented 0.8% of the Company’s total portfolio at March 31, 2003.

 

27

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*Aircraft Financial Services*

 

*Revenues* for the three months ended March 31, 2003were $220 million compared with $170 million for the same period in 2002, anincrease of $50 million (29.4%). A larger portfolio, resulting from new businessvolume and portfolio transfers from Boeing, and an increase in realized gainson derivatives and fee income were primarily responsible for the increasedrevenues. This increase was slightly offset by a decrease in gains on disposalof assets.

 

*Interest expense* (allocated) for the three months endedMarch 31, 2003 was $88 million compared with $68 million for the sameperiod in 2002, an increase of $20 million (29.4%). Higher debt associated withthe growth in the portfolio, offset by lower effective interest rates, wasprimarily responsible for the increase.

 

*Depreciation expense* for the three months ended March 31, 2003was $50 million compared with $35 million for the same period in 2002, anincrease of $15 million (42.9%). Growth in depreciable assets was responsiblefor the increase.

 

*Income (loss) before provision (benefit) forincome taxes* forthe three months ended March 31, 2003 was ($127) million compared with $52million for the same period in 2002, a decrease of $179 million. In addition to the aforementioned items, income (loss) before provision(benefit) for income taxes was reduced by:

•                       $130 million of provision for losses to increase and strengthen theallowance for losses on receivables,

•                       $40 million in chargesfor impairment of portfolio assets related to certain aircraft under operatinglease and equipment held for sale or re-lease, and

•                       $21 million charge for the write-off offorward-starting interest rate swaps that no longer qualified for fair valuehedge accounting treatment.

 

*Commercial Financial Services*

 

*Revenues* for the three months ended March 31, 2003were $59 million compared with $57 million for the same period in 2002, anincrease of $2 million (3.5%). Increase in gains on disposal of assets and aslight increase in average portfolio resulting from new business were primarilyresponsible for the increase.

 

StandardsIssued and Not Yet Implemented

 

In January 2003, the FASBissued FIN 46, “Consolidation of Variable Interest Entities,” which clarifies the application of AccountingResearch Bulletin No. 51, “Consolidated Financial Statements,” relating toconsolidation of certain entities. FIN 46 requires identification of theCompany’s participation in VIEs, which are defined as entities with a level ofinvested equity insufficient to fund future activities to operate on astand-alone basis or whose equity holders lack certain characteristicsof a controlling financial interest.For an entity identified as a VIE, FIN 46 sets forth a model to evaluatepotential consolidation based on an assessment of which party to the VIE, ifany, bears a majority of the exposure to the expected losses, or stands to gainfrom a majority of the expected returns. FIN 46 also sets forth certaindisclosures regarding interests in VIEs that are deemed significant, even ifconsolidation is not required. The provisions of FIN 46 are effectiveJuly 1, 2003 for VIEs created on or before January 31, 2003, andimmediately for VIEs created after January 31, 2003. The Company iscurrently assessing the application of FIN 46.

 

28

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**Item 4****.  Controls andProcedures**

 

Evaluation of DisclosureControls and Procedures

 

TheCompany’s principal executive officer and its principal financial officer,based on their evaluation of the Company’s disclosure controls and procedures(as defined in Exchange Act Rules 13a -14 (c)) as of a date within 90 daysprior to the filing of this Quarterly Report on Form 10-Q, have concluded thatthe Company’s disclosure controls and procedures are adequate and effective forthe purposes set forth in the definition in Exchange Act rules.

 

Changes in Internal Controls

 

There wereno significant changes in the Company’s internal controls or in other factorsthat could significantly affect the Company’s internal controls subsequent to thedate of their evaluation.

 

**Part II**

 

**Item 1. Legal Proceedings**

 

Variouslegal proceedings and claims are pending or have been asserted against theCompany, many of which are covered by third parties, including insurancecompanies. The Company believes that the final outcome of such proceedings andclaims will not have a material adverse effect on its earnings, cash flows orfinancial position.

 

**Item 5. Other Information**

 

New Business Volume(1)

 

New business volume issummarized as follows:

 
|                          |   | **Three Months  Ended****March 31,** |   |
|-------------------------------|--------|-------------------------------------------|--------|
| **(Dollars in millions)**     |   | **2003**                                  |   | **2002** |   |
| Aircraft Financial Services   |   | $                                         | 354    |   | $ | 1,039 |   |
| Commercial Financial Services |   | 18                                        |   | 102 |   |
| Other                         |   | 3                                         |   | 2 |   |
|                          |   | $                                         | 375    |   | $ | 1,143 |   |

 

----

(1)               Excludes transfers from Boeing, unless newfinancing occurred in current year.

