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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 1996
Commission file number 1-442
THE BOEING COMPANY
7755 East Marginal Way South
Seattle, Washington 98108
Telephone: (206) 655-2121
State of incorporation: Delaware
IRS identification number: 91-0425694
Securities registered pursuant to Section 12(b) of the Act:
Class of Security: Registered on
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Common Stock, $5 par value New York Stock Exchange
The registrant has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and has been subject to such filing requirements
for the past 90 days.
A disclosure of one delinquent filer pursuant to Item 405 of
regulation S-K will be contained in the registrant's definitive proxy
statement incorporated by reference in part III of this Form 10-K.
As of January 31, 1997, there were 360,537,365 common shares
outstanding, and the aggregate market value of the common shares
(based upon the closing price of these shares on the New York Stock
Exchange) held by nonaffiliates of the registrant was approximately
$38.6 billion.
Part I and Part II incorporate information by reference to certain
portions of the Company's 1996 Annual Report to Shareholders. Part III
incorporates information by reference to the registrant's definitive
proxy statement, to be filed with the Securities and Exchange
Commission within 120 days after the close of the fiscal year.
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PART I
Item 1. Business
The Boeing Company, together with its subsidiaries (herein referred
to as the "Company"), is one of the world's major aerospace firms. The
Company operates in two principal industries: commercial aircraft, and
defense and space. Commercial aircraft operations - conducted through
Boeing Commercial Airplane Group - involve development, production and
marketing of commercial jet aircraft and providing related support
services to the commercial airline industry worldwide. Defense and
space operations - conducted through Boeing Defense & Space Group -
involve research, development, production, modification and support of
military aircraft and helicopters and related systems, space and
missile systems, rocket engines, and information services, primarily
through U.S. Government contracts. Revenues, operating profits and
other financial data of the Company's industry segments for the three
years ended December 31, 1996, are set forth on pages 61 and 62 of the
Company's 1996 Annual Report to Shareholders and are incorporated
herein by reference.
With respect to the commercial aircraft segment, the Company is a
leading producer of commercial aircraft and offers a family of
commercial jetliners designed to meet a broad spectrum of passenger
and cargo requirements of domestic and foreign airlines. This family
of commercial jet aircraft currently includes the 737 and 757
standard-body models and the 767, 747 and 777 wide-body models.
The worldwide market for commercial jet aircraft is predominantly
driven by long-term trends in airline passenger traffic. The principal
factors underlying long-term traffic growth are sustained economic
growth in developed and emerging countries and political stability.
Demand for the Company's commercial aircraft is further influenced by
airline industry profitability, world trade policies, government-to-
government relations, environmental constraints imposed upon airplane
operations, technological changes, and price and other competitive
factors.
Commercial jet aircraft are normally sold on a firm fixed-price
basis with an indexed price escalation clause. The Company's ability
to deliver jet aircraft on schedule is dependent upon a variety of
factors, including availability of raw materials, performance of
suppliers and subcontractors, and regulatory certification. The
introduction of new commercial aircraft programs and major derivatives
involves increased risks associated with meeting development,
production and certification schedules.
The Company's commercial aircraft sales are subject to intense
competition, including foreign companies which are nationally owned or
subsidized. To meet competition, the Company maintains a program
directed toward continually enhancing the performance and capability
of its products and has a family of commercial aircraft to meet varied
and changing airline requirements. Since the 1970s, the Company has
maintained approximately a 60% share of the available commercial jet
aircraft market.
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The Company continually evaluates opportunities to improve current
models, and assesses the marketplace to ensure that its family of
commercial jet aircraft is well positioned to meet future requirements
of the airline industry. The fundamental strategy is to maintain a
broad product line responsive to changing market conditions by
maximizing commonality among the Boeing family of commercial aircraft.
Additionally, the Company is determined to continue to lead the
industry in customer satisfaction by offering products with the
highest standards of quality, safety, technical excellence, economic
performance and in-service support.
The major focus of commercial aircraft development activities over
the past three years has been the 777 wide-body twinjet, which entered
service in May 1995, and the 737-600/700/800 family. The new 777 model
is designed to meet airline requirements for an efficient,
comfortable, high-capacity jetliner to be used in domestic and
regional markets internationally. Deliveries of the extended-range
version 777-200 will begin in early 1997, to be followed in 1998 by
the 777-300 version with 20% greater passenger-carrying capability.
Development of the 737-600/700/800 family of short-to-medium-range
jetliners began in 1993. These new 737s will provide greater range,
increased speed, and reduced noise and emissions while maintaining 737
family commonality. The 737-700, the middle-sized member of the family,
will be the first version to be placed into service, with initial
deliveries scheduled for late 1997. The 737-800, a larger version, is
currently scheduled to be delivered in early 1998. Initial delivery of
the smallest version, the 737-600, is currently scheduled for late
1998.
In 1996 the Company launched a new version of the 757 twinjet. The
new 757-300, with approximately 20% more seating, will have about 10%
lower seat-mile operating costs than the -200, which already has the
lowest seat-mile operating cost in its market segment. First delivery
is scheduled for 1999.
In January 1997, the Company began offering for sale a new extended-
range version of the 767. The proposed 767-400ERX, which could enter
commercial service as early as the year 2000, will be capable of
carrying over 300 passengers in a two-class configuration.
The Company has been working with some of the world's largest
airlines to explore the development of aircraft capable of carrying
more than 500 passengers over longer ranges than the current 747
family. However, sufficient market demand has not developed to justify
committing the very substantial investment levels required to develop
either an all new aircraft or significantly larger versions of the 747.
The timing of a decision to proceed with a 747 derivative aircraft and
the development schedule depend on customer demand and the Company's
ability to achieve favorable long-term financial returns on the
substantial development costs that would be required. Other new
products under consideration include larger and longer-range versions
of the 777.
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Effective December 6, 1996, the Company acquired Rockwell's aerospace
and defense business by issuing 9.2 million shares of common stock
valued at $875 million and assuming debt valued at $2,180 million. The
acquired business units are currently operating under the name Boeing
North American, Inc., and are expected to strengthen the strategic
position of the Company's defense and space segment, particularly with
respect to space systems and information/battle management systems.
This transaction has been accounted for under the purchase method. The
assets and liabilities have been recorded at fair value, with excess
purchase price recorded as goodwill. Goodwill is amortized on a
straight-line basis over 30 years.
The major product groups of Boeing North American are rocket
propulsion including the Space Shuttle main engine; Space Station
electric power; Space Shuttle integration, logistics and operations;
Global Positioning System satellites; ICBM systems; tactical missiles;
sensors; B1-B bomber; commercial aerostructures; aircraft and
helicopter modifications; airborne laser and electro-optics; space
defense; and advanced programs. The Rockwell aerospace and defense
units had fiscal 1996 annual sales of $2.5 billion, excluding sales to
Boeing, with approximately 21,000 employees.
On December 15, 1996, the Company and McDonnell Douglas Corporation
jointly announced the signing of a merger agreement. Pending government
and shareholder approvals, McDonnell Douglas shareholders will receive
0.65 of a share of Boeing common stock for each share of McDonnell
Douglas common stock pursuant to which McDonnell Douglas will merge
with Boeing in a stock-for-stock transaction. The merger is intended to
be accounted for as a pooling of interests. The merger would result in
the issuance of approximately 138 million additional shares of the
Company. The transaction, which is subject to approval by the McDonnell
Douglas shareholders, the authorization of additional shares by Company
shareholders and approvals by certain regulatory agencies, is expected
to be completed in the third quarter of 1997. The merged companies will
operate under the name of The Boeing Company. Combined sales for the
companies would have been approximately $36,500 million in 1996 before
consideration of intercompany transactions and conforming accounting
methods.
The Company's defense and space segment is highly sensitive to
changes in national priorities and U.S. Government defense and space
budgets. The principal contributors to defense and space sales in 1996
consisted of the International Space Station program (for which the
Company has the prime contractor role), F-22 fighter aircraft
developmental production activities, E-3 AWACS (Airborne Warning and
Control System) updates, 767 AWACS development and manufacturing for
the Government of Japan, V-22 Osprey tiltrotor aircraft development
and test activities, production and remanufacturing of CH-47
helicopters, various facilities management and information services
contracts (identified as "Other industries" prior to 1995), B-2 bomber
subcontract work, and RAH-66 Comanche helicopter development
activities. Classified projects for the U.S. Government also continued
to contribute to defense and space segment revenues.
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Significant restructuring in the form of mergers, acquisitions and
strategic alliances are continuing by companies throughout the
aerospace industry to maintain or increase market share, to reduce
costs or obtain economies of scale, and to be competitive for new
business opportunities. Joint venture arrangements with other
companies are expected to continue to be common for major
developmental programs and follow-on production activities. Currently,
the Company's activities in the F-22, V-22, RAH-66, Sea Launch, and
Civil Tiltrotor developmental programs are under joint venture
arrangements. Sea Launch program team members include Kvaerner a.s. of
Norway, RSC-Energia of Russia, and Yuzhnoye of Ukraine. In general,
business risk is greater when working with joint venture partners
located in foreign countries. The Company is also a 50/50 partner with
Lockheed Martin in United Space Alliance (USA) to operate NASA's
manned spaceflight activities.
Defense and space developmental programs are normally performed
under cost-reimbursement-type contracts, although certain past
developmental programs were under fixed-price arrangements.
Developmental contracts often contain incentives related to cost
performance and/or awards for other contract milestone
accomplishments. Production programs are generally performed under
firm fixed-price contracts or fixed-price contracts containing
incentive provisions related to costs. During 1995 and 1996, an
increased percentage of the Company's defense and space business was
contracted under cost-reimbursement-type contracts. The current major
developmental programs, principally the International Space Station,
F-22 fighter, V-22 Osprey tiltrotor aircraft and RAH-66 Comanche
helicopter, primarily involve cost-reimbursement-type contracts.
The U.S. Government defense market environment is one in which
continued intense competition among defense contractors can be
expected, especially in light of U.S. Government budget constraints.
The Company's ability to successfully compete for and retain such
business is highly dependent on its technical excellence, demonstrated
management proficiency, strategic alliances, and cost-effective
performance.
Company-sponsored research and development not recoverable under
contracts and charged directly to earnings as incurred amounted to
$1.2 billion, $1.3 billion and $1.7 billion in 1996, 1995 and 1994,
respectively. Based on current programs and plans, research and
development expense for 1997 is expected to be comparable with the
1995 and 1996 levels.
The Company's backlog of firm contractual orders (in billions) at
December 31 follows:
1996 1995
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Commercial aircraft $79.2 $66.5
Defense and space 8.5 5.8
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Total $87.7 $72.3
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Not included in contractual backlog are purchase options and
announced orders for which definitive contracts have not been executed
and orders from customers which have filed for bankruptcy protection.
Additionally, U.S. Government and foreign military firm backlog is
limited to amounts obligated to contracts. Unobligated contract
funding not included in backlog at December 31, 1996 and 1995, totaled
$9.0 billion and $7.6 billion.
In evaluating the Company's contractual backlog for commercial
customers, certain risk factors should be considered. Approximately
25% of the commercial aircraft backlog units are scheduled for
delivery beyond 1999. Changes in the economic environment and the
financial condition of airlines sometimes result in customer requests
for rescheduling or cancellation of contractual orders.
Contracts with the U.S. Government are subject to termination for
default or for convenience by the Government if deemed in its best
interests. Contracts which are terminated for convenience generally
provide for payments to a contractor for its costs and a proportionate
share of profit for work accomplished through the date of termination.
Contracts which are terminated for default generally provide that the
Government pays only for the work it has accepted, can require the
contractor to pay the difference between the original contract price
and the cost to reprocure the contract items net of the value of the
work accepted from the original contractor, and can hold a contractor
liable for damages.
Historically, the Company has not experienced significant shortages
of raw materials essential to its business. Although the Company does
not anticipate any shortages of critical commodities over the longer
term, this is difficult to assess because many factors causing such
possible shortages are outside its control.
The Company is highly dependent on its suppliers and subcontractors
in order to meet commitments to its customers, and many major
components and product equipment items are procured or subcontracted
on a sole-source basis with a number of domestic and foreign
companies. The Company maintains an extensive qualification and
performance surveillance system to control risk associated with such
reliance on third parties. Although the Company has occasionally
experienced problems with supplier and subcontractor performance, none
has resulted in material production delays.
While the Company owns numerous patents and has licenses under
patents owned by others relating to its products and their
manufacture, it does not believe that its business would be materially
affected by the expiration of any patents or termination of any patent
license agreements. The Company has no trademarks, franchises or
concessions that are considered to be of material importance to the
conduct of its business.
The Company is subject to federal, state and local laws and
regulations designed to protect the environment and to regulate the
discharge of materials into the environment. The Company believes its
policies, practices and procedures are properly designed to prevent
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unreasonable risk of environmental damage and the consequent financial
liability to the Company. Compliance with environmental laws and
regulations requires continuing management effort and expenditures by
the Company. Compliance with environmental laws and regulations has
not had in the past, and, the Company believes, will not have in the
future, material effects on the capital expenditures, earnings, or
competitive position of the Company. (See Item 3, Legal Proceedings,
for additional information regarding environmental regulation.)
The Company is subject to business and cost classification
regulations associated with its U.S. Government defense and space
contracts. Violations can result in civil, criminal or administrative
proceedings involving fines, compensatory and treble damages,
restitution, forfeitures, and suspension or debarment from Government
contracts.
Sales outside the United States (principally export sales from
domestic operations) by geographic area are included on page __ of the
Company's 1996 Annual Report to Shareholders and incorporated herein
by reference. Less than 1% of total sales were derived from non-U.S.
operations of the Company for each of the three years in the period
ended December 31, 1996. Approximately 60% of the Company's
contractual backlog value at December 31, 1996, was with non-U.S.
customers. Sales outside the United States are influenced by U.S.
Government foreign policy, international relationships, and trade
policies by governments worldwide. Relative profitability is not
significantly different from that experienced in the domestic market.
Approximately 11% of accounts receivable and customer financing
combined consisted of amounts due from customers outside the United
States. Substantially all of these amounts are payable in U.S.
dollars, and, in management's opinion, related risks are adequately
covered by allowance for losses. The Company has not experienced
materially adverse financial consequences as a result of sales and
financing activities outside the United States.
The Company had approximately 143,000 employees at January 31,
1997, including approximately 1,600 in Canada and 1,500 in Australia.
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Item 2. Properties
The locations and floor areas of the Company's principal operating
properties at January 1, 1997, are indicated in the following table.
Floor area in
thousands of square feet
------------------------
Company-
owned Leased
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United States:
Seattle, Washington, and
surrounding area 45,201 4,269
Wichita, Kansas 12,046 1,093
Greater Los Angeles area 5,908 38
Philadelphia, Pennsylvania 3,462 202
Portland, Oregon 1,093
Palmdale, California 1,069
Huntsville, Alabama 686 77
Oakridge, Tennessee 492
Sunnyvale, California 461 356
Spokane, Washington 437 44
Corinth & Irving, Texas 431 36
Duluth, Georgia 340 34
Vienna, Virginia 330 194
Chicago, Illinois 204
Glasgow, Montana 179
Tulsa, Oklahoma 166 1,134
Australia 764 274
Canada:
Winnipeg, Manitoba 522 40
Arnprior, Ontario 162 53
With the exception of the Glasgow Industrial Airport located in
Glasgow, Montana, which is Company-owned, runways and taxiways used by
the Company are located on airport properties owned by others and are
used by the Company jointly with others. The Company's rights to use
such facilities are provided for under long-term leases with
municipal, county or other government authorities. In addition, the
U.S. Government furnishes the Company certain office space,
installations and equipment at Government bases for use in connection
with various contract activities.
Facilities at the major locations support both principal industry
segments. Work related to a given program may be assigned to various
locations, based upon periodic review of shop loads and production
capability.
The Company's principal properties are well maintained and in good
operating condition. Unused or under-utilized facilities are not
considered significant. Existing facilities are sufficient to meet the
Company's near-term operating requirements. No major plant expansions
are currently planned.
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Item 3. Legal Proceedings
Various legal proceedings, claims and investigations related to
products, contracts and other matters are pending against the Company.
Most significant legal proceedings are related to matters covered by
insurance. Major contingencies are discussed below.
In January 1991, the Company received from the U.S. Government a
notice of partial termination for default which terminated most of the
work required under contracts to develop and install a new air defense
system for Saudi Arabia, known as the Peace Shield program. During the
second quarter of 1996, the Peace Shield program issues were settled,
and all terminations for default have been converted to terminations
for convenience. The settlement resulted in the release of all
Government claims, including any potential Government claim for excess
cost of reprocurement or other damages.
The Company is subject to federal and state requirements for
protection of the environment, including those for discharge of
hazardous materials and remediation of contaminated sites. Due in part
to their complexity and pervasiveness, such requirements have resulted
in the Company being involved with related legal proceedings, claims
and remediation obligations since the 1980s.
The Company routinely assesses, based on in-depth studies, expert
analyses and legal reviews, its contingencies, obligations and
commitments for remediation of contaminated sites, including
assessments of ranges and probabilities of recoveries from other
responsible parties who have and have not agreed to a settlement and
of recoveries from insurance carriers. The Company's policy is to
immediately accrue and charge to current expense identified exposures
related to environmental remediation sites based on conservative
estimates of investigation, cleanup and monitoring costs to be
incurred.
The costs incurred and expected to be incurred in connection with
such activities have not had, and are not expected to have, a material
impact to the Company's financial position. With respect to results of
operations, related charges have averaged less than 2% of annual net
earnings. Such accruals as of December 31, 1996, without consideration
for the related contingent recoveries from insurance carriers, are
less than 2% of total liabilities.
Because of the regulatory complexities and risk of unidentified
contaminated sites and circumstances, the potential exists for
environmental remediation costs to be materially different from the
estimated costs accrued for identified contaminated sites. However,
based on all known facts and expert analyses, the Company believes it
is not reasonably likely that identified environmental contingencies
will result in additional costs that would have a material adverse
impact to the Company's financial position or operating results and
cash flow trends.
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The Company is subject to U.S. Government investigations of its
practices from which civil, criminal or administrative proceedings
could result. Such proceedings could involve claims by the government
for fines, penalties, compensatory and treble damages, restitution
and/or forfeitures. Under government regulations, a company, or one or
more of its operating divisions or subdivisions, can also be suspended
or debarred from government contracts, or lose its export privileges,
based on the results of investigations. The Company believes, based
upon all available information, that the outcome of such government
disputes and investigations will not have a material adverse effect on
its financial position or continuing operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders
during the quarter ended December 31, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Information required by this item is included on page 66 and the
inside back cover of the Company's 1996 Annual Report to Shareholders
and is incorporated herein by reference.
Item 6. Selected Financial Data
Information required by this item is included on page 64 of the
Company's 1996 Annual Report to Shareholders and is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Information required by this item is included on pages 30-42 of the
Company's 1996 Annual Report to Shareholders and is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary
data, included in the Company's 1996 Annual Report to Shareholders at
the pages indicated, are incorporated herein by reference:
Consolidated Statements of Net Earnings - years ended
December 31, 1996, 1995 and 1994: Page 42.
Consolidated Statements of Financial Position - December 31,
1996 and 1995: Page 43.
Consolidated Statements of Cash Flows - years ended December
31, 1996, 1995 and 1994: Page 44.
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Notes to Consolidated Financial Statements: Pages 45-66.
Independent Auditors' Report: Page 41.
Supplementary data regarding quarterly results of operations:
Page 67.
Information regarding the commercial program method of accounting
is included in Exhibit (99).
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers
No family relationships exist between any of the executive
officers, directors or director nominees. The executive officers of
the Company as of February 24, 1997, are as follows:
Positions and offices held
Name Age and business experience
---- --- --------------------------
Philip M. Condit 55 Chairman of the Board since
February 1, 1997. Chief Executive
Officer since April 1996. Director
since August 1992. President from
August 1992 through January 1997.
Prior thereto, Executive Vice
President and General
Manager - 777 Division, Boeing
Commercial Airplane Group, from
1989.
Douglas P. Beighle 64 Senior Vice President of the
Company since 1986.
Lawrence W. Clarkson 58 Senior Vice President of the
Company since April 1994.
President of Boeing Enterprises
since February 1, 1997. Prior
thereto, Senior Vice President
- Planning & International
Development since April 1994.
Prior thereto, Vice President -
Planning & International
Development from 1992.
Boyd E. Givan 60 Senior Vice President and Chief
Financial Officer since 1990.
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Positions and offices held
Name Age and business experience
---- --- --------------------------
C. Gerald King 62 Senior Vice President of the
Company since May 1993. President
of Boeing Defense & Space Group
from May 1993 through January 13,
1997. Prior thereto, Executive
Vice President, Boeing Defense
& Space Group, from 1991.
Larry G. McKean 61 Senior Vice President - Human
Resources since April 1994. Prior
thereto, Vice President - Human
Resources from 1990.
Alan R. Mulally 51 Senior Vice President of the
Company since February 24, 1997.
President of Boeing Defense &
Space Group since January 13, 1997.
Prior thereto, Senior Vice President
of Airplane Development and
Definition, Boeing Commercial
Airplane Group, from 1994. Prior
thereto, Vice President and General
Manager of the 777 Division, from
1992.
John D. Warner 57 Senior Vice President of the Company
since February 24, 1997. President
of Boeing Information & Support
Services since April 1995. Prior
thereto, President of Boeing
Computer Services from July 1993.
Prior thereto, Executive Vice
President of Boeing Computer
Services from March 1993. Prior
thereto, Vice President - Computing,
Boeing Commercial Airplane Group,
from 1991.
Ronald B. Woodard 53 Senior Vice President of the Company
and President of Boeing Commercial
Airplane Group since December 1993.
Prior thereto, Executive Vice
President, Boeing Commercial
Airplane Group, from March 1993.
Prior thereto, Vice President and
General Manager - Renton Division,
Boeing Commercial Airplane Group,
from 1991.
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Other information required by Item 10 involving the identification
and election of directors is incorporated herein by reference to the
registrant's definitive proxy statement, which will be filed with the
Commission within 120 days after the close of the fiscal year.
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and
Management *
Item 13. Certain Relationships and Related Transactions *
* Information required by Items 11, 12, and 13 is incorporated herein
by reference to the registrant's definitive proxy statement, which
will be filed with the Commission within 120 days after the close
of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) List of documents filed as part of this report:
1. Financial Statements
All consolidated financial statements of the Company as set
forth under Item 8 of this report on Form l0-K.
2. Financial Statement Schedules
Schedule Description Page
-------- ----------- ----
II Valuation and Qualifying Accounts 19
The auditors' report with respect to the above-listed financial
statement schedule appears on page 18 of this report. All other
financial statements and schedules not listed are omitted
either because they are not applicable, not required, or the
required information is included in the consolidated financial
statements.
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3. Exhibits
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
(i) Agreement and Plan of Merger dated as of July 31,
1996, among Rockwell International Corporation, The
Boeing Company and Boeing NA, Inc. (Exhibit 2.1 to
the Company's Registration Statement on Form S-4
(File No. 333-15001) filed October 29, 1996 (herein
referred to as "Form S-4").)
(ii) Agreement and Plan of Merger, dated as of December
14, 1996, among The Boeing Company, West Acquisition
Corp. and McDonnell Douglas Corporation. Filed
herewith.
(3) Articles of Incorporation and By-Laws.
(i) Restated Certificate of Incorporation. (Exhibit (3)
of the Company's Annual Report on Form 10-K (File
No. 1-442) for the year ended December 31, 1991
(herein referred to as "1991 Form 10-K").)
(ii) By-Laws, as amended and restated on August 26, 1996.
(Exhibit (3)(i) to the Form S-4.)
(4) Instruments Defining the Rights of Security Holders,
Including Indentures.
(i) Indenture, dated as of August 15, 1991, between the
Company and The Chase Manhattan Bank (National
Association), Trustee. (Exhibit (4) to the Company's
Current Report on Form 8-K (File No. 1-442) dated
August 27, 1991.)
(ii) Rights Agreement, dated as of July 27, 1987, between
the Company and The First National Bank of Boston,
Rights Agent. (Exhibit 1 to the Company's
Registration Statement on Form 8-A (File No. 1-442)
filed July 20, 1987.)
(10) Material Contracts.
o The Boeing Company Bank Credit Agreements.
(i) Agreement Amended and Restated as of September 27,
1996 [the Seven-Year Agreement]. (Exhibit 10.18 to
the Form S-4.)
(ii) Agreement Amended and Restated as of September 27,
1996 [the 364-Day Agreement]. (Exhibit 10.19 to the
Form S-4.)
o Management Contracts and Compensatory Plans.
(iii) 1984 Stock Option Plan.
(a) Plan, as amended February 23, 1987, and August
28, 1989. (Exhibit (10)(iii)(a) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995 (herein referred to as "1995
Form 10-K").)
(b) Forms of stock option agreements. (Exhibit
(10)(vi)(b) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992
(herein referred to as "1992 Form 10-K").)
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(iv) 1988 Stock Option Plan.
(a) Plan, as amended on December 14, 1992. (Exhibit
(10)(vii)(a) of the 1992 Form 10-K.)
(b) Form of Notice of Terms of Stock Option Grant.
(Exhibit (10)(vii)(b) of the 1992 Form 10-K.)
(v) 1992 Stock Option Plan for Nonemployee Directors.
(a) Plan. (Exhibit (19) of the Company's Form 10-Q
for the quarter ended March 31, 1992.)
(b) Form of Stock Option Agreement. (Exhibit
(10)(viii)(b) of the 1992 Form 10-K.)
(vi) Supplemental Benefit Plan for Employees of The
Boeing Company, as amended December 14, 1992.
(Exhibit (10)(vi) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994
(herein referred to as "1994 Form 10-K").)
(vii) Supplemental Retirement Plan for Executives of The
Boeing Company, as amended October 25, 1994.
(Exhibit (10)(vii) to the 1994 Form 10-K.)
(viii) Deferred Compensation Plan for Employees of The
Boeing Company, as amended on October 31, 1994.
(Exhibit (10)(iii) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1994 (herein referred to as "3rd Quarter 1994 Form
10-Q").)
(ix) Deferred Compensation Plan for Directors of The
Boeing Company, as amended on October 28, 1996.
(Exhibit 10.1 to the Form S-4.)
(x) 1993 Incentive Stock Plan for Employees.
(a) Plan, as amended on December 13, 1993. (Exhibit
(10)(ix)(a) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993
(herein referred to as "1993 Form 10-K").)
(b) Form of Notice of Stock Option Grant.
(i) Regular Annual Grant. (Exhibit
(10)(ix)(b)(i) to the 1993 Form 10-K.)
(ii) Supplemental Grant. (Exhibit (10)(ix)(b)(ii)
to the 1993 Form 10-K.)
(xi) Incentive Compensation Plan for Officers and Employees of
the Company and Subsidiaries, as amended on October 31,
1994. (Exhibit (10)(v) to the 3rd Quarter 1994 Form 10-Q.)
(xii) SAR Deferral Arrangements of the Company.
(a) Form of SAR Deferral Agreement. (Exhibit (10)(xii)
(a) to 1995 Form 10-K.)
(b) Plan for Employees, as amended. (Exhibit (10)(xii)
(b) to 1995 Form 10-K.)
(c) Form of SAR deferral election notice. (Exhibit (10)
(xiv)(c) of the 1992 Form 10-K.) (xiii) The Boeing
Company ShareValue Program, as amended on December
20, 1996. Filed herewith.
(xiv) Stock Purchase and Restriction Agreement dated as of July
1, 1996, between The Boeing Company and Wachovia Bank of
North Carolina, N.A. as Trustee, under the ShareValue Trust
Agreement dated as of July 1, 1996. (Exhibit 10.20 to the
Form S-4.)
(12) Computation of Ratio of Earnings to Fixed Charges. Page 20.
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<PAGE> 16
(13) Portions of the 1996 Annual Report to Shareholders incorporated by
reference herein. Filed herewith.
(21) List of Company Subsidiaries. Pages 152-154.
(24) Independent Auditors' Consent and Report on Financial Statement
Schedule for use in connection with filings of Form S-8 under the
Securities Act of 1933. Page 18.
(99) Additional Exhibits
(i) Commercial Program Method of Accounting. Filed herewith.
(b) Reports on Form 8-K filed during quarter ended December 31, 1996:
On December 20, 1996, the Company filed a Current Report on Form
8-K reporting the completion on December 6, 1996, of the
transactions contemplated by the Agreement and Plan of Merger
dated as of July 31, 1996, among Rockwell International
Corporation, the Company, and Boeing NA, Inc.
On December 20, 1996, the Company also filed a Current Report on
Form 8-K reporting the execution on December 14, 1996 of an
Agreement and Plan of Merger among the Company, West Acquisition
Corp., and McDonnell Douglas Corporation.
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<PAGE> 17
Signatures
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
the date indicated.
THE BOEING COMPANY
(Registrant)
By: /s/ Philip M. Condit By: /s/ B. E. Givan
--------------------------------- -------------------------
Philip M. Condit - Chairman of the B. E. Givan - Senior Vice
Board, Chief Executive Officer and President and Chief
Director Financial Officer
By: /s/ Gary W. Beil
------------------------------
Gary W. Beil - Vice President
and Controller
Date: February 24, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date
indicated.
/s/ John E. Bryson /s/ Donald E. Petersen
- ------------------------------ ---------------------------------
John E. Bryson - Director Donald E. Petersen - Director
/s/ John B. Fery /s/ Charles M. Pigott
- ------------------------------ ---------------------------------
John B. Fery - Director Charles M. Pigott - Director
/s/ Paul E. Gray /s/ Rozanne L. Ridgway
- ------------------------------ ---------------------------------
Paul E. Gray - Director Rozanne L. Ridgway - Director
/s/ Harold J. Haynes /s/ Frank A. Shrontz
- ------------------------------ ---------------------------------
Harold J. Haynes - Director Frank A. Shrontz - Director
/s/ Stanley Hiller, Jr. /s/ George H. Weyerhaeuser
- ------------------------------ ---------------------------------
Stanley Hiller, Jr. - Director George H. Weyerhaeuser - Director
Date: February 24, 1997
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<PAGE> 18
INDEPENDENT AUDITORS' CONSENT
AND REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
The Boeing Company
Seattle, Washington
We consent to the incorporation by reference in Registration Statement
Nos. 2-48576, 33-25332, 33-31434, 33-43854, 33-58798, 333-03191 and
333-16363 of The Boeing Company on Form S-8 of our report dated
January 23, 1997, appearing in and incorporated by reference in the
Annual Report on Form 10-K of The Boeing Company for the year ended
December 31, 1996.
Our audits of the financial statements referred to in our
aforementioned report also included the financial statement schedule
of The Boeing Company listed in Item 14(a)2 in this Annual Report on
Form 10-K for the year ended December 31, 1996. This financial
statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
March 6, 1997
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<PAGE> 19
SCHEDULE II - Valuation and Qualifying Accounts
The Boeing Company and Subsidiaries
Allowance for Doubtful Accounts and Customer Financing
(Deducted from assets to which they apply)
(Dollars in millions)
1996 1995 1994
- ------------------------------------------------------------------------------
Balance at January 1 $110 $115 $126
Increase due to acquisition of Rockwell
aerospace and defense business 6
Charged to costs and expenses 1 (4) 1
Collection of accounts
previously charged off 1
Deductions from reserves
(accounts charged off) 1 1 13
Balance at December 31 $116 $110 $115
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<PAGE> 20
EXHIBIT (12) - Computation of Ratio of Earnings to Fixed Charges
The Boeing Company and Subsidiaries
(Dollars in millions)
Year ended December 31,
----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Earnings before
federal taxes on income $1,363 $ 360* $1,143 $1,821 $2,256
Fixed charges excluding
capitalized interest 162 170 154 75 62
Amortization of previously
capitalized interest 79 58 51 31 22
Less undistributed earnings
of affiliates (1) (5) (3) 1 1
Plus distributed earnings
of affiliates - - - - -
Earnings available for ------ ------ ------ ------ ------
fixed charges $1,603 $ 583 $1,345 $1,928 $2,341
====== ====== ====== ====== ======
Fixed charges:
Interest expense $ 145 $ 151 $ 130 $ 39 $ 14
Interest capitalized during
the period 58 65 87 150 119
Rentals deemed
representative of an
interest factor 17 19 24 36 48
------- ------ ------ ------ ------
Total fixed charges $ 220 $ 235 $ 241 $ 225 $ 181
======= ====== ====== ====== ======
Ratio of earnings to fixed
charges 7.3 2.5* 5.6 8.6 12.9
======= ====== ====== ====== ======
*Includes $600 pretax charge associated with a special retirement program. The
ratio of earnings to fixed charges exclusive of the special retirement charge
was 5.0.
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<PAGE> 21
EXHIBITS FILED WITH THIS REPORT ON FORM 10-K
Commission File Number 1-442
THE BOEING COMPANY
Exhibit Index
Annual
Report
to
Share- Form
holders 10-K
Exhibit Description Page Page
- -------------------------------------------------------------------------------
(2) (ii) Agreement and Plan of Merger, dated as of
December 14, 1996, among The Boeing Company,
West Acquisition Corp. and McDonnell Douglas
Corporation. 72
(10)(xiii) The Boeing Company Sharevalue Program, as
amended on December 20, 1996. 127
(12) Computation of ration of Earnings to Fixed
Charges 20
(13) Portions of the 1996 Annual Report to Share-
holders incorporated by reference in Part I
and part II
Market for registrant's Common Equity and
related Sockholder Matters * 70
Selected Financial Data 64 68
Management's Discussion and Analysis of
Financial Position and Results of 23
Operations 30
Consolidated Statements of Net Earnings 44 42
Consolidated Statements of Financial Position 45 43
Consoldiated Statements of Cash Flows 46 44
Notes to Consolidated Financial Statements 47 45
Independent Auditors' Report 43 41
Supplimentary Data regarding Quarterly
results of Operations 63 67
(21) List of Subsidiaries 152
(24) Independent Auditors' Consent and Report on
Financial Statement Schedule for use in
connection with filings of Form S-8 under
the Securities Act of 1933. 18
(99) (i) Commercial Program Method of Accounting 148
Appendix of graphic and image material pursuant
to Rule 304(a) of Regulation S-T 155
* Listed on inside back cover of annual report
21 of 156
<PAGE> 22
Exhibit (13)
Portions of the 1996 Annual Report to Shareholders
Incorporated by Reference in Part I and Part II
22 of 156
<PAGE> 23
Management's Discussion and Analysis
Results of Operations, Financial Condition and Business Environment
Results of Operations
REVENUES
Operating revenues for 1996 were $22.7 billion compared with $19.5 billion in
1995 and $21.9 billion in 1994. The increase in revenues in 1996 was principally
due to increased jet aircraft deliveries, and reversed a trend of decreasing
revenues for the previous three years. The declines in revenues for the three
years ending in 1995 were due to fewer commercial jet aircraft deliveries as a
result of economic conditions and airline industry overcapacity in most major
market areas of the world. The 1995 revenues were also adversely impacted by a
ten-week labor strike which resulted in the delay of approximately 30 aircraft
deliveries representing over $2 billion in reduced sales in 1995. The
Company's commercial jet aircraft market share has averaged nearly 60% in
terms of sales dollar value of deliveries over the three-year period.
Commercial jet aircraft deliveries by model:
1996 1995 1994
- ---------------------------------------
737 76 89 121
747 26 25 40
757 42 43 69
767 42 36 40
777 32 13 -
- ---------------------------------------
Total 218 206 270
=======================================
Commercial aircraft products and services accounted for 75%, 71% and 77% of
total operating revenues for the years 1996, 1995 and 1994, respectively.
Commercial production rates have gradually increased since the low of 18 1/2
aircraft per month in early 1995. Based on current schedules, total commercial
aircraft production will increase from 22 1/2 per month at the end of 1996 to 40
per month by year-end 1997. Production rate increases are planned for all models
except the 767 in 1997. The approximately 80% increase in the total monthly
commercial aircraft production rate planned for 1997 involves significant
performance challenges and risks.
Total commercial jet aircraft deliveries for 1997 are currently projected to be
in the range of 340 aircraft, including 60 777s. Commercial transportation sales
trends are discussed further in the Commercial Aircraft Business Environment and
Trends section on pages 32-35.
Sales by industry segment:
[Graphic and image material item Number 1
See appendix on page 155 for description.]
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<PAGE> 24
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
When used in this Management's Discussion and Analysis of Capital Results of
Operations, Financial Condition and Business Environment, the words
"estimate," "project," "intend," "expect" and similar expressions are
intended to identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date of this Annual Report. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements. Such risks and uncertainties
include those identified under the headings "Commercial Aircraft Business
Environment and Trends," "Defense and Space Business Environment and Trends,"
elsewhere throughout this Management's Discussion and Analysis of Results of
Operations, Financial Conditions and Business Environment and in Note 21 to
the Consolidated Financial Statements on page 64. Boeing does not undertake
any obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date of this Annual
Report or to reflect the occurrence of unanticipated events.
Commercial sales by geographic region:
[Graphic and image material item Number 2
See appendix on page 155 for description.]
Defense and space segment revenues, including activities identified as "Other
industries" prior to 1995, were $5.8 billion in 1996, compared with $5.6
billion in 1995 and $5.1 billion in 1994. The International Space Station
program was the major contributor to defense and space revenues during this
period, following NASA's selection of Boeing Defense & Space Group as the
prime contractor for the restructured Space Station program in 1993. The
Company's defense and space business is broadly diversified, and no program
other than the International Space Station accounted for more than 20% of
total 1994-1996 defense and space revenues. The International Space Station
program represented approximately 25% of 1994-1996 defense and space revenues.
In addition to the Space Station program, the principal contributors to 1996
defense and space sales included F-22 fighter aircraft developmental production
activities, E-3 AWACS (Airborne Warning and Control System) updates, 767 AWACS
development and manufacturing for the Government of Japan, V-22 Osprey tiltrotor
aircraft development and test activities, production and remanufacturing of CH-
47 helicopters, various facilities management and information services contracts
(identified as "Other industries" prior to 1995), B-2 bomber subcontract work,
and RAH-66 Comanche helicopter development activities. Classified projects for
the U.S. Government also continued to contribute to defense and space segment
revenues. Sales of $92 million from the acquired Rockwell aerospace and defense
units are included for the period subsequent to the acquisition on December 6,
1996.
In the fourth quarter of 1996, the U.S. Government announced that Boeing was
awarded a contract to proceed with the concept demonstration phase of the Joint
Strike Fighter (JSF) program in competition with Lockheed Martin. The Boeing JSF
award is valued at $660 million, and encompasses the four-year Concept
Demonstration Program (CDP) in which Boeing will define the technologies,
processes and characteristics of its plan to produce the JSF. Boeing will build
and flight test two JSF prototypes. The JSF is intended to be an affordable,
multi-service aircraft that will enter service in the next century. Also in the
fourth quarter, the U.S. Air Force awarded the $1.1 billion Airborne Laser (ABL)
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<PAGE> 25
Program Definition and Risk Reduction (PDRR) contract to a team led by Boeing.
The PDRR phase of the ABL program includes the detailed design, integration,
testing and delivery of two prototype systems in which a high power laser and
optical steering system are installed in a 747-400 freighter.
Defense and space business trends are discussed further in the Defense and Space
Business Environment and Trends section on pages 35 and 36.
Based on current programs and schedules, the Company projects total 1997
revenues to be approximately $33 billion, including revenues associated with the
aerospace and defense business acquired from Rockwell. This estimate does not
take into account the potential impact of the proposed merger with McDonnell
Douglas Corporation. For further discussion of the Rockwell aerospace and
defense acquisition and the proposed McDonnell Douglas merger, see page 36.
EARNINGS
Net earnings of $1,095 million for 1996 include a non-cash after-tax charge of
$87 million ($133 million pretax) associated with the ShareValue Trust market
value appreciation since the Trust was established on July 1, 1996. The
ShareValue Trust arrangement is discussed on pages 39 and 40, and in Note 13
to the Consolidated Financial Statements on page 59. Net earnings of $393
million for 1995 include the recognition of a $600 million one-time pretax
charge, or $390 million after-tax, for a special retirement program offered in
the first half of 1995. Exclusive of these charges, net earnings, on a
comparable basis, were $1,182 million, $783 million and $856 million for 1996,
1995 and 1994, respectively.
Net earnings:
[Graphic and image material item Number 3
See appendix on page 155 for description.]
The comparable net earnings in 1996 were $399 million higher than the net
earnings for 1995 primarily due to the increase in commercial jet aircraft sales
discussed above, recognition of prior years' tax benefits of $125 million,
settlement of various defense and space contract matters resulting in a $114
million pretax increase to earnings, reduced research and development expense,
and increased interest income. Research and development expense of $1,200
million for 1996 was down $67 million from 1995. Corporate investment income was
$78 million higher in 1996 than in 1995 due primarily to higher cash and short-
term investment balances.
The comparable earnings of $783 million for 1995 were $73 million lower than
1994 primarily due to the decline in commercial aircraft sales from $16.9
billion in 1994 to $13.9 billion in 1995. Also contributing to lower earnings
was an increase in interest expense of $21 million due to less interest being
capitalized on plant and equipment investments. These factors were partially
offset by lower research and development expense, an increase in other income of
$87 million principally attributable to increased interest income on
investments, and a lower income tax provision. Research and development expense
of $1,267 million for 1995 was down $437 million from 1994, primarily due to
reduced 777 developmental expenditures.
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<PAGE> 26
A special retirement program was offered during the first half of 1995, and
approximately 9,500 employees - 9% of total employees - accepted the early
retirement offer. Funding of the program will occur over a minimum of ten years
through the Company's retirement plan and will not have a significant impact
on annual cash flow.
The overall commercial operating profit margin, exclusive of research and
development expense, was 12.8% for 1996 compared with 13.8% for 1995, excluding
the impact of the special retirement program, and 15.7% for 1994. The lower
overall commercial operating profit margin was primarily attributable to a model
mix that included 19 more 777s in 1996 than in 1995. New commercial jet aircraft
programs normally have lower operating profit margins due to initial tooling
amortization and higher unit production costs in the early years of a program
averaged over the initial production quantity (400 aircraft for the 777).
Increased 777 deliveries and the initial deliveries of the 737-700 will
constitute a larger proportion of commercial aircraft sales in 1997 than in
1996. Operating profit margins on established commercial aircraft programs do
not differ significantly among individual programs.
Although significant production efficiencies have been gained through process
improvements, the commercial jet aircraft market remains extremely competitive
and airline revenue yields continue to follow a downward trend. These factors
result in continued price pressure on the Company's products, and major
productivity gains are essential to help ensure maintenance of a favorable
market position at acceptable profit margins.
During the past several years, the Company developed process efficiencies that
have helped minimize operational disruption due to significant changes in
aircraft production rates. The magnitude of the production rate increases
planned throughout 1997, however, represents a significant challenge to the
operational structure of the Company and its supplier base. Potential problem
areas relating to raw materials and parts shortages, skill dilution, abnormal
overtime and rework are being closely monitored.
Defense and space segment operating profits for 1996 included $114 million of
pretax earnings related to the settlement of various contract matters, partially
offset by $53 million of losses from joint ventures associated with early stages
of new commercial business opportunities. Excluding these items and the early
retirement program charge in 1995, the defense and space segment operating
margin before research and development was 8.7% in 1996, 8.1% in 1995, and 7.5%
in 1994. These margins indicate continued solid technical and cost performance
among the Company's defense and space programs. Since 1994, a significant
percentage of defense and space segment business has been under cost-
reimbursement-type contracts, which generally have lower profit margins than
fixed-price-type contracts. The current major developmental programs,
principally the International Space Station, F-22 Fighter, V-22 Osprey tiltrotor
aircraft, and the RAH-66 Comanche helicopter, primarily involve cost-
reimbursement-type contracts. Write-offs of developmental joint ventures
expenditures will continue in 1997, principally from development and
administrative costs on the Sea Launch program (a commercial satellite launch
venture with Norwegian, Russian and Ukrainian partners), and the Civil Tiltrotor
program (a collaboration with Bell Helicopter Textron, Inc., to build a
commercial variant of the V-22).
Research and development expensed:
[Graphic and image material item Number 4
See appendix on page 156 for description.]
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<PAGE> 27
Research and development expenditures charged directly to earnings include
design, developmental and related test activities for new and derivative
commercial jet aircraft, other company-sponsored product development, and basic
defense and space research and development not recoverable under U.S. Government
flexibly priced contracts.
The principal commercial aircraft developmental programs during the 1994-1996
period were the 777 wide-body twinjet and the 737-600/700/800 family. Flight
testing of the Pratt & Whitney-powered 777 began in mid-1994, and continued
through the first half of 1995. Flight testing of the General Electric-powered
and Rolls-Royce-powered 777s continued through 1995. The first delivery of the
777 occurred in May 1995. Development of the 777-200ER extended-range version of
the 777 commenced in 1995 and continued in 1996, with certification and first
delivery scheduled for early 1997. The increased-capacity version 777-300
continues to be under development, with certification and first delivery
scheduled for mid-1998. The development and production of the 737-700, the first
of three new 737 derivative models, is progressing on schedule, with first
delivery scheduled for October 1997.
The defense and space segment continues to selectively pursue commercial-type
business opportunities where it can utilize its technical and large-scale
integration capabilities. Such business pursuits, which are outside the
traditional U.S. Government contracting environment, are expected to require
increased levels of research and development expenditures for the defense and
space segment over the next few years. Company-sponsored research and
development attributable to the defense and space segment was $108 million in
1996, $86 million in 1995 and $74 million in 1994.
Research and development expenditures for 1997 will be influenced by the timing
of commercial aircraft wide-body derivative programs, and commercial space and
communication activities in the defense and space segment. Based on current
programs and plans, research and development expense is expected to be
comparable with 1995 and 1996 levels. Research and development activities are
discussed further in the Strategic Investments for Long-Term Value section on
pages 37 and 38.
The effective federal income tax rate of 19.7% for 1996 includes the recognition
of $90 million of Foreign Sales Corporation tax benefits attributable to
qualified exports, $95 million attributable to a one-time tax benefit related to
prior years' investment tax credits and $30 million attributable to an
adjustment for prior years' tax expense. Without the prior years' tax benefits
of $125 million, the effective income tax rate would have been 28.8%. The non-
deductibility of annual goodwill amortization of approximately $82 million
associated with the acquisition of the Rockwell aerospace and defense business
will result in a somewhat higher effective tax rate for 1997. The negative
effective income tax rate of 9.2% for 1995 was due to the combination of
relatively low pretax earnings - resulting from both the $600 million pretax
charge for the special retirement program and the effect of the labor strike
- - and to the level of tax benefits recognized. Tax benefits for 1995 included
a research and experimentation tax credit of $90 million primarily associated
with the initial 777 development program and Foreign Sales Corporation tax
benefits of $75 million. Without the special retirement program charge, the
effective tax rate for 1995 would have been 18.4%. Research and
experimentation tax credit and Foreign Sales Corporation tax benefits in 1994
were $60 million and $65 million, respectively, resulting in an effective tax
rate of 25.1%.
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<PAGE> 28
Essentially all of the Company's business is performed under contract;
therefore, operating results trends are not significantly influenced by the
effects of inflation. Additional information relating to sales and earnings
contributions by business segment can be found in Note 21 to the Consolidated
Financial Statements on pages 64 thru 66.
BACKLOG
[Graphic and image material item Number 5
See appendix on page 156 for description.]
Total contractual backlog of unfilled orders at December 31, 1996, was $87.7
billion, compared with $72.3 billion at the end of 1995. Of the total 1996
backlog, $79.2 billion or 90% related to the commercial aircraft segment,
compared with $66.5 billion or 92% in 1995. Not included in contractual backlog
are purchase options and announced orders for which definitive contracts have
not been executed. Commercial backlog includes orders for deliveries that extend
several years into the future. Approximately 25% of the units in the commercial
aircraft backlog are scheduled for delivery beyond 1999.
U.S. Government and foreign military backlog is limited to amounts obligated to
contracts. Unobligated contract funding not included in backlog at December 31,
1996 and 1995, total $9.0 billion and $7.6 billion.
LIQUIDITY AND CAPITAL RESOURCES
The primary factors that affect the Company's investment requirements and
liquidity position, other than operating results associated with current sales
activity, include the timing of new and derivative commercial jet aircraft
programs requiring both high developmental expenditures and initial inventory
buildup; cyclical growth and expansion requirements; customer financing
assistance; and the timing of federal income tax payments.
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<PAGE> 29
CASH FLOW SUMMARY
Following is a summary of cash flow based on changes in cash and short-term
investments. This cash flow summary is not intended to replace the Consolidated
Statements of Cash Flows on page 44 that is prepared in accordance with
generally accepted accounting principles, but is intended to highlight and
facilitate understanding of the principal cash flow elements.
(Dollars in billions) 1996 1995 1994
===============================================================================
Net earnings $ 1.1 $ 0.4 $ 0.9
Non-cash charges to earnings (a) 1.2 1.8 1.2
- -------------------------------------------------------------------------------
Net earnings adjusted for non-cash items 2.3 2.2 2.1
Change in gross inventory (b) (2.3) (2.7) (0.8)
Change in customer advances (c) 2.5 0.8 (0.7)
Net changes in receivables, liabilities
and deferred income taxes (d) 0.7 0.3
0.3
Facilities and equipment expenditures (0.8) (0.6) (0.8)
Pension funding in excess of expense (0.1) (0.2) (0.1)
Change in customer financing (e) 1.1 1.5 (0.2)
- -------------------------------------------------------------------------------
Cash flows from operating and
investment activities 3.4 1.3
(0.2)
Debt payments (f) (0.8)
Cash dividends (0.4) (0.3) (0.3)
ShareValue Trust shares acquired (g) (0.9)
Cash received on stock options exercised 0.2 0.1
- -------------------------------------------------------------------------------
Increase (decrease) in cash and
short-term investments $ 1.5 $ 1.1 $ (0.5)
===============================================================================
Cash and short-term
investments at end of year $ 5.2 $ 3.7 $ 2.6
===============================================================================
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<PAGE> 30
(a)Non-cash charges to earnings as presented here consisted of depreciation and
retiree health care accruals for all years, the charge for the ShareValue
Trust distributable appreciation for 1996, and the special retirement
program charge for 1995. The Company has not funded retiree health care
accruals and, at this time, has no plan to fund these accruals in the
future. The ShareValue Trust charge to earnings relates to potential
distributions from an irrevocable trust established by the Company in 1996.
The obligation to make these distributions is solely that of the Trust, and
current and future ShareValue Trust charges and credits reflected in
earnings will not impact the Company's current or future cash flow. The
special retirement program charge will be funded over a minimum of ten
years. Retirement plan funding in excess of retirement plan expense is
separately indicated.
(b)Inventory associated with the 777 program increased substantially throughout
the 1994-1996 time period due to initial tooling and production inventory
buildup. Inventory balances on the 737, 747, 757 and 767 commercial jet
programs declined significantly in 1994 due to production rate reductions
and improvements in production inventory flow times, increased in 1995 due
to the ten-week labor strike, and increased in 1996 due to increased
production rates. Additionally, the new 737-600/700/800 program resulted in
increased production and tooling inventory in 1996.
(c)Commercial customer advances declined in 1994 as backlog and deliveries for
commercial aircraft programs in total declined. The increase in commercial
customer advances during 1995 was principally associated with the 777
program, while the increase during 1996 was broadly distributed among the
commercial jet programs. With regard to defense and space activity, the
ratio of progress billings to gross inventory did not significantly change
during this period.
(d)Over the three-year period 1994-1996, changes in accounts receivable,
accounts payable, other liabilities and deferred taxes resulted in a net
increase in cash of $1.3 billion. This was largely attributable to an
increase in advances in excess of related costs of $0.6 billion and an
increase in accounts payable and other liabilities of $0.5 billion, mostly
as a result of increased business activity. Federal income tax payments over
the next two years are projected to substantially exceed income tax expense
due to anticipated completion of contracts executed under prior tax
regulations.
(e)The changes in customer financing balances have been largely driven by
commercial aircraft market conditions and the ability of the Company to sell
customer financing assets. The Company generated $1.5 billion, $2.6 billion
and $0.8 billion of cash in 1996, 1995 and 1994, respectively, from
principal repayments and by selling customer financing receivables and
operating lease assets. As of December 31, 1996, the Company had outstanding
commitments of approximately $3.9 billion to arrange or provide financing
related to aircraft on order or under option for deliveries scheduled
through 2002. However, not all these commitments are likely to be utilized.
The Company will continue to sell customer financing assets from time to
time when capital markets are favorable in order to maintain maximum capital
resource flexibility. Outstanding loans and commitments are primarily
secured by the underlying aircraft.
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<PAGE> 31
(f)In addition to $250 million of debt that matured in 1996, the Company also
paid down $545 million of short-term debt assumed in the acquisition of the
Rockwell aerospace and defense business.
(g)Total funding of the ShareValue Trust was $1.15 billion; however, a portion
of the funding was accomplished through issuance of treasury and newly
issued shares.
Customer financing - net changes:
[Graphic and image material item Number 6
See appendix on page 156 for description.]
CAPITAL RESOURCES
The Company has long-term debt obligations of $4.0 billion which are unsecured
and include $2.2 billion issued in the 1990-1993 time period and $1.6 billion
assumed in the acquisition of the Rockwell aerospace and defense business.
Approximately $300 million matures in each of 1998 and 1999 and the balance has
an average maturity of 21 years. Total long-term debt as of year-end 1996
amounted to 27% of total capital (shareholders' equity plus borrowings). The
Company has substantial additional long-term borrowing capability, although no
additional debt issuance is anticipated at this time. Revolving credit line
agreements with a group of major banks, totaling $2.0 billion, remain available
but unused.
The Company believes its internally generated liquidity, together with access to
external capital resources, will be sufficient to satisfy existing commitments
and plans, and to provide adequate financial flexibility to take advantage of
potential strategic business opportunities should they arise.
CONTINGENT ITEMS
The Company is subject to federal and state requirements for protection of the
environment, including those for discharge of hazardous materials and
remediation of contaminated sites. Based on in-depth studies, expert analyses
and legal reviews, the Company routinely assesses its contingencies, obligations
and commitments to clean up sites, including assessments of the probability of
recoveries from other responsible parties who have and have not agreed to a
settlement and recoveries from insurance carriers. The Company's policy is to
immediately recognize identified exposures related to environmental cleanup
sites based on conservative estimates of investigation, cleanup and monitoring
costs to be incurred. The costs incurred in connection with such activities have
not had a material impact on the Company's financial position. Based on all
known facts and expert analyses, the Company believes it is not reasonably
likely that identified environmental contingencies will result in a materially
adverse impact on the Company's future financial position or operating results
and cash flow trends.
Accidents involving the Company's aircraft often result in legal proceedings
and in extensive investigations regarding design and production issues. The
Company maintains an ongoing comprehensive process for conducting
safety-related studies and investigations, both internally and in conjunction
with regulatory authorities. Provisions are made for all warranty and related
commitments of the Company, and most significant legal proceedings are related
to matters covered by insurance.
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<PAGE> 32
In 1991 the Company received from the U.S. Government a notice of partial
termination for default which terminated most of the work required under
contracts to develop and install a new air defense system for Saudi Arabia,
known as the Peace Shield program. During the second quarter of 1996, the Peace
Shield program issues were settled, and all terminations for default have been
converted to terminations for convenience. The settlement resulted in the
release of all Government claims, including any potential Government claim for
excess cost of reprocurement or other damages.
COMMERCIAL AIRCRAFT BUSINESS ENVIRONMENT AND TRENDS
The worldwide market for commercial jet aircraft is predominantly driven by
long-term trends in airline passenger traffic. The principal factors underlying
long-term traffic growth are sustained economic growth in developed and emerging
countries and political stability. Demand for the Company's commercial
aircraft is further influenced by airline industry profitability, world trade
policies, government-to-government relations, technological changes, and price
and other competitive factors.
GLOBAL ECONOMIC AND PASSENGER TRAFFIC TRENDS
Since the 1970s, world air travel has grown in parallel with prevailing economic
conditions. Major slumps occurred in tandem with the two petroleum price-driven
world recessions and the most recent worldwide recession in developed countries,
which followed the high economic growth of the late 1980s. The current world
economic recovery has been moderate in the United States and the United Kingdom,
and slow in continental Europe and Japan. Current economic indications suggest
that most Asian economies, except Japan, will continue to experience above
average expansion.
As the world economy has improved, airline passenger traffic has been
increasing. Following the decline in passenger traffic in 1991, the first annual
decline since the start of the jet era, worldwide passenger traffic has grown
steadily. For the five-year period 1992-1996, the average annual growth rate
for worldwide passenger traffic was approximately 5.5%. The Company's 20-year
forecast of the average long-term growth rate in passenger traffic is
approximately 5.6% annually for the next five years and slightly less than 5.0%
annually for the balance of the 20-year forecast period, based on projected
average worldwide annual economic real growth of 3.2% over the period.
Significant excess capacity in the worldwide aircraft fleet developed during the
recent global recession, following several years of record-setting delivery
levels of new jet aircraft. At the end of 1993, approximately 1,100 commercial
jet aircraft out of the total world fleet of over 11,000 aircraft were in out-
of-service status. By the end of 1996, that number had declined to approximately
700. Due to noise constraints, inferior economics of older aircraft and the
market requirement for readily available used aircraft, the Company currently
estimates that less than one-fourth of the stored aircraft are potentially
practical alternatives to new aircraft for airlines seeking added capacity.
Based on global economic growth projections over the long term, and taking into
consideration increasing utilization levels of the worldwide aircraft fleet and
requirements to replace older aircraft, the Company projects the total
commercial jet aircraft market over the next 20 years at more than $1,000
billion in 1996 dollars.
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<PAGE> 33
AIRLINE PROFITABILITY
The airline industry's ability to achieve substantial levels of profitability
will be an important factor in determining whether the Company's long-term
market forecast will be realized. In addition to aggressive cost control
measures being taken by many airlines, continued growth in passenger traffic,
together with stable fare structures, are important conditions if the airline
industry is to sustain acceptable earnings levels.
Through a combination of passenger traffic growth, improved revenue, lower fuel
costs and aggressive cost control measures, the airline industry showed
significant improvement in operating profitability over the past few years.
Airlines' net earnings (after interest costs on debt) also showed a marked
improvement over the past three years. In the aggregate, the industry achieved
approximately a break-even level of net earnings in 1994. The industry realized
a substantial positive level of earnings in 1995 and an even greater level in
1996. The outlook for traffic growth in 1997 is generally positive; however,
higher fuel costs and wage increase pressures, particularly in the United
States, could lower margins and limit industry profit growth.
AIRCRAFT REPLACEMENT DUE TO NOISE REGULATIONS
There are approximately 3,500 Stage 2 aircraft worldwide that cannot operate in
conformity with legislated noise requirements to be phased in by the year 2002.
Approximately 2,000 of these aircraft are in the United States and most of the
remainder operate in Europe. Airlines have the option of modifying Stage 2
aircraft, replacing them, or selling or otherwise removing them from service
without replacement. The Company projects that about one-half of the U.S. Stage
2 aircraft will eventually be modified, and the remainder, primarily older
aircraft, will be replaced.
AIRLINE DEREGULATION
Worldwide, the airline industry has experienced progressive deregulation of
domestic markets and increasing liberalization of international markets. Twenty
years ago virtually all air travel took place within a framework of domestic and
international oversight. Since then, several countries, most notably the United
States, Australia and the countries in Western Europe, have eliminated
restrictive regulations for domestic airline markets and promoted a liberal
climate for international services. Currently, about one-half of all air travel
takes place within an open competitive environment. These trends are expected to
continue, but at varying rates in different parts of the world.
Liberalization of government regulations together with increased aircraft range
capabilities is giving airlines greater freedom to pursue optimal fleet-mix
strategies. This increased flexibility allows the airlines to accommodate
traffic growth by selecting the best mix of flight frequencies and aircraft size
and capabilities for their route systems. In intercontinental markets, more
liberal bilateral air service agreements favor increased flight frequency over
capacity growth by providing an important stimulus to opening new city-pair
markets. In parallel with regulatory liberalization, developments in improving
aircraft range performance will continue to allow airlines to expand the number
of direct city-to-city routes, thus reducing the reliance on indirect routes
through central hubs that require larger capacity aircraft.
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<PAGE> 34
INDUSTRY COMPETITIVENESS AND WORLD TRADE POLICIES
Since the 1970s, the Company has achieved approximately a 60% share of the
available commercial jet aircraft market. This market share has been maintained
throughout the economic cycles of the commercial jet aircraft market, including
the difficult market environment in recent years that resulted in lower
production rates and excess production capacity for all jet aircraft
manufacturers. With regard to new orders, that market environment resulted in
intense pressures on pricing and other competitive factors that continue today.
The Company's focus on improving processes and other cost reduction efforts is
intended to enhance its ability to pursue pricing strategies that enable the
Company to maintain market share at satisfactory margins.
The Company's extensive customer support services network for airlines
throughout the world plays a key role in maintaining high customer satisfaction.
On-line access to engineering drawings and parts lists needed for aircraft
maintenance is already available to airline customers, and in 1996, service
bulletins and maintenance manuals were also delivered on-line. To help airline
customers more effectively manage their operating costs, new facilities and
systems now provide for next-day shipment for routine spare parts orders, and
the highest priority orders are processed and ready for shipment within two
hours. A regional customer service center was opened in Beijing in 1994 to serve
growing airline requirements in China and other Asian countries. The Company now
has 17 field service bases located throughout China. In 1995 the Company opened
an avionics center in Singapore that is able to service a significant number of
Asian customers.
Over the past five years, sales outside the United States have accounted for
approximately 64% of the Company's total commercial aircraft sales;
approximately 67% of the contractual backlog at year-end 1996 was with customers
based outside the United States. Continued access to global markets is extremely
important to the Company's future ability to fully realize its sales potential
and projected long-term investment returns.
Governments and companies in Asia and the former Soviet Union are seeking to
develop or expand aircraft design and manufacturing capabilities by teaming
arrangements with each other or current manufacturers. The Company is actively
exploring ways to expand its global presence in this environment.
In 1992 the U.S. Government and the European Community announced agreement on
interpreting the commercial aircraft code of the General Agreement on Tariffs
and Trade (GATT). The 1992 agreement bans government production subsidies and
limits development support in the form of loans to 33% of development costs. The
Company would have preferred a ban on all government subsidies for commercial
airplane programs, but the controls embodied in the 1992 agreement are
considered important in limiting future government subsidies to Airbus
Industrie, the Company's primary competitor. The recent announcement by the
four Airbus partners to transform the Airbus consortium into a commercial
company should further remove Airbus operations from government control and
influence.
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The World Trade Organization (WTO), based in Geneva, was inaugurated in 1995.
Consisting of approximately 128 nations, the WTO was established to promote open
and nondiscriminatory trade among its members. The WTO contains an improved
subsidies code, applicable to all members, that provides important protections
against injurious subsidies by governments, as well as improved dispute
settlement procedures to resolve disagreements among nations. The 1992 bilateral
United States - European Union agreement and the WTO subsidies code constitute
the basic limits on government support of development costs.
Company forecasts indicate that the airlines of China represent a significant
potential for commercial jet aircraft orders over the next 20 years; however,
China is not currently a member of the WTO. The Company believes the accession
of China to the WTO and the granting of permanent Most-Favored-Nation trading
status by the U.S. Government would help ensure an open market and effective
trade policies. However, if government and trade relations between the United
States and China deteriorate significantly, the Company's ability to sell
commercial aircraft to airlines in China could be severely constrained.
Airlines of Russia and other states of the former Soviet Union operate a limited
number of western-built aircraft. Because of high customs duties, a shortage of
foreign exchange, legal and other financing constraints, the potential for new
aircraft orders has been severely limited. In January 1996, the U.S. Government
reached a trade agreement with the Russian Federation that provides for future
aircraft tariff reductions. The Company expects that the airlines and aircraft
manufacturing industry of this region will eventually be integrated into the
international economy.
SUMMARY
Although market uncertainties remain, particularly with respect to the airline
industry's profitability and open market access, the long-term market outlook
appears favorable. The Company is well positioned in all segments of the
commercial jet aircraft market, and intends to remain the airline industry's
preferred supplier through emphasis on product offerings and customer service
that provide the best overall value in the industry.
DEFENSE AND SPACE BUSINESS ENVIRONMENT AND TRENDS
Procurement budget - Department of Defense and NASA:
[Graphic and image material item Number 7
See appendix on page 156 for description.]
Uncertain defense priorities and severe U.S. Government funding pressures
continue to characterize the business environment for the defense and space
segment. Since 1992, total procurement and research funding for U.S. Government
defense and space programs have declined nearly 20%. As a consequence, some of
the Company's programs remain subject to stretch-out, curtailment or
termination. It is currently anticipated that total annual U.S. Government
defense and space funding for procurement and research programs will be
relatively constant over the next five years in the $90 billion range.
The Company's defense and space business is broadly diversified among priority
government programs involving military aircraft, helicopters, information and
electronic systems, and space systems. Additionally, the Company's programs are
balanced between potential future production programs and ongoing modernization
activities for existing defense systems.
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<PAGE> 36
Sales to foreign governments represented 15% of total 1996 defense and space
sales, principally due to foreign government sales associated with the 767 AWACS
and CH-47 programs. The percent of defense and space sales to foreign
governments increased during the 1994-1996 period.
Significant restructuring in the form of mergers, acquisitions and strategic
alliances are continuing by companies throughout the aerospace industry to
maintain or increase market share, to reduce costs or obtain economies of scale,
and to be competitive for new business opportunities. Joint venture arrangements
with other companies are expected to continue to be common for major
developmental programs and follow-on production activities. Currently, the
Company's activities in the F-22, V-22, RAH-66, Sea Launch, and Civil
Tiltrotor developmental programs are under joint venture arrangements. Sea
Launch program team members include Kvaerner a.s. of Norway, RSC-Energia of
Russia, and Yuzhnoye of Ukraine. In general, business risk is greater in
working with joint venture partners located in foreign countries. The Company
is also a 50/50 partner with Lockheed Martin in United Space Alliance (USA) to
operate NASA's manned spaceflight activities.
The Company is pursuing promising opportunities in the growing civil space
market in the areas of launch systems, communication systems, earth observation
systems and remote sensing. The addition of Boeing North American will
strengthen the Company's role in civil space business.
MERGER AND ACQUISITION ACTIVITY
The acquisition by Boeing of most of Rockwell's aerospace and defense business
was completed on December 6, 1996. Boeing issued approximately 9.2 million
shares of its common stock valued at $875 million and assumed debt valued at
$2,180 million. The acquired business units are currently operating under the
name Boeing North American, Inc., and are expected to strengthen the strategic
position of the Company's defense and space segment, particularly with respect
to space systems and information/battle management systems.
The major product groups of Boeing North American are rocket propulsion
including the Space Shuttle main engine; Space Station electric power; Space
Shuttle integration, logistics and operations; Global Positioning System
satellites; ICBM systems; tactical missiles; sensors; B1-B bomber; commercial
aerostructures; aircraft and helicopter modifications; airborne laser and
electro-optics; space defense; and advanced programs. The Rockwell aerospace and
defense units had fiscal 1996 annual sales of $2.5 billion, excluding sales to
Boeing, with approximately 21,000 employees.
On December 15, 1996, The Boeing Company and McDonnell Douglas Corporation
jointly announced the signing of a merger agreement. In the merger, which is
subject to government and shareholder approvals, McDonnell Douglas shareholders
will receive 0.65 of a share of Boeing common stock for each share of McDonnell
Douglas common stock pursuant to which McDonnell Douglas will merge with Boeing
in a stock-for-stock transaction. The merger will result in a broad-based
aerospace company with excellent capabilities in commercial aircraft, military
aircraft, and defense and space systems. The defense business base of the merged
companies will represent a good balance of current military aircraft production
programs and those scheduled for production in the years ahead, in addition to
manned space programs and space transportation programs. The combined company
will have about 200,000 employees. The merger is expected to be completed in the
third quarter of 1997.
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<PAGE> 37
STRATEGIC INVESTMENTS FOR LONG-TERM VALUE
Over the past several years, the Company has made significant internal
investments to meet future airline product requirements, and to aggressively
pursue new defense and space business opportunities and to achieve production
efficiencies. Although constraining earnings and requiring substantial resources
in the near term, these investments are building long-term value by streamlining
operations and positioning the Company to maintain its leadership position.
NEW PRODUCT DEVELOPMENT
The Company continually evaluates opportunities to improve current aircraft
models, and assesses the marketplace to ensure that its family of commercial jet
aircraft is well positioned to meet future requirements of the airline industry.
The fundamental strategy is to maintain a broad product line responsive to
changing market conditions by maximizing commonality among the Boeing family of
commercial aircraft. Additionally, the Company is determined to continue to lead
the industry in customer satisfaction by offering products with the highest
standards of quality, safety, technical excellence, economic performance and in-
service support.
The major focus of commercial aircraft development activities over the past
three years has been the 777 wide-body twinjet, which entered service in May
1995, and the 737-600/700/800 family. The new 777 model is designed to meet
airline requirements for an efficient, comfortable, high-capacity jetliner to be
used in domestic and regional markets internationally. Deliveries of the
extended-range version 777-200 will begin in early 1997, to be followed in 1998
by the 777-300 version with 20% greater passenger-carrying capability. As of
December 31, 1996, orders for 318 and options for 126 777s have been announced
by 24 customers.
Development of the 737-600/700/800 family of short-to-medium-range jetliners
began in 1993. These new 737s will provide greater range, increased speed, and
reduced noise and emissions while maintaining 737 family commonality. The 737-
700, the middle-sized member of the family, will be the first version to be
placed into service, with initial deliveries scheduled for late 1997 to
Southwest Airlines. The 737-800, a larger version, is currently scheduled to be
delivered in early 1998 to Hapag-Lloyd. Initial delivery of the smallest
version, the 737-600, is currently scheduled for late 1998 to SAS. As of
December 31, 1996, orders for 517 and options for 287 737-600/700/800s have
been announced by 24 customers.
In 1996 the Company launched a new version of the 757 twinjet. The new 757-300,
with approximately 20% more seating, will have about 10% lower seat-mile
operating costs than the -200, which already has the lowest seat-mile operating
cost in its market segment. First delivery is scheduled for 1999.
Also in 1996, the Company and General Electric formed a joint venture, Boeing
Business Jets, to respond to the market demand for a larger, more capable
business aircraft that can fly over 6,000 miles. The Boeing Business Jet will be
derived from the 737-700.
In January 1997, the Company began offering for sale a new extended-range
version of the 767. The proposed 767-400ERX, which could enter commercial
service as early as the year 2000, will be capable of carrying over 300
passengers in a two-class configuration.
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<PAGE> 38
The Company has been working with some of the world's largest airlines to
explore the development of aircraft capable of carrying more than 500 passengers
over longer ranges than the current 747 family. However, sufficient market
demand has not developed to justify committing the very substantial investment
levels required to develop either an all new aircraft or significantly larger
versions of the 747. The timing of a decision to proceed with a 747 derivative
aircraft and the development schedule depend on customer demand and the
Company's ability to achieve favorable long-term financial returns on the
substantial development costs that would be required.
Other new products under consideration include larger and longer-range versions
of the 777. Potential versions of the 777 being studied would be capable of non-
stop flights approaching 10,000 miles or carrying more than 400 passengers in a
three-class configuration.
While product development activities are principally oriented toward maintaining
and enhancing the competitiveness of the Boeing subsonic fleet, the Company is
also involved in studying the technological and economic issues associated with
development of commercial supersonic aircraft.
Opportunities for major new U.S. Government defense and space programs in the
near term are relatively limited; however, the Company is aggressively seeking
ways to capitalize on its existing broad program base and its competitive
strength with regard to military and space technology.
New business opportunities being pursued or studied include both military and
commercial applications. On the military side, the Company continues to assess
potential applications using the Company's commercial aircraft, particularly
the 767. In the commercial space arena, Boeing is leading the Sea Launch team
to offer highly automated commercial satellite launching from a seagoing
launch platform. First launch is currently scheduled for 1998. In November
1996, the Company and Bell Helicopter Textron, Inc., announced that they plan
to continue their tiltrotor association by forming a joint venture to design,
develop, certify, market and sell a six-to-nine passenger Civil Tiltrotor,
designated the Bell Boeing 609. The new aircraft is offered for delivery in
2001.
In communication activities, Boeing is studying several potential business
opportunities including developing and marketing a phased-array communications
antenna for a variety of mobile commercial and military system applications.
Initial application of this product would be for reception of Direct Broadcast
Satellite (DBS) television on in-flight commercial aircraft. The Company is
studying methods to provide a two-way voice and data wholesale communications
service to "in-country" distributors via a space-based switching network of
low- earth-orbit satellites, and a potential business venture to generate and
sell satellite remote sensing data to agricultural and non-agricultural
business users.