 

Portfolio balances aresummarized as follows:

 
| **(Dollars in millions)**     |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------|--------|---------------------|--------|------------------------|--------|
| Aircraft Financial Services   |   | $                   | 9,147  |                   | $      | 9,111 |   |
| Commercial Financial Services |   | 2,484               |   | 2,538                  |   |
| Other                         |   | 100                 |   | 113                    |   |
|                          |   | $                   | 11,731 |                   | $      | 11,762 |   |

 

29

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Thefollowing table summarizes the net change in total Company portfolio:

 
| **(Dollars in millions)**                 |   | **Three Months Ended  March 31,  2003** |   | **Year Ended  December 31,  2002** |   |
|-------------------------------------------|--------|----------------------------------------------|--------|-----------------------------------------|--------|
| New business volume                       |   | $                                            | 375    |                                    | $      | 3,415 |   |
| Financing assets transferred  from Boeing |   | —                                       |   | 386                                     |   |
| Portfolio impairment                      |   | (42                                          | )      | (100                                    | )      |
| Asset run-off                             |   | (301                                         | )      | (913                                    | )      |
| Depreciation expense                      |   | (63                                          | )      | (223                                    | )      |
| Net change in portfolio  balance          |   | $                                            | (31    | )                                       | $      | 2,565 |   |

 

Significant Concentrations

 

The following table includesthe five largest customers at March 31, 2003, with their related portfoliobalances at December 31, 2002:

 
|                      |   | **March 31, 2003**  |   | **December 31, 2002**     |   |
|---------------------------|--------|---------------------|--------|---------------------------|--------|
| **(Dollars in millions)** |   | **Net Asset Value** |   | **% of Total  Portfolio** |   | **Net Asset Value** |   | **% of Total  Portfolio** |   |
| AirTran                   |   | $                   | 1,222  |                      | 10.4   | % | $ | 1,069 |   | 9.1 | % |
| United                    |   | 1,187               |   | 10.1                      |   | 1,190 |   | 10.1 |   |
| Boeing                    |   | 724                 |   | 6.2                       |   | 878 |   | 7.5 |   |
| ATA                       |   | 604                 |   | 5.1                       |   | 611 |   | 5.2 |   |
| Hawaiian                  |   | 546                 |   | 4.7                       |   | 479 |   | 4.1 |   |
|                      |   | $                   | 4,283  |                      |   |   | $ | 4,227 |   |   |   |

 

TheCompany’s largest customer, AirTran Holdings, Inc. (“AirTran”),accounted for $1.2 billion and $1.1 billion of total Company portfolio atMarch 31, 2003 and December 31, 2002, respectively. Investments inAirTran EETCs, securities convertible into common stock and common stock of $42million and $40 million at March 31, 2003 and December 31, 2002,respectively, are included in the AirTran portfolio. On October 23, 2002,Boeing announced that AirTran signed an agreement with the Company to lease 22of the 24 B-717 aircraft returned by American. The B-717 aircraft are scheduledfor delivery throughout 2003, six of which were delivered during the firstquarter of 2003.

 

TheCompany’s second largest customer, United, accounted for $1.2 billion of totalCompany portfolio at both March 31, 2003 and December 31, 2002. AtMarch 31, 2003, the United portfolio was secured by security interests intwo B-767s and 13 B-777s and by an ownership and security interest in fiveB-757s. United filed for Chapter 11 bankruptcy protection on December 9,2002. On February 7, 2003, United agreed to perform under the loanagreements securing the B-767s and B-777s bringing its payments under thoseagreements current. As of April 10, 2003, United failed to make certainprincipal and rental payments due in respect of certain of the aircraftincluding the B-757s. Discussions with United are continuing on a fullrestructuring of the various transactions. Future negotiations may result inchanges to the agreements in respect of the aircraft with United. Until Unitedemerges from bankruptcy or the Company takes possession of its collateral,United has the right to reject or abandon its transactions with the Company. Inthe event that future negotiations or proceedings result in the return of asubstantial number of aircraft, there could be a material adverse effect on theCompany’s earnings, cash flows or financial position at least until such timeas the aircraft are sold or redeployed for adequate consideration.