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MAJOR PROCESS IMPROVEMENTS
The Company remains strongly committed to continuous quality improvement in all
aspects of its business and to maintaining a strong focus on customer needs,
including product capabilities, technology, in-service economics and product
support. Major long-term productivity gains are being aggressively pursued, with
substantial resources invested in training, restructuring of processes, new
technology, and organizational realignment.
The 777, the 737-600/700/800 and other recent commercial and government
developmental programs included early commitment of resources for integrated
product teams, design interface with customer representatives, use of advanced
three-dimensional digital product definition and digital pre-assembly computer
applications, and increased use of automated manufacturing processes. Although
these measures have required significant current investments, substantial long-
term benefits are anticipated from reductions in design changes and rework and
improved quality of internally manufactured and supplier parts.
A major initiative has been launched to greatly simplify and streamline
commercial aircraft configuration control, production management, and related
systems. Organizations have been realigned and substantial resources have been
dedicated to ensure the new processes and systems are successfully implemented
over the next few years.
The Defense & Space Group continues to aggressively pursue important process
improvements through integrated product teams that provide cost-effective
solutions and maintain technological superiority. One example is a rapid
prototyping process that facilitates quick and effective cross-disciplinary
integration in creating new product prototypes.
------
SHAREHOLDER VALUE AS CORPORATE PERFORMANCE MEASURE AND SHAREVALUE TRUST
The Company's long-range mission is to be the number one aerospace company in
the world and among the premier industrial concerns in terms of quality,
profitability and growth. The Company's fundamental goal with respect to
profitability and growth is now defined as increasing shareholder value over the
long term. Total company performance, operating group performance measurements,
and strategic planning processes are aligned with, or directly based on,
enhancing long-term shareholder value.
During 1996 the Company established a self-sufficient irrevocable 12-year trust,
"ShareValue Trust," designed to allow substantially all employees to share in
the results of increasing shareholder value over the long term. Funding of the
ShareValue Trust totaled $1,150 million. The Trust investments consist solely of
Boeing stock and the appreciation of the Trust investments in the Company's
stock above an annual 3% threshold will be distributed to qualifying
participants based on overlapping investment cycles. Potential distributions
occur every two years. Shares of common stock held by the Trust are legally
outstanding, and dividends received by the Trust are reinvested in additional
shares of common stock.
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<PAGE> 40
Although the obligation to make the ShareValue Trust appreciation distributions
is solely that of the Trust and no assets of the Company will be required in the
future to satisfy the Trust distributions, the change in Trust appreciation
above the threshold amounts for the respective investment periods is charged or
credited to earnings based on the Trust valuation as of the end of the reporting
period. ShareValue Trust charges and credits reflected in earnings will not
impact the Company's current or future cash flow. (See Note 13 to the
Consolidated Financial Statements on page 59).
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders, The Boeing Company:
We have audited the accompanying consolidated statements of financial position
of The Boeing Company and subsidiaries as of December 31, 1996 and 1995, and
the related statements of net earnings and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Boeing Company and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
January 23, 1997
Seattle, Washington
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<PAGE> 42
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(Dollars in millions except per share data)
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Sales and other operating revenues $22,681 $19,515 $21,924
Costs and expenses 21,327 18,613 20,773
Special retirement program expense 600
- -------------------------------------------------------------------------------
Earnings from operations 1,354 302 1,151
Other income, principally interest 287 209 122
Interest and debt expense (145) (151) (130)
ShareValue Trust appreciation (133)
- -------------------------------------------------------------------------------
Earnings before federal taxes on income 1,363 360 1,143
Federal taxes on income 268 (33) 287
- -------------------------------------------------------------------------------
Net earnings $ 1,095 $ 393 $ 856
===============================================================================
Earnings per share $3.19 $1.15 $2.51
===============================================================================
Cash dividends per share $1.09 $1.00 $1.00
===============================================================================
See notes to consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions except per share data)
December 31, 1996 1995
- -------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 4,375 $ 3,730
Short-term investments 883
Accounts receivable 1,988 1,470
Current portion of customer financing 150 205
Deferred income taxes 745 840
Inventories, net of advances and progress billings 6,939 6,933
- -------------------------------------------------------------------------------
Total current assets 15,080 13,178
Customer financing 648 1,660
Property, plant and equipment, net 6,813 6,456
Deferred income taxes 415 58
Goodwill 2,478
Prepaid pension expense 1,708 698
Other assets 112 48
- -------------------------------------------------------------------------------
$27,254 $22,098
===============================================================================
Liabilities and Shareholders' Equity
Accounts payable and other liabilities $ 7,306 $ 6,245
Advances in excess of related costs 973 510
Income taxes payable 350 389
Current portion of long-term debt 13 271
- -------------------------------------------------------------------------------
Total current liabilities 8,642 7,415
Accrued retiree health care 3,691 2,441
Long-term debt 3,980 2,344
Shareholders' equity:
Common shares, par value $5.00 -
600,000,000 shares authorized;
Shares issued - 360,437,668 and 349,256,792 1,802 1,746
Additional paid-in capital 1,951 615
Treasury shares, at cost - 15,220 and 5,304,135 (1) (209)
Retained earnings 8,447 7,746
ShareValue Trust - 13,059,851 shares (1,258)
- -------------------------------------------------------------------------------
Total shareholders' equity 10,941 9,898
- -------------------------------------------------------------------------------
$27,254 $22,098
===============================================================================
See notes to consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Cash flows - operating activities:
Net earnings $ 1,095 $ 393 $ 856
Adjustments to reconcile net earnings to net
cash provided by operating activities:
ShareValue Trust appreciation 133
Special retirement program expense 600
Depreciation and amortization 991 1,033 1,142
Changes in assets and liabilities -
Short-term investments (874) 559 207
Accounts receivable 243 194 (49)
Inventories, net of advances and
progress billings 250 (1,954) (1,545)
Accounts payable and other liabilities 176 (24) 413
Advances in excess of related costs 293 237 47
Income taxes payable and deferred (94) 37 (117)
Other assets (116) (168) (11)
Accrued retiree health care 126 159 134
- -------------------------------------------------------------------------------
Net cash provided by operating activities 2,223 1,066 1,077
- -------------------------------------------------------------------------------
Cash flows - investing activities:
Customer financing additions (420) (1,239) (975)
Customer financing reductions 1,482 2,638 770
Property, plant and equipment, net additions (762) (629) (795)
- -------------------------------------------------------------------------------
Net cash provided (used) by investing activities 300 770 (1,000)
- -------------------------------------------------------------------------------
Cash flows - financing activities:
Long-term debt financing, net (822) 6 (21)
ShareValue Trust (891)
Dividends paid (379) (342) (340)
Stock options exercised, other 214 146 26
- -------------------------------------------------------------------------------
Net cash used by financing activities (1,878) (190) (335)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 645 1,646 (258)
Cash and cash equivalents at beginning of year 3,730 2,084 2,342
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,375 $ 3,730 $ 2,084
===============================================================================
See notes to consolidated financial statements.
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<PAGE> 45
THE BOEING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
(Dollars in millions except per share data)
Note 1 - Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of all majority-
owned subsidiaries, including the Rockwell aerospace and defense business
acquired in December 1996 (See Note 2). Intercompany profits, transactions and
balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions and estimates
that directly affect the amounts reported in the consolidated financial
statements. Significant estimates for which changes in the near term are
considered reasonably possible and that may have a material impact on the
financial statements are addressed in these notes to the consolidated financial
statements.
Sales and other operating revenues
Sales under commercial programs and U.S. Government and foreign military
fixed-price contracts are generally recorded as deliveries are made. For
certain fixed-price contracts that require substantial performance over an
extended period before deliveries begin, sales are recorded based upon
attainment of scheduled performance milestones. Sales under cost-reimbursement
contracts are recorded as costs are incurred. Certain U.S. Government
contracts contain profit incentives based upon performance relative to
predetermined targets. Incentives based on cost performance are recorded
currently, and other incentives and fee awards are recorded when the amounts
can be reasonably estimated or are awarded. Income associated with customer
financing activities is included in sales and other operating revenues.
Contract and Program Accounting
Defense and space segment operations principally consist of performing work
under U.S. Government and foreign military contracts. Cost of sales for such
contracts is determined based on the estimated average total contract cost and
revenue. To the extent the total of such costs is expected to exceed the total
estimated sales price, charges are made to current earnings to reduce
inventoried costs to estimated realizable value.
45 of 156
<PAGE> 46
Commercial jet aircraft programs are planned, committed and facilitized
based on long-term delivery forecasts, normally for quantities in excess of
contractually firm orders. Cost of sales for all commercial jet aircraft
programs is determined based on estimated average total cost and revenue for the
current program commitment quantity. For new commercial jet aircraft programs,
the program quantity is initially based on an established number of units
representing what is believed to be a conservative market projection. Program
commitment quantities generally represent deliveries for the next three to five
years, although the initial program quantity for new programs will normally
include orders and deliveries over periods up to ten years. The initial program
quantity for the new 777 program has been established at 400 units, the same
initial program quantity as for the 747 program in 1969 and for the 767 and 757
programs in 1982. The commercial program method of accounting, an industry-
developed practice adopted by the Company in the 1960s and applied to all
its commercial jet aircraft programs since that time, requires the demonstrated
ability to reliably estimate and manage the cost-revenue relationship for the
defined program quantity. The program method of accounting effectively
amortizes or averages tooling and special equipment costs, as well as unit
production costs, over the program quantity. Because of the higher unit
production costs experienced at the beginning of a new program and the
substantial investment required for initial tooling and special equipment, new
commercial jet aircraft programs normally have lower operating profit margins
than established programs. The estimated program average costs and revenues are
reviewed and reassessed quarterly, and changes in estimates are recognized over
current and future deliveries constituting the program quantity.
Inventories
Inventoried costs on long-term commercial jet aircraft programs and U.S.
Government and foreign military contracts include direct engineering, production
and tooling costs, and applicable overhead. In addition, for U.S. Government
fixed-price-incentive contracts, inventoried costs include research and
development and general and administrative expenses estimated to be recoverable.
Inventoried costs associated with commercial jet aircraft programs and long-
term contracts, less estimated average cost of sales, are not in excess of
estimated realizable value. In accordance with industry practice, inventoried
costs include amounts relating to programs and contracts with long production
cycles, a portion of which is not expected to be realized within one year.
Commercial spare parts and general stock materials are stated at average cost
not in excess of realizable value.
Research and development, general and administrative expenses
Research and development and general and administrative expenses are charged
directly to earnings as incurred except to the extent estimated to be directly
recoverable under U.S. Government flexibly priced contracts.
Interest expense
Interest and debt expense is presented net of amounts capitalized. Interest
expense is subject to capitalization as a construction-period cost of property,
plant and equipment and of commercial program tooling.
46 of 156
<PAGE> 47
Postretirement benefits
The Company's funding policy for pension plans is to contribute, at a
minimum, the statutorily required amount to an irrevocable trust. Benefits
under the plans are generally based on years of credited service, age at
retirement and average of last five years' earnings. The actuarial cost method
used in determining the net periodic pension cost is the projected unit credit
method.
Cash and cash equivalents
Cash and cash equivalents consist of highly liquid instruments, such as
certificates of deposit, time deposits, treasury notes and other money market
instruments, which generally have maturities of less than three months.
Short-term investments
Short-term investments, consisting principally of U.S. Government Treasury
obligations, are classified as trading securities with unrealized gains and
losses reflected in other income.
Property, plant and equipment
Property, plant and equipment are recorded at cost, including applicable
construction-period interest, and depreciated principally over the following
estimated useful lives: new buildings and land improvements, from 20 to 45
years; machinery and equipment, from 3 to 10 years. The principal methods of
depreciation are as follows: buildings and land improvements, 150% declining
balance; machinery and equipment, sum-of-the-years' digits.
Goodwill
Goodwill, representing the excess of acquisition costs over the fair value of
net assets of businesses purchased, is being amortized by the straight-line
method over 30 years. Goodwill is included in the respective industry
segments' identifiable assets and the goodwill amortization is charged against
the respective industry segments' operating profit. Recoverability of the
unamortized goodwill balance is based upon assessment of related operational
cash flows.
Per share data
Net earnings per share are computed based on the weighted average number of
shares outstanding, excluding the outstanding shares held by the ShareValue
Trust, of 343,658,097; 342,159,741; and 340,574,779 for the years ended
December 31, 1996, 1995 and 1994, respectively. There is no material dilutive
effect on net earnings per share due to common stock equivalents.
47 of 156
<PAGE> 48
Note 2 - Acquisition of Rockwell Aerospace and Defense Business
On December 6, 1996, the Company acquired Rockwell's aerospace and defense
business by issuing 9.2 million shares of common stock valued at $875 and
assuming debt valued at $2,180. This transaction has been accounted for under
the purchase method. The assets and liabilities have been recorded at fair
value based on preliminary valuations, with excess purchase price recorded as
goodwill. Goodwill is amortized on a straight-line basis over 30 years. The
fair value of the net liabilities acquired was $1,610 and goodwill was valued
at $2,485 as shown in the following table:
Assets Liabilities and common stock
- -------------------------------------------------------------------------------
Accounts Receivable $ 761 Accounts payable and other
Inventories 230 liabilities $1,059
Property, plant and equipment 538 Long-term debt 2,180
Prepaid pension, other 1,018 Accrued retiree health care 1,124
Net deferred tax asset 206 Common stock issued 875
Goodwill 2,485
- -------------------------------------------------------------------------------
$5,238 $5,238
===============================================================================
Pro forma combined operating results for 1996 and 1995, which are presented
solely as unaudited supplemental information and not necessarily indicative of
what results would have been if the acquisition had been effective the
beginning of 1995, are as follows: sales of $25,214 and $22,267, net earnings
of $1,123 and $437 and earnings per share of $3.19 and $1.24.
Note 3 - Accounts Receivable
Accounts receivable at December 31 consisted of the following:
1996 1995
- -------------------------------------------------------------------------------
Accounts receivable under
U.S. Government contracts $1,515 $1,059
Accounts receivable from commercial
and foreign military customers 473 411
- -------------------------------------------------------------------------------
$1,988 $1,470
===============================================================================
Accounts receivable included the following as of December 31, 1996 and 1995,
respectively: amounts not currently billable of $249 and $119 relating
primarily to sales values recorded upon attainment of performance milestones
that differ from contractual billing milestones and withholds on U.S.
Government contracts ($92 and $65 not expected to be collected within one
year); $259 and $162 relating to claims and other amounts on U.S. Government
contracts subject to future settlement ($255 and $19 not expected to be
collected within one year); and $31 and $46 of other receivables not expected
to be collected within one year.
48 of 156
<PAGE> 49
Note 4 - Inventories
Inventories at December 31 consisted of the following:
1996 1995
- -------------------------------------------------------------------------------
Commercial jet aircraft programs
and long-term contracts in progress $15,378 $13,107
Commercial spare parts, general stock
materials and other 1,150 894
- -------------------------------------------------------------------------------
16,528 14,001
Less advances and progress billings (9,589) (7,068)
- -------------------------------------------------------------------------------
$6,939 $6,933
===============================================================================
General and administrative and research and development expenses included in
inventories represented less than 1% of total inventories. Interest
capitalized as construction-period tooling costs amounted to $30, $33 and $36
in 1996, 1995 and 1994, respectively.
As of December 31, 1996, there were no significant deferred production costs
in excess of estimated average cost of deliveries or unamortized tooling costs
not recoverable from existing firm orders for commercial programs other than
the 777 and 737-600/700/800 programs. The program quantity for the 777 program
for determining deferred production costs in excess of aggregate estimated
average cost and over which total tooling costs will be amortized and absorbed
in cost of sales has been established at 400 units. Inventory costs relating
to the 777 program included unamortized tooling of $3,159 and $3,241 at
December 31, 1996 and 1995, and $2,488 and $1,440 at December 31, 1996 and
1995, of deferred production costs incurred on in-process and delivered units
in excess of the estimated average cost of such units determined as described
in Note 1. It is estimated that $2,020 of the 777 program unamortized tooling
and deferred production costs as of December 31, 1996, will be recovered from
firm orders received after December 31, 1996. As of December 31, 1996, 228
777s were under firm contract, and 45 777s had been delivered. Inventory costs
relating to the 737-600/700/800 program included unamortized tooling of $668 at
December 31, 1996. As of December 31, 1996, 413 737-600/700/800s were under
firm contract.
As of December 31, 1996 and 1995, inventory balances included $7 and $324
subject to claims or other uncertainties related to U.S. Government contracts.
The estimates underlying the average costs of deliveries reflected in the
inventory valuations may differ materially from amounts eventually realized for
the reasons outlined in Note 21.
49 of 156
<PAGE> 50
Note 5 - Customer Financing
Long-term customer financing, less current portion, at December 31 consisted of
the following:
1996 1995
- -------------------------------------------------------------------------------
Notes receivable $ 253 $ 721
Investment in sales-type leases 237 351
Operating lease aircraft, at cost,
less accumulated depreciation of $77 and $326 258 688
- -------------------------------------------------------------------------------
748 1,760
Less valuation allowance (100) (100)
- -------------------------------------------------------------------------------
$ 648 $1,660
===============================================================================
Financing for aircraft is collateralized by security in the related asset,
and historically, the Company has not experienced a problem in accessing such
collateral. The operating lease aircraft category includes new and used jet
and commuter aircraft, spare engines and spare parts.
Scheduled principal payments from notes receivable and sales-type leases for
the next five years are as follows:
1997 1998 1999 2000 2001
------------------------------------
$150 $149 $14 $12 $9
====================================
The Company has entered into interest rate swaps with third-party investors
whereby the interest rate terms differ from the terms in the original
receivable. These interest rate swaps related to $67 of customer financing
receivables as of December 31, 1996.
Interest rates on fixed-rate notes ranged from 7.87% to 12.00%, and effective
interest rates on variable-rate notes ranged from 0.75% to 3.50% above the
London Interbank Offered Rate (LIBOR).
Sales and other operating revenues included interest income associated with
notes receivable and sales-type leases of $43, $160 and $183 for 1996, 1995 and
1994, respectively.
The valuation allowance is subject to change depending on estimates of
collectability and realizability of the customer financing balances.
50 of 156
<PAGE> 51
Note 6 - Property, Plant and Equipment
Property, plant and equipment at December 31 consisted of the following:
1996 1995
- -------------------------------------------------------------------------------
Land $ 431 $ 404
Buildings 6,165 5,791
Machinery and equipment 7,688 7,251
Construction in progress 367 298
- -------------------------------------------------------------------------------
14,651 13,744
Less accumulated depreciation (7,838) (7,288)
- -------------------------------------------------------------------------------
$ 6,813 $ 6,456
===============================================================================
Depreciation expense was $942, $976 and $1,081 for 1996, 1995 and 1994,
respectively. Interest capitalized as construction-period property, plant and
equipment costs amounted to $28, $32 and $51 in 1996, 1995 and 1994,
respectively.
Note 7 - Taxes on Income
The provision for federal taxes on income consisted of the following:
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Taxes paid or currently payable $324 $ 38 $251
Change in deferred taxes (56) (71) 36
- -------------------------------------------------------------------------------
$268 $(33) $287
===============================================================================
State taxes on income, which have been relatively minor in amount, are
included in general and administrative expense. The provisions for federal
taxes on income were less than those which result from application of the
statutory corporate tax rates due to the following:
1996 1995 1994
- -------------------------------------------------------------------------------
Statutory tax rate 35.0 % 35.0 % 35.0 %
Foreign Sales Corporation tax benefit (6.6) (20.8) (5.7)
Research benefit (0.3) (25.0) (5.2)
Prior years' investment tax credit (7.0)
Prior years' tax adjustment (2.2)
Other 0.8 1.6 1.0
- ------------------------------------------------------------------------------
Effective tax rate 19.7 % (9.2)% 25.1 %
==============================================================================
51 of 156
<PAGE> 52
The deferred tax assets, net of deferred tax liabilities, resulted from an
alternative minimum tax credit carryforward and from temporary tax differences
associated with the following:
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Inventory and long-term contract methods
of income recognition $ 204 $ 191 $ 473
Pension benefit accruals (540) (206) (347)
Retiree health care accruals 1,292 854 799
Other employee benefits accruals 338 291 220
Customer financing (134) (362) (318)
Alternative minimum tax
credit carryforward 130
- -------------------------------------------------------------------------------
Net deferred tax assets $1,160 $ 898 $ 827
===============================================================================
The temporary tax differences associated with inventory and long-term
contract methods of income recognition encompass related costing differences,
including timing and depreciation differences.
Valuation allowances were not required due to the nature of and circumstances
associated with the temporary tax differences.
The Company has filed a suit in the United States District Court for the
Western District of Washington for the refund of taxes and interest previously
paid associated with disputed assessments. The suit relates to the taxation of
export sales through the Company's Domestic International Sales Corporation
(DISC) and its Foreign Sales Corporation (FSC) for the years 1979 through 1987.
The Company has been unable to resolve these issues within the Internal Revenue
Service administrative process. Successful resolution of this suit could
result in recovery of taxes and interest in excess of $400. Income taxes have
been settled with the Internal Revenue Service for all years through 1978, and
Internal Revenue Service field examinations have been completed through 1987.
The Company believes adequate provision has been made for all open years.
Federal income tax payments (refunds) and transfers were $306, $(91) and $401
in 1996, 1995 and 1994, respectively.
Note 8 - Accounts Payable and Other Liabilities
Accounts payable and other liabilities at December 31 consisted of the
following:
1996 1995
- -------------------------------------------------------------------------------
Accounts payable $3,554 $3,017
Accrued compensation and employee benefit costs 1,597 1,374
Lease and other deposits 399 508
Other 1,756 1,346
- -------------------------------------------------------------------------------
$7,306 $6,245
===============================================================================
52 of 156
<PAGE> 53
Note 9 - Long-Term Debt
Long-term debt at December 31 consisted of the following:
1996 1995
- -------------------------------------------------------------------------------
Unsecured debentures and notes:
8 3/8% due Mar. 1, 1996 $ - $ 250
7 5/8% due Feb. 17, 1998 306 -
8 7/8% due Sep. 15, 1999 319 -
8 3/8% due Feb. 15, 2001 212 -
6 3/4% due Sep. 15, 2002 297 -
6.35% due Jun. 15, 2003 299 299
7 7/8% due Feb. 15, 2005 210 -
6 5/8% due Jun. 1, 2005 290 -
8 1/10% due Nov. 15, 2006 175 175
8 3/4% due Aug. 15, 2021 398 398
7.95% due Aug. 15, 2024 300 300
7 1/4% due Jun. 15, 2025 247 247
8 3/4% due Sep. 15, 2031 248 248
8 5/8% due Nov. 15, 2031 173 173
7.50% due Aug. 15, 2042 100 100
7 7/8% due Apr. 15, 2043 173 173
6 7/8% due Oct. 15, 2043 125 125
Other notes 121 127
Less current portion (13) (271)
- -------------------------------------------------------------------------------
$3,980 $2,344
===============================================================================
The $300 debentures due August 15, 2024, are redeemable at the holder's
option on August 15, 2012. All other debentures and notes are not redeemable
prior to maturity. The $100 notes due August 15, 2042, with a stated rate of
7.50% were issued to a private investor in connection with an interest rate
swap arrangement that resulted in an effective synthetic rate of 7.865%.
Maturities of long-term debt for the next five years are as follows:
1997 1998 1999 2000 2001
------------------------------------
$13 $337 $330 $11 $221
====================================
Interest payments were $200, $210 and $210 in 1996, 1995 and 1994,
respectively.
The Company has $2,000 currently available under credit-line agreements with
a group of commercial banks. Under these agreements, revised as of September
27, 1996, $1,000 is available until September 26, 1997, and $1,000 is available
until September 30, 2003. There are compensating balance arrangements, and
retained earnings totaling $1,909 are free from dividend restrictions. The
Company has complied with restrictive covenants contained in the various debt
agreements.
53 of 156
<PAGE> 54
Note 10 - Postretirement Plans
Pensions
The Company has various noncontributory plans covering substantially all
employees. All major pension plans are funded and have plan assets that exceed
accumulated benefit obligations. The following table reconciles the plans'
funded status to the prepaid expense balance at December 31.
1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $(15,598) $ (8,816)
Nonvested (1,065) (806)
- -------------------------------------------------------------------------------
Accumulated benefit obligation (16,663) (9,622)
Effect of projected future salary increases (1,977) (1,421)
- -------------------------------------------------------------------------------
Projected benefit obligation (18,640) (11,043)
Plan assets at fair value - primarily equities,
fixed income obligations and cash equivalents 21,029 11,506
- -------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 2,389 463
Unrecognized net actuarial gain (1,041) (80)
Unrecognized prior service cost 420 388
Unrecognized net asset at January 1, 1987, being recognized
over the plans' average remaining service lives (60) (73)
- -------------------------------------------------------------------------------
Prepaid pension expense recognized in the Consolidated
Statements of Financial Position $ 1,708 $ 698
===============================================================================
The pension provision included the following components:
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost (current period attribution) $ 302 $ 293 $ 352
Interest accretion on projected benefit obligation 790 760 669
Actual return on plan assets (1,820) (2,830) (101)
Net deferral and amortization of actuarial gains
and losses 1,011 2,078 (596)
- -------------------------------------------------------------------------------
Net pension provision $ 283 $ 301 $ 324
===============================================================================
The actuarial present value of the projected benefit obligation at December
31, 1996, 1995 and 1994, respectively, was determined using a weighted average
discount rate of 7.25%, 7.0% and 8.5%, and a rate of increase in future
compensation levels of 5.25%, 5.0% and 5.75%. The expected long-term rate of
return on plan assets was 8.0% for each year.
The pension plans provide that, in the event there is a change in control of
the Company which is not approved by the Board of Directors and the plans are
terminated within five years thereafter, the assets in the plans first will be
used to provide the level of retirement benefits required by the Employee
Retirement Income Security Act, and then any surplus will be used to fund a
trust to continue present and future payments under the postretirement medical
and life insurance benefits in the Company's group insurance programs.
54 of 156
<PAGE> 55
The Company has an agreement with the Government with respect to certain of
the Company pension plans. Under the agreement, should the Company terminate
any of the plans (although the Company has no intention of doing so) under
conditions in which the plan's assets exceed that plan's obligations, the
Government will be entitled to a fair allocation of any of the plan's assets
based on plan contributions that were reimbursed under Government contracts.
Also, the Revenue Reconciliation Act of 1990 imposes a 20% nondeductible excise
tax on the gross assets reverted if the Company establishes a qualified
replacement plan or amends the terminating plan to provide for benefit
increases; otherwise, a 50% tax is applied. Any net amount retained by the
Company is treated as taxable income.
A special retirement program was offered during the first half of 1995 to
encourage early retirements, resulting in a pretax charge of $600. The special
retirement program will be funded over a minimum of ten years through the
Company's retirement plan.
The Company has certain unfunded and partially funded plans with a projected
benefit obligation of $278 and $233; plan assets of $44 and $38; and
unrecognized prior service costs and actuarial losses of $74 and $85 as of
December 31, 1996 and 1995, respectively, based on actuarial assumptions
consistent with the funded plans. The net provision for the unfunded plans was
$32 and $27 for 1996 and 1995.
The principal defined contribution plans are the Company-sponsored 401(k)
plans and a funded plan for unused sick leave. Under the terms of the Company-
sponsored 401(k) plans, eligible employees are currently allowed to contribute
up to 15% of their base pay. The Company contributes amounts equal to 50% of
the employee's contribution to a maximum of 4% of the employee's pay, subject
to statutory limitations. The provision for these defined contribution plans
in 1996, 1995 and 1994 was $193, $190 and $206, respectively.
Other postretirement benefits
The Company's postretirement benefits other than pensions consist principally
of health care coverage for eligible retirees and qualifying dependents.
Except for employees covered by the United Auto Workers bargaining agreement
for whom lifetime benefits are provided, retiree health care is provided
principally until age 65.
The retiree health care cost provision was $233, $246 and $218 for 1996, 1995
and 1994, respectively. The components of expense were as follows:
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost (current period attribution) $ 89 $ 92 $ 91
Interest accretion on accumulated retiree
health care obligation 152 157 136
Net deferral and amortization of actuarial gains (8) (3) (9)
- -------------------------------------------------------------------------------
Net provision for retiree health care $233 $246 $218
===============================================================================
55 of 156
<PAGE> 56
Benefit costs were calculated based on assumed cost growth for retiree health
care costs of an 8.9% annual rate for 1997, decreasing to a 5.0% annual growth
rate by the year 2008. A 1% increase or decrease in the assumed annual trend
rates would increase or decrease the accumulated retiree health care obligation
by $309, $271 and $231 as of December 31, 1996, 1995 and 1994, respectively,
with a corresponding effect on the retiree health care expense of $37, $41 and
$37. The accumulated retiree health care obligation at December 31, 1996, 1995
and 1994 was determined using a weighted average discount rate of 7.25%, 7.0%
and 8.5%, respectively.
The accumulated retiree health care obligation at December 31 consisted of the
following components:
1996 1995
- -------------------------------------------------------------------------------
Retirees and dependents $1,660 $ 890
Fully eligible active plan participants 292 201
Other active plan participants 982 1,121
- -------------------------------------------------------------------------------
Total accumulated retiree health care
obligation 2,934 2,212
Unrecognized gain on plan changes 249
Unrecognized net actuarial gain 508 229
- -------------------------------------------------------------------------------
Accrued retiree health care $3,691 $2,441
===============================================================================
The special retirement program offered during the first half of 1995 did not
result in an additional retiree health care cost due to offsetting unrecognized
actuarial gains.
Note 11 - Research and Development, General and Administrative Expenses
Expenses charged directly to earnings as incurred included the following:
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Research and development $1,200 $1,267 $1,704
General and administrative 1,074 1,020 1,126
===============================================================================
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<PAGE> 57
Note 12 - Shareholders' Equity
Changes in shareholders' equity consisted of the following:
- -------------------------------------------------------------------------------
1996 1995 1994
(Shares in thousands) Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Common stock
Beginning balance-January 1 349,257 $1,746 349,257 $1,746 349,257 $1,746
Shares issued for incentive
stock plans 294 1
Shares issued for
ShareValue Trust 1,733 9
Shares issued for acquisi-
tion of Rockwell aerospace
and defense business 9,154 46
- -------------------------------------------------------------------------------
Ending balance-December 31 360,438 $1,802 349,257 $1,746 349,257 $1,746
===============================================================================
Additional paid-in capital
Beginning balance-January 1 $ 615 $586 $413
Treasury shares issued for
incentive stock plans, net 6 (11) (9)
Tax effect of incentive
stock plans 57 20 3
Stock appreciation rights
expired or surrendered 10 9 4
Incentive stock plan accrual 11
Transfer from contingent stock
repurchase provision 175
Shares issued for ShareValue
Trust 218
ShareValue Trust market
value adjustment 216
Shares issued for acquisition
of Rockwell aerospace and
defense business 829
- -------------------------------------------------------------------------------
Ending balance-December 31 $1,951 $615 $586
===============================================================================
Treasury stock
Beginning balance-January 1 5,304 $(209) 8,378 $(328) 9,119 $(356)
Shares issued for
incentive stock plans, net (3,807) 150 (3,074) 119 (741) 28
Shares issued to
ShareValue Trust (1,482) 58
- -------------------------------------------------------------------------------
Ending balance-December 31 15 $ (1) 5,304 $(209) 8,378 $(328)
===============================================================================
Retained earnings
Beginning balance-January 1 $7,746 $7,696 $7,180
Net earnings 1,095 393 856
Cash dividends declared (394) (343) (340)
- -------------------------------------------------------------------------------
Ending balance-December 31 $8,447 $7,746 $7,696
===============================================================================
57 of 156
<PAGE> 58
Changes in shareholders' equity (continued):
- -------------------------------------------------------------------------------
1996 1995 1994
(Shares in thousands) Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------
ShareValue Trust
Beginning balance-January 1 0 $ 0 0 $ 0 0 $ 0
Shares acquired for
original funding 13,016 (1,171)
Shares acquired from
dividend reinvestment 44 (4)
Market value adjustment (216)
Accrual of appreciation 133
- -------------------------------------------------------------------------------
Ending balance-December 31 13,060 $(1,258) 0 $ 0 0 $ 0
===============================================================================
Ten million shares of authorized preferred stock remain unissued.
In July 1987, the Company adopted a Stockholder Rights Plan and declared a
dividend distribution of one Right for each outstanding share of common stock.
Under certain conditions, each Right may be exercised to purchase one one-
hundredth of a share of Series A Junior Participating Preferred Stock at a
purchase price of $150, subject to adjustment. The Rights will be exercisable
only if a person or group has acquired, or obtained the right to acquire, 20% or
more of the outstanding shares of common stock; following the commencement of a
tender or exchange offer for 30% or more of such outstanding shares of common
stock; or after the Board of Directors of the Company declares any person, alone
or together with affiliates and associates, to be an Adverse Person. If the
Board of Directors declares an Adverse Person, or a person or group acquires
more than 30% of the then outstanding shares of common stock (except pursuant to
an offer which the independent directors determine to be fair to and otherwise
in the best interests of the Company and its shareholders), each Right will
entitle its holder to receive, upon exercise, common stock (or, in certain
circumstances, cash, property or other securities of the Company) having a value
equal to two times the exercise price of the Right. The Company will be
entitled to redeem the Rights at 5 cents per Right at any time prior to the
earlier of the expiration of the Rights in August 1997 or ten days following the
time that a person has acquired or obtained the right to acquire a 20% position.
The Company may not redeem the Rights if the Board of Directors has previously
declared a person to be an Adverse Person. The Rights do not have voting or
dividend rights, and until they become exercisable, have no dilutive effect on
the earnings of the Company.
In 1992 the Company issued put options on five million shares of its stock,
exercisable on specific dates in 1994, giving another party the right to sell
shares of Boeing stock to the Company at contractually specified prices. As of
January 1, 1994, $175 was the amount the Company would have been obligated to
pay if all the put options were exercised. All of the put options expired in
1994 and none were exercised. The proceeds from the issuance of the put
options were recorded as paid-in capital.
58 of 156
<PAGE> 59
Note 13 - ShareValue Trust
In July 1996, the Company established a self-sufficient irrevocable 12-year
trust, "ShareValue Trust," designed to allow substantially all employees to
share in the results of increasing shareholder value over the long term. The
Trust acquired 13.016 million shares of the Company's common stock, equivalent
to $1,150 of market value based upon a stock price of $88 3/8, which was the
average price per share on June 28, 1996, plus 44 thousand shares acquired from
reinvested dividends. Shares of common stock held by the Trust are legally
outstanding and entitled to receive dividends. Dividends received by the Trust
are reinvested in additional shares of common stock. If the term of the Trust
is not extended beyond the initial irrevocable 12-year period, any residual
investment balance will revert to the Company.
Two investment periods began on July 1, 1996. One period has a duration of
two years and the other has a duration of four years. Each period was
allocated a fund of one-half of the total shares. Distributions from the
ShareValue Trust to employees in the form of common stock will be made to the
extent the market value of that ShareValue Trust fund has increased above a
pre-defined threshold amount of 3% per annum at the end of each investment
period. The ShareValue Trust bears its own nominal administrative costs paid
out of the Trust assets. At the end of each investment period, a new, four-
year investment period will begin, resulting in overlapping periods, with
potential distributions every two years. The Trust fund market value after
distribution will be the basis for determining the distributable market value
appreciation over the threshold for each succeeding investment period.
Although the obligation to make these distributions is solely that of the
Trust and no assets of the Company will be required in the future to satisfy
the Trust distributions, the change in Trust appreciation above the threshold
amounts for the respective investment periods is charged or credited to
earnings based on the Trust valuation as of the end of the reporting period.
ShareValue Trust charges and credits reflected in earnings will not impact the
Company's current or future cash flow. As of December 31, 1996, the increased
value of the funds exceeded the thresholds by $133.
The shares held by the ShareValue Trust, recorded in the contra equity account
"ShareValue Trust," are legally outstanding for registration purposes and
dividend payments. The ShareValue Trust is adjusted to market value at each
reporting period, with an offsetting adjustment to additional paid-in capital.
Note 14 - Stock-Based Plans
The Company's 1993 incentive stock plan permits the grant of stock options,
stock appreciation rights (SARs) and stock awards to any employee of the
Company or its subsidiaries. Under the terms of the plan, 14,000,000 shares
are authorized for issuance upon exercise of options, as payment of SARs and as
stock awards, of which no more than an aggregate of 2,000,000 shares are
available for issuance as stock awards. This authorization will terminate on
April 30, 1998. As of December 31, 1996, no SARs have been granted under the
1993 Plan. The 1984 and 1988 stock option plans permitted the grant of options
or SARs to officers or other key employees of the Company or its subsidiaries.
No further grants may be awarded under these two plans.
59 of 156
<PAGE> 60
Options and SARs have been granted with an exercise price equal to the fair
market value of the Company's stock on the date of grant and expire ten years
after the grant date. Vesting is generally over a five-year period with
portions of a grant becoming exercisable at one year, three years and five
years after the grant date. In 1993 and 1994, certain senior executives were
awarded options that became exercisable based solely upon maintenance of
certain stock prices for periods of twenty consecutive days. These options
became fully exercisable in late 1995 and expire on December 13, 1998. SARs
granted previously under the 1984 and 1988 plans were granted in tandem with
stock options; therefore, exercise of the SAR cancels the related option and
exercise of the option cancels the attached SAR.
Information concerning stock options and stock appreciation rights (SARs)
issued to officers and other employees is presented in the following table.
1996 1995 1994
- -------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------
Number of shares under option:
Outstanding at beginning
of year 13,596 $41.08 14,337 $38.51 13,265 $36.35
Granted 3,333 80.65 2,866 46.50 2,225 47.23
Exercised (4,121) 39.02 (3,114) 35.48 (767) 26.75
Canceled or expired (113) 71.87 (232) 43.29 (252) 45.25
Exercised as SARs (166) 27.40 (261) 24.63 (134) 23.22
------ ------ ------
Outstanding at end of year 12,529 52.18 13,596 41.08 14,337 38.51
===============================================================================
Exercisable at end of year 5,983 $40.71 8,058 $38.74 6,820 $35.98
===============================================================================
As of December 31, 1996, 7,523,000 shares were available for grant under the
incentive stock plan, and 5,121,000 shares were available for grant under the
incentive compensation plan.
The following table summarizes information about stock options outstanding at
December 31, 1996 (shares in thousands).
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life(years) Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------
$20 to $29 545 1.7 $25.65 545 $25.65
$30 to $39 2,241 6.2 34.51 1,783 34.51
$40 to $49 6,491 6.4 46.27 3,650 45.96
$60 to $69 5 3.6 60.06 5 60.06
$70 to $79 893 9.2 77.06 0 0.00
$80 to $89 2,353 9.3 82.00 0 0.00
$90 to $99 1 9.8 91.13 0 0.00
- -------------------------------------------------------------------------------
12,529 5,983
===============================================================================
60 of 156
<PAGE> 61
Accounting for stock-based plans is in accordance with Accounting Principles
Board Opinion 25, Accounting for Stock Issued to Employees. Accordingly, no
compensation expense has been recognized for fixed stock option plans. Expense
recognized for performance-based stock plans and the ShareValue Program was
$160, $48 and $7 for 1996, 1995 and 1994, respectively.
As required by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has determined the weighted average fair values of stock-based
arrangements granted, including ShareValue Trust, during 1996 and 1995 to be
$16.78 and $16.26. The fair values of stock-based compensation awards granted
and of potential distributions under the ShareValue Trust arrangement were
estimated using a binomial option pricing model with the following assumptions.
- -------------------------------------------------------------------------------
Expected Risk-Free
Grant ----------------------------------------- Interest
Date Option Term Volatility Dividend Yield Rate
- -------------------------------------------------------------------------------
1996 1/11/96 5 years 17% 1.3% 5.3%
7/1/96 2 years 17% - 6.3%
7/1/96 4 years 17% - 6.3%
2/26/96 9 years 21% 1.2% 6.0%
===============================================================================
1995 2/27/95 9 years 20% 2.2% 7.2%
===============================================================================
Had compensation expense for the Company's stock-based plans been accounted
for using the fair value method prescribed by SFAS No. 123, net income and
earnings per share would have been as follows:
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Net earnings as reported $1,095 $393
Pro forma net earnings under SFAS No. 123 $1,129 $379
- -------------------------------------------------------------------------------
Earnings per share as reported $3.19 $1.15
Pro forma earnings per share under SFAS No. 123 $3.29 $1.11
- -------------------------------------------------------------------------------
The effects of applying SFAS No. 123 in the above pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards granted
prior to 1995.
Note 15 - Derivative Financial Instruments
The derivative financial instruments held by the Company at December 31, 1996,
consisted of simple and specifically tailored interest rate swaps (associated
with certain customer financing receivables and long-term debt) to achieve a
desired balance of fixed and variable rate positions. The interest rate swaps
are accounted for as integral components of the associated receivable and debt,
with interest accrued and recognized based upon the effective rates. Due to
the component nature of these interest rate swaps, there are no associated
gains or losses. (See Note 5, Note 9 and Note 18.)
63 of 156
<PAGE> 62
Note 16 - Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business, principally relating to customer financing
activities. Financial instruments with off-balance-sheet risk include
financing commitments, credit guarantees, and participations in customer
financing receivables with third-party investors which involve interest rate
terms different from the underlying receivables.
Irrevocable financing commitments related to aircraft on order, including
options, scheduled for delivery through 2002 totaled $3,933 and $3,632 as of
December 31, 1996 and 1995. The Company anticipates that not all of these
commitments will be utilized and that it will be able to arrange for third-
party investors to assume a portion of the remaining commitments, if necessary.
None of these financing commitments has potentially adverse interest rate
terms.
Participations in customer financing receivables with third-party investors
which involve interest rate terms different from the underlying receivables
totaled $77 and $79 as of December 31, 1996 and 1995.
The Company's maximum exposure to credit-related losses associated with
credit guarantees, without regard to collateral, totaled $324 ($178 associated
with commercial aircraft and collateralized) and $211 as of December 31, 1996
and 1995.
Note 17 - Significant Group Concentrations of Credit Risk
Financial instruments involving potential credit risk are predominantly with
commercial airline customers and the U.S. Government. As of December 31, 1996,
off-balance-sheet financial instruments described in Note 16 predominantly
related to commercial aircraft customers. Of the $2,527 in accounts receivable
and customer financing receivables included in the Consolidated Statements of
Financial Position, $739 related to commercial aircraft customers and $1,514
related to the U.S. Government. No single commercial airline customer is
associated with more than 25% of all financial instruments relating to customer
financing. Financing for aircraft is collateralized by security in the related
asset, and historically, the Company has not experienced a problem in accessing
such collateral.
Note 18 - Disclosures about Fair Value of Financial Instruments
As of December 31, 1996 and 1995, the carrying amount of accounts receivable
was $1,988 and $1,470 and the fair value of accounts receivable was estimated
to be $1,929 and $1,445. The lower fair value reflects a discount due to
deferred collection for certain receivables that will be collected over an
extended period. The carrying value of accounts payable is estimated to
approximate fair value.
The carrying amount of notes receivable, net of valuation allowance, is
estimated to approximate fair value. Although there are generally no quoted
market prices available for customer financing notes receivable, the valuation
assessments were based on the respective interest rates, risk-related rate
spreads and collateral considerations.
62 of 156
<PAGE> 63
As of December 31, 1996 and 1995, the carrying amount of long-term debt was
$3,993 and $2,615, and the fair value of long-term debt, based on current
market rates for debt of the same risk and maturities, was estimated at $4,229
and $2,996. The Company's long-term debt, however, is generally not callable
until maturity.
With regard to financial instruments with off-balance-sheet risk, it is not
practicable to estimate the fair value of future financing commitments, and all
other off-balance-sheet financial instruments are estimated to have only a
nominal fair value. The terms and conditions reflected in the outstanding
guarantees and commitments for financing assistance are not materially
different from those that would have been negotiated as of December 31, 1996.
Note 19 - Contingencies
Various legal proceedings, claims and investigations related to products,
contracts and other matters are pending against the Company. Most significant
legal proceedings are related to matters covered by insurance. Major
contingencies are discussed below.
In January 1991, the Company received from the U.S. Government a notice of
partial termination for default which terminated most of the work required
under contracts to develop and install a new air defense system for Saudi
Arabia, known as the Peace Shield program. During the second quarter of 1996,
the Peace Shield program issues were settled, and all terminations for default
have been converted to terminations for convenience. The settlement resulted
in the release of all Government claims, including any potential Government
claim for excess cost of reprocurement or other damages.
The Company is subject to federal and state requirements for protection of
the environment, including those for discharge of hazardous materials and
remediation of contaminated sites. Due in part to their complexity and
pervasiveness, such requirements have resulted in the Company being involved
with related legal proceedings, claims and remediation obligations since the
1980s.
The Company routinely assesses, based on in-depth studies, expert analyses
and legal reviews, its contingencies, obligations and commitments for
remediation of contaminated sites, including assessments of ranges and
probabilities of recoveries from other responsible parties who have and have
not agreed to a settlement and of recoveries from insurance carriers. The
Company's policy is to immediately accrue and charge to current expense
identified exposures related to environmental remediation sites based on
conservative estimates of investigation, cleanup and monitoring costs to be
incurred.
The costs incurred and expected to be incurred in connection with such
activities have not had, and are not expected to have, a material impact to the
Company's financial position. With respect to results of operations, related
charges have averaged less than 2% of annual net earnings. Such accruals as of
December 31, 1996, without consideration for the related contingent recoveries
from insurance carriers, are less than 2% of total liabilities.
63 of 156
<PAGE> 64
Because of the regulatory complexities and risk of unidentified contaminated
sites and circumstances, the potential exists for environmental remediation
costs to be materially different from the estimated costs accrued for
identified contaminated sites. However, based on all known facts and expert
analyses, the Company believes it is not reasonably likely that identified
environmental contingencies will result in additional costs that would have a
material adverse impact to the Company's financial position or operating
results and cash flow trends.
The Company is subject to U.S. Government investigations of its practices
from which civil, criminal or administrative proceedings could result. Such
proceedings could involve claims by the government for fines, penalties,
compensatory and treble damages, restitution and/or forfeitures. Under
government regulations, a company, or one or more of its operating divisions or
subdivisions, can also be suspended or debarred from government contracts, or
lose its export privileges, based on the results of investigations. The
Company believes, based upon all available information, that the outcome of any
such government disputes and investigations will not have a material adverse
effect on its financial position or continuing operations.
Note 20 - Proposed Merger with McDonnell Douglas
On December 15, 1996, the Company and McDonnell Douglas Corporation jointly
announced the signing of a merger agreement. Pending government and
shareholder approvals, McDonnell Douglas shareholders will receive 0.65 of a
share of Boeing common stock for each share of McDonnell Douglas common stock
pursuant to which McDonnell Douglas will merge with Boeing in a stock-for-stock
transaction. The merger is intended to be accounted for as a pooling of
interests. The merger would result in the issuance of approximately 138
million additional shares of the Company. The transaction, which is subject to
approval by the McDonnell Douglas shareholders, the authorization of additional
shares by Company shareholders and approvals by certain regulatory agencies, is
expected to be completed in the third quarter of 1997. The merged companies
will operate under the name of The Boeing Company. Combined sales for the
companies would have been approximately $36,500 in 1996 before consideration of
intercompany transactions and conforming accounting methods.
Note 21 - Industry Segment Information
The Company operates in two principal industries: commercial aircraft, and
defense and space. Commercial aircraft operations principally involve
development, production and marketing of commercial jet aircraft and providing
related support services, principally to the commercial airline industry
worldwide. Defense and space operations principally involve research,
development, production, modification and support of military aircraft and
helicopters and related systems, space and missile systems, rocket engines, and
information services, primarily through U.S. Government contracts. No single
product line in the defense and space segment represented more than 10% of
consolidated revenues, operating profits or identifiable assets.
64 of 156
<PAGE> 65
The commercial aircraft segment is subject to both operational and external
business-environment risks. Operational risks that can seriously disrupt the
Company's ability to make timely delivery of its commercial jet aircraft and
meet its contractual commitments include execution of internal performance
plans, product performance risks associated with regulatory certifications of
the Company's commercial aircraft by the U.S. Government and foreign
governments, other regulatory uncertainties, collective bargaining labor
disputes, and performance issues with key suppliers and subcontractors. While
the Company's principal operations are in the United States and Canada, some
key suppliers and subcontractors are located in Europe and Japan. External
business-environment risks include adverse governmental export and import
policies, factors that result in significant and prolonged disruption to air
travel worldwide, and other factors that affect the economic viability of the
commercial airline industry. Examples of factors relating to external
business-environment risks include the volatility of aircraft fuel prices,
global trade policies, and worldwide political stability and economic growth.
In addition to the foregoing risks associated with the commercial aircraft
segment, the defense and space segment is subject to changing priorities or
reductions in the U.S. Government defense and space budget, and termination of
government contracts due to unilateral government action (termination for
convenience) or failure to perform (termination for default). Civil, criminal
or administrative proceedings involving fines, compensatory and treble damages,
restitution, forfeiture and suspension or debarment from government contracts
may result from violations of business and cost classification regulations on
U.S. Government contracts.
As of December 31, 1996, the Company's principal collective bargaining
agreements were with the International Association of Machinists and Aerospace
Workers (IAM) representing 31% of employees (current agreement expiring
September 1999), Seattle Professional Engineering Employees Association (SPEEA)
bargaining units representing 16% of employees (current agreement expiring
December 1999) and United Auto Workers (UAW) representing 4% of employees
(current agreement expiring September 1999).
Foreign sales by geographic area consisted of the following:
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Asia, other than China $ 6,478 $4,491 $ 6,149
China 757 721 1,254
Europe 2,205 1,901 3,277
Oceania 360 485 887
Africa 35 127 135
Western Hemisphere 285 474 142
- -------------------------------------------------------------------------------
$10,120 $8,199 $11,844
===============================================================================
Defense sales were approximately 13%, 27% and 9% of total sales in Europe for
1996, 1995 and 1994, respectively. Defense sales were approximately 9%, 12%
and 3% of total sales in Asia excluding China for 1996, 1995 and 1994,
respectively. Exclusive of these amounts, defense and space sales were
principally to the U.S. Government.
65 of 156
<PAGE> 66
Financial information by segment for the three years ended December 31, 1996,
is summarized below. Corporate income consists principally of interest
income from corporate investments. Activities previously identified
as "Other industries" have been combined with defense and space because the
amounts were not material and such remaining activities were organizationally
aligned into the defense and space segment in 1995. Goodwill resulting from
the acquisition of the Rockwell aerospace and defense business is included in
the defense and space segment. Corporate assets consist principally of cash,
cash equivalents, short-term investments and deferred income taxes.
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Revenues
Commercial aircraft $16,904 $13,933 $16,851
Defense and space 5,777 5,582 5,073
- -------------------------------------------------------------------------------
Operating revenues 22,681 19,515 21,924
Corporate income 287 209 122
- -------------------------------------------------------------------------------
Total revenues $22,968 $19,724 $22,046
===============================================================================
Operating profit
Commercial aircraft $ 1,072 $ 391 $ 1,022
Defense and space 457 124 305
- -------------------------------------------------------------------------------
Operating profit 1,529 515 1,327
Corporate income 287 209 122
Debt and other corporate expense (320) (364) (306)
ShareValue Trust appreciation (133)
- -------------------------------------------------------------------------------
Earnings before taxes $ 1,363 $ 360 $ 1,143
===============================================================================
Depreciation
Commercial aircraft $ 798 $ 837 $ 902
Defense and space 186 196 240
- -------------------------------------------------------------------------------
Total depreciation $ 984 $ 1,033 $ 1,142
===============================================================================
Capital expenditures, net
Commercial aircraft $ 564 $ 493 $ 619
Defense and space 198 136 176
- -------------------------------------------------------------------------------
Total capital expenditures, net $ 762 $ 629 $ 795
===============================================================================
Identifiable assets at December 31
Commercial aircraft $12,634 $14,195 $14,440
Defense and space 8,158 3,220 3,412
- -------------------------------------------------------------------------------
20,792 17,415 17,852
Corporate 6,462 4,683 3,611
- -------------------------------------------------------------------------------
Consolidated assets $27,254 $22,098 $21,463
===============================================================================
66 of 156
<PAGE> 67
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in millions except per share data)
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Quarter 4th 3rd 2nd 1st 4th 3rd 2nd 1st
- -------------------------------------------------------------------------------
Sales and other
operating revenues $6,512 $5,601 $6,275 $4,293 $4,539 $4,381 $5,558 $5,037
Earnings from operations 422 294 484 154 140 223 (287) 226
Net earnings 254 254 468 119 218 225 (231) 181
Net earnings per share .75 .74 1.35 .35 .63 .66 (.68) .53
- -------------------------------------------------------------------------------
Net earnings excluding
ShareValue Trust charge
in 1996 and $600 pretax
special retirement
charge in 1995 338 257 468 119 159 189 254 181
Per share (a) .96 .74 1.35 .35 .46 .56 .74 .53
- -------------------------------------------------------------------------------
Cash dividends per share .28 .28 .28 .25 .25 .25 .25 .25
- -------------------------------------------------------------------------------
Market price:
High 107.50 96.00 90.50 89.13 80.00 72.38 65.38 54.00
Low 90.25 79.88 74.13 75.38 62.00 60.38 52.63 44.38
Quarter end 106.50 94.50 87.13 86.63 78.38 68.25 62.63 53.75
===============================================================================
(a) Per share computation includes outstanding shares held by the ShareValue
Trust.
67 of 156
<PAGE> 68
FIVE-YEAR SUMMARY
(Dollars in millions except per share data)
- -----------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------
Operations
Sales and other operating revenues
Commercial aircraft $16,904 $13,933 $16,851 $20,568 $24,133
Defense and space 5,777 5,582 5,073 4,870 6,051
- -----------------------------------------------------------------------------
Total $22,681 $19,515 $21,924 $25,438 $30,184
- -----------------------------------------------------------------------------
Net earnings $ 1,095 $ 393 $ 856 $ 1,244 $ 1,554(c)
Per share(a) 3.19 1.15 2.51 3.66 4.57(c)
- -----------------------------------------------------------------------------
Net earnings excluding
ShareValue Trust and 1995
special retirement charge $ 1,182 $ 783 $ 856 $ 1,244 $ 1,554(c)
Per share(b) 3.40 2.29 2.51 3.66 4.57(c)
Percent of sales 5.2% 4.0% 3.9% 4.9% 5.2%
- -----------------------------------------------------------------------------
Cash dividends paid $ 379 $ 342 $ 340 $ 340 $ 340
Per share 1.09 1.00 1.00 1.00 1.00
- -----------------------------------------------------------------------------
Other income, principally interest 287 209 122 169 230
- -----------------------------------------------------------------------------
Research and development expensed 1,200 1,267 1,704 1,661 1,846
General and administrative
expensed 1,074 1,020 1,126 1,102 1,232
- -----------------------------------------------------------------------------
Additions to plant and
equipment, net 762 629 795 1,317 2,160
Depreciation of plant and equipment 942 976 1,081 953 870
- -----------------------------------------------------------------------------
Salaries and wages 5,931 5,341 5,799 6,087 6,318
Average employment 112,000 109,400 119,400 134,400 148,600
=============================================================================
Financial position at December 31
Total assets $27,254 $22,098 $21,463 $20,450 $18,147
Working capital 6,438 5,763 3,587 2,601 1,947
Net plant and equipment 6,813 6,456 6,802 7,088 6,724
- -----------------------------------------------------------------------------
Cash and short-term investments 5,258 3,730 2,643 3,108 3,614
Total debt 3,993 2,615 2,609 2,630 1,793
Customer financing 798 1,865 3,321 3,177 2,295
- -----------------------------------------------------------------------------
Shareholders' equity 10,941 9,898 9,700 8,983 8,056
Per share 31.49 28.77 28.45 26.41 23.74
Common shares outstanding
(in millions) 347.4 344.0 340.9 340.1 339.4
=============================================================================
Contractual backlog
Commercial aircraft $79,151 $66,540 $60,614 $69,000 $81,991
Defense and space 8,523 5,805 5,696 4,528 5,939
- -----------------------------------------------------------------------------
Total $87,674 $72,345 $66,310 $73,528 $87,930
=============================================================================
68 of 156
<PAGE> 69
(FIVE YEAR SUMMARY continued)
(Dollars in millions except per share data)
Cash dividends have been paid on common stock every year since 1942.
(a) Per share computation excludes outstanding shares held by the ShareValue
Trust.
(b) Per share computation includes outstanding shares held by the ShareValue
Trust.
(c) Exclusive of the cumulative effect of adopting Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. Net earnings including the effect were
$552 or $1.62 per share.
69 of 156
<PAGE> 70
Market for Registrant's Common Equity and Related Stockholder Matters
The Boeing Company General Offices
7755 East Marginal Way South
Seattle, Washington 98108
(206) 655-2121
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
The transfer agent is responsible for shareholder records, issuance of stock
certificates, and distribution of dividends and IRS Form 1099. Requests
concerning these matters are most efficiently answered by contacting:
The First National Bank of Boston
c/o Boston EquiServe, L.P.
Mail Stop 45-02-64
P.O. Box 644
Boston, Massachusetts 02102-0644
(800) 733-5001 or (617) 575-3400
Boeing shareholders can obtain answers to frequently asked questions, such as
transfer instructions and the terms of the Dividend Reinvestment and Stock
Purchase Plan, through Boston EquiServe's home page on the World Wide Web at
<http://www.equiserve.com>.
DUPLICATE SHAREHOLDER ACCOUNTS
Shareholders with duplicate accounts may call the Bank of Boston for
instructions on consolidating those accounts. The company recommends that
registered shareholders always use the same form of their names in all stock
transactions to be handled in the same account. Shareholders may also request
the Bank to eliminate excess mailings of annual and midyear reports going to
shareholders in the same household.
EQUAL OPPORTUNITY EMPLOYER
Boeing is an equal opportunity employer and seeks to attract and retain the
best-qualified people regardless of race, sex, age, religion, national origin
or veteran status.
COMPANY SHAREHOLDER SERVICES
Pre-recorded shareholder information and quarterly earnings data are available
toll-free from Boeing Shareholder Services at (800) 457-7723.
70 of 156
<PAGE> 71
ANNUAL MEETING
The annual meeting of Boeing shareholders will be held in the auditorium of the
company's 2-22 building, located at 7755 East Marginal Way South, Seattle,
Washington, at 11:00 a.m. on April 28, 1997. Formal notice of the meeting,
proxy statement, form of proxy, and annual report were mailed to shareholders
beginning March 18, 1997.
Additional Reports
To obtain a report on the company's environmental programs or charitable
contributions you may write to:
Executive Communications
Mail Stop 10-06
The Boeing Company
P.O. Box 3707
Seattle, Washington 98124-2207
Other written inquiries may be sent to:
Shareholder Services
Mail Stop 10-13
Investor Relations
Mail Stop 10-16
The Boeing Company
P.O. Box 3707
Seattle, Washington 98124-2207
STOCK EXCHANGES
The company's common stock is traded principally on the New York Stock
Exchange; the trading symbol is BA. Boeing common stock is also listed on the
Amsterdam, Brussels, London, Swiss and Tokyo stock exchanges. Additionally,
the stock is traded on the Boston, Chicago, Cincinnati, Pacific and
Philadelphia exchanges. The number of shareholders of record as of January
31, 1997, was 135,125.
GENERAL AUDITORS
Deloitte & Touche LLP
700 Fifth Avenue, Suite 4500
Seattle, Washington 98104-5044
(206) 292-1800
BOEING ON WORLD WIDE WEB
For more information about Boeing, including an electronic copy of the annual
report, visit our web site at <http://www.boeing.com>.
71 of 156
<PAGE> 72
Exhibit (2) (ii)
Agreement and Plan of Merger, Dated as of December 14, 1996,
Among The Boeing Company, West Acquisition Corp., and
McDonnell Douglas Corporation.
72 of 156
<PAGE> 73
==============================================================================
AGREEMENT AND PLAN OF MERGER
among
THE BOEING COMPANY
WEST ACQUISITION CORP.
and
MCDONNELL DOUGLAS CORPORATION
Dated as of December 14, 1996
==============================================================================
TABLE OF CONTENTS
AGREEMENT AND PLAN OF MERGER
page
----
ARTICLE I
The Merger
1.1. The Merger . . . . . . . . . . . . . . . . . . 77
1.2. Closing . . . . . . . . . . . . . . . . . . . 77
1.3. Effective Time . . . . . . . . . . . . . . . . 78
1.4. Effects of the Merger . . . . . . . . . . . . 78
1.5. Charter and By-laws . . . . . . . . . . . . . 78
1.6. Directors . . . . . . . . . . . . . . . . . . 78
ARTICLE II
EFFECT OF THE MERGER ON THE
STOCK OF THE CONSTITUENT COMPANIES;
EXCHANGE OF CERTIFICATES
2.1. Effect on Stock . . . . . . . . . . . . . . . 78
2.2. Exchange of Certificates . . . . . . . . . . . 79
73 of 156
<PAGE> 74
ARTICLE III
STOCKHOLDER APPROVAL; BOARD
OF DIRECTORS OF Boeing
3.1. Stockholder Approval . . . . . . . . . . . . . 82
3.2. Board of Directors of Boeing . . . . . . . . . 83
3.3. Officers of Boeing . . . . . . . . . . . . . . 83
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MDC
4.1. Organization, Qualification, Etc. . . . . . . 84
4.2. Stock . . . . . . . . . . . . . . . . . . . . 84
4.3. Corporate Authority Relative to this
Agreement; No Violation . . . . . . . . . . . 85
4.4. Reports and Financial Statements . . . . . . . 86
4.5. No Undisclosed Liabilities . . . . . . . . . . 86
4.6. No Violation of Law . . . . . . . . . . . . . 87
4.7. Environmental Laws and Regulations . . . . . . 87
4.8. No Undisclosed Employee Benefit Plan
Liabilities or Severance Arrangements . . . . 87
4.9. Absence of Certain Changes or Events . . . . . 87
4.10. Investigations; Litigation . . . . . . . . . . 88
4.11. Joint Proxy Statement; Registration Statement;
Other information . . . . . . . . . . . . . . 88
4.12. MDC Rights Plan . . . . . . . . . . . . . . . 88
4.13. Lack of Ownership of Boeing Common Stock . . . 88
4.14. Tax Matters . . . . . . . . . . . . . . . . . 89
4.15. Opinion of Financial Advisor . . . . . . . . . 90
4.16. Required Vote of MDC Stockholders . . . . . . 90
4.17. Pooling of Interests . . . . . . . . . . . . . 90
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF Boeing and SUB
5.1. Organization, Qualification, Etc. . . . . . . 90
5.2. Capital Stock . . . . . . . . . . . . . . . . 91
5.3. Corporate Authority Relative to this
Agreement; No Violation . . . . . . . . . . 92
5.4. Reports and Financial Statements . . . . . . . 92
5.5. No Undisclosed Liabilities . . . . . . . . . . 93
5.6. No Violation of Law . . . . . . . . . . . . . 93
5.7. Environmental Laws and Regulations . . . . . . 93
5.8. No Undisclosed Employee Benefit Plan
Liabilities or Severance Arrangements . . . . 94
5.9. Absence of Certain Changes or Events . . . . . 94
5.10. Investigation; Litigation . . . . . . . . . . 94
5.11. Joint Proxy Statement; Registration
Statement; Other Information . . . . . . . . 94
5.12. Lack of Ownership of MDC Common Stock . . . . 95
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5.13. Boeing Rights Plan . . . . . . . . . . . . . . 95
5.14. Tax Matters . . . . . . . . . . . . . . . . . 95
5.15. Opinion of Financial Advisor . . . . . . . . . 96
5.16. Required Vote of Boeing Stockholders . . . . . 96
5.17. Pooling of Interests . . . . . . . . . . . . . 96
ARTICLE VI
COVENANTS AND AGREEMENTS
6.1. Conduct of Business by MDC or Boeing . . . . . 96
6.2. Investigation . . . . . . . . . . . . . . . . 100
6.3. Cooperation . . . . . . . . . . . . . . . . . 100
6.4. Affiliate Agreements . . . . . . . . . . . . . 101
6.5. Employee Stock Options; Incentive and
Benefit Plans . . . . . . . . . . . . . . . . 101
6.6. Filings; Other Action . . . . . . . . . . . . 103
6.7. Further Assurances . . . . . . . . . . . . . . 103
6.8. Takeover Statute . . . . . . . . . . . . . . . 103
6.9. No Solicitation . . . . . . . . . . . . . . . 104
6.10. Public Announcements . . . . . . . . . . . . . 104
6.11. Indemnification and Insurance . . . . . . . . 104
6.12. Accountants' "Comfort" Letters . . . . . . . . 105
6.13. Additional Reports . . . . . . . . . . . . . . 105
6.14. Co-Ordination of Dividends . . . . . . . . . . 105
ARTICLE VII
CONDITIONS TO THE MERGER
7.1. Conditions to Each Party's Obligation
to Effect the Merger . . . . . . . . . . . . 105
7.2. Conditions to Obligations of MDC
to Effect in the Merger . . . . . . . . . . . 106
7.3. Conditions to Obligations of Boeing
to Effect the Merger . . . . . . . . . . . . 107
ARTICLE VIII
TERMINATION, WAIVER, AMENDMENT AND CLOSING
8.1. Termination of Abandonment . . . . . . . . . . 107
8.2. Termination Fee . . . . . . . . . . . . . . . 109
8.3. Amendment or Supplement . . . . . . . . . . . 109
8.4. Extension of Time, Waiver, Etc. . . . . . . . 109
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ARTICLE IX
MISCELLANEOUS
9.1. No Survival of Representations
and Warranties . . . . . . . . . . . . . . . 110
9.2. Expenses . . . . . . . . . . . . . . . . . . . 110
9.3. Counterparts; Effectiveness . . . . . . . . . 110
9.4. Governing Law . . . . . . . . . . . . . . . . 110
9.5. Notices . . . . . . . . . . . . . . . . . . . 110
9.6. Assignment; Binding Effect . . . . . . . . . . 111
9.7. Severability . . . . . . . . . . . . . . . . . 111
9.8. Enforcement of Agreement . . . . . . . . . . . 111
9.9. Miscellaneous . . . . . . . . . . . . . . . . 111
9.10. Headings . . . . . . . . . . . . . . . . . . . 112
9.11. Subsidiaries; Significant
Subsidiaries; Affiliates . . . . . . . . . . 112
9.12. Finders or Brokers . . . . . . . . . . . . . . 112
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THIS AGREEMENT AND PLAN OF MERGER, dated as of December 14,
1996 (this "Agreement"), is among THE BOEING COMPANY ("Boeing"), WEST
ACQUISITION CORP. ("Sub") and MCDONNELL DOUGLAS CORPORATION ("MDC").
WHEREAS, MDC is a corporation duly organized and existing under
the laws of the State of Maryland, Boeing is a corporation duly organized and
existing under the laws of the State of Delaware and Sub is a corporation duly
organized and existing under the laws of the State of Maryland;
WHEREAS, the respective Boards of Directors of Boeing, Sub and
MDC have approved and have declared advisable the merger of Sub with and into
MDC (the "Merger"), upon the terms and subject to the conditions set forth
herein, whereby each issued and outstanding share of MDC Common Stock (as
defined in Section 4.2) not owned directly by MDC or Boeing will be converted
into .65 of a share of Boeing Common Stock (as defined in Section 5.2), and
have determined that the Merger and the other transactions contemplated hereby
are consistent with, and in furtherance of, their respective business
strategies and goals;
WHEREAS, the parties desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that
the Merger will qualify as a reorganization under the provisions of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for financial accounting purposes, it is intended that
the Merger will be accounted for as a pooling of interests transaction.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
The Merger
Section 1.1. The Merger. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the Maryland
General Corporation Law (the "MGCL"), Sub shall be merged with and into MDC at
the Effective Time (as defined in Section 1.3). Following the Effective Time,
the separate corporate existence of Sub shall cease and MDC shall be the
surviving corporation (the "Surviving Corporation") and shall succeed to and
assume all the rights and obligations of Sub in accordance with the MGCL.
Section 1.2. Closing. The closing of the Merger (the
"Closing") will take place at 10:00 a.m. on a date to be specified by the
parties (the "Closing Date"), which shall be no later than the second business
day after satisfaction or waiver of the conditions set forth in Article VII,
unless another time or date is agreed to by the parties hereto. The Closing
will be held at such location in the City of New York as is agreed to by the
parties hereto.
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Section 1.3. Effective Time. Subject to the provisions of
this Agreement, as soon as practicable on or after the Closing Date, the
parties shall file articles of merger or other appropriate documents (in any
such case, the "Articles of Merger") executed in accordance with the relevant
provisions of the MGCL and shall make all other filings or recordings required
under the MGCL. The Merger shall become effective at such time as the State
Department of Assessments and Taxation of Maryland accepts the Articles of
Merger for record, or at such subsequent date or time as Boeing and MDC shall
agree and specify in the Articles of Merger (the time the Merger becomes
effective being hereinafter referred to as the "Effective Time").
Section 1.4. Effects of the Merger. The Merger shall have the
effects set forth in Section 3-114 of the MGCL.
Section 1.5. Charter and By-laws. A. The charter of MDC, as
in effect immediately prior to the execution of this Agreement, shall be the
charter of the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law.
B. The by-laws of MDC, as in effect immediately prior to the
execution of this Agreement, shall be the by-laws of the Surviving Corporation
until thereafter changed or amended as provided therein or by applicable law.
Section 1.6. Directors. The directors of Sub at the Effective
Time shall be the directors of the Surviving Corporation until the next annual
meeting of stockholders of the Surviving Corporation (or their earlier
resignation or removal) and until their respective successors are duly elected
and qualified, as the case may be.
ARTICLE II
Effect of the Merger on the Stock of the
Constituent Corporations; Exchange of Certificates
Section 2.1. Effect on Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of Sub, MDC or the
holders of any securities of MDC or Sub:
(a) Cancelation of MDC-Owned Stock and Boeing-Owned Stock.
Each share of MDC Common Stock that is owned directly by MDC or by Boeing shall
automatically be canceled and retired and shall cease to exist, and no
consideration shall be delivered in exchange therefor.
(b) Conversion of MDC Common Stock. Subject to Section
2.2(e), each issued and outstanding share of MDC Common Stock (other than
shares to be canceled in accordance with Section 2.1(a)) shall be converted
into .65 of a fully paid and nonassessable share of Boeing Common Stock,
together with the associated Boeing Right (as defined in Section 5.2; unless
the context otherwise requires, all references herein to Boeing Common Stock
include the associated Boeing Rights) (the "Merger Consideration"). As of the
Effective Time, all such shares of MDC Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate or certificates which immediately prior
to the Effective Time represented outstanding shares of MDC Common Stock (the
"Certificates") shall cease to have any rights with respect thereto, except the
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right to receive (i) certificates representing the number of whole shares of
Boeing Common Stock into which such shares have been converted ("Boeing
Certificates"), (ii) certain dividends and other distributions in accordance
with Section 2.2(c) and (iii) cash in lieu of fractional shares of Boeing
Common Stock in accordance with Section 2.2(e), without interest.
(c) Conversion of Common Stock of Sub. Each issued and
outstanding share of common stock, par value $1.00 per share, of Sub shall be
converted into one validly issued, fully paid and nonassessable share of common
stock of the Surviving Corporation.
Section 2.2. Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Boeing shall
enter into an agreement with such bank or trust company as may be designated
by Boeing and as shall be reasonably satisfactory to MDC (the "Exchange
Agent"), which shall provide that Boeing shall deposit with the Exchange Agent
as of the Effective Time, for the benefit of the holders of shares of MDC
Common Stock, for exchange in accordance with this Article II, through the
Exchange Agent, Boeing Certificates representing the number of whole shares of
Boeing Common Stock (such shares of Boeing Common Stock, together with any
dividends or distributions with respect thereto with a record date after the
Effective Time, any Excess Shares (as defined in Section 2.2(e)) and any cash
(including cash proceeds from the sale of the Excess Shares) payable in lieu
of any fractional shares of Boeing Common Stock being hereinafter referred to
as the "Exchange Fund") issuable pursuant to Section 2.1 in exchange for
outstanding shares of MDC Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable
after the Effective Time, the Exchange Agent shall mail to each holder of
record of a Certificate whose shares were converted into the Merger
Consideration, pursuant to Section 2.1, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Boeing and MDC may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancelation to the
Exchange Agent, together with such letter of transmittal, duly executed, and
such other documents as may reasonably be required by the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor a
Boeing Certificate representing that number of whole shares of Boeing Common
Stock which such holder has the right to receive pursuant to the provisions of
this Article II, certain dividends or other distributions in accordance with
Section 2.2(c) and cash in lieu of any fractional share in accordance with
Section 2.2(e), and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of MDC Common Stock which
is not registered in the transfer records of MDC, a Boeing Certificate
representing the proper number of shares of Boeing Common Stock may be issued
to a person other than the person in whose name the Certificate so surrendered
is registered if such Certificate shall be properly endorsed or otherwise be
in proper form for transfer and the person requesting such issuance shall pay
any transfer or other nonincome taxes required by reason of the issuance of
shares of Boeing Common Stock to a person other than the registered holder of
such Certificate or establish to the satisfaction of Boeing that such tax has
been paid or is not applicable. Until surrendered as contemplated by this
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Section 2.2, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender Boeing
Certificates representing the number of whole shares of Boeing Common Stock
into which the shares of MDC Common Stock formerly represented by such
Certificate have been converted, certain dividends or other distributions in
accordance with Section 2.2(c) and cash in lieu of any fractional share in
accordance with Section 2.2(e). No interest will be paid or will accrue on any
cash payable to holders of Certificates pursuant to the provisions of this
Article II.