 

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The Company’sthird largest customer, Boeing, accounted for $724 million and $878 million oftotal Company portfolio at March 31, 2003 and December 31, 2002,respectively. During the second quarter of 2002, American returned 24 B-717aircraft. Boeing guarantees a substantial portion of the rental streams ofthese aircraft; thus, in effect Boeing became the lessee under these leases. OnOctober 23, 2002, Boeing announced that AirTran signed an agreement with theCompany to lease 22 of the 24 B-717 aircraft returned by American. The 22 B-717aircraft are scheduled for delivery throughout 2003, six of which weredelivered during the first quarter of 2003. The remaining two B-717 aircraftwere placed on lease during October 2002.

 

TheCompany’s fourth largest customer, ATA, accounted for $604 million and $611million of total Company portfolio at March 31, 2003 and December 31,2002, respectively. At March 31, 2003, the ATA portfolio primarilyconsisted of ten B-757s and an investment in ATA preferred stock with aface amount of $50 million, which is included in the portfolio at its carryingvalue. In November 2002, ATA received a loan of $168 million administered bythe Airline Transportation Stabilization Board. ATA has requested that theCompany restructure certain outstanding leases by deferring a portion of itsrent payments for a limited period of time. The Company is currently innegotiations with ATA but has yet to reach a definitive agreement.

 

TheCompany’s fifth largest customer, Hawaiian, accounted for $546 million and $479million of total Company portfolio at March 31, 2003 and December 31,2002, respectively. At March 31, 2003, the Hawaiian portfolio primarilyconsisted of 13 B-717s and three B-767s. Hawaiian filed for Chapter 11bankruptcy protection on March 21, 2003. On March 31,2003, the Company filed a motion seeking appointment of an independent trusteeto administer Hawaiian during bankruptcy. Subject to final documentation andbankruptcy court approval, the Company has agreed to the terms under which itwould release Hawaiian from its obligations to take delivery of a new B-767scheduled for delivery to Hawaiian in April 2003. The Company will re-marketthat aircraft to another airline. Taking into account the specific reservesallocated at the end of the first quarter of 2003 for the Hawaiian receivables,the Company does not expect that its transactions with Hawaiian will have amaterial adverse effect on the Company’s earnings, cash flow or financialposition. In the event that futurenegotiations or proceedings result in the return of a substantial number ofaircraft, there could be a material adverse effect on the Company’s earnings,cash flows or financial position at least until such time as the aircraft aresold or redeployed for adequate consideration.

 

One of the Company’s tenlargest customers, American, accounted for $512 million and $381 million oftotal Company portfolio at March 31, 2003 and December 31, 2002,respectively. At March 31, 2003, the American portfolio consisted of leasesof two B-757s, three B-767s, 39 MD-83s, four MD-82s and subordinated debt inone B-777. The Company financed three B-767s during the first quarter of 2003.In addition, Boeing has a commitment to provide backstop loan financing for sixremaining B-767 deliveries and two B-777 aircraft in the maximum amount of $434million. The backstop loan financing for the final delivery payments that maybe exercised on individual deliveries at the option of American is secured bythe delivered aircraft. As of March 31, 2003, American exercised the option fordelivery financing on the fourth B-767 aircraft, which the Company financed inApril 2003. Subsequent to March 31, 2003, American exercised the optionfor delivery financing on the fifth and sixth B-767 and the first B-777. TheCompany believes that such delivery payment loans are adequatelycollateralized.

 

Aspart of American’s internal restructuring and cost reduction initiatives,American has approached its labor unions, aircraft lessors, lenders andsuppliers for cost reductions. The Company has recently been requested toreduce lease rates on certain American leases. The Company is in discussionswith American in respect of a proposed restructuring. In the event that futurenegotiations or proceedings result in the return of a substantial number ofaircraft, there could be a material adverse effect on the Company’s earnings,cash flows or financial position at least until such time as the aircraft aresold or redeployed for adequate consideration.

 

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Aircraft Financial ServicesPortfolio

 

The Aircraft Financial Servicesportfolio consisted of the following commercial aircraft types(1):

 
| **(Dollars in millions)**       |   | **Receivables****(2)** |   | **Operating  Leases****(2)** |   | **Investments****(5)** |   | **Held for  Sale or  Re-Lease** |   | **Total** |   |
|---------------------------------|--------|------------------------|--------|------------------------------|--------|------------------------|--------|---------------------------------|--------|-----------|--------|
| **March 31, 2003**         |   |                   |   |                         |   |                   |   |                            |   |      |   |
| B-717                           |   | $                      | 1,849  |                         | $      | 173                    |   | $                               | — |      | $      | — |   | $ | 2,022 |   |
| B-737                           |   | 86                     |   | 676                          |   | —                 |   | 37                              |   | 799       |   |
| B-747                           |   | 235                    |   | 244                          |   | —                 |   | —                          |   | 479       |   |
| B-757                           |   | 792                    |   | 340                          |   | —                 |   | 23                              |   | 1,155     |   |
| B-767                           |   | 451                    |   | 379                          |   | —                 |   | 15                              |   | 845       |   |
| B-777                           |   | 1,072                  |   | —                       |   | —                 |   | —                          |   | 1,072     |   |
| DC-9(3)                         |   | 91                     |   | 6                            |   | —                 |   | —                          |   | 97        |   |
| MD-80(3)                        |   | 381                    |   | 115                          |   | —                 |   | 25                              |   | 521       |   |
| MD-90(3)                        |   | 87                     |   | —                       |   | —                 |   | 51                              |   | 138       |   |
| DC-10(3)                        |   | 59                     |   | 40                           |   | —                 |   | 2                               |   | 101       |   |
| MD-11(3)                        |   | 176                    |   | 637                          |   | —                 |   | 150                             |   | 963       |   |
| Other Aircraft and Equipment(4) |   | 377                    |   | 57                           |   | —                 |   | 9                               |   | 443       |   |
| Asset Pools(6)                  |   | —                 |   | —                       |   | 463                    |   | —                          |   | 463       |   |
| Other(7)                        |   | —                 |   | —                       |   | 49                     |   | —                          |   | 49        |   |
|                            |   | $                      | 5,656  |                         | $      | 2,667                  |   | $                               | 512    |      | $      | 312 |   | $ | 9,147 |   |
|                            |   |                   |   |                         |   |                   |   |                            |   |      |   |
| **December 31, 2002**      |   |                   |   |                         |   |                   |   |                            |   |      |   |
| B-717                           |   | $                      | 1,838  |                         | $      | 122                    |   | $                               | — |      | $      | — |   | $ | 1,960 |   |
| B-737                           |   | 81                     |   | 705                          |   | —                 |   | 19                              |   | 805       |   |
| B-747                           |   | 240                    |   | 247                          |   | —                 |   | —                          |   | 487       |   |
| B-757                           |   | 820                    |   | 333                          |   | —                 |   | 23                              |   | 1,176     |   |
| B-767                           |   | 319                    |   | 309                          |   | —                 |   | 26                              |   | 654       |   |
| B-777                           |   | 1,076                  |   | —                       |   | —                 |   | —                          |   | 1,076     |   |
| DC-9(3)                         |   | 95                     |   | 6                            |   | —                 |   | —                          |   | 101       |   |
| MD-80(3)                        |   | 391                    |   | 118                          |   | —                 |   | 18                              |   | 527       |   |
| MD-90(3)                        |   | 119                    |   | —                       |   | —                 |   | 36                              |   | 155       |   |
| DC-10(3)                        |   | 62                     |   | 57                           |   | —                 |   | 4                               |   | 123       |   |
| MD-11(3)                        |   | 175                    |   | 717                          |   | —                 |   | 152                             |   | 1,044     |   |
| Other Aircraft and Equipment(4) |   | 418                    |   | 58                           |   | —                 |   | 10                              |   | 486       |   |
| Asset Pools(6)                  |   | —                 |   | —                       |   | 474                    |   | —                          |   | 474       |   |
| Other(7)                        |   | —                 |   | —                       |   | 43                     |   | —                          |   | 43        |   |
|                            |   | $                      | 5,634  |                         | $      | 2,672                  |   | $                               | 517    |      | $      | 288 |   | $ | 9,111 |   |

 

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(1)               Excludesexecutive aircraft of $940 million and $950 million at March 31, 2003 andDecember 31, 2002, respectively, which are included in the CommercialFinancial Services portfolio.

(2)               Includesowned aircraft and aircraft collateralizing receivables, some of which aresubordinated.

(3)               Out of production, but currently supported byBoeing with respect to parts and other services.

(4)               Some of these aircraft are out of production, butare supported by the manufacturer or other third party part and serviceproviders.

(5)               Represents aircraft collateralizing EETCs, ETCsand other trust-related interests and other investments held by theCompany.

(6)    Investmentsare supported by asset pools secured by various commercial aircraft types.