(c) Distributions with Respect to Unexchanged Shares. No
dividends or other distributions with respect to Boeing Common Stock with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of Boeing Common Stock
represented thereby, and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 2.2(e), and all such dividends,
other distributions and cash in lieu of fractional shares of Boeing Common
Stock shall be paid by Boeing to the Exchange Agent and shall be included in
the Exchange Fund, in each case until the surrender of such Certificate in
accordance with this Article II. Subject to the effect of applicable escheat
or similar laws, following surrender of any such Certificate there shall be
paid to the holder of the Boeing Certificate representing whole shares of
Boeing Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such
whole shares of Boeing Common Stock and the amount of any cash payable in lieu
of a fractional share of Boeing Common Stock to which such holder is entitled
pursuant to Section 2.2(e) and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective Time
but prior to such surrender and with a payment date subsequent to such
surrender payable with respect to such whole shares of Boeing Common Stock.
Boeing shall make available to the Exchange Agent cash for these purposes.
(d) No Further Ownership Rights in MDC Common Stock. All
shares of Boeing Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms of this Article II (including any
cash paid pursuant to this Article II) shall be deemed to have been issued (and
paid) in full satisfaction of all rights pertaining to the shares of MDC Common
Stock theretofore represented by such Certificates, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have
been authorized or made by MDC on such shares of MDC Common Stock which remain
unpaid at the Effective Time, and there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the
shares of MDC Common Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to
the Surviving Corporation or the Exchange Agent for any reason, they shall be
canceled and exchanged as provided in this Article II, except as otherwise
provided by law.
(e) No Fractional Shares. (i) No Boeing Certificates or scrip
representing fractional shares of Boeing Common Stock shall be issued upon the
surrender for exchange of Certificates, no dividend or distribution of Boeing
shall relate to such fractional share interests and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of Boeing.
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(ii) As promptly as practicable following the Effective Time,
the Exchange Agent will determine the excess of (A) the number of whole shares
of Boeing Common Stock delivered to the Exchange Agent by Boeing pursuant to
Section 2.2(a) over (B) the aggregate number of whole shares of Boeing Common
Stock to be distributed to holders of MDC Common Stock pursuant to Section
2.2(b) (such excess being herein called the "Excess Shares"). Following the
Effective Time, the Exchange Agent will, on behalf of former stockholders of
MDC, sell the Excess Shares at then-prevailing prices on the New York Stock
Exchange, Inc. (the "NYSE"), all in the manner provided in Section 2.2(e)(iii).
(iii) The sale of the Excess Shares by the Exchange Agent will
be executed on the NYSE through one or more member firms of the NYSE and will
be executed in round lots to the extent practicable. The Exchange Agent will
use reasonable efforts to complete the sale of the Excess Shares as promptly
following the Effective Time as, in the Exchange Agent's sole judgment, is
practicable consistent with obtaining the best execution of such sales in light
of prevailing market conditions. Until the net proceeds of such sale or sales
have been distributed to the holders of MDC Common Stock, the Exchange Agent
will hold such proceeds in trust for the holders of MDC Common Stock (the
"Common Shares Trust"). The Surviving Corporation will pay all commissions,
transfer taxes and other out-of-pocket transaction costs, including the
expenses and compensation of the Exchange Agent incurred in connection with
such sale of the Excess Shares. The Exchange Agent will determine the portion
of the Common Shares Trust to which each holder of MDC Common Stock is
entitled, if any, by multiplying the amount of the aggregate net proceeds
comprising the Common Shares Trust by a fraction, the numerator of which is the
amount of the fractional share interest to which such holder of MDC Common
Stock is entitled (after taking into account all shares of MDC Common Stock
held at the Effective Time by such holder) and the denominator of which is the
aggregate amount of fractional share interests to which all holders of MDC
Common Stock are entitled.
(iv) Notwithstanding the provisions of Section 2.2(e)(ii) and
(iii), the Surviving Corporation may elect at its option, exercised prior to
the Effective Time, in lieu of the issuance and sale of Excess Shares and the
making of the payments hereinabove contemplated, to pay each holder of MDC
Common Stock an amount in cash equal to the product obtained by multiplying (A)
the fractional share interest to which such holder (after taking into account
all shares of MDC Common Stock held at the Effective Time by such holder) would
otherwise be entitled by (B) the closing price for a share of Boeing Common
Stock as reported on the NYSE Composite Transaction Tape (as reported in The
Wall Street Journal, or, if not reported thereby, any other authoritative
source) on the Closing Date, and, in such case, all references herein to the
cash proceeds of the sale of the Excess Shares and similar references will be
deemed to mean and refer to the payments calculated as set forth in this
Section 2.2(e)(iv).
(v) As soon as practicable after the determination of the
amount of cash, if any, to be paid to holders of MDC Common Stock with respect
to any fractional share interests, the Exchange Agent will make available such
amounts to such holders of MDC Common Stock subject to and in accordance with
the terms of Section 2.2(c).
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(f) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the holders of the Certificates for six
months after the Effective Time shall be delivered to Boeing, upon demand, and
any holders of the Certificates who have not theretofore complied with this
Article II shall thereafter look only to Boeing for payment of their claim for
Merger Consideration or shares, any cash in lieu of fractional shares of
Boeing Common Stock and any dividends or distributions with respect to Boeing
Common Stock.
(g) No Liability. None of Boeing, MDC, Sub or the Exchange
Agent shall be liable to any person in respect of any shares of Boeing Common
Stock (or dividends or distributions with respect thereto) or cash from the
Exchange Fund in each case delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificate
shall not have been surrendered prior to seven years after the Effective Time
(or immediately prior to such earlier date on which any Merger Consideration,
any cash payable to the holder of such Certificate pursuant to this Article II
or any dividends or distributions payable to the holder of such Certificate
would otherwise escheat to or become the property of any governmental body or
authority) any such Merger Consideration or cash, dividends or distributions
in respect of such Certificate shall, to the extent permitted by applicable
law, become the property of the Surviving Corporation, free and clear of all
claims or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall
invest any cash included in the Exchange Fund, as directed by Boeing, on a
daily basis. Any interest and other income resulting from such investments
shall be paid to Boeing.
(i) Lost Certificates. If any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such person of a bond in
such reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen
or destroyed Certificate the Merger Consideration and, if applicable, any cash
in lieu of fractional shares, and unpaid dividends and distributions on shares
of Boeing Common Stock deliverable in respect thereof, pursuant to this
Agreement.
ARTICLE III
Stockholder Approval; Board
of Directors of Boeing
Section 3.1. Stockholder Approval. Subject to the terms and
conditions contained herein, (i) this Agreement shall be submitted for approval
to the holders of shares of MDC Common Stock at a meeting to be duly held for
this purpose by MDC (the "MDC Meeting"), and (ii) the issuance of Boeing Common
Stock in connection with the Merger (the "Share Issuance"), shall be submitted
for approval to the holders of shares of Boeing Common Stock at a meeting to be
duly held for this purpose by Boeing (the "Boeing Meeting"). MDC and Boeing
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shall coordinate and cooperate with respect to the timing of such meetings and
shall endeavor to hold such meetings on the same day and as soon as practicable
after the date hereof. MDC and Boeing shall recommend that their respective
stockholders approve such matters and such recommendation shall be contained in
the Joint Proxy Statement (as defined in Section 4.11), except, in the case of
MDC, to the extent that the Board of Directors of MDC shall have withdrawn or
modified its approval or recommendation of this Agreement or the Merger and
terminated this Agreement in accordance with Section 8.1(e). Nothing contained
in the preceding sentence shall prohibit MDC from taking and disclosing to its
stockholders a position contemplated by Rule 14e-2(a) promulgated under the
Exchange Act (as defined in Section 4.3) or from making any disclosure to MDC
or MDC's stockholders if, in the good faith judgment of the Board of
Directors of MDC, after consultation with outside counsel, failure so to
disclose would be inconsistent with its duties to MDC or MDC's stockholders
under applicable law; provided, however, neither MDC nor its Board of
Directors nor any committee thereof shall, except as permitted by the
preceding sentence, withdraw or modify, or propose publicly to its position
with respect to this Agreement or the Merger or approve or recommend, or
propose publicly to approve or recommend, a Takeover Proposal (as defined in
Section 6.9).
Section 3.2. Board of Directors of Boeing. The Board of
Directors of Boeing shall take all action necessary immediately following the
Effective Time to fix the number of directors constituting the Board of
Directors at between 12 and 15 members. The Board of Directors of MDC shall
select from among the current members of the Board of Directors of MDC such
number (rounded up to the next whole number) of individuals acceptable to
Boeing for nomination as directors of Boeing as shall constitute one-third of
the total number of members of the Board of Directors of Boeing immediately
following the Effective Time. If an individual so selected consents to serve
as a director, such individual shall be elected as a director of Boeing (and
shall be assigned to such class of directors such that, after giving effect to
the election of all the directors of MDC to be elected to the Board of
Directors of Boeing pursuant to the preceding sentence and the assignment of
each such director to a class, the directors of MDC elected to the Board of
Directors of Boeing shall be allocated as equally as practicable among the
different classes of the Board of Directors of Boeing), effective as of the
Effective Time, for a term expiring at Boeing's next annual meeting of
stockholders following the Effective Time at which the term of the class to
which such director belongs expires, subject to being renominated as a
director at the discretion of Boeing's Board of Directors.
Section 3.3. Officers of Boeing. Immediately following the
Effective Time, Philip Condit shall be the Chairman of the Board and the Chief
Executive Officer and Harry Stonecipher shall be the President and the Chief
Operating Officer of Boeing.
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ARTICLE IV
Representations and Warranties of MDC
MDC represents and warrants to Boeing and Sub that:
Section 4.1. Organization, Qualification, Etc. MDC is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Maryland and has the corporate power and authority to own
its properties and assets and to carry on its business as it is now being
conducted and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification, except for jurisdictions in which such
failure to be so qualified or to be in good standing would not, individually or
in the aggregate, have a Material Adverse Effect (as hereinafter defined) on
MDC. As used in this Agreement, any reference to any state of facts, event,
change or effect having a "Material Adverse Effect" on or with respect to MDC
or Boeing, as the case may be, means such state of facts, event, change or
effect that has had, or would reasonably be expected to have, a material
adverse effect on the business, results of operations or financial condition
of MDC and its Subsidiaries (as defined in Section 9.11), taken as a whole, or
Boeing and its Subsidiaries, taken as a whole, as the case may be. The copies
of MDC's charter and by-laws which have been delivered to Boeing are complete
and correct and in full force and effect on the date hereof. Each of MDC's
Significant Subsidiaries (as defined in Section 9.11) is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has the power and authority to
own its properties and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which such
failure to be so qualified or to be in good standing would not, individually
or in the aggregate, have a Material Adverse Effect on MDC. All the
outstanding shares of capital stock of, or other ownership interests in, MDC's
Significant Subsidiaries are validly issued, fully paid and non-assessable and
are owned by MDC, directly or indirectly, free and clear of all liens, claims,
charges or encumbrances, except for restrictions contained in credit
agreements and similar instruments to which MDC is a party under which no
event of default has occurred or arisen. There are no existing options,
rights of first refusal, preemptive rights, calls or commitments of any
character relating to the issued or unissued capital stock or other securities
of, or other ownership interests in, any Significant Subsidiary of MDC (other
than rights of first refusal, preemptive rights or similar rights held by MDC
with respect to certain of such Subsidiaries).
Section 4.2. Stock. The authorized stock of MDC consists of
400,000,000 shares of common stock, par value $1.00 per share ("MDC Common
Stock"), and 10,000,000 shares of preferred stock, par value $1.00 per share
("MDC Preferred Stock"), of which 1,000,000 shares have been designated as
Series A Junior Participating Preferred Stock ("MDC Series A Preferred Stock").
As of December 6, 1996, 209,731,625 shares of MDC Common Stock and no shares of
MDC Preferred Stock were issued and outstanding. All the outstanding shares of
MDC Common Stock have been validly issued and are fully paid and non-
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assessable. As of December 6, 1996, there were no outstanding subscriptions,
options, warrants, rights or other arrangements or commitments obligating MDC
to issue any shares of its stock other than:
(a) rights to acquire shares of MDC Series A Preferred Stock
pursuant to the Rights Agreement, amended and restated as of May 31, 1996,
between MDC and First Chicago Trust Company of New York (the "MDC Rights
Plan"); and
(b) options and other rights to receive or acquire 1,050,479
shares of MDC Common Stock granted on or prior to December 6, 1996, pursuant to
employee incentive or benefit plans, programs and arrangements and non-employee
director plans.
Except for the issuance of shares of MDC Common Stock pursuant
to the options and other rights referred to in clause 4.2(b) and except as
provided for in clause 6.1(a)(ix), since December 6, 1996, no shares of MDC
Common Stock or MDC Preferred Stock have been issued.
Section 4.3. Corporate Authority Relative to this Agreement;
No Violation. MDC has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of MDC and, except for the approval of its stockholders, no other
corporate proceedings on the part of MDC are necessary to authorize this
Agreement and the transactions contemplated hereby. The Board of Directors of
MDC has determined that the transactions contemplated by this Agreement are in
the best interest of MDC and its stockholders and to recommend to such
stockholders that they vote in favor thereof. This Agreement has been duly
and validly executed and delivered by MDC and, assuming this Agreement
constitutes a valid and binding Agreement of the other parties hereto, this
Agreement constitutes a valid and binding agreement of MDC, enforceable
against MDC in accordance with its terms (except insofar as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally, or by principles governing
the availability of equitable remedies). MDC is not subject to or obligated
under any charter, bylaw or contract provision or any licenses, franchise or
permit, or subject to any order or decree, which would be breached or violated
by its executing or, subject to the approval of its stockholders, carrying out
this Agreement, except as otherwise previously disclosed in writing to Boeing
and for any breaches or violations which would not, individually or in the
aggregate, have a Material Adverse Effect on MDC. Other than in connection
with or in compliance with the provisions of the MGCL, the Securities Act of
1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), Section 4043 of ERISA (as defined in
Section 4.8), the Communications Act of 1934, as amended (the "Communications
Act"), any non-United States competition, antitrust and investment laws and
the securities or blue sky laws of the various states and other than any
necessary approvals of the United States government or any agencies,
departments or instrumentalities thereof (collectively, the "MDC Required
Approvals"), no authorization, consent or approval of, or filing with, any
governmental body or authority is necessary for the consummation by MDC of the
transactions contemplated by this Agreement, except for such authorizations,
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consents, approvals or filings, the failure to obtain or make which would not,
individually or in the aggregate, have a Material Adverse Effect on MDC or
substantially impair or delay the consummation of the transactions
contemplated hereby; provided that MDC makes no representation with respect to
such of the foregoing as are required by reason of the regulatory status of
Boeing or any of its Subsidiaries or facts specifically pertaining to any of
them.
Section 4.4. Reports and Financial Statements. MDC has
previously furnished to Boeing true and complete copies of:
(a) MDC's Annual Reports on Form 10-K filed with the Securities
and Exchange Commission (the "SEC") for each of the years ended December 31,
1993 through 1995;
(b) MDC's Quarterly Reports on Form 10-Q filed with the SEC for
the quarters ended March 31, June 30 and September 30, 1996;
(c) each definitive proxy statement filed by MDC with the SEC
since December 31, 1993;
(d) each final prospectus filed by MDC with the SEC since
December 31, 1993, except any final prospectus on Form S-8; and
(e) all Current Reports on Form 8-K filed by MDC with the SEC
since December 31, 1995.
Except as previously disclosed in writing to Boeing, as of
their respective dates, such reports, proxy statements and prospectuses
(collectively, the "MDC SEC Reports") (i) complied as to form in all material
respects with the applicable requirements of the Securities Act, the Exchange
Act and the rules and regulations promulgated thereunder and (ii) did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited
consolidated interim financial statements included in the MDC SEC Reports
(including any related notes and schedules) fairly present the financial
position of MDC and its consolidated Subsidiaries as of the dates thereof and
the results of operations and cash flows for the periods or as of the dates
then ended (subject, where appropriate, to normal year-end adjustments), in
each case in accordance with past practice and generally accepted accounting
principles in the United States ("GAAP") consistently applied during the
periods involved (except as otherwise disclosed in the notes thereto). Since
December 31, 1993, MDC has timely filed all material reports, registration
statements and other filings required to be filed by it with the SEC under the
rules and regulations of the SEC. Notwithstanding anything to the contrary
contained in this Section 4.4, no representation or warranty is made with
respect to matters relating to the consent decree dated June 24, 1996, between
MDC and the SEC, the complaint referred to therein and the matters at issue or
referred to in such complaint.
Section 4.5. No Undisclosed Liabilities. Neither MDC nor any
of its Subsidiaries has any liabilities or obligations of any nature, whether
or not accrued, contingent or otherwise, except (a) liabilities or obligations
reflected in any of the MDC SEC Reports and (b) liabilities or obligations
which would not, individually or in the aggregate, have a Material Adverse
Effect on MDC.
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Section 4.6. No Violation of Law. The businesses of MDC and
its Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any governmental body or authority (provided that no
representation or warranty is made in this Section 4.6 with respect to
Environmental Laws (as hereinafter defined)) except (a) as described in any of
the MDC SEC Reports and (b) for violations or possible violations which would
not, individually or in the aggregate, have a Material Adverse Effect on MDC.
Section 4.7. Environmental Laws and Regulations. Except as
described in any of the MDC SEC Reports, (a) MDC and each of its Subsidiaries
is in material compliance with all applicable federal, state, local and foreign
laws and regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata) (collectively, "Environmental Laws"),
except for non-compliance which would not, individually or in the aggregate,
have a Material Adverse Effect on MDC, which compliance includes, but is not
limited to, the possession by MDC and its Subsidiaries of material permits and
other governmental authorizations required under applicable Environmental Laws,
and compliance with the terms and conditions thereof; (b) neither MDC nor any
of its Subsidiaries has received written notice of, or, to the knowledge of
MDC, is the subject of, any actions, causes of action, claims, investigations,
demands or notices by any Person alleging liability under or non-compliance
with any Environmental Law ("Environmental Claims") which would, individually
or in the aggregate, have a Material Adverse Effect on MDC; and (c) to the
knowledge of MDC, there are no circumstances that are reasonably likely to
prevent or interfere with such material compliance in the future.
Section 4.8. No Undisclosed Employee Benefit Plan Liabilities
or Severance Arrangements. Except as described in any of the MDC SEC Reports,
all "employee benefit plans", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), maintained or
contributed to by MDC or its Subsidiaries are in compliance with all
applicable provisions of ERISA and the Code, and MDC and its Subsidiaries do
not have any liabilities or obligations with respect to any such employee
benefit plans, whether or not accrued, contingent or otherwise, except (a) as
described in any of the MDC SEC Reports or previously disclosed in writing to
Boeing and (b) for instances of non-compliance or liabilities or obligations
that would not, individually or in the aggregate, have a Material Adverse
Effect on MDC. Except with respect to (i) awards granted under the MDC 1994
Performance and Equity Incentive Plan, (ii) the termination benefit agreements
(substantially in the form previously provided to Boeing) which are in effect
on the date hereof or which may be entered into hereafter in accordance with
the approval of the MDC Board prior to the date hereof (the "Termination
Benefit Agreements") and (iii) the Stonecipher Agreement (as defined in
Section 4.14), no employee of MDC will be entitled to any additional benefits
or any acceleration of the time of payment or vesting of any benefits under
any employee incentive or benefit plan, program or arrangement as a result of
the transactions contemplated by this Agreement.
Section 4.9. Absence of Certain Changes or Events. Other than
as disclosed in the MDC SEC Reports or previously disclosed in writing to
Boeing, since December 31, 1995 the businesses of MDC and its Subsidiaries
have been conducted in all material respects in the ordinary course and there
has not been any event, occurrence, development or state of circumstances or
facts that has had, or would have, a Material Adverse Effect on MDC.
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Section 4.10. Investigations; Litigation. Except as described
in any of the MDC SEC Reports or previously disclosed in writing to Boeing:
(a) no investigation or review by any governmental body or
authority with respect to MDC or any of its Subsidiaries which would,
individually or in the aggregate, have a Material Adverse Effect on MDC is
pending nor has any governmental body or authority notified MDC of an intention
to conduct the same; and
(b) there are no actions, suits or proceedings pending (or,
to MDC's knowledge, threatened) against or affecting MDC or its Subsidiaries,
or any of their respective properties at law or in equity, or before any
federal, state, local or foreign governmental body or authority, which,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on MDC.
Section 4.11. Joint Proxy Statement; Registration Statement;
Other Information. None of the information with respect to MDC or its
Subsidiaries to be included in the Joint Proxy Statement or the Registration
Statement (as defined in Section 6.3(a)) will, in the case of the Joint Proxy
Statement or any amendments thereof or supplements thereto, at the time of the
mailing of the Joint Proxy Statement or any amendments or supplements thereto,
and at the time of the MDC Meeting and the Boeing Meeting, or, in the case of
the Registration Statement, at the time it becomes effective, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representation is made by MDC with respect to
information supplied in writing by Boeing or any affiliate of Boeing
specifically for inclusion in the Joint Proxy Statement. The Joint Proxy
Statement will comply as to form in all material respects with the provisions
of the Exchange Act and the rules and regulations promulgated thereunder. The
letters to stockholders, notices of meeting, joint proxy statement and forms
of proxies to be distributed to stockholders in connection with the Merger,
the Share Issuance and any schedules required to be filed with the SEC in
connection therewith are collectively referred to herein as the "Joint Proxy
Statement".
Section 4.12. MDC Rights Plan. The Board of Directors of MDC
has approved in writing the acquisition by Boeing of beneficial ownership of
voting securities of MDC and, accordingly, the execution and delivery of this
Agreement, and the consummation of the Merger and the other transactions
contemplated hereby, will not cause (i) Boeing to constitute an "Acquiring
Person" (as such term is defined in the MDC Rights Plan), (ii) a "Distribution
Date" (as such term is defined in the MDC Rights Plan) to occur or (iii) the
rights issued pursuant to the MDC Rights Plan to become exercisable. MDC shall
cause the MDC Rights Plan to be amended such that the "Final Expiration Date"
(as defined in the MDC Rights Plan) shall occur immediately prior to the
Effective Time.
Section 4.13. Lack of Ownership of Boeing Common Stock.
Neither MDC nor any of its Subsidiaries owns any shares of Boeing Common Stock
or other securities convertible into shares of Boeing Common Stock (exclusive
of any shares owned by MDC's employee benefit plans).
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Section 4.14. Tax Matters. (a) All federal, state, local and
foreign Tax Returns required to be filed by or on behalf of MDC, each of its
Subsidiaries, and each affiliated, combined, consolidated or unitary group of
which MDC or any of its Subsidiaries is (i) a member (a "Current MDC Group") or
(ii) has been a member within six years prior to the date hereof but is not
currently a member, but only insofar as any such Tax relates to a taxable
period ending on a date within the last six years (a "Past MDC Group",
together with Current MDC Groups, an "MDC Affiliated Group") have been timely
filed, and all returns filed are complete and accurate except to the extent
any failure to file or any inaccuracies in filed returns would not,
individually or in the aggregate, have a Material Adverse Effect on MDC (it
being understood that the representations made in this Section, to the extent
that they relate to Past MDC Groups, are made to the knowledge of MDC). All
Taxes due and owing by MDC, any Subsidiary of MDC or any MDC Affiliated Group
have been paid, or adequately reserved for, except to the extent any failure
to pay or reserve would not, individually or in the aggregate, have a Material
Adverse Effect on MDC. There is no audit examination, deficiency, refund
litigation, proposed adjustment or matter in controversy with respect to any
Taxes due and owing by MDC, any Subsidiary of MDC or any MDC Affiliated Group
which would, individually or in the aggregate, have a Material Adverse Effect
on MDC. All assessments for Taxes due and owing by MDC, any Subsidiary of MDC
or any MDC Affiliated Group with respect to completed and settled examinations
or concluded litigation have been paid. As soon as practicable after the
public announcement of the Merger Agreement, MDC will provide Boeing with
written schedules of (i) the taxable years of MDC for which the statutes of
limitations with respect to federal income Taxes, have not expired, and (ii)
with respect to federal income Taxes those years for which examinations have
been completed, those years for which examinations are presently being
conducted, and those years for which examinations have not yet been initiated.
MDC and each of its Subsidiaries has complied in all material respects with
all rules and regulations relating to the withholding of Taxes, except to the
extent any such failure to comply would not, individually or in the aggregate,
have a Material Adverse Effect on MDC.
(b) Neither MDC nor any of its Subsidiaries knows of any
fact or has taken any action that could reasonably be expected to prevent the
Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code.
(c) Except with respect to awards granted under the MDC 1994
Performance and Equity Incentive Plan, the Termination Benefit Agreements and
the Employment Agreement dated September 24, 1994 between MDC and Harry
Stonecipher, as amended (the "Stonecipher Agreement"), any amount or other
entitlement that could be received (whether in cash or property or the vesting
of property) as a result of any of the transactions contemplated by this
Agreement by any employee, officer or director of MDC or any of its affiliates
who is a "disqualified individual" (as such term is defined in proposed
Treasury Regulation Section 1.280G-1) under any employee benefit plan or other
compensation arrangement currently in effect would not be characterized as an
"excess parachute payment" or a "parachute payment" (as such terms are defined
in Section 280G(b)(1) of the Code).
For purposes of this Agreement: (i) "Taxes" means any and all
federal, state, local, foreign or other taxes of any kind (together with any
and all interest, penalties, additions to tax and additional amounts imposed
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with respect thereto) imposed by any taxing authority, including, without
limitation, taxes or other charges on or with respect to income, franchises,
windfall or other profits, gross receipts, property, sales, use, capital
stock, payroll, employment, social security, workers' compensation,
unemployment compensation, or net worth, and taxes or other charges in the
nature of excise, withholding, ad valorem or value added, and (ii) "Tax
Return" means any return, report or similar statement (including the attached
schedules) required to be filed with respect to any Tax, including, without
limitation, any information return, claim for refund, amended return or
declaration of estimated Tax.
Section 4.15. Opinion of Financial Advisor. The Board of
Directors of MDC has received the opinion of J.P. Morgan Securities Inc., dated
the date of this Agreement, to the effect that, as of such date, the exchange
ratio is fair to MDC's stockholders from a financial point of view. A copy of
the written opinion of J.P. Morgan Securities Inc. will be delivered to Boeing
as soon as practicable after the date of this Agreement.
Section 4.16. Required Vote of MDC Stockholders. The
affirmative vote of the holders of two-thirds of the outstanding shares of MDC
Common Stock is required to approve the Merger. No other vote of the
stockholders of MDC is required by law, the charter or by-laws of MDC or
otherwise in order for MDC to consummate the Merger and the transactions
contemplated hereby.
Section 4.17. Pooling of Interests. To the knowledge of MDC,
neither it nor any of its Subsidiaries has taken any action or failed to take
any action which action or failure (without giving effect to any actions or
failures to act by Boeing or any of its Subsidiaries) would prevent the
treatment of the Merger as a pooling of interests for accounting purposes,
except as previously disclosed in writing to Boeing.
ARTICLE V
Representations and Warranties of Boeing and Sub
Boeing and Sub represent and warrant to MDC that:
Section 5.1. Organization, Qualification, Etc. Each of Boeing
and Sub is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization and has the corporate power
and authority to own its properties and assets and to carry on its business as
it is now being conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the ownership of its properties or the
conduct of its business requires such qualification, except for jurisdictions
in which such failure to be so qualified or to be in good standing would not,
individually or in the aggregate, have a Material Adverse Effect on Boeing.
The copies of Boeing's Restated Certificate of Incorporation and by-laws and
Sub's articles of incorporation and by-laws which have been delivered to MDC
are complete and correct and in full force and effect on the date hereof. Each
of Boeing's Significant Subsidiaries is duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization, has the power
and authority to own its properties and to carry on its business as it is now
being conducted, and is duly qualified to do business and is in good standing
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in each jurisdiction in which the ownership of its property or the conduct of
its business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not,
individually or in the aggregate, have a Material Adverse Effect on Boeing.
All the outstanding shares of capital stock of, or other ownership interests
in, Boeing's Significant Subsidiaries and Sub are validly issued, fully paid
and non-assessable and are owned by Boeing, directly or indirectly, free and
clear of all liens, claims, charges or encumbrances, except for restrictions
contained in credit agreements and similar instruments to which Boeing is a
party under which no event of default has occurred or arisen. There are no
existing options, rights of first refusal, preemptive rights, calls or
commitments of any character relating to the issued or unissued capital stock
or other securities of, or other ownership interests in, any Significant
Subsidiary of Boeing or Sub (other than rights of first refusal, preemptive
rights or similar rights held by Boeing with respect to certain of such
Subsidiaries).
Section 5.2. Capital Stock. Except as previously disclosed in
writing to MDC, the authorized capital stock of Boeing consists of 600,000,000
shares of common stock, par value $5.00 per share ("Boeing Common Stock"), and
10,000,000 shares of preferred stock, par value $1.00 per share ("Boeing
Preferred Stock"), of which 6,000,000 shares were designated as Series A Junior
Participating Preferred Stock ("Boeing Series A Preferred Stock"). The shares
of Boeing Common Stock to be issued in the Merger or upon the exercise of MDC
stock options, warrants, conversion rights or other rights or vesting or
payment of other MDC equity-based awards thereafter will, when issued, be
validly issued fully paid and non-assessable. As of December 13, 1996,
349,384,515 shares of Boeing Common Stock and no shares of Boeing Preferred
Stock were issued and outstanding, 9,194,044 shares of Boeing Common Stock were
reserved for issuance in connection with the acquisition of the aerospace and
defense businesses of Rockwell International Corporation (the "Rockwell A&D
Acquisition") and 4,689 shares of Boeing Common Stock were held in Boeing's
treasury. All the outstanding shares of Boeing Common Stock have been validly
issued and are fully paid and non-assessable. Included in the number of shares
of Boeing Common Stock that were issued and outstanding are 11,326,943 shares
held in the Boeing ShareValue Trust, which shares are legally outstanding and
entitled to receive dividends. As of November 30, 1996, there were no
outstanding subscriptions, options, warrants, rights or other arrangements or
commitments obligating Boeing to issue any shares of its capital stock other
than:
(a) rights ("Boeing Rights") to acquire shares of Boeing
Series A Preferred Stock pursuant to the Rights Agreement, dated as of July 27,
1987, between Boeing and The First National Bank of Boston (the "Boeing Rights
Plan"); and
(b) options and other rights to receive or acquire
14,004,086 shares of Boeing Common Stock granted on or prior to November 30,
1996, pursuant to employee incentive or benefit plans, programs and
arrangements and non-employee director plans.
Except for the issuance of shares of Boeing Common Stock
pursuant to the options and other rights referred to in clause 5.2(b) and for
the issuance of shares of Boeing Common Stock pursuant to the Rockwell A&D
Acquisition and except as provided for in clause 6.1(b) (viii), since November
30, 1996, no shares of Boeing Common Stock or Boeing Preferred Stock have been
issued.
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Section 5.3. Corporate Authority Relative to this Agreement;
No Violation. Each of Boeing and Sub has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Boards of Directors of Boeing and Sub and, except for the approval of the
stockholders of Boeing of the Share Issuance, no other corporate proceedings on
the part of Boeing or Sub are necessary to authorize this Agreement and the
transactions contemplated hereby. The Board of Directors of Boeing has
determined that the transactions contemplated by this Agreement are in the best
interest of Boeing and its stockholders and to recommend to such stockholders
that they vote in favor thereof. This Agreement has been duly and validly
executed and delivered by Boeing and Sub and, assuming this Agreement
constitutes a valid and binding Agreement of the other parties hereto, this
Agreement constitutes a valid and binding agreement of Boeing and Sub,
enforceable against each of them in accordance with its terms (except insofar
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by principles governing the availability of equitable remedies).
Neither Boeing nor Sub is subject to or obligated under any charter, by-law or
contract provision or any license, franchise or permit, or subject to any order
or decree, which would be breached or violated by its executing or, subject to
the approval by the stockholders of Boeing of the Share Issuance, carrying out
this Agreement, except for any breaches or violations which would not,
individually or in the aggregate, have a Material Adverse Effect on Boeing.
Other than in connection with or in compliance with the provisions of the MGCL,
the Delaware General Corporation Law, the Securities Act, the Exchange Act, the
HSR Act, Section 4043 of ERISA, the Communications Act, any non-United States
competition, antitrust and investments laws and the securities or blue sky laws
of the various states and other than any necessary approvals of the United
States government or any agencies, departments or instrumentalities thereof
(collectively, the "Boeing Required Approvals"), no authorization, consent or
approval of, or filing with, any governmental body or authority is necessary
for the consummation by Boeing of the transactions contemplated by this
Agreement, except for such authorizations, consents, approvals or filings, the
failure to obtain or make which would not, individually or in the aggregate,
have a Material Adverse Effect on Boeing or substantially impair or delay the
consummation of the transactions contemplated hereby; provided that Boeing
makes no representation with respect to such of the foregoing as are required
by reason of the regulatory status of MDC or any of its Subsidiaries or facts
specifically pertaining to any of them.
Section 5.4. Reports and Financial Statements. Boeing has
previously furnished to MDC true and complete copies of:
(a) Boeing's Annual Reports on Form 10-K filed with the SEC
for each of the years ended December 31, 1993 through 1995;
(b) Boeing's Quarterly Reports on Form 10-Q filed with the
SEC for the quarters ended March 31, June 30 and September 30, 1996;
(c) each definitive proxy statement filed by Boeing with
the SEC since December 31, 1993;
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(d) each final prospectus filed by Boeing with the SEC
since December 31, 1993, except any final prospectus on Form S-8; and
(e) all Current Reports on Form 8-K filed by Boeing with
the SEC since December 31, 1995.
As of their respective dates, such reports, proxy statements
and prospectuses (collectively, "Boeing SEC Reports") (i) complied as to form
in all material respect with the applicable requirements of the Securities Act,
the Exchange Act, and the rules and regulations promulgated thereunder and (ii)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited
consolidated interim financial statements included in the Boeing SEC Reports
(including any related notes and schedules) fairly present the financial
position of Boeing and its consolidated Subsidiaries as of the dates thereof
and the results of their operations and their cash flows for the periods or as
of the dates then ended (subject, where appropriate, to normal year-end
adjustments), in each case in accordance with past practice and GAAP
consistently applied during the periods involved (except as otherwise disclosed
in the notes thereto). Since December 31, 1993, Boeing has timely filed all
material reports, registration statements and other filings required to be
filed by it with the SEC under the rules and regulations of the SEC.
Section 5.5. No Undisclosed Liabilities. Neither Boeing nor
any of its Subsidiaries has any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, except (a) liabilities or
obligations reflected in any of the Boeing SEC Reports and (b) liabilities or
obligations which would not, individually or in the aggregate, have a Material
Adverse Effect on Boeing.
Section 5.6. No Violation of Law. The businesses of Boeing
and its Subsidiaries are not being conducted in violation of any law, ordinance
or regulation of any governmental body or authority (provided that no
representation or warranty is made in this Section 5.6 with respect to
Environmental Laws) except (a) as described in any of the Boeing SEC Reports
and (b) for violations or possible violations which would not, individually or
in the aggregate, have a Material Adverse Effect on Boeing.