(7)    Representsinvestments in mandatorily redeemable preferred stock, common stock and bonds.

 

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At March 31, 2003, theCompany owned 327 commercial aircraft and had partial ownership or securityinterest in an additional 214 aircraft, including those owned in jointventures, EETC and other investment transactions.

 

AtMarch 31, 2003, $8.2 billion (94.9%) of the Aircraft Financial Servicesportfolio, excluding investments, was collateralized by Boeing products.

 

At March 31, 2003, theAircraft Financial Services portfolio (excluding investments) was comprised ofthe following aircraft vintages:

 

| 2003 – 1999                               |   | 58.5  | %      |
|------------------------------------------------|--------|-------|--------|
| 1998 – 1994                               |   | 15.1  |   |
| 1993 – 1989                               |   | 15.9  |   |
| 1988 – 1984                               |   | 4.9   |   |
| 1983 and older                                 |   | 2.5   |   |
| Secured by pooled assets and  other collateral |   | 3.1   |   |
|                                           |   | 100.0 | %      |

 

Guarantees

 

AtMarch 31, 2003, the Company was the beneficiary under $2.8 billion ofguarantees with respect to its portfolio relating to transactions totaling $4.1billion. Any guarantee call by the Company would be net of realization ofunderlying residual values, partial rent payments, re-lease rental payments orother mitigating value received.

 

Theguarantees in favor of the Company are either full or partial in nature andinclude, but are not limited to, residual value guarantees, first lossdeficiency guarantees and rental guarantees. Residual value guarantees providea specified asset value at the end of a lease agreement in the event of adecline in market value of the financed aircraft. First loss deficiencyguarantees cover a specified portion of the Company’s losses on aircraftfinanced by the Company in the event of a loss upon disposition of the aircraftfollowing a default by the lessee. Rental guarantees are whole or partialguarantees covering the Company against the lessee’s failure to pay rent underthe lease agreement or the Company’s inability to re-lease these aircraft at orabove a specified rent level.

 

Thefollowing table summarizes such guarantees:

 
| **(Dollars in millions)** |   | **Domestic  Airlines** |   | **Foreign  Airlines** |   | **Domestic  Equipment** |   | **Other** |   | **Total** |   |
|---------------------------|--------|------------------------|--------|-----------------------|--------|-------------------------|--------|-----------|--------|-----------|--------|
| Amounts guaranteed by:    |   |                   |   |                  |   |                    |   |      |   |      |   |
| Boeing and subsidiaries   |   | $                      | 2,243  |                  | $      | 451                     |   | $         | 59     |      | $      | 6 |   | $ | 2,759 |   |
| Other(1)                  |   | 15                     |   | —                |   | —                  |   | —    |   | 15        |   |
|                      |   | $                      | 2,258  |                  | $      | 451                     |   | $         | 59     |      | $      | 6 |   | $ | 2,774 |   |

 

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(1)               Excludes guarantees made by entitiesaffiliated with the primary obligor.

 

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Guarantee amounts by aircrafttype or equipment at March 31, 2003 are summarized as follows:

 
| **(Dollars in millions)**                |   | **Guarantee** |   | **Net Asset Value** |   |
|------------------------------------------|--------|---------------|--------|---------------------|--------|
| B-717                                    |   | $             | 1,264  |                | $      | 1,955 |   |
| Out of production twin-aisle  aircraft   |   | 451           |   | 754                 |   |
| Out of production single-aisle  aircraft |   | 101           |   | 148                 |   |
| Other Boeing and regional  aircraft      |   | 893           |   | 1,199               |   |
| Other equipment                          |   | 59            |   | 59                  |   |
| Other                                    |   | 6             |   | 6                   |   |
|                                     |   | $             | 2,774  |                | $      | 4,121 |   |

 

Duringthe three months ended March 31, 2003, the Company recognized income of$19 million under these guarantees, all of which were from Boeing.

 

Portfolio by Region

 

AtMarch 31, 2003, portfolio net asset values were represented in thefollowing regions:

 
| **(Dollars in millions)** |   | **Aircraft  Financial  Services** |   | **Commercial  Financial  Services** |   | **Other** |   | **Total** |   | **% of Total  Portfolio** |   |
|---------------------------|--------|-----------------------------------|--------|-------------------------------------|--------|-----------|--------|-----------|--------|---------------------------|--------|
| **Region**                |   |                              |   |                                |   |      |   |      |   |                      |   |
| United States             |   | $                                 | 6,307  |                                | $      | 1,998     |   | $         | 100    |                      | $      | 8,405 |   | 71.7 | % |
| Europe                    |   | 1,101                             |   | 82                                  |   | —    |   | 1,183     |   | 10.1                      |   |
| Latin America             |   | 759                               |   | 259                                 |   | —    |   | 1,018     |   | 8.7                       |   |
| Asia                      |   | 805                               |   | 130                                 |   | —    |   | 935       |   | 8.0                       |   |
| Africa                    |   | 67                                |   | —                              |   | —    |   | 67        |   | 0.6                       |   |
| Australia                 |   | 65                                |   | —                              |   | —    |   | 65        |   | 0.5                       |   |
| Canada                    |   | 43                                |   | 15                                  |   | —    |   | 58        |   | 0.4                       |   |
|                      |   | $                                 | 9,147  |                                | $      | 2,484     |   | $         | 100    |                      | $      | 11,731 |   | 100.0 | % |

 

**Item6.  Exhibits and Reports on Form 8-K**

 
| A.     | Exhibits             |                                                                                              |                                                                                                                                                                                                                                                                                  |
|--------|----------------------|---------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                 |                                                                                              |
|   | Exhibit 12           |                                                                                              | Computation  of Ratio of Income to Fixed Charges.                                                                                                                                                                                                                                     |
|   |                 |                                                                                              |
|   | Exhibit 99.1         |                                                                                              | Certification  of President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. This document is being  furnished in accordance with Securities and Exchange Commission Release  Nos. 33-8212 and 34-47551.               |
|   |                 |                                                                                              |
|   | Exhibit 99.2         |                                                                                              | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This document is  being furnished in accordance with Securities and Exchange Commission Release  Nos. 33-8212 and 34-47551. |
|   |                 |                                                                                              |
| B.     | Reports on  Form 8-K |
|   |                 |                                                                                              |
|   | 1.                   | Form 8-K  dated January 30, 2003, to release earnings for the year ended December 31,  2002. |
|        |                      |                                                                                                   |                                                                                                                                                                                                                                                                                       |  |

 

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Signatures

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, its principal financial officerand by its principal accounting officer, thereunto duly authorized.

 
|        |   | **Boeing Capital Corporation**             |
|-------------|--------|--------------------------------------------|
|        |   |                                       |
| May 5, 2003 |   | /s/ STEVEN  W. VOGEDING                    |   |
|        |   |                                       |
|        |   | Steven W.  Vogeding                        |
|        |   | Vice  President and Chief Financial        |
|        |   | Officer  (Principal Financial Officer) and |
|        |   | Registrant’s  Authorized Officer      |
|        |   |                                       |
|        |   | /s/ JILL C.  RICHLING                      |   |
|        |   |                                       |
|        |   | Jill C.  Richling                          |
|        |   | Controller  (Principal Accounting Officer) |

 

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CERTIFICATION

(pursuant to Rule 13a-14 of the Securities ExchangeAct of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

 

I, James F. Palmer, certify that:

1.                                       I have reviewed this quarterly report onForm 10-Q of Boeing Capital Corporation;

2.                                       Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

4.                                       The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controlprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

a)                                     designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

b)                                    evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

c)                                     presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

5.                                       The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

a)                                     all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b)                                    any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| May 5, 2003 | /s/ JAMES F. PALMER    |   |
|-------------|------------------------|--------|
|        |                   |
|        | James F. Palmer        |
|        | President and Director |

 

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CERTIFICATION

(pursuantto Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

 

I, Steven W. Vogeding, certify that:

1.                                       I have reviewed this quarterly report on Form 10-Q of Boeing CapitalCorporation;

2.                                       Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

3.                                       Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this quarterlyreport;

4.                                       The registrant’s other certifying officer andI are responsible for establishing and maintaining disclosure controlprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

a)                                     designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this quarterly report isbeing prepared;

b)                                    evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

c)                                     presented in this quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.                                       The registrant’s other certifying officer andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

a)                                     all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and have identifiedfor the registrant’s auditors any material weaknesses in internal controls; and

b)                                    any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

6.                                       The registrant’s other certifying officer andI have indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantly affect internal controls subsequentto the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

 
| May 5, 2003 | /s/ STEVEN W. VOGEDING                      |   |
|-------------|---------------------------------------------|--------|
|        |                                        |
|        | Steven W.  Vogeding                         |
|        | Vice  President and Chief Financial Officer |

 

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