Section 5.7. Environmental Laws and Regulations. Except as
described in any of the Boeing SEC Reports, (a) Boeing and each of its
Subsidiaries is in material compliance with all applicable Environmental Laws,
except for non-compliance which would not, individually or in the aggregate,
have a Material Adverse Effect on Boeing, which compliance includes, but is not
limited to, the possession by Boeing and its Subsidiaries of material permits
and other governmental authorizations required under applicable Environmental
Laws, and compliance with the terms and conditions thereof; (b) neither Boeing
nor any of its Subsidiaries has received written notice of, or, to the
knowledge of Boeing, is the subject of, any Environmental Claims which would,
individually or in the aggregate, have a Material Adverse Effect on Boeing;
and (c) to the knowledge of Boeing, there are no circumstances that are
reasonably likely to prevent or interfere with such material compliance in the
future.
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Section 5.8. No Undisclosed Employee Benefit Plan Liabilities
or Severance Arrangements. Except as described in any of the Boeing SEC
Reports, all "employee benefit plans", as defined in Section 3(3) of ERISA,
maintained or contributed to by Boeing or its Subsidiaries are in compliance
with all applicable provisions of ERISA and the Code, and Boeing and its
Subsidiaries do not have any liabilities or obligations with respect to any
such employee benefit plans, whether or not accrued, contingent or otherwise,
except (a) as described in any of the Boeing SEC Reports and (b) for instances
of non-compliance or liabilities or obligations that would not, individually
or in the aggregate, have a Material Adverse Effect on Boeing. No employee of
Boeing will be entitled to any additional benefits or any acceleration of the
time of payment or vesting of any benefits under any employee incentive or
benefit plan, program or arrangement as a result of the transactions
contemplated by this Agreement.
Section 5.9. Absence of Certain Changes or Events. Other than
as disclosed in the Boeing SEC Reports, since December 31, 1995 the businesses
of Boeing and its Subsidiaries have been conducted in all material respects in
the ordinary course and there has not been any event, occurrence, development
or state of circumstances or facts that has had, or would have, a Material
Adverse Effect on Boeing.
Section 5.10. Investigations; Litigation. Except as described
in any of the Boeing SEC Reports or previously disclosed in writing to MDC:
(a) no investigation or review by any governmental body or
authority with respect to Boeing or any of its Subsidiaries which would,
individually or in the aggregate, have a Material Adverse Effect on Boeing is
pending nor has any governmental body or authority notified Boeing of an
intention to conduct the same; and
(b) there are no actions, suits or proceedings pending (or,
to Boeing's knowledge, threatened) against or affecting Boeing or its
Subsidiaries, or any of their respective properties at law or in equity, or
before any federal, state, local or foreign governmental body or authority
which, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on Boeing.
Section 5.11. Joint Proxy Statement; Registration Statement;
Other Information. None of the information with respect to Boeing or its
Subsidiaries to be included in the Joint Proxy Statement or the Registration
Statement will, in the case of the Joint Proxy Statement or any amendments
thereof or supplements thereto, at the time of the mailing of the Joint Proxy
Statement or any amendments or supplements thereto, and at the time of the MDC
Meeting and the Boeing Meeting, or, in the case of the Registration Statement,
at the time it becomes effective, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made by Boeing with respect to information supplied in
writing by MDC or any affiliate of MDC specifically for inclusion in the Joint
Proxy Statement. The Joint Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated thereunder.
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Section 5.12. Lack of Ownership of MDC Common Stock. Neither
Boeing nor any of its Subsidiaries owns any shares of MDC Common Stock or other
securities convertible into shares of MDC Common Stock (exclusive of any shares
owned by Boeing's employee benefit plans).
Section 5.13. Boeing Rights Plan. Under the terms of the
Boeing Rights Plan, the transactions contemplated by this Agreement will not
cause a Distribution Date (as such term is defined in the Boeing Rights Plan)
to occur or cause the rights issued pursuant to the Boeing Rights Plan to
become exercisable.
Section 5.14. Tax Matters. (a) All federal, state, local and
foreign Tax Returns required to be filed by or on behalf of Boeing, each of its
Subsidiaries, and each affiliated, combined, consolidated or unitary group of
which Boeing or any of its Subsidiaries is (i) a member (a "Current Boeing
Group") or (ii) has been a member within six years prior to the date hereof but
is not currently a member, but only insofar as any such Tax relates to a
taxable period ending on a date within the last six years (a "Past Boeing
Group", together with Current Boeing Groups, a "Boeing Affiliated Group") have
been timely filed, and all returns filed are complete and accurate except to
the extent any failure to file or any inaccuracies in filed returns would not,
individually or in the aggregate, have a Material Adverse Effect on Boeing (it
being understood that the representations made in this Section, to the extent
that they relate to Past Boeing Groups, are made to the knowledge of Boeing).
All Taxes due and owing by Boeing, any Subsidiary of Boeing or any Boeing
Affiliated Group have been paid, or adequately reserved for, except to the
extent any failure to pay or reserve would not, individually or in the
aggregate, have a Material Adverse Effect on Boeing. There is no audit
examination, deficiency, refund litigation, proposed adjustment or matter in
controversy with respect to any Taxes due and owing by Boeing, any Subsidiary
of Boeing or any Boeing Affiliated Group which would, individually or in the
aggregate, have a Material Adverse Effect on Boeing. All assessments for Taxes
due and owing by Boeing, any Subsidiary of Boeing or any Boeing consolidated
group with respect to completed and settled examinations or concluded
litigation have been paid. As soon as practicable after the public
announcement of the Merger Agreement, Boeing will provide MDC with written
schedules of (i) the taxable years of Boeing for which the statutes of
limitations with respect to federal income Taxes have not expired, and (ii)
with respect to federal income Taxes, those years for which examinations have
been completed, those years for which examinations are presently being
conducted, and those years for which examinations have not yet been initiated.
Boeing and each of its Subsidiaries has complied in all material respects with
all rules and regulations relating to the withholding of Taxes, except to the
extent any such failure to comply would not, individually or in the aggregate,
have a Material Adverse Effect on Boeing.
(b) Neither Boeing nor any of its Subsidiaries knows of any
fact or has taken any action that could reasonably be expected to prevent the
Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code.
(c) Any amount or other entitlement that could be received
(whether in cash or property or the vesting of property) as a result of any of
the transactions contemplated by this Agreement by any employee, officer or
director of Boeing or any of its affiliates who is a "disqualified individual"
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(as such term is defined in proposed Treasury Regulation Section 1.280G-1)
under any employee benefit plan or other compensation arrangement currently in
effect would not be characterized as an "excess parachute payment" or a
"parachute payment" (as such terms are defined in Section 280G(b)(1) of the
Code).
Section 5.15. Opinion of Financial Advisor. The Board of
Directors of Boeing has received the opinion of CS First Boston Corporation,
dated the date of this Agreement to the effect that, as of such date, the
exchange ratio is fair to Boeing from a financial point of view. A copy of
the written opinion of CS First Boston Corporation will be delivered to MDC as
soon as practicable after the date of this Agreement.
Section 5.16. Required Vote of Boeing Stockholders. The
affirmative vote of the holders of a majority of the shares of Boeing Common
Stock voted at the Boeing Meeting is required to approve the Share Issuance;
provided that holders of a majority of the outstanding shares of Boeing Common
Stock are present, in person or by proxy, at the Boeing Meeting and vote upon
the Share Issuance. No other vote of the stockholders of Boeing is required
by law, the charter or by-laws of Boeing or otherwise in order for Boeing to
consummate the Merger and the transactions contemplated hereby.
Section 5.17. Pooling of Interests. To the knowledge of
Boeing, neither it nor any of its Subsidiaries has taken any action or failed
to take any action which action or failure (without giving effect to any
actions or failures to act by MDC or any of its Subsidiaries) would prevent
the treatment of the Merger as a pooling of interests for accounting purposes.
ARTICLE VI
Covenants and Agreements
It is further agreed as follows:
Section 6.1. Conduct of Business by MDC or Boeing. Prior to
the Effective Time or the date, if any, on which this Agreement is earlier
terminated pursuant to Section 8.1 (the "Termination Date"), and except as may
be agreed to by the other parties hereto or as may be permitted pursuant to
this Agreement:
(a) MDC:
(i) shall, and shall cause each of its Subsidiaries to, conduct
its operations according to their ordinary and usual course of business in
substantially the same manner as heretofore conducted;
(ii) shall use its reasonable best efforts, and cause each of
its Subsidiaries to use its reasonable best efforts, to preserve intact its
business organizations and goodwill in all material respects, keep available
the services of its officers and employees as a group, subject to changes in
the ordinary course, and maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with them;
(iii) shall confer at such times as Boeing may reasonably
request with one or more representatives of Boeing to report material
operational matters and the general status of ongoing operations (to the
extent Boeing reasonably requires such information);
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(iv) shall notify Boeing of any emergency or other change in
the normal course of its or its Subsidiaries' respective businesses or in the
operation of its or its Subsidiaries' respective properties and of any
complaints, investigations or hearings (or communications indicating that the
same may be contemplated) of any governmental body or authority if such
emergency, change, complaint, investigation or hearing would have a Material
Adverse Effect on MDC;
(v) shall not, and shall not (except in the ordinary course of
business consistent with past practice) permit any of its Subsidiaries that is
not wholly owned, to authorize or pay any dividends on or make any distribution
with respect to its outstanding shares of stock other than regular quarterly
dividends of $.12 per share on MDC Common Stock made in the ordinary course
consistent with past practice;
(vi) shall not, and shall not permit any of its Subsidiaries
to, except (i) in the ordinary course of business consistent with past
practice, (ii) as otherwise provided in this Agreement, (iii) as previously
disclosed in writing to Boeing or (iv) for the Termination Benefit Agreements,
enter into or amend any employment, severance or similar agreements or
arrangements with any of their respective directors or executive officers;
(vii) shall not, and shall not permit any of its Subsidiaries
to, authorize, propose or announce an intention to authorize or propose, or
enter into an agreement with respect to, any merger, consolidation or business
combination (other than the Merger and any mergers, consolidations or business
combinations with MDC's Subsidiaries entered into in the ordinary course of
business consistent with past practice), any acquisition of a material amount
of assets or securities, any disposition of a material amount of assets or
securities or any release or relinquishment of any material contract rights not
in the ordinary course of business;
(viii) shall not propose or adopt any amendments to its
corporate charter or by-laws;
(ix) shall not, and shall not permit any of its Significant
Subsidiaries to, issue any shares of their capital stock, except upon exercise
of rights or options issued pursuant to existing employee incentive or benefit
plans, programs or arrangements and non-employee director plans (including,
without limitation, shares issued in connection with stock grants or awards or
the exercise of rights or options granted in the ordinary course of business
consistent with past practice pursuant to such plans, programs or arrangements)
or effect any stock split not previously announced or otherwise change its
capitalization as it existed on December 6, 1996, except as contemplated herein
and except for the contemplated issuance or sale of shares of MDC Common Stock
previously agreed to in writing by Boeing);
(x) shall not, and shall not permit any of its Subsidiaries to,
grant, confer or award any options, warrants, conversion rights or other
rights, not existing on the date hereof, to acquire any shares of its capital
stock, except pursuant to employee incentive or benefit plans, programs or
arrangements and non-employee director plans in existence on the date hereof
in the ordinary course of business and consistent with past practice
(including, but not limited to, certain grants of Performance Accelerated
Restricted Stock under the MDC 1994 Performance and Equity Incentive Plan)
covering not in excess of 700,000 shares of MDC Common Stock;
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(xi) shall not, and shall not permit any of its Subsidiaries
to, except in the ordinary course of business in connection with employee
incentive and benefit plans, programs or arrangements in existence on the date
hereof, purchase or redeem any shares of its stock;
(xii) shall not, and shall not permit any of its Subsidiaries
to, take any actions which would, or would be reasonably likely to, prevent
Boeing from accounting for the Merger in accordance with the pooling of
interests method of accounting under the requirements of Opinion No. 16
"Business Combinations" of the Accounting Principles Board of the American
Institute of Certified Public Accountants, as amended by applicable
pronouncements by the Financial Accounting Standards Board ("APB No. 16");
(xiii) shall not, and shall not permit any of its Subsidiaries
to, except as contemplated by this Section 6.1 or Section 6.5 or except as
previously disclosed in writing to Boeing, amend in any significant respect the
terms of their respective employee benefit plans, programs or arrangements or
any severance or similar agreements or arrangements in existence on the date
hereof, or adopt any new employee benefit plans, programs or arrangements or
any severance or similar agreements or arrangements;
(xiv) shall not, and shall not permit any of its Subsidiaries
to, enter into any material loan agreement, other than in the ordinary course
of business consistent with past practice and other than any loan or lease
arrangement relating to the sale or lease of commercial aircraft or commercial
equipment;
(xv) shall not, and shall not permit any of its Subsidiaries to
make any material Tax election or settle or compromise any material Tax
liability, other than in connection with currently pending proceedings or
other than in the ordinary course of business; and
(xvi) shall not, and shall not permit any of its Subsidiaries
to, agree, in writing or otherwise, to take any of the foregoing actions or
take any action which would make any representation or warranty in Article IV
hereof untrue or incorrect.
(b) Boeing:
(i) shall, and shall cause each of its Subsidiaries to, conduct
its operations according to their ordinary and usual course of business in
substantially the same manner as heretofore conducted;
(ii) shall use its reasonable best efforts, and cause each of
its Subsidiaries to use its reasonable best efforts, to preserve intact its
business organizations and goodwill in all material respects, keep available
the services of its officers and employees as a group, subject to changes in
the ordinary course, and maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with them;
(iii) shall confer at such times as MDC may reasonably request
with one or more representatives of MDC to report material operational matters
and the general status of ongoing operations (to the extent MDC reasonably
requires such information);
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(iv) shall notify MDC of any emergency or other change in the
normal course of its or its Subsidiaries' respective businesses or in the
operation of its or its Subsidiaries' respective properties and of any
complaints, investigations or hearings (or communications indicating that the
same may be contemplated) of any governmental body or authority if such
emergency, change, complaint, investigation or hearing would have a Material
Adverse Effect on Boeing;
(v) except as previously disclosed in writing to MDC, shall
not, and shall not (except in the ordinary course of business consistent with
past practice) permit any of its Subsidiaries that is not wholly owned, to
declare or pay any dividends on or make any distribution with respect to their
outstanding shares of capital stock other than regular quarterly dividends of
$.28 per share on Boeing Common Stock made in the ordinary course consistent
with past practice;
(vi) shall not, and shall not permit any of its Subsidiaries
to, authorize, propose or announce an intention to authorize or propose, or
enter into an agreement with respect to, any merger, consolidation or business
combination (other than the Merger and any mergers, consolidations or business
combinations with Boeing's Subsidiaries entered into in the ordinary course of
business consistent with past practice), any acquisition of a material amount
of assets or securities, or any release or relinquishment of any material
contract rights not in the ordinary course of business;
(vii) shall not propose or adopt any amendments to its
corporate charter (except as previously disclosed in writing to MDC) or
by-laws;
(viii) shall not, and shall not permit any of its Significant
Subsidiaries to, issue any shares of their capital stock, except upon exercise
of rights or options issued pursuant to existing employee incentive or benefit
plans, programs or arrangements and non-employee director plans (including,
without limitation, shares issued in connection with stock grants or awards or
the exercise of rights or options granted in the ordinary course of business
consistent with past practice pursuant to such plans, programs or arrangements)
or effect any stock split not previously announced or otherwise change its
capitalization as it existed on November 30, 1996 (except as contemplated
herein or as previously disclosed in writing to MDC);
(ix) shall not, and shall not permit any of its Subsidiaries
to, grant, confer or award any options, warrants, conversion rights or other
rights, not existing on the date hereof, to acquire any shares of its capital
stock, except pursuant to employee incentive or benefit plans, programs or
arrangements and non-employee director plans in existence on the date hereof in
the ordinary course of business and consistent with past practice covering not
in excess of 5,000,000 shares of Boeing Common Stock;
(x) shall not, and shall not permit any of its Subsidiaries to,
take any actions which would, or would be reasonably likely to, prevent Boeing
from accounting for the Merger in accordance with the pooling of interests
method of accounting under the requirements of APB No. 16; and
(xi) shall not, and shall not permit any of its Subsidiaries
to, agree, in writing or otherwise, to take any of the foregoing actions or
take any action which would make any representation or warranty in Article V
hereof untrue or incorrect.
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Section 6.2. Investigation. Each of MDC and Boeing shall
afford to one another and to one another's officers, employees, accountants,
counsel and other authorized representatives full and complete access during
normal business hours, throughout the period prior to the earlier of the
Effective Time or the date of termination of this Agreement, to its and its
Subsidiaries' plants, properties, contracts, commitments, books, and records
(including but not limited to tax returns) and any report, schedule or other
document filed or received by it pursuant to the requirements of federal or
state securities laws and shall use their reasonable best efforts to cause
their respective representatives to furnish promptly to one another such
additional financial and operating data and other information as to its and its
Subsidiaries' respective businesses and properties as the other or its duly
authorized representatives may from time to time reasonably request; provided,
that nothing herein shall require either MDC or Boeing or any of their
respective Subsidiaries to disclose any information to the other that would
cause significant competitive harm to such disclosing party or its affiliates
if the transactions contemplated by this Agreement are not consummated. The
parties hereby agree that each of them will treat any such information in
accordance with the Confidentiality Agreement, dated as of October 17, 1995,
between MDC and Boeing (the "Confidentiality Agreement"). Notwithstanding any
provision of this Agreement to the contrary, no party shall be obligated to
make any disclosure in violation of applicable laws or regulations, including
any such laws or regulations pertaining to the treatment of classified
information.
Section 6.3. Cooperation. (a) MDC and Boeing shall together,
or pursuant to an allocation of responsibility to be agreed upon between them:
(i) prepare and file with the SEC as soon as is reasonably
practicable the Joint Proxy Statement (which, if requested by Boeing, may also
relate to an amendment of the Restated Certificate of Incorporation of Boeing
to increase its authorized capitalization) and a registration statement on Form
S-4 under the Securities Act with respect to the Boeing Common Stock issuable
in the Merger (the "Registration Statement"), and shall use their reasonable
best efforts to have the Joint Proxy Statement cleared by the SEC under the
Exchange Act and the Registration Statement declared effective by the SEC under
the Securities Act;
(ii) as soon as is reasonably practicable take all such
action as may be required under state blue sky or securities laws in
connection with the transactions contemplated by this Agreement;
(iii) promptly prepare and file with the NYSE and such other
stock exchanges as shall be agreed upon listing applications covering the
shares of Boeing Common Stock issuable in the Merger or upon exercise of MDC
stock options, warrants, conversion rights or other rights or vesting or
payment of other MDC equity-based awards and use its reasonable best efforts to
obtain, prior to the Effective Time, approval for the listing of such Common
Stock, subject only to official notice of issuance;
(iv) cooperate with one another in order to lift any
injunctions or remove any other impediment to the consummation of the
transactions contemplated herein; and
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(v) cooperate with one another in obtaining opinions of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel to MDC, and Cravath, Swaine &
Moore, counsel to Boeing, dated as of the Effective Time, to the effect that
the Merger qualifies as a reorganization under the provisions of Section 368(a)
of the Code. In connection therewith, each of MDC and Boeing shall deliver to
Skadden, Arps, Slate, Meagher & Flom LLP and Cravath, Swaine & Moore
representation letters substantially in the form attached hereto as Exhibits
7.1(g)(1) and 7.1(g)(2), respectively, and MDC shall use its reasonable best
efforts to obtain the representation letter substantially in the form attached
hereto as Exhibit 7.1(g)(3) from appropriate stockholders and shall deliver any
such letters obtained to Skadden, Arps, Slate, Meagher & Flom LLP and Cravath,
Swaine & Moore.
(b) Subject to the limitations contained in Section 6.2, MDC
and Boeing shall each furnish to one another and to one another's counsel all
such information as may be required in order to effect the foregoing actions
and each represents and warrants to the other that no information furnished by
it in connection with such actions or otherwise in connection with the
consummation of the transactions contemplated by this Agreement will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated in order to make any information so furnished, in light
of the circumstances under which it is so furnished, not misleading.
Section 6.4. Affiliate Agreements. (a) MDC shall, prior to
the Effective Time, deliver to Boeing a list (reasonably satisfactory to
counsel for Boeing), setting forth the names and addresses of all persons who
are, at the time of the MDC Meeting, in MDC's reasonable judgment, "affiliates"
of MDC for purposes of Rule 145 under the Securities Act or under applicable
SEC accounting releases with respect to pooling of interests accounting
treatment. MDC shall furnish such information and documents as Boeing may
reasonably request for the purpose of reviewing such list. MDC shall use its
reasonable best efforts to cause each person who is identified as an
"affiliate" in the list furnished pursuant to this Section 6.4 to execute a
written agreement on or prior to the Effective Time, in substantially the form
of Exhibit 6.4(a) hereto.
(b) Boeing shall, prior to the Effective Time, deliver to MDC a
list (reasonably satisfactory to counsel for MDC) setting forth the names and
addresses of all persons who are, at the time of the Boeing Meeting, in
Boeing's reasonable judgment, affiliates of Boeing under applicable SEC
accounting releases with respect to pooling of interests accounting treatment.
Boeing shall furnish such information and documents as MDC may reasonably
request for the purpose of reviewing such list. Boeing shall use its
reasonable best efforts to cause each person who is identified as an affiliate
in the list furnished pursuant to this Section 6.4 to execute a written
agreement on or prior to the Effective Time, in substantially the form of
Exhibit 6.4(b) hereto.
Section 6.5. Employee Stock Options, Incentive and Benefit
Plans. (a) Simultaneously with the Merger, (i) each outstanding option (and
related stock appreciation right ("MDC SAR"), if any) to purchase or acquire a
share of MDC Common Stock under employee incentive or benefit plans, programs
or arrangements and non-employee director plans presently maintained by MDC
("MDC Option Plans") shall be converted into an option (together with a related
stock appreciation right of Boeing, if applicable) to purchase the number of
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shares of Boeing Common Stock equal to .65 times the number of shares of MDC
Common Stock which could have been obtained prior to the Effective Time upon
the exercise of each such option, at an exercise price per share equal to the
exercise price for each such share of MDC Common Stock subject to an option
(and related MDC SAR, if any) under the MDC Option Plans divided by .65, and
all references in each such option (and related MDC SAR, if any) to MDC shall
be deemed to refer to Boeing, where appropriate, and (ii) Boeing shall assume
the obligations of MDC under the MDC Option Plans. The other terms of each
such option and MDC SAR, and the plans under which they were issued, shall
continue to apply in accordance with their terms, including any provisions
providing for acceleration.
(b) Simultaneously with the Merger, each outstanding award
(including restricted stock, stock equivalents and stock units) ("MDC Award")
under any employee incentive or benefit plans, programs or arrangements and
non-employee director plans presently maintained by MDC which provide for
grants of equity-based awards shall be amended or converted into a similar
instrument of Boeing, in each case with such adjustments to the terms of such
MDC Awards as are appropriate to preserve the value inherent in such MDC Awards
with no detrimental effects on the holders thereof. The other terms of each
MDC Award, and the plans or agreements under which they were issued, shall
continue to apply in accordance with their terms, including any provisions
providing for acceleration. With respect to any restricted stock awards as to
which the restrictions shall have lapsed on or prior to the Effective Time in
accordance with the terms of the applicable plans or award agreements, shares
of such previously restricted stock shall be converted in accordance with the
provisions of Section 2.1(b).
(c) Simultaneously with the Merger, Boeing shall assume each
Termination Benefit Agreement then in effect and all of MDC's rights and
obligations under each such Termination Benefit Agreement.
(d) MDC and Boeing agree that each of their respective
employee incentive or benefit plans, programs and arrangements and non-employee
director plans shall be amended, to the extent necessary and appropriate, to
reflect the transactions contemplated by this Agreement, including, but not
limited to the conversion of shares of MDC Common Stock held or to be awarded
or paid pursuant to such benefit plans, programs or arrangements into shares of
Boeing Common Stock on a basis consistent with the transactions contemplated by
this Agreement. The actions to be taken by MDC and Boeing pursuant to Section
6.5(d) shall include the submission by MDC or Boeing of the amendments to the
plans, programs or arrangements referred to herein to their respective
stockholders at the MDC Meeting or the Boeing Meeting, respectively, if such
submission is determined to be necessary or advisable by counsel to MDC or
Boeing after consultation with one another; provided, however, that such
approval shall not be a condition to the consummation of the Merger.
(e) Boeing shall (i) reserve for issuance the number of
shares of Boeing Common Stock that will become subject to the benefit plans,
programs and arrangements referred to in this Section 6.5 and (ii) issue or
cause to be issued the appropriate number of shares of Boeing Common Stock
pursuant to such plans, programs and arrangements, upon the exercise or
maturation of rights existing thereunder on the Effective Time or thereafter
granted or awarded.
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Section 6.6. Filings; Other Action. (a) Subject to the terms
and conditions herein provided, MDC and Boeing shall (a) promptly make their
respective filings and thereafter make any other required submissions under the
HSR Act, (b) use reasonable efforts to cooperate with one another in (i)
determining whether any filings are required to be made with, or consents,
permits, authorizations or approvals are required to be obtained from, any
third party, the United States government or any agencies, departments or
instrumentalities thereof or other governmental or regulatory bodies or
authorities of federal, state, local and foreign jurisdictions in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and thereby and (ii) timely making all such
filings and timely seeking all such consents, permits, authorizations or
approvals, and (c) use reasonable efforts to take, or cause to be taken, all
other actions and do, or cause to be done, all other things necessary, proper
or advisable to consummate and make effective the transactions contemplated
hereby, including, without limitation, taking all such further action as
reasonably may be necessary to resolve such objections, if any, as the Federal
Trade Commission, the Antitrust Division of the Department of Justice, state
antitrust enforcement authorities or competition authorities of any other
nation or other jurisdiction or any other person may assert under relevant
antitrust or competition laws with respect to the transactions contemplated
hereby and to ensure that it is a "poolable entity" eligible to participate in
a transaction to be accounted for under the pooling of interests method of
accounting.
(b) MDC and Boeing shall take all such action as reasonably
may be necessary to obtain the advance agreement of the U.S. Department of
Defense ("DOD") to the effect that (i) the transactions contemplated by this
Agreement will not trigger any liability to DOD with respect to any surplus
assets in a pension plan, (ii) for cost accounting purposes, the pension plans
of MDC, Boeing and Boeing North American, Inc. will be a single pension plan
and (iii) any subsequent reorganization or restructuring of MDC, Boeing and
Boeing North American, Inc. or mergers and other transactions conducted between
MDC, Boeing and Boeing North American, Inc. or between any of their pension
plans will not trigger a segment closing adjustment under Cost Accounting
Standard 413 after the Effective Time unless MDC, Boeing and Boeing North
American, Inc. discontinue doing business with the U.S. government or Boeing
curtails the benefits of all the pension plans.
Section 6.7. Further Assurances. In case at any time after
the Effective Time any further action is necessary or desirable to carry out
the purposes of this Agreement, the proper officers of MDC and Boeing shall
take all such necessary action.
Section 6.8. Takeover Statute. If any "fair price",
"moratorium", "control share acquisition" or other form of antitakeover statute
or regulation shall become applicable to the transactions contemplated hereby,
each of MDC and Boeing and the members of their respective Boards of Directors
shall grant such approvals and take such actions as are reasonably necessary so
that the transactions contemplated hereby may be consummated as promptly as
practicable on the terms contemplated hereby and otherwise act to eliminate or
minimize the effects of such statute or regulation on the transactions
contemplated hereby.
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Section 6.9. No Solicitation. From and after the date hereof,
MDC will not, and shall use its reasonable best efforts not to permit, any of
its officers, directors, employees, attorneys, financial advisors, agents or
other representatives or those of any of its Subsidiaries to, directly or
indirectly, solicit, initiate or knowingly encourage (including by way of
furnishing information) any Takeover Proposal from any person, or engage in or
continue discussions or negotiations relating thereto; provided, however, that
MDC may engage in discussions or negotiations with, and furnish information
concerning MDC and its Subsidiaries, businesses, properties or assets to, any
third party which makes a Takeover Proposal if the Board of Directors of MDC
concludes in good faith after consultation with its outside counsel (who may be
its regularly engaged outside counsel) that the failure to take such action
would present a reasonable possibility of violating the obligations of such
Board to MDC or to MDC's stockholders under applicable law. MDC will promptly
(but in no case later than 24 hours) notify Boeing of the receipt of any
Takeover Proposal, including the material terms and conditions thereof and the
identity of the person or group making such Takeover Proposal, and will
promptly (but in no case later than 24 hours) notify Boeing of any
determination by MDC's Board of Directors that a Superior Proposal (as
hereinafter defined) has been made. As used in this Agreement, (i) "Takeover
Proposal" shall mean any proposal or offer, or any expression of interest by
any third party relating to MDC's willingness or ability to receive or discuss
a proposal or offer, in each case made prior to the stockholder vote at the MDC
Meeting, other than a proposal or offer by Boeing or any of its Subsidiaries,
for a merger, consolidation or other business combination involving, or any
purchase of, all or substantially all of the assets or more than 50% of the
voting securities of, MDC, and (ii) "Superior Proposal" shall mean a bona fide
Takeover Proposal made by a third party on terms that a majority of the members
of the Board of Directors of MDC determines in their good faith reasonable
judgment (based on the advice of an independent financial advisor) may be more
favorable to MDC and to its stockholders than the transactions contemplated
hereby and for which any required financing is committed or which, in the good
faith reasonable judgment of a majority of such members (after consultation
with any independent financial advisor), is reasonably capable of being
financed by such third party.
Section 6.10. Public Announcements. MDC and Boeing will
consult with each other before issuing any press release relating to this
Agreement or the transactions contemplated herein and shall not issue any such
press release prior to such consultation except as may be required by law or by
obligations pursuant to any listing agreement with any national securities
exchange.
Section 6.11. Indemnification and Insurance. (a) Boeing and
Sub agree that all rights to exculpation and indemnification for acts or
omissions occurring prior to the Effective Time now existing in favor of the
current or former directors or officers (the "Indemnified Parties") of MDC as
provided in its charter or by-laws or in any agreement shall survive the Merger
and shall continue in full force and effect in accordance with their terms.
For six years from the Effective Time, Boeing shall indemnify the Indemnified
Parties to the same extent as such Indemnified Parties are entitled to
indemnification pursuant to the preceding sentence.
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(b) For six years from the Effective Time, Boeing shall,
maintain in effect MDC's current directors' and officers' liability insurance
covering those persons who are currently covered by MDC's directors' and
officers' liability insurance policy (a copy of which has been heretofore
delivered to Boeing); provided, however, that in no event shall Boeing be
required to expend in any one year an amount in excess of 200% of the annual
premiums currently paid by MDC for such insurance, and, provided, further, that
if the annual premiums of such insurance coverage exceed such amount, Boeing
shall be obligated to obtain a policy with the greatest coverage available for
a cost not exceeding such amount.
Section 6.12. Accountants' "Comfort" Letters. MDC and Boeing
will each use reasonable best efforts to cause to be delivered to each other
letters from their respective independent accountants, dated a date within two
business days before the date of the Registration Statement, in form reasonably
satisfactory to the recipient and customary in scope for comfort letters
delivered by independent accountants in connection with registration statements
on Form S-4 under the Securities Act.
Section 6.13. Additional Reports. MDC and Boeing shall each
furnish to the other copies of any reports of the type referred to in Sections
4.4 and 5.4 which it files with the SEC on or after the date hereof, and MDC
and Boeing, as the case may be, represents and warrants that as of the
respective dates thereof, such reports will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statement therein, in light of the circumstances under
which they were made, not misleading. Any unaudited consolidated interim
financial statements included in such reports (including any related notes and
schedules) will fairly present the financial position of MDC and its
consolidated Subsidiaries or Boeing and its consolidated Subsidiaries, as the
case may be, as of the dates thereof and the results of operations and changes
in financial position or other information included therein for the periods or
as of the date then ended (subject, where appropriate, to normal year-end
adjustments), in each case in accordance with past practice and GAAP
consistently applied during the periods involved (except as otherwise disclosed
in the notes thereto).
Section 6.14. Co-ordination of Dividends. MDC and Boeing
shall coordinate with the other the authorization or declaration of any
dividends in respect of MDC Common Stock and Boeing Common Stock and the record
dates and payment dates relating thereto, it being the intention of the parties
that holders of MDC Common Stock or Boeing Common Stock shall not receive two
dividends, or fail to receive one dividend, for any single calendar quarter
with respect to their shares of MDC Common Stock and/or Boeing Common Stock and
any shares of Boeing Common Stock any such holder receives in exchange for MDC
Common Stock in the Merger.
ARTICLE VII
Conditions to the Merger
Section 7.1. Conditions to Each Party's Obligation to Effect
the Merger. The respective obligations of each party to effect the Merger
shall be subject to the fulfillment at or prior to the Effective Time of the
following conditions:
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(a) The holders of issued and outstanding shares of MDC
Common Stock shall have duly approved the Merger, and the holders of issued and
outstanding shares of Boeing Common Stock shall have approved the Share
Issuance, all in accordance with applicable law and the rules of the NYSE.
(b) No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or enforced
by any court or other tribunal or governmental body or authority which
prohibits the consummation of the Merger substantially on the terms
contemplated hereby. In the event any order, decree or injunction shall have
been issued, each party shall use its reasonable efforts to remove any such
order, decree or injunction.
(c) The Registration Statement shall have become effective
in accordance with the provisions of the Securities Act and no stop order
suspending such effectiveness shall have been issued and remain in effect.
(d) The shares of Boeing Common Stock issuable in the
Merger shall have been approved for listing on the NYSE, subject only to
official notice of issuance.
(e) Any applicable waiting period under the HSR Act shall
have expired or been terminated and any other MDC Required Approvals and Boeing
Required Approvals shall have been obtained, except where the failure to obtain
such other MDC Required Approvals and Boeing Required Approvals would not have
a Material Adverse Effect on MDC or Boeing, as the case may be.
(f) At the Effective Time each of MDC and Boeing shall have
received a letter of its independent public accountants, in form and substance
reasonably satisfactory to it, stating that they concur with management's
conclusion that the Merger will qualify as a transaction to be accounted for
the parties hereto in accordance with the pooling of interests method of
accounting under the requirements of APB No. 16.
(g) Each of MDC and Boeing shall have received an opinion
of its tax counsel, Skadden, Arps, Slate, Meagher & Flom LLP and Cravath,
Swaine & Moore, respectively, in form and substance reasonably satisfactory to
it, and dated within five days of the date of the Joint Proxy Statement, to the
effect that the Merger will qualify for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code and that none
of MDC, its stockholders, Boeing and Sub shall recognize gain or loss for
federal income tax purposes as a result of the Merger (other than, with respect
to any cash paid in lieu of fractional shares of Boeing Common Stock). In
rendering such opinions, Skadden, Arps, Slate, Meagher & Flom LLP and
Cravath, Swaine & Moore may rely upon representations of officers of MDC and
Boeing and stockholders of MDC substantially in the form of Exhibits
7.1(g)(1), 7.1(g)(2) and 7.1(g)(3).
Section 7.2. Conditions to Obligations of MDC to Effect the
Merger. The obligation of MDC to effect the Merger is further subject to the
conditions that (a) the representations and warranties of Boeing contained
herein shall be true and correct in all respects (but without regard to any
materiality qualifications or references to Material Adverse Effect contained
in any specific representation or warranty) as of the Effective Time with the
same effect as though made as of the Effective Time except (i) for changes
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specifically permitted by the terms of this Agreement, (ii) that the accuracy
of representations and warranties that by their terms speak as of the date of
this Agreement or some other date will be determined as of such date and (iii)
where any such failure of the representations and warranties in the aggregate
to be true and correct in all respects would not have a Material Adverse Effect
on Boeing, (b) Boeing shall have performed in all material respects all
obligations and complied with all covenants required by this Agreement to be
performed or complied with by it prior to the Effective Time and (c) Boeing
shall have delivered to MDC a certificate, dated the Effective Time and signed
by its Chairman of the Board and Chief Executive Officer or a Senior Vice
President, certifying to both such effects.
Section 7.3. Conditions to Obligations of Boeing to Effect the
Merger. The obligation of Boeing to effect the Merger is further subject to
the conditions that (a) the representations and warranties of MDC contained
herein shall be true and correct in all respects (but without regard to any
materiality qualifications or references to Material Adverse Effect contained
in any specific representation or warranty) as of the Effective Time with the
same effect as though made as of the Effective Time except (i) for changes
specifically permitted by the terms of this Agreement, (ii) that the accuracy
of representations and warranties that by their terms speak as of the date of
this Agreement or some other date will be determined as of such date and (iii)
where any such failure of the representations and warranties in the aggregate
to be true and correct in all respects would not have a Material Adverse Effect
on MDC, (b) MDC shall have performed in all material respects all obligations
and complied with all covenants required by this Agreement to be performed or
complied with by it prior to the Effective Time and (c) MDC shall have
delivered to Boeing a certificate, dated the Effective Time and signed by its
Chairman of the Board, Chief Executive Officer and President or a Senior Vice
President, certifying to both such effects.
ARTICLE VIII
Termination, Waiver, Amendment and Closing
Section 8.1. Termination or Abandonment. Notwithstanding
anything contained in this Agreement to the contrary, this Agreement may be
terminated and abandoned at any time prior to the Effective Time, whether
before or after any approval of the matters presented in connection with the
Merger by the respective stockholders of MDC and Boeing:
(a) by the mutual written consent of MDC and Boeing;
(b) by either MDC or Boeing if the Effective Time shall not
have occurred on or before December 31, 1997; provided, that the party seeking
to terminate this Agreement pursuant to this clause 8.1(b) shall not have
breached in any material respect its obligations under this Agreement in any
manner that shall have proximately contributed to the failure to consummate
the Merger on or before such date;
(c) by either MDC or Boeing if (i) a statute, rule,
regulation or executive order shall have been enacted, entered or promulgated
prohibiting the consummation of the Merger substantially on the terms
contemplated hereby or (ii) an order, decree, ruling or injunction shall have
been entered permanently restraining, enjoining or otherwise prohibiting the
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consummation of the Merger substantially on the terms contemplated hereby and
such order, decree, ruling or injunction shall have become final and
non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to this clause 8.1(c)(ii) shall have used its reasonable best efforts
to remove such injunction, order or decree;
(d) by either MDC or Boeing if the approvals of the
stockholders of either MDC or Boeing contemplated by this Agreement shall not
have been obtained by reason of the failure to obtain the required vote at a
duly held meeting of stockholders or of any adjournment thereof;
(e) by either Boeing or MDC if the Board of Directors of
MDC reasonably determines that a Takeover Proposal constitutes a Superior
Proposal; provided, however, that MDC may not terminate this Agreement pursuant
to this clause 8.1(e) unless and until five business days have elapsed
following delivery to Boeing of a written notice of such determination by the
Board of Directors of MDC and during such five business day period MDC (i)
informs Boeing of the terms and conditions of the Takeover Proposal and the
identity of the Person making the Takeover Proposal and (ii) otherwise fully
cooperates with Boeing with respect thereto (subject, in the case of this
clause (ii), to the condition that the MDC Board of Directors shall not be
required to take any action that it believes, after consultation with outside
legal counsel, would present a reasonable possibility of violating its
obligations to MDC or MDC's stockholders under applicable law) with the intent
of enabling Boeing to agree to a modification of the terms and conditions of
this Agreement so that the transactions contemplated hereby may be effected;
provided, further, that MDC may not terminate this Agreement pursuant to this
clause 8.1(e) unless at the end of such five business day period the Board of
Directors of MDC continues reasonably to believe that the Takeover Proposal
constitutes a Superior Proposal and simultaneously with such termination MDC
pays to Boeing the amount specified under Section 8.2; and provided, further,
that this Agreement shall not terminate pursuant to this clause 8.1(e) unless
simultaneously with such termination MDC enters into a definitive acquisition,
merger or similar agreement to effect the Superior Proposal;
(f) by Boeing if a tender offer or exchange offer for 50% or
more of the outstanding shares of capital stock of MDC is commenced prior to
the MDC Meeting, and the Board of Directors of MDC fails to recommend against
acceptance of such tender offer or exchange offer within the time period
presented by Rule 14e-2 by its stockholders (including by taking no position
with respect to the acceptance of such tender offer or exchange offer by its
stockholders); or
(g) by MDC or Boeing if there shall have been a material
breach by the other of any of its representations, warranties, covenants or
agreements contained in this Agreement and such breach shall not have been
cured within 30 days after notice thereof shall have been received by the party
alleged to be in breach.
In the event of termination of this Agreement pursuant to this
Section 8.1, this Agreement shall terminate (except for the confidentiality
agreement referred to in Section 6.2 and Sections 8.2 and 9.2), and there shall
be no other liability on the part of MDC or Boeing to the other except
liability arising out of a wilful breach of this Agreement or as provided for
in the Confidentiality Agreement.
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Section 8.2. Termination Fee. (a) Notwith-standing any
provision in this Agreement to the contrary (but subject to subsection (b)
below), if (i) this Agreement is terminated by MDC or Boeing pursuant to
Section 8.1(e) or (ii) (x) prior to the termination of this Agreement, a bona
fide Takeover Proposal is commenced, publicly proposed or publicly disclosed
and not withdrawn, (y) this Agreement is terminated by MDC pursuant to Section
8.1(b) or by Boeing or MDC pursuant to Section 8.1(d) (but only due to the
failure of the MDC stockholders to approve the Merger) and (z) concurrently
with or within twelve months after such termination a Takeover Proposal shall
have been consummated, then, in each case, MDC shall (without prejudice to any
other rights of Boeing against MDC) pay to Boeing a fee (the "Termination Fee")
of $200 million in cash, such payment to be made simultaneously with such
termination in the case of a termination by MDC pursuant to Section 8.1(e) and
promptly, but in no event later than the second business day following a
termination by Boeing pursuant to Section 8.1(e) and, in the case of clause
(ii), upon the consummation of such Takeover Proposal.
(b) Notwithstanding anything to the contrary in this
Agreement, if this Agreement is terminated by either party hereto for any
reason, and if prior to such termination, the Board of Directors of Boeing
shall have breached its covenants hereunder by (i) failing to recommend to the
Boeing stockholders in the Joint Proxy Statement that they vote in favor of the
Share Issuance, (ii) having withdrawn a recommendation to the Boeing
stockholders that they vote in favor of the Share Issuance or (iii) having
modified any such recommendation that they vote in favor of the Share Issuance,
then Boeing shall (without prejudice to any other rights of MDC against Boeing)
pay to MDC a fee in cash equal to $200 million, such fee to be paid
simultaneously with any termination of this Agreement by Boeing and promptly
after any termination of this Agreement by MDC.
Section 8.3. Amendment or Supplement. At any time before or
after approval of the matters presented in connection with the Merger by the
respective stockholders of MDC and Boeing and prior to the Effective Time, this
Agreement may be amended or supplemented in writing by MDC and Boeing with
respect to any of the terms contained in this Agreement, except that following
approval by the stockholders of MDC and Boeing there shall be no amendment or
change to the provisions hereof with respect to the conversion ratio of shares
of MDC Common Stock into shares of Boeing Common Stock as provided herein nor
any amendment or change not permitted under applicable law, without further
approval by the stockholders of MDC and Boeing.
Section 8.4. Extension of Time, Waiver, Etc. At any time
prior to the Effective Time, MDC and Boeing may:
(a) extend the time for the performance of any of the
obligations or acts of the other party;
(b) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any document delivered
pursuant hereto; or
(c) waive compliance with any of the agreements or
conditions of the other party contained herein.
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Notwithstanding the foregoing no failure or delay by MDC or
Boeing in exercising any right hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right hereunder. Any agreement
on the part of a party hereto to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party.
ARTICLE IX
Miscellaneous
Section 9.1. No Survival of Representations and Warranties.
None of the representations, warranties and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Merger,
except for the agreements set forth in Article II and Article III, the
agreements of "affiliates" of MDC and Boeing to be delivered pursuant to
Section 6.4, the provisions of Sections 6.5, 6.7 and 6.11 and this Article IX.
Section 9.2. Expenses. Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby and thereby shall be paid by the party
incurring such expenses, except that (a)(i) the filing fee in connection with
any HSR Act filing, (ii) the commissions and other out-of-pocket transaction
costs, including the expenses and compensation of the Exchange Agent, incurred
in connection with the sale of Excess Shares and (iii) the expenses incurred in
connection with the printing and mailing of the Joint Proxy Statement, shall be
shared equally by MDC and Boeing and (b) all transfer taxes shall be paid by
MDC.
Section 9.3. Counterparts; Effectiveness. This Agreement may
be executed in two or more consecutive counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were
upon the same instrument, and shall become effective when one or more
counterparts have been signed by each of the parties and delivered (by telecopy
or otherwise) to the other parties.
Section 9.4. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York, except
that Maryland law shall apply to the Merger, without regard to the principles
of conflicts of laws thereof.
Section 9.5. Notices. All notices and other communications
hereunder shall be in writing (including telecopy or similar writing) and shall
be effective (a) if given by telecopy, when such telecopy is transmitted to the
telecopy number specified in this Section 9.5 and the appropriate telecopy
confirmation is received or (b) if given by any other means, when delivered at
the address specified in this Section 9.5:
To MDC:
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, Missouri 63166
Attention: F. Mark Kuhlmann, Esq.
Telecopy: (314) 234-3226
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copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attention: Franklin M. Gittes, Esq.
Lou R. Kling, Esq.
Telecopy: (212) 735-2000
To Boeing:
The Boeing Company
7755 East Marginal Way South
Seattle, WA 98108
Attention: Theodore J. Collins, Esq.
Telecopy: (206) 544-4900
copy to:
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019
Attention: Allen Finkelson, Esq.
Telecopy: (212) 474-3700
Section 9.6. Assignment; Binding Effect. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties. Subject to
the preceding sentence, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
Section 9.7. Severability. Any term or provision of this
Agreement which is invalid or unenforceable in any jurisdiction shall, as to
that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement in any other jurisdiction. If any provision
of this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
Section 9.8. Enforcement of Agreement. The parties hereto
agree that money damages or other remedy at law would not be sufficient or
adequate remedy for any breach or violation of, or a default under, this
Agreement by them and that in addition to all other remedies available to them,
each of them shall be entitled to the fullest extent permitted by law to an
injunction restraining such breach, violation or default or threatened breach,
violation or default and to any other equitable relief, including, without
limitation, specific performance, without bond or other security being
required.
Section 9.9. Miscellaneous. This Agreement:
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(a) along with the Confidentiality Agreement and the
agreements referred to in Section 6.1(a)(ix) and contained in the disclosure
referred to in Section 6.1(b)(viii) constitutes the entire agreement, and
supersedes all other prior agreements and understandings, both written and
oral, between the parties, or any of them, with respect to the subject matter
hereof and thereof; and
(b) except for the provision of Section 6.11 hereof, is not
intended to and shall not confer upon any Person other than the parties hereto
any rights or remedies hereunder.
Section 9.10. Headings. Headings of the Articles and Sections
of this Agreement are for convenience of the parties only, and shall be given
no substantive or interpretive effect whatsoever.
Section 9.11. Subsidiaries; Significant Subsidiaries;
Affiliates. References in this Agreement to "Subsidiaries" of MDC or Boeing
shall mean any corporation or other form of legal entity of which more than 50%
of the outstanding voting securities are on the date hereof directly or
indirectly owned by MDC or Boeing, as the case may be. References in this
Agreement to "Significant Subsidiaries" shall mean Subsidiaries (as defined
above) which constitute "significant subsidiaries" under Rule 405 promulgated
by the SEC under the Securities Act. References in this Agreement (except as
specifically otherwise defined) to "affiliates" shall mean, as to any person,
any other person which, directly or indirectly, controls, or is controlled by,
or is under common control with, such person. As used in this definition,
"control" (including, with its correlative meanings, "controlled by" and "under
common control with") shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of management or policies of a Person,
whether through the ownership of securities or partnership of other ownership
interests, by contract or otherwise. References in the Agreement to "person"
shall mean an individual, a corporation, a partnership, an association, a trust
or any other entity or organization, including, without limitation, a
governmental body or authority.
Section 9.12. Finders or Brokers. Except for J.P. Morgan
Securities Inc. with respect to MDC, a copy of whose engagement agreement has
been or will be provided to Boeing, and CS First Boston Corporation with
respect to Boeing, a copy of whose engagement agreement has been or will be
provided to MDC, neither MDC nor Boeing nor any of their respective
Subsidiaries has employed any investment banker, broker, finder or intermediary
in connection with the transactions contemplated hereby who might be entitled
to any fee or any commission in connection with or upon consummation of the
Merger.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the date first above written.
MCDONNELL DOUGLAS CORPORATION
By: /s/ Harry C. Stonecipher
---------------------------
Name: Harry C. Stonecipher
Title: President and Chief
Executive Officer
THE BOEING COMPANY
By: /s/ Philip M. Condit
---------------------------
Name: Philip M. Condit
Title: President and Chief
Executive Officer
WEST ACQUISITION CORP.
By: /s/ Philip M. Condit
----------------------------
Name: Philip M. Condit
Title: President
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FORM OF AFFILIATE LETTER FOR AFFILIATES OF MDC
The Boeing Company
7755 East Marginal Way South
Seattle, WA 98108
Attention of [ ]
Gentlemen:
I have been advised that as of the date of this letter I may be
deemed to be an "affiliate" of McDonnell Douglas Corporation, a Maryland
corporation ("MDC"), as the term "affiliate" is (i) defined for purposes of
paragraphs (c) and (d) of Rule 145 of the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), and/or (ii) used in
and for purposes of Accounting Series Releases 130 and 135, as amended, of the
Commission. Pursuant to the terms of the Agreement and Plan of Merger dated as
of December 14, 1996 (the "Merger Agreement") among The Boeing Company, a
Delaware corporation ("Boeing"), West Acquisition Corp, a Maryland corporation
("Sub"), and MDC, Sub will be merged with and into MDC, with MDC continuing as
the Surviving Corporation (the "Merger"). Capitalized terms used in this
letter without definition shall have the meanings assigned to them in the
Merger Agreement.
As a result of the Merger, I may receive shares of common
stock, par value $5.00 per share, of Boeing (the "Boeing Shares"). I would
receive such Boeing Shares in exchange for shares (or upon exercise of options
for shares) owned by me of common stock, par value $1.00 per share of MDC (the
"MDC Shares").
1. I hereby represent, warrant and covenant to Boeing that in
the event I receive any Boeing Shares as a result of the Merger:
A. I shall not make any sale, transfer or other
disposition of the Boeing Shares in violation of the Act or the Rules and
Regulations.
B. I have carefully read this letter and the Merger
Agreement and discussed the requirements of such documents and other applicable
limitations upon my ability to sell, transfer or otherwise dispose of the
Boeing Shares, to the extent I felt necessary, with my counsel or counsel for
MDC.
C. I have been advised that the issuance of the Boeing
Shares to me pursuant to the Merger has been registered with the Commission
under the Act on a Registration Statement on Form S-4. However, I have also
been advised that, because at the time the Merger is submitted for a vote of
the stockholders of MDC, (a) I may be deemed to be an affiliate of MDC and (b)
the distribution by me of the Boeing Shares has not been registered under the
Act, I may not sell, transfer or otherwise dispose of the Boeing Shares issued
to me in the Merger unless (i) such sale, transfer or other disposition is made
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in conformity with the volume and other limitations of Rule 145 promulgated by
the Commission under the Act, (ii) such sale, transfer or other disposition has
been registered under the Act or (iii) in the opinion of counsel reasonably
acceptable to Boeing, such sale, transfer or other disposition is otherwise
exempt from registration under the Act.
D. I understand that except as provided for in the
Merger Agreement, Boeing is under no obligation to register the sale, transfer
or other disposition of the Boeing Shares by me or on my behalf under the Act
or, except as provided in paragraph 2(A) below, to take any other action
necessary in order to make compliance with an exemption from such registration
available.
E. I also understand that there will be placed on the
certificates for the Boeing Shares issued to me, or any substitutions therefor,
a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED
IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SHARES REPRESENTED BY
THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH
THE TERMS OF AN AGREEMENT DATED [ ], 1997 BETWEEN
THE REGISTERED HOLDER HEREOF AND BOEING, A COPY OF WHICH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF BOEING."
F. I also understand that unless a sale or
transfer is made in conformity with the provisions of Rule 145, or pursuant to
a registration statement, Boeing reserves the right to put the following legend
on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND WERE
ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES
ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE
HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH,
ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933."
G. I further represent to, and covenant with, Boeing
that I will not, during the 30 days prior to the Effective Time (as defined in
the Merger Agreement), sell, transfer or otherwise dispose of or reduce my risk
(as contemplated by the SEC Accounting Series Release No. 135) with respect to
MDC Shares or shares of the capital stock of Boeing that I may hold and,
furthermore, that I will not sell, transfer or otherwise dispose of or reduce
my risk (as contemplated by SEC Accounting Series Release No. 135) with respect
to the Boeing Shares received by me in the Merger or any other shares of the
capital stock of Boeing until after such time as results covering at least 30
days of combined operations of MDC and Boeing have been published by Boeing, in
the form of a quarterly earnings report, an effective registration statement
filed with the Commission, a report to the Commission on Form 10-K 10-Q or 8-K,
or any other public filing or announcement which includes the combined results
of operations (the period commencing 30 days prior to the Effective Time and
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ending on the date of the publication of the post-Merger financial results is
referred to herein as the "Pooling Period"). Boeing shall notify the
"affiliates" of the publications of such results. Notwithstanding the
foregoing, I understand that during the aforementioned period, subject to
providing written notice to Boeing, I will not be prohibited from selling up to
10% of the Boeing Shares (the "10% Shares") received by me or MDC Shares owned
by me or making charitable contributions or bona fide gifts of the Boeing
Shares received by me or MDC Shares owned by me, subject to the same
restrictions. The 10% Shares shall be calculated in accordance with SEC
Accounting Series Release 135 as amended by Staff Accounting Bulletin No. 76.
I covenant with Boeing that I will not sell, transfer or otherwise dispose of
any 10% Shares during the period commencing from the Effective Time and ending
on the last day of the Pooling Period except in compliance with Rule 145(d)(i)
under the Securities Act or pursuant to charitable contributions or bona fide
gifts.
H. Execution of this letter should not be considered
an admission on my part that I am an "affiliate" of MDC as described in the
first paragraph of this letter, nor as a waiver of any rights I may have to
object to any claim that I am such an affiliate on or after the date of this
letter.
2. By Boeing's acceptance of this letter, Boeing
hereby agrees with me as follows:
A. For so long as and to the extent necessary to
permit me to sell the Boeing Shares pursuant to Rule 145 and, to the extent
applicable, Rule 144 under the Act, Boeing shall (a) use its reasonable best
efforts to (i) file, on a timely basis, all reports and data required to be
filed with the Commission by it pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and (ii) furnish to me upon
request a written statement as to whether Boeing has complied with such
reporting requirements during the 12 months preceding any proposed sale of the
Boeing Shares by me under Rule 145, and (b) otherwise use its reasonable
efforts to permit such sales pursuant to Rule 145 and Rule 144. Boeing has
filed all reports required to be filed with the Commission under Section 13 of
the 1934 Act during the preceding 12 months.
B. It is understood and agreed that certificates with
the legends set forth in paragraphs E and F above will be substituted by
delivery of certificates without such legend if (i) two years shall have
elapsed from the date the undersigned acquired the Boeing Shares received in
the Merger and the provisions of Rule 145(d)(2) are then available to the
undersigned, (ii) three years shall have elapsed from the date the undersigned
acquired the Boeing Shares received in the Merger and the provisions of Rule
145(d)(3) are then applicable to the undersigned, or (iii) Boeing has received
either an opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to Boeing, or a "no-action" letter obtained by the undersigned
from the staff of the Commission, to the effect that the restrictions imposed
by Rule 144 and Rule 145 under the Act no longer apply to the undersigned.
Very truly yours,
_________________
Name:
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Agreed and accepted this day
of [ ], 1997, by
THE BOEING COMPANY,
By:_________________________
Name:
Title:
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FORM OF AFFILIATE LETTER FOR AFFILIATES OF BOEING
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO 63166
Attention of [ ]
Gentlemen:
I have been advised that as of the date of this letter I may be
deemed to be an "affiliate" of The Boeing Company, a Delaware corporation
("Boeing"), as the term "affiliate" is defined for purposes of Accounting
Series Releases 130 and 135, as amended, of the Securities and Exchange
Commission (the "Commission"). Pursuant to the terms of the Agreement and Plan
of Merger dated as of December 14, 1996 (the "Merger Agreement") among Boeing,
West Acquisition Corp., a Maryland corporation ("Sub"), and McDonnell Douglas
Corporation, a Maryland corporation ("MDC"), Sub will be merged with and into
MDC, with MDC continuing as the Surviving Corporation (the "Merger").
I represent to, and covenant with, MDC that I will not, during
the 30 days prior to the Effective Time (as defined in the Merger Agreement)
until after such time as results covering at least 30 days of combined
operations of MDC and Boeing have been published by Boeing, in the form of a
quarterly earnings report, an effective registration statement filed with the
Commission, a report to the Commission on Form 10-K, 10-Q or 8-K, or any other
public filing or announcement which includes the combined results of
operations, sell, transfer or otherwise dispose of or reduce my risk (as
contemplated by the SEC Accounting Series Release No. 135) with respect to any
shares of the capital stock of Boeing ("Boeing Stock") or MDC that I may hold.
I understand that Boeing shall notify the "affiliates" of the publication of
such results. Notwithstanding the foregoing, I understand that subject to
providing written notice to Boeing and subject to SEC Accounting Series Release
No. 135 as amended by Staff Accounting Bulletin No. 76, during the
aforementioned period I will not be prohibited from selling up to 10% of the
Boeing Stock that I hold or from making charitable contributions or bona fide
gifts of the Boeing Stock that I hold, subject to the same restrictions.
Execution of this letter should not be considered an admission
on my part that I am an "affiliate" of Boeing as described in the first
paragraph of this letter, nor as a waiver of any rights I may have to object to
any claim that I am such an affiliate on or after the date of this letter.
Very truly yours,
_________________________
Name:
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Accepted this day of
[ ], 1997 by
MCDONNELL DOUGLAS CORPORATION,
By: _________________________
Name:
Title:
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[Letterhead of]
THE BOEING COMPANY
___, 1997
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Dear Sirs:
In connection with the opinion to be delivered by you pursuant
to the Agreement and Plan of Merger (the "Merger Agreement") dated as of
December 14, 1996, by and among The Boeing Company, a Delaware corporation
("Parent"), McDonnell Douglas Corporation, a Maryland corporation (the
"Company"), and West Acquisition Corp., a Maryland corporation and a wholly
owned subsidiary of Parent ("Sub"), I certify that to the best of my knowledge
and belief, after due inquiry and investigation, as follows (any capitalized
term used but not defined herein shall have the meaning given to such term in
the Merger Agreement):
1. The facts relating to the contemplated merger (the
"Merger") of Sub with and into the Company pursuant to the Merger Agreement, as
described in the Merger Agreement, the documents described in Section 9.9(a) of
the Merger Agreement and the joint proxy statement/prospectus prepared by
Parent and the Company, are, insofar as such facts pertain to Parent and Sub,
true, correct and complete in all material respects.
2. Except in the Merger, neither Parent nor Sub (nor any other
subsidiary of Parent) has acquired or prior to the Merger will acquire, or has
owned in the past five years, [any] shares of common stock of the Company
("Company Common Stock").
3. Cash payments to be made to stockholders of the Company in
lieu of fractional shares of common stock of Parent ("Parent Common Stock")
that would otherwise be issued to such stockholders in the Merger will be made
for the purpose of saving Parent the expense and inconvenience of issuing and
transferring fractional shares of Parent Common Stock, and do not represent
separately bargained for consideration.
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4. Prior to the Merger, Parent will own all the capital stock
of Sub. Parent has no plan or intention to cause the Company to issue
additional shares of its stock that would result in Parent owning less than all
the capital stock of the Company after the Merger.
5. Parent has no plan or intention, following the Merger, to
reacquire any of the Parent Common Stock issued in the Merger, other than
through a stock purchase program meeting the requirements of Section 4.05(1)(b)
of Revenue Procedure 96-30.
6. Parent has no plan or intention, following the Merger, to
liquidate the Company, to merge the Company with and into another corporation,
to sell or otherwise dispose of any of the stock of the Company, or to cause
the Company to sell or otherwise dispose of any of the assets held by the
Company at the time of the Merger, except for dispositions of such assets in
the ordinary course of business; provided, however, that Parent may transfer
assets or stock of the Company in a manner that is consistent with Section
368(a)(2)(C) of the Internal Revenue Code of 1986, as amended (the "Code").
7. Parent and Sub will each pay their respective expenses, if
any, incurred in connection with the Merger.
8. Following the Merger, Parent intends to cause the Company
to continue its historic business or use a significant portion of its historic
business assets in a business.
9. Neither Parent nor Sub is an investment company as defined
in Section 368(a)(2)(F)(iii) and (iv) of the Code.
10. Neither Parent nor Sub will take any position on any
Federal, state or local income or franchise tax return, or take any other tax
reporting position, that is inconsistent with the treatment of the Merger as a
reorganization within the meaning of Section 368(a) of the Code, unless
otherwise required by a "determination" (as defined in Section 1313(a)(1) of
the Code) or by applicable state or local income or franchise tax law.
11. None of the compensation received by any stockholder-
employee of the Company in respect of periods after the Effective Time
represents separate consideration for, or is allocable to, any of their
Company Common Stock. None of the Parent Common Stock that will be received
by Company stockholder-employees in the Merger represents separately bargained
for consideration which is allocable to any employment agreement or
arrangement. The compensation paid to any shareholder-employees will be for
services actually rendered and will be determined by bargaining at
arm's-length.
12. No stock of Sub will be issued in the Merger.
13. There is no intercorporate indebtedness existing between
Parent and the Company or between Sub and the Company that was issued or
acquired, or will be settled, at a discount.
14. The Merger Agreement and the documents described in
Section 9.9(a) of the Merger Agreement represent the entire understanding of
the Company, Parent and Sub with respect to the Merger.
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15. Sub is a corporation newly formed for the purpose of
participating in the Merger and at no time prior to the Merger has had assets
(other than nominal assets contributed upon the formation of Sub, which assets
will be held by the Company following the Merger) or business operations. Sub
will have no liabilities assumed by the Company, and will not transfer to the
Company any assets subject to liabilities in the Merger.
16. The Company Common Stock will be surrendered pursuant to
the Merger in an arms-length exchange, and the Parent Common Stock received in
exchange therefor represents the sole bargained-for consideration therefor.
The Boeing Company,
By: ____________________________
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[Letterhead of]
[McDONNELL DOUGLAS CORPORATION STOCKHOLDER]
___, 1997
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Dear Sirs:
In connection with the opinion to be delivered by you pursuant
to the Agreement and Plan of Merger (the "Merger Agreement") dated as of
December 14, 1996, by and among The Boeing Company, a Delaware corporation
("Parent"), McDonnell Douglas Corporation, a Maryland corporation (the
"Company"), and West Acquisition Corp., a Maryland corporation and a wholly
owned subsidiary of Parent ("Sub"), the undersigned certifies (to the best of
its knowledge and belief, where indicated), after due inquiry and
investigation, as follows (any capitalized term used but not defined herein
shall have the meaning given to such term in the Merger Agreement):
1. The undersigned has no present plan or intention to
sell, exchange or otherwise dispose of, reduce the risk of loss (by short sale
or otherwise) of the holding of, enter into any contract or other arrangement
with respect to, the sale, exchange or other disposition of (each of the
foregoing, a "disposition"), any interest in the shares of Parent common stock
received in the merger contemplated by the Merger Agreement (the "Merger").
For purposes of this representation, shares of Company common stock and shares
of Parent common stock received in the Merger and sold, redeemed or disposed
of prior to or subsequent to the Merger, in contemplation thereof or as part
of a plan therewith, will be considered in making this representation.
2. The undersigned will not take any position on any
Federal, state or local income or franchise tax return, or take any other tax
reporting position, that is inconsistent with the treatment of the Merger as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), unless otherwise required by a
"determination" (as defined in Section 1313(a)(1) of the Code) or by
applicable state or local income or franchise tax law.
[McDONNELL DOUGLAS CORPORATION
STOCKHOLDER]
______________________________
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[Letterhead of]
McDONNELL DOUGLAS CORPORATION
___, 1997
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Dear Sirs:
In connection with the opinion to be delivered by you pursuant
to the Agreement and Plan of Merger (the "Merger Agreement") dated as of
December 14, 1996, by and among The Boeing Company, a Delaware corporation
("Parent"), McDonnell Douglas Corporation, a Maryland corporation (the
"Company"), and West Acquisition Corp., a Maryland corporation and a wholly
owned subsidiary of Parent ("Sub"), the undersigned certifies to the best of
its knowledge and belief, after due inquiry and investigation, as follows (any
capitalized term used but not defined herein shall have the meaning given to
such term in the Merger Agreement):
1. The facts relating to the contemplated merger (the
"Merger") of Sub with and into the Company pursuant to the Merger Agreement,
as described in the Merger Agreement, the documents described in Section
9.9(a) of the Merger Agreement and the joint proxy statement/prospectus
prepared by Parent and the Company, are, insofar as such facts pertain to the
Company, true, correct and complete in all material respects.
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2. Neither the Company nor any of its subsidiaries has
acquired any shares of Company Common Stock in contemplation of the Merger, or
otherwise as part of a plan of which the Merger is a part. For purposes of
this representation, Company Common Stock acquired in the ordinary course of
business in connection with employee incentive and benefit plans, programs or
arrangements in existence on the date hereof shall not be treated as an
acquisition in contemplation of the Merger or otherwise as part of a plan of
which the Merger is a part.
3. There is no present plan or intention on the part of the
stockholders of the Company that own 5% or more of the common stock of the
Company ("Company Common Stock") (including [ ]), and the Company knows of no
present plan or intention on the part of the remaining holders of Company
Common Stock, to sell, exchange or otherwise dispose of, reduce the risk of
loss (by short sale or otherwise) of the holding of, enter into any contract
or other arrangement with respect to, the sale, exchange or other disposition
of (each of the foregoing, a "disposition"), any interest in the shares of
Parent Common Stock received in the Merger in exchange for such Company Common
Stock that would reduce the ownership of Parent Common Stock by former holders
of Company Common Stock to a number of shares having a value, as of
immediately prior to the Merger, of less than 50% of the value of all of the
outstanding shares of Company Common Stock as of such date. For purposes of
this representation, any "disposition" (as defined above) of Parent Common
Stock will be treated as a reduction in ownership thereof. In addition, for
purposes of this representation, shares of Company Common Stock exchanged by
holders of Company Common Stock for cash in lieu of fractional shares of
Parent Common Stock will be treated as outstanding Company Common Stock
immediately prior to the Merger. Moreover, for purposes of this
representation, shares of Company Common Stock and shares of Parent Common
Stock received in the Merger and sold, redeemed or disposed of prior to or
subsequent to the Merger, in contemplation thereof or as part of a plan
therewith, will be considered in making this representation.
4. The Company and the stockholders of the Company will each
pay their respective expenses, if any, incurred in connection with the Merger,
except in the case of transfer taxes for which such stockholders are liable,
which shall be paid by the Company.
5. Following the Merger, the Company will hold at least 90
percent of the fair market value of the net assets and at least 70 percent of
the fair market value of the gross assets the Company held immediately prior
to the Merger. For purposes of this representation, Company assets used to
pay its reorganization expenses and all redemptions and distributions (except
for regular, normal dividends) made by the Company immediately preceding, or
in contemplation of, the Merger will be included as assets of the Company
prior to the Merger.
6. Except as provided in [list plans], immediately prior to
the time of the Merger, the Company will not have outstanding any warrants,
options, convertible securities or any other type of right pursuant to which
any person could acquire stock of the Company ("Company Stock").
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7. In the Merger, shares of Company Stock representing at
least 80% of the total combined voting power of all classes of Company Stock
outstanding on the date of the Merger, and at least 80% of the total number of
each other class of Company Stock outstanding on the date of the Merger will
be exchanged solely for Parent Common Stock. For purposes of this
representation, shares of Company Stock exchanged for cash or other property
originating with Parent will be treated as outstanding stock of the Company on
the date of the Merger.
8. The Company is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as
amended (the "Code").
9. The Company will not take, and the Company is not aware of
any plan or intention of Company stockholders to take, any position on any
Federal, state or local income or franchise tax return, or take any other tax
reporting position, that is inconsistent with the treatment of the Merger as a
reorganization within the meaning of Section 368(a) of the Code, unless
otherwise required by a "determination" (as defined in Section 1313(a)(1) of
the Code) or by applicable state or local income or franchise tax law.
10. None of the compensation received by any stockholder-
employee of the Company in respect of periods at or prior to the Effective Time
represents separate consideration for, or is allocable to, any of their Company
Common Stock. None of the Parent Common Stock that will be received by Company
stockholder-employees in the Merger represents separately bargained for
consideration which is allocable to any employment agreement or arrangement.
The compensation paid to any shareholder-employees will be for services
actually rendered and will be determined by bargaining at arm's-length.
11. There is no intercorporate indebtedness existing between
Parent and the Company or between Sub and the Company that was issued or
acquired, or will be settled, at a discount.
12. The Company is not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Code.
13. The Merger Agreement and the documents described in
Section 9.9(a) of the Merger Agreement represent the entire understanding of
the Company, Parent and Sub with respect to the Merger.
14. The Company Common Stock will be surrendered pursuant to
the Merger in an arms-length exchange, and the Parent Common Stock received in
exchange therefor represents the sole bargained-for consideration therefor.
MCDONNELL DOUGLAS CORPORATION
By: __________________________
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Exhibit (10) (xiii)
The Boeing Comnpany Sharevalve Program,
as amended on December 20, 1996
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THE BOEING COMPANY
SHAREVALUE PROGRAM
Effective July 1, 1996
ARTICLE I. THE BOEING COMPANY SHAREVALUE PROGRAM
1. Purpose
1.1 The purpose of this Program is to provide an opportunity for
Employees of the Company and of Participating Subsidiaries to share
in the profits of the Company by benefiting from increases in
shareholder value over a multiple-year period, to reinforce the focus
of Employees on shareholder value, and to encourage Employees to view
their actions and responsibilities as those of "owners" of the
Company.
2. Definitions
As used in the Program, the following words and phrases have the
meanings indicated:
2.1 "Active Payroll" means the status of an Employee who is not on
(a) layoff or (b) leave of absence for more than 90 days.
2.2 "Board of Directors" means the Board of Directors of the Company.
2.3 "Boeing Common Stock" means the Company's common stock, par value
$5 per share.
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
2.5 "Committee" means a committee of directors or officers of the Company
charged by the Board of Directors to administer the Plan as set forth
in Section 4.1 and Section 4.3 of the Plan.
2.6 "Company" means The Boeing Company.
2.7 "Designated Beneficiary" means a beneficiary, designated by a
Participant pursuant to Section 6.3 of the Plan, who is to receive
benefits under the Plan upon the Participant's death.
2.8 "Effective Date" means July 1, 1996.
2.9 "Eligible Employee" has the meaning specified in Section 1 of the
Plan.
2.10 "Employee" means any person on the Active Payroll of the Company or a
Participating Subsidiary.
2.11 "Executive Payroll" means the payroll identified by the Company or a
Participating Subsidiary as its executive payroll.
2.12 "Final Investment Value" has the meaning specified in Section 3.2.2
of the Plan.
2.13 "Fair Market Value" means the mean of the high and low pershare
trading prices for the Boeing Common Stock as reported in The Wall
Street Journal for the "New York Stock Exchange--Composite
Transactions" for a single trading day.
2.14 "Fund" means the account established in the Trust Fund for each
Investment Period. Each Fund shall be numbered to correspond with
the Investment Period to which it relates.
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2.15 "Initial Investment" has the meaning specified in Section 2.1 of the
Plan.
2.16 "Insolvent" or "Insolvency" means (a) inability to pay debts as they
become due or (b) being subject to a pending proceeding as a debtor
under the provisions of Title 11 of the United States Code (the
Bankruptcy Code).
2.17 "Investment Period" means a period of four years commencing on July 1
of the first year of the four-year period and ending on June 30 of
the fourth year of the same four-year period; provided that two
Investment Periods shall commence on July 1, 1996, one of such
Investment Periods being a two-year Investment Period terminating on
June 30, 1998 ("Investment Period 1") and the other a four-year
Investment Period terminating on June 30, 2000 ("Investment
Period 2"). New four-year Investment Periods shall commence on
July 1, 1998 and on every second July 1 thereafter up to and
including July 1, 2004. A new Investment Period shall not commence
on July 1, 2006, however, unless prior to that date the Plan and the
Trust Agreement have been amended, in accordance with their terms, to
extend the term of the Plan and the Trust Agreement.
2.18 "Participant" means an Eligible Employee who is on the Active Payroll
and who receives one hour of pay for any month during an Investment
Period.
2.19 "Participant Distribution" means the portion of the ShareValue
Distribution for an Investment Period that is awarded to a
Participant with respect to that Investment Period.
2.20 "Participating Subsidiary" means (a) a company that is included with
the Company in a "controlled group of corporations" as determined
under Section 1563 of the Code without regard to subsections (a)(4)
and (e)(3)(C) thereof or (b) any other trade or business, whether or
not incorporated, that, based on principles similar to those defining
a "controlled group of corporations" for purposes of clause
(a) hereof, is under common control with the Company; provided that
such company, trade or business has adopted the Plan pursuant to its
terms and the Committee, in its sole discretion, approves such
participation.
2.21 "Plan" means The Boeing Company ShareValue Plan, including all
amendments thereto, which is included as Article II of the Program.
2.22 "Program" means The Boeing Company ShareValue Program, including the
Plan and the Trust, and including all amendments thereto.
2.23 "ShareValue Distribution" means the aggregate amount to be
distributed to all Participants at the conclusion of an Investment
Period.
2.24 "Stock Purchase and Restriction Agreement" means the Stock Purchase
and Restriction Agreement dated as of the date hereof between the
Company and the Trustee.
2.25 ""Threshold Amount" has the meaning specified in Section 3.2.1 of the
Plan.
2.26 "Trust" means The Boeing Company ShareValue Trust established by the
Trust Agreement.
2.27 "Trust Agreement" means The Boeing Company ShareValue Trust Agreement
executed between the Company and the Trustee named therein, effective
as of July 1, 1996, including all amendments thereto, which is
included as Article III of the Program.
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2.28 "Trust Fund" means the trust fund held by the Trustee consisting of
all contributions received by the Trustee together with all proceeds
of any investments and reinvestments thereof, the earnings and income
thereon, and proceeds of sales of Boeing Common Stock awaiting
distribution, less disbursements therefrom and expenses charged
thereto.
2.29 "Trust Termination Date" means the date on which the Trust is
terminated.
2.30 "Trustee" means Wachovia Bank of North Carolina, N.A. (not in its
corporate capacity but as trustee of the Trust), or any successor
trustee.
2.31 "Year" means the period beginning on the Effective Date and ending on
June 30, 1997, and each 12-month period thereafter beginning on
July 1 and ending on June 30.
ARTICLE II. THE BOEING COMPANY SHAREVALUE PLAN
1. Eligibility and Participation
1.1 An Employee shall be an Eligible Employee for purposes of the Plan
during
1.1.1 the period or periods that he or she is not within a group of
Employees covered by a collective bargaining agreement between
the Company or a Participating Subsidiary and a collective
bargaining representative certified under the Labor-Management
Relations Act, in the negotiation of which agreement employee
benefits were the subject of good-faith bargaining, or
1.1.2 the period or periods that he or she is within such a
collective bargaining unit to the extent that such period or
periods are included within the time for which the Plan is
effective as to such unit, in accordance with the terms of the
collective bargaining agreement between the Company or a
Participating Subsidiary and the collective bargaining
representative certified under such act.
1.2 An Employee of a Participating Subsidiary who is not a resident of
the United States and who receives no earned income from such
Participating Subsidiary for services performed within the United
States shall not be an Eligible Employee unless the Plan has been
made applicable to such Employee by the Participating Subsidiary.
1.3 An Employee of a Participating Subsidiary who is a citizen of the
United States and who (a) at the time of his or her employment by the
Participating Subsidiary was a bona fide resident of a country other
than the United States or (b) is hired directly by an operation of
such Participating Subsidiary to perform services outside the United
States shall not be an Eligible Employee, unless the Plan has been
made applicable to such Employee by the Participating Subsidiary.
1.4 A person who is included on the Executive Payroll, or who is a
participant in an executive bonus or compensation plan of the Company
or a Participating Subsidiary, shall not be an Eligible Employee for
any period of time during which such person is so included or so
participates.
1.5 An Eligible Employee shall be a Participant in any Investment Period
during which such Eligible Employee is on the Active Payroll and
receives at least one hour of pay from the Company or a Participating
Subsidiary. A Participant shall be entitled to a Participant
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Distribution for an Investment Period as described in Section 3.2.4
of the Plan, notwithstanding his or her death, retirement, disability
or termination of employment during the Investment Period.
1.6 A person who is an Eligible Employee with respect to one Investment
Period does not, for that reason, become an Eligible Employee with
respect to any other Investment Period.
2. Contributions and Dividends
2.1 Contributions for Initial Investment Periods. On the Effective Date
or within 30 days thereafter, the Company shall contribute to the
Trust such number of shares of Boeing Common Stock as equals
$1 billion divided by the Fair Market Value on June 28, 1996;
provided that the Company may, in lieu thereof, contribute either
(a) cash in an amount sufficient to enable the Trustee to purchase
such number of shares of Boeing Common Stock or (b) a combination of
Boeing Common Stock and cash sufficient for the Trustee to purchase
Boeing Common Stock so that the aggregate number of shares acquired
by the Trust through (i) contribution of shares by the Company and
(ii) purchases of shares by the Trustee is equal to the number of
shares that equals $1 billion divided by the Fair Market Value on
June 28, 1996.
2.2 Purchase of Boeing Common Stock. If either (a) or (b) of Section 2.1
applies, the cash portion of the contribution shall be used by the
Trustee to purchase shares of Boeing Common Stock pursuant to the
Trust Agreement and the Stock Purchase and Restriction Agreement. If
the Trustee requires additional cash to purchase Boeing Common Stock
so that the Trust will hold the number of shares of Boeing Common
Stock required under Section 2.1, the Company shall contribute such
cash to the Trustee on a timely basis. If less cash is required to
purchase the number of shares of Boeing Common Stock required under
Section 2.1, the Trustee shall, on a timely basis, refund any excess
contributions to the Company.
2.3 Initial Funds. After any cash portions of the Company's
contributions to the Trust have been invested by the Trustee in
Boeing Common Stock, the Trust Fund shall be divided into two equal
parts, one part of which shall constitute the Initial Investment for
Investment Period 1 and the other part of which shall constitute the
Initial Investment for Investment Period 2. The Initial Investments
for each of Investment Period 1 and Investment Period 2, together
with all proceeds of any investments and reinvestments thereof, the
earnings and income thereon, and proceeds of sales of Boeing Common
Stock awaiting distribution, less disbursements therefrom and
expenses charged thereto, shall be segregated into separate accounts
("Fund 1" and "Fund 2," respectively) within the Trust.
2.4 Subsequent Investment Periods. The Initial Investment for each
subsequent Investment Period shall be equal to the lesser of the
Threshold Amount or the Final Investment Value for the Investment
Period that terminates on the June 30 immediately preceding the
beginning of such succeeding Investment Period. The Initial
Investment for each subsequent Investment Period shall be segregated
into a separate account, such Fund to be numbered the number
following the number of the most recently initiated Fund within the
Trust.
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2.5 Additional Contributions. The Trustee shall at any time, or from
time to time, accept from any person or entity, including the
Company, additional contributions of cash or Boeing Common Stock to
the Trust to augment the principal to be held, administered and
disposed of by the Trustee as provided in the Trust Agreement;
provided that the Board of Directors, in its sole discretion, shall
have approved such additional contributions to the Trust. Neither
the Trustee nor any Participant or beneficiary shall have the right
to compel such additional contributions. Such additional
contributions shall be divided equally among the Funds then existing
in the Trust, unless the Board of Directors, in its sole discretion,
shall have prescribed a different allocation method with respect to
such additional contributions. Any such additional contributions
made in cash shall be invested by the Trustee in Boeing Common Stock
pursuant to the Trust Agreement and the Stock Purchase and
Restriction Agreement.
2.6 Dividends. Except as otherwise provided herein, dividends paid in
cash on the Boeing Common Stock held by the Trust shall be invested
by the Trustee in additional Boeing Common Stock as soon as
practicable. Dividends that are not paid in cash or in Boeing Common
Stock shall be reduced to cash by the Trustee and reinvested in
Boeing Common Stock as soon as practicable. Dividends shall be
allocated to the Fund holding the Boeing Common Stock with respect to
which such dividends are payable. Investments in Boeing Common Stock
may be made through open-market purchases, the Company's Dividend
Reinvestment and Stock Purchase Plan, private transactions or (with
the Company's consent) purchases from the Company, in the Trustee's
discretion and subject to the Stock Purchase and Restriction
Agreement.
3. Distributions to Participants
3.1 Information to Be Provided to Trustee. The Committee shall, no less
than two months prior to the end of each Investment Period, inform
the Trustee in writing of the Committee's estimate of the amount of
any required or permitted withholding from the Participant
Distributions for all Participants for that Investment Period.
The Committee shall, within 90 days following the end of each
Investment Period, inform the Trustee in writing of (a) the name and
last known mailing address of each Participant for the Investment
Period, (b) the name and last known mailing address of the Designated
Beneficiary of each Participant who has died during the Investment
Period or, in the absence of a Designated Beneficiary, the name and
last known mailing address of the person to whom such Participant's
Participant Distribution should be paid, and, if more than one person
is so designated to receive such Participant's Participant
Distribution, the share thereof to be paid to each, (c) with respect
to each Participant for the Investment Period, the number of months
during such Investment Period in which such individual was a
Participant, and (d) the total number of months of participation in
the Plan by all Participants during the Investment Period.
3.2 Trustee's Determination of Distributions. The Trustee shall be
responsible for determining the amount of any ShareValue Distribution
for each Investment Period and any Participant Distribution for each
Participant. Such determination shall be made as follows:
3.2.1 The Threshold Amount for an Investment Period shall be equal to
the Initial Investment for that Investment Period increased and
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compounded by 3% per annum for each Year of the Investment
Period. If for any reason an Investment Period does not
terminate at the end of a Year, the Threshold Amount for such
Investment Period shall be prorated.
3.2.2 During the last two months of an Investment Period, the Trustee
shall sell, in accordance with the Trust Agreement and the
Stock Purchase and Restriction Agreement, such number of shares
of Boeing Common Stock held in the Fund for that Investment
Period as the Trustee estimates will be sufficient (in
combination with any cash on hand in the appropriate Fund) to
pay the appropriate withholding and cash payment for fractional
shares on the estimated Participant Distributions for that
Investment Period. (Notwithstanding the foregoing, if the
Trustee is unable for any reason to sell sufficient shares of
Boeing Common Stock to pay the appropriate withholding and cash
payment for fractional shares on the Participant Distributions
before the end of the Investment Period, the Trustee shall sell
such shares as soon as practicable after the end of such
Investment Period.) The fair market value of all cash and
Boeing Common Stock held in the Fund on the last day of the
Investment Period (with the Boeing Common Stock valued at the
Fair Market Value for the last day of the Investment Period or,
if that day is not a trading day, for the next preceding
trading day) shall constitute the Final Investment Value for
such Investment Period.
3.2.3 The Final Investment Value for that Investment Period shall
then be reduced (but not below zero) by the Threshold Amount
for that Investment Period. The result shall be the ShareValue
Distribution for that Investment Period.
3.2.4 The ShareValue Distribution for an Investment Period shall be
proportionately distributed among the Participants for that
Investment Period as Participant Distributions, in the ratio
that the number of months in that Investment Period in which
the individual was a Participant bears to the total number of
months of Plan participation by all Participants in that
Investment Period.
3.2.5 A Participant Distribution shall be payable only in whole
shares of Boeing Common Stock after appropriate withholding
calculated in accordance with Section 3.3 of the Plan and
Section 4.3 of the Trust Agreement; provided that a Participant
Distribution of less than one full share of Boeing Common Stock
after appropriate withholding calculated in accordance with
Section 3.3 of the Plan and Section 4.3 of the Trust Agreement
shall be paid in cash.
3.3 Payment of Participant Distributions. Following the Trustee's
determination of the ShareValue Distribution for an Investment Period
pursuant to Section 3.2 of the Plan, the Trustee shall report to the
Committee in writing the amount of any ShareValue Distribution as so
determined. Within 90 days following the report from the Trustee,
the Committee shall instruct the Trustee in writing of the amount of
any required or permitted withholding from the Participant
Distribution of each Participant. As soon as practicable following
receipt of such information from the Committee, the Trustee shall
remit to the Company the amount of the withholding as instructed and
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distribute the Participant Distributions to Participants (or their
beneficiaries) for such Investment Period. The number of shares of
Boeing Common Stock payable to a Participant (or beneficiary) shall
equal the amount of the Participant Distribution (as determined by
the Trustee pursuant to Section 3.2 of the Plan) reduced by any
withholding as provided herein (and further reduced by any
withholding determined by the Trustee pursuant to Section 4.3 of the
Trust Agreement) divided by the Fair Market Value for the last day of
the Investment Period or, if that day is not a trading day, for the
next preceding trading day. Fractional shares shall not be issued,
and the value thereof shall be used first to pay withholding and
then, for Participant Distributions of less than one full share of
Boeing Common Stock, shall be paid to the Participant in cash. No
payment of a Participant Distribution may be deferred or paid in
installments.
The Trustee may, by contract with the Company, on such terms as they
may mutually agree, delegate to the Committee such of its functions
under the Plan as it may determine. The Trustee may, with the
consent of the Committee, delegate to agents such functions under the
Plan as the Trustee and the Committee determine.
4. Administration of the Plan
4.1 The Board of Directors shall have full power and authority to
administer the Plan. The Board of Directors, in its sole discretion,
may delegate some or all of its authority and duties under the Plan
to the Committee. (Where such delegation does not exist, the term
"Committee" as used in the Program shall also refer to the Board of
Directors.) Decisions of the Committee shall be final, conclusive
and binding on the Participants and their Designated Beneficiaries
and all other persons. Any action taken by the Committee in respect
of any election or request made by a Participant or Designated
Beneficiary pursuant to the Plan shall be taken at the sole
discretion of the Committee.
4.2 The Committee shall have the exclusive right to interpret the terms
and provisions of the Plan; to take all steps deemed necessary or
advisable by the Committee to correct mistakes in administering the
Plan; to determine any and all questions arising under the Plan or in
connection with the administration thereof or the applicability
thereof to any and all individuals; and to remedy possible
ambiguities, inconsistencies or omissions. All interpretations,
corrections and decisions of the Committee in respect of any matter
or question relating to the Plan or the administration thereof shall
be final, conclusive and binding on all persons affected thereby.
4.3 The Committee may delegate all or part of its functions hereunder to
a committee appointed by the Board of Directors for such purpose.
4.4 Each member of the Committee or its delegate, if any, shall use
ordinary care and diligence in the performance of such person's
duties, but no such person shall be personally liable by reason of
any contract, agreement or other instrument made or executed by such
person, or on behalf of such person, or for any loss, unless
resulting from the willful misconduct of such person or failure to
exercise good faith in performing such functions. No such person
shall be liable for the neglect, omission or wrongdoing of any other
such person, or of the agents of or counsel to the Company or such
persons. The Company shall indemnify each member of the Committee
and of its delegate, if any, against, and save him or her harmless
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from and against, any and all expenses and liabilities arising out of
any act or omission to act hereunder, except such expenses and
liabilities as are due to such person's willful misconduct or failure
to exercise good faith in performing such functions.
5. Amendment and Termination
5.1 Except as provided in Section 5.3 of the Plan, Article I and this
Article II of the Program may be amended only by the Committee and
only to the extent such amendment is required by law or is necessary
or desirable to (a) prevent adverse tax consequences to Participants
or the Company, (b) provide for financial reporting treatment deemed
appropriate and desirable by the Committee, or (c) cure
administrative deficiencies.
5.2 No modification, amendment or termination of the Plan shall
(a) retroactively deprive a Participant of rights theretofore accrued
to the Participant under the Plan or (b) result in a change in the
duties of the Trustee under the Trust Agreement without the Trustee's
consent (to the extent and in the form required by the Trust
Agreement), except in either case to the extent that any change is
made necessary by law or governmental regulation.
5.3 The Plan shall terminate on June 30, 2008, unless the Board of
Directors, in its sole discretion, amends the Plan prior to that date
to extend its term.
5.4 Upon termination of the Plan, the interests of the Participants under
the Plan shall be fully vested and nonforfeitable. Upon such
termination, the Trustee shall make the calculations required
pursuant to the Plan and shall pay Participant Distributions to
Participants based on such calculations, as provided in Section 3.3
of the Plan. All assets remaining in the Trust after completion of
all Participant Distributions for all Investment Periods and after
payment of all amounts required to be paid from the Trust pursuant to
Section 4 of the Trust Agreement shall be transferred to the Company.
5.5 In the event of any merger, consolidation or reorganization of the
Company in which the Company is not the surviving corporation, the
successor corporation shall continue the Plan and shall be
substituted for the Company under the Plan.
6. Miscellaneous
6.1 Notices. Each Participant eligible to receive a Participant
Distribution under the Plan shall file with the Company or the
appropriate Participating Subsidiary, in writing, his or her post
office address and each change of post office address until receipt
of the benefit payment. Any communication, statement or notice
addressed to such Participant at his or her last post office address
filed with the Company or the Participating Subsidiary (or if no post
office address was filed with the Company or the Participating
Subsidiary, then the Participant's last post office address shown by
the Company's or the Participating Subsidiary's payroll records)
shall be binding on such Participant for all purposes of the Plan,
and the Company or the Participating Subsidiary shall not be
obligated to search for or ascertain the whereabouts of any such
Participant. Participant Distributions that are undeliverable to a
Participant shall be remitted to the Company.
6.2 No Employment Contract. Nothing contained in the Plan shall confer
upon any person the right to be retained in the employ of the Company
or any Participating Subsidiary or shall interfere with the right of
the Company or a Participating Subsidiary to discharge or otherwise
deal with such person without regard to the existence of the Plan.
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6.3 Designation of Beneficiary. A Participant may designate a
beneficiary to receive benefits under the Plan upon the Participant's
death. The Participant may revoke or change such designation at any
time. A designation by a married Participant of a beneficiary other
than the Participant's spouse shall not be valid without the written
consent of the Participant's spouse. Benefits payable under the Plan
after the death of a Participant shall be paid to the Designated
Beneficiary. If there is no valid designation of a beneficiary or no
living Designated Beneficiary at the Participant's death, the
benefits shall be paid to the Participant's surviving spouse or, if
none, to the Participant's children in equal shares or, if none, to
the Participant's estate. Beneficiary designations, revocations or
changes of a beneficiary hereunder must be on forms provided by the
Company or the Participating Subsidiary and filed with the Company or
the Participating Subsidiary during the Participant's lifetime. Any
beneficiary designation filed by a Participant under the Company's
Voluntary Investment Plan or any similar plans of Participating
Subsidiaries, shall constitute a designation under the Plan until
revoked or changed by the Participant.
6.4 No Rights to Assign or Alienate. No right or interest of a
Participant to receive distributions under the Plan shall be subject
in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, execution, attachment,
garnishment or any other legal process, and any attempt to make any
such benefit so subject shall be void.
6.5 No Rights as Shareholder. No right or interest of a Participant to
receive distributions under the Plan shall entitle a Participant to
any dividend, voting or other right of a shareholder of the Company
unless and until shares of Boeing Common Stock are issued under the
Plan in payment of a Participant Distribution.
6.6 No Rights Under Other Plans. Participant Distributions under the
Plan shall not be considered as compensation or wages, or otherwise
included in the determination of contributions or benefits, under any
other plan or benefit program maintained by the Company, including,
without limitation, the Employee Retirement Plan and the Voluntary
Investment Plan or any similar plans of Participating Subsidiaries.
6.7 Plan Not Subject to ERISA. The Plan is not subject to the provisions
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), because it is neither an employee pension benefit plan nor
an employee welfare benefit plan under the terms of ERISA.
6.8 Program. The Plan is included in the Program, and the definitions of
terms in Section 2 of the Program apply to the Plan.
6.9 Governing Law. The Plan shall be construed according to the laws of
the State of Washington, without regard to conflict of law rules.
6.10 Headings. Headings and subheadings in the Plan are inserted for
reference only and are not to be considered in construction of the
provisions of the Plan.
ARTICLE III. THE BOEING COMPANY SHAREVALUE TRUST AGREEMENT
THIS TRUST AGREEMENT (the "Trust Agreement") is made effective as of
July 1, 1996 between The Boeing Company, a Delaware corporation, and
Wachovia Bank of North Carolina, N.A., a national banking association with
trust powers, as trustee.
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RECITALS
A. The Company desires to establish the Trust in accordance with
the laws of the State of Washington and for the purposes stated in the
Trust Agreement.
B. The Trustee desires to act as trustee of the Trust, and to hold
legal title to the assets of the Trust, in trust, for the purposes
hereinafter stated and in accordance with the terms hereof.
C. The Company desires that the assets to be held in the Trust
Fund should be principally or exclusively securities of the Company and,
therefore, it expressly waives any diversification of investments that
might otherwise be necessary, appropriate or required pursuant to
applicable provisions of law.
D. The Trustee has been appointed as trustee and has accepted such
appointment as of the date first set forth above.
Accordingly, the parties hereto hereby establish the Trust and agree
that the Trust will be comprised, held and disposed of as follows:
AGREEMENTS
1. Trust, Trustee and Trust Assets
1.1 Trust
The Trust Agreement and the Trust shall be known as The Boeing
Company ShareValue Trust. The parties intend that the Trust will be an
independent legal entity with title to and power to convey all of its
assets. The assets of the Trust will be held, invested and disposed of by
the Trustee, in accordance with the terms of the Trust.
1.2 Trustee
The trustee named above, and its successor or successors, is hereby
designated as the Trustee hereunder, to receive, hold, invest, administer
and distribute the Trust Fund in accordance with the Trust Agreement, the
provisions of which shall govern the powers, duties and responsibilities of
the Trustee.
1.3 Trust Assets
The assets held at any time and from time to time under the Trust
collectively shall consist of contributions received by the Trustee,
proceeds of any investments and reinvestments thereof, the earnings and
income thereon, and proceeds of sales of Boeing Common Stock awaiting
distribution to meet cash requirements as described in Section 3.3 of the
Plan and Section 4.3 of the Trust Agreement, less disbursements therefrom
and expenses charged thereto. Except as herein otherwise provided, title
to the assets of the Trust shall at all times be vested in the Trustee, and
securities that are part of the Trust shall be held in such manner that the
Trustee's name and the fiduciary capacity in which the securities are held
are fully disclosed, subject to the right of the Trustee to hold title in
bearer form or in the name of a nominee.
1.4 Trust Assets Subject to Creditor Claims
Notwithstanding any provision of the Trust Agreement to the contrary,
the assets of the Trust shall as provided herein at all times remain
subject to the claims of the general creditors of the Company and of any
Participating Subsidiary, under federal and state law.
1.4.1 Information to Trustee
The Committee shall inform the Trustee in writing of the Insolvency
of the Company or of any Participating Subsidiary. If a person claiming to
be a creditor of the Company or of a Participating Subsidiary alleges in
writing to the Trustee that the Company or such Participating Subsidiary
has become Insolvent, the Trustee shall determine whether the Company or
such Participating Subsidiary is Insolvent and, pending such determination,
the Trustee shall discontinue distributions pursuant to Section 3 of the
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Trust Agreement to Participants employed by the Company or the
Participating Subsidiary, as the case may be.
1.4.2 Duty of Trustee
Unless the Trustee has actual knowledge of the Insolvency of the
Company or a Participating Subsidiary, or has received notice from the
Company or a Participating Subsidiary, or from a person claiming to be a
creditor alleging that the Company or a Participating Subsidiary is
Insolvent, the Trustee shall have no duty to inquire whether the Company or
any Participating Subsidiary is Insolvent. The Trustee may in all events
rely on such evidence concerning the solvency of the Company or any
Participating Subsidiary as may be furnished to the Trustee and that
provides the Trustee with a reasonable basis for making a determination
concerning Insolvency.
1.4.3 Separate Account
If the Committee advises the Trustee that a Participating Subsidiary
is Insolvent, the Committee may at any time thereafter direct the Trustee
to establish an account (the "Separate Account") as part of the Trust Fund.
The Separate Account shall be allocated a portion of the Trust Fund equal
to (i) the ratio of the number of Eligible Employees of such Insolvent
Participating Subsidiary to the number of all Eligible Employees for each
Investment Period then existing and for which distributions to Participants
have not yet been made, as reported by the Committee to the Trustee, (ii)
multiplied by, for each Investment Period then existing and for which
distributions to Participants have not yet been made, the sum of (A) the
Fair Market Value of all shares of Boeing Common Stock in the Trust Fund
and (B) any cash held in the Trust Fund. Fair Market Value shall be
determined for these purposes as of the date such Participating Subsidiary
became Insolvent. The Separate Account shall also be allocated a portion
of the Trust Fund, calculated in the manner just described, for any
Investment Period that commences after the date on which such Participating
Subsidiary becomes Insolvent if such Participating Subsidiary remains
Insolvent at the time such Investment Period commences. The calculation
shall be made as of the last work day of the month in which the Investment
Period commences. In such event, the Committee shall advise the Trustee of
the ratio to be used in determining the amount to be allocated to the
Separate Account.
Once a Separate Account is established, the assets thereof (but no
other assets of the Trust) shall at all times remain subject to the claims
of the general creditors of such Insolvent Participating Subsidiary, under
federal and state law, for as long as such Participating Subsidiary remains
Insolvent. The Committee may from time to time direct the Trustee to
allocate such additional funds from the Trust Fund to such Special Account
as it may direct. The Separate Account shall be terminated as soon as the
period of Insolvency ends.
1.4.4 Payments to Participants
If at any time the Trustee has determined that the Company or a
Participating Subsidiary is Insolvent, the Trustee shall discontinue
payments pursuant to Section 3 of the Trust Agreement to Participants who
are Employees of the Company or the Participating Subsidiary, as the case
may be, and shall hold the assets of the Trust (or, if a Separate Account
has been established pursuant to Section 1.4.3, the assets of such Separate
Account) for the benefit of the general creditors of the Company or of such
Participating Subsidiary.
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The Trustee shall resume payments pursuant to Section 3 of the Trust
Agreement only after the Trustee has determined that the Company or such
Participating Subsidiary, as the case may be, is not Insolvent.
1.5 Program
The definitions of terms in Section 2 of the Program apply to the
Trust Agreement.
2. Contributions and Dividends
2.1 Contributions and Accounts
The Company shall make contributions and the Trustee shall establish
accounts and invest contributions as set forth in Sections 2.1 and 2.2 of
the Plan, which are incorporated herein by reference.
All contributions made to the Trust shall be delivered to the
Trustee. The Trustee shall be accountable for all contributions received
by it, but shall have no duty to require any contributions to be made to
it.
2.2 Additional Contributions
Additional contributions to the Trust may be made as set forth in
Section 2.5 of the Plan, which is incorporated herein by reference.
2.3 Dividends
Dividends paid other than in Boeing Common Stock shall be reinvested
as set forth in Section 2.6 of the Plan, which is incorporated herein by
reference.
3. Distributions Under the Plan
Distributions shall be determined and paid as set forth in Section 3
of the Plan, which is incorporated herein by reference.
4. Compensation, Expenses and Tax Withholding
4.1 Compensation and Expenses
The Trustee shall be entitled to such reasonable compensation for its
services as may be agreed upon from time to time by the Committee and the
Trustee, and to be reimbursed for its reasonable legal, accounting and
appraisal fees, expenses and other charges reasonably incurred in
connection with the administration, management, investment and distribution
of the Trust. Such compensation shall be paid, and such reimbursement
shall be made out of the Trust, and shall be allocated among the Funds
within the Trust as the Trustee in its sole discretion shall determine.
The Trustee is authorized to sell Boeing Common Stock in an amount equal to
its compensation and other amounts required to be paid from the Trust
pursuant to Section 4.2 of the Trust Agreement and to hold cash dividends
for the payment of such compensation and amounts required to be paid from
the Trust. To the extent the assets in the Trust are insufficient to pay
the compensation and expenses of the Trustee, the Trustee shall be entitled
to seek payment thereof directly from the Company, and the Company agrees
to pay the same directly to the Trustee.
4.2 Expenses of the Trust or the Company
Any amounts required to be paid by the Trustee or by the Company or
any Participating Subsidiary, as a result of the Trust Agreement or the
establishment and operation of the Trust, whether by reason of any
distributions and payments provided for herein or otherwise, including,
without limitation, any amounts payable as taxes, interest, penalties or
damages, any amounts payable in settlement of any claims against the Trust,
the Trustee, the Company or any Participating Subsidiary, any additional
amounts due to Employees of the Company or any Participating Subsidiary as
a direct or indirect result of the payments and distributions provided for
herein, all expenses (including reasonable attorneys' fees) incurred by the
Trustee or by the Company or any Participating Subsidiary as a result of
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the investigation and defense of any claims hereunder, and any amounts due
from the Company to the Trustee pursuant to the indemnification provisions
of Section 5.7 of the Trust Agreement, shall be paid from the Trust;
provided that, in the case of the Company and any Participating Subsidiary,
the Company or such Participating Subsidiary, in its sole discretion, shall
have submitted a claim for reimbursement for such amounts in accordance
with this Section 4.2. The Trustee, in its sole discretion, shall allocate
such payments to the appropriate Fund or Funds. Company claims for
reimbursement shall be submitted to the Trustee either prior to the date on
which the Company pays the reimbursable expense or within one year
following the date of such payment. The Trustee shall pay the Company's
claim for reimbursement within 60 days following the date on which it is
submitted. The Trustee shall have no duty to inquire into the basis for
any Company claim for reimbursement hereunder, or to challenge or refuse to
honor the same.
4.3 Withholding of Taxes
While it is anticipated that the Company will make provisions for
complying with all applicable withholding requirements, the Trustee may, on
any distribution that it makes pursuant hereto, withhold, require
withholding of, or otherwise satisfy its withholding obligation for such
amount as it may deem reasonably necessary to comply with applicable
federal, state and local withholding requirements. Upon settlement of such
tax liability, the Trustee shall distribute the balance of such amount, if
any, in whole shares of Boeing Common Stock or, for Participant
Distributions of less than one full share of Boeing Common Stock, in cash
to the Participants entitled thereto. Prior to making any distribution
hereunder, the Trustee may require such release or documents from any
taxing authority, or may require such indemnity, as the Trustee shall
reasonably deem necessary for its protection.
5. Administration of Trust Assets
5.1 Management and Control of Trust Assets
Subject to the terms of the Trust Agreement, the Trustee shall have
exclusive authority, discretion and responsibility to manage and control
the assets of the Trust Fund.
5.2 Investment of Funds
Except as otherwise provided in Section 2.2 of the Trust Agreement
and in this Section 5.2, the Trustee shall invest and reinvest the assets
of the Trust exclusively in Boeing Common Stock. The Trustee shall invest
any portion of the Trust temporarily pending investment in Boeing Common
Stock, distribution or payment of expenses in (a) investments in U.S.
Government obligations with maturities of less than one year, (b) interest-
bearing accounts, including, but not limited to, certificates of deposit,
time deposits, saving accounts and money market accounts with maturities of
less than one year in any bank, including the Trustee's, with aggregate
capital in excess of $1 billion and a Moody's Investor Services rating of
at least P1, or an equivalent rating from a nationally recognized ratings
agency, which accounts are insured by the Federal Deposit Insurance
Corporation or other similar federal agency, (c) obligations issued or
guaranteed by any agency or instrumentality of the United States of America
with maturities of less than one year, (d) short-term discount obligations
of the Federal National Mortgage Association, or (e) mutual funds,
including the Trustee's proprietary mutual funds, which are composed of the
assets described in (a), (b), (c) and (d) of this Section 5.2.
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5.3 Trustee's Administrative Powers
Except as otherwise provided herein, and subject to the Trustee's
duties hereunder, the Trustee shall have the following powers and rights,
in addition to those provided elsewhere in the Trust Agreement or by law:
(a) to retain any asset of the Trust for the purposes set
forth herein;
(b) subject to Sections 2.3, 3, 5.2 and 5.4 of the Trust
Agreement, to sell, transfer or otherwise dispose of any Trust assets at
public or private sale;
(c) upon direction from the Committee or as provided herein,
to acquire Boeing Common Stock as authorized by the Stock Purchase and
Restriction Agreement and by the Trust Agreement;
(d) with the consent of the Committee, to settle, submit to
arbitration, compromise, contest, prosecute or abandon claims and demands
in favor of or against the Trust;
(e) to vote or to give any consent with respect to any
securities, including any Boeing Common Stock, held by the Trust either in
person or by proxy for any purpose; provided that the Trustee shall vote,
tender or exchange all shares of Boeing Common Stock as provided in
Section 5.4 of the Trust Agreement;
(f) to exercise any of the powers and rights of an individual
owner with respect to any assets of the Trust and to perform any and all
other acts that in its judgment are necessary or appropriate for the proper
administration of the Trust, even though such powers, rights and acts are
not specifically enumerated in the Trust Agreement;
(g) to employ such accountants, actuaries, investment
bankers, appraisers, other advisors and agents as may be advisable in
collecting, managing, administering, investing, valuing, distributing and
protecting the Trust or the assets thereof; and to pay their reasonable
fees and expenses, which shall be reimbursed in accordance with Section 4.1
of the Trust Agreement;
(h) to cause any asset of the Trust to be issued, held or
registered in the Trustee's name or in the name of the nominee, or in such
form that title will pass by delivery; provided that the records of the
Trustee shall indicate the true ownership of such asset;
(i) to utilize another entity as custodian to hold, but not
invest or otherwise manage or control, some or all of the assets of the
Trust;
(j) to consult with legal counsel (who may also be counsel
for the Trustee or the Company generally) with respect to any of its duties
or obligations hereunder; and to pay reasonable fees and expenses of such
counsel, which shall be deemed to be expenses of the Trust and for which
the Trustee shall be reimbursed in accordance with Section 4.1 of the Trust
Agreement; and
(k) to enter agreements from time to time with the Company
pursuant to which the Company contracts to provide services to the Trustee
in connection with the Trust.
Notwithstanding the foregoing, neither the Trust nor the Trustee shall have
any power to, and shall not, engage in any trade or business.
5.4 Rights Regarding Boeing Common Stock
5.4.1 Voting Rights
To the extent permitted by the Delaware General Corporation Law, the
Trustee shall give its proxy, with respect to the shares of Boeing Common
Stock held in the Trust, to the Secretary of the Company (or to such other
person as the Committee may from time to time designate in writing) with
respect to any matter pending before an annual or special meeting of
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stockholders of the Company and with respect to any action proposed to be
taken by written consent of the stockholders in lieu of a meeting, with
instructions to vote all of such shares in accordance with the
recommendation of the Board of Directors as set forth in the related proxy
statement.
5.4.2 Tender or Exchange Offer
If a tender or exchange offer is commenced for Boeing Common Stock,
the Trustee shall, with respect to the shares of Boeing Common Stock held
in the Trust, tender or exchange, or not tender or exchange, such shares
as directed in writing by the Board of Directors. In the absence of such
written instructions, the Trustee shall not tender or exchange such shares.
5.4.3 Trustee Action
The Trustee shall not make any recommendations regarding the manner
of exercising any rights under this Section 5.4, including whether or not
any rights should be exercised
5.5 Purchase of Boeing Common Stock by Trustee
All purchases of Boeing Common Stock by the Trustee pursuant to the
Trust Agreement shall be made in accordance with the Stock Purchase and
Restriction Agreement and shall be made by the Trustee in a manner and with
the timing of purchases to not cause or contribute to significant movements
in the price of the Boeing Common Stock. Subject to Section 2.1 of the
Plan, the Trustee is empowered to make purchases over such period of time
as is reasonable to accomplish the purpose of the Trust and not cause or
contribute to significant movements in the price of the Boeing Common
Stock. The Trustee may make block purchases of Boeing Common Stock at
appropriate discounts.
5.6 Sale of Boeing Common Stock by Trustee
All sales of Boeing Common Stock by the Trustee pursuant to the Trust
Agreement shall be made in accordance with the Stock Purchase and
Restriction Agreement and shall be made by the Trustee in a manner and with
the timing of sales to not cause or contribute to significant movements in
the price of Boeing Common Stock. Subject to Section 3.2.1 of the Plan,
the Trustee is empowered to make sales over such period of time as is
reasonable to accomplish the purpose of the Trust and not cause or
contribute to significant movements in the price of the Boeing Common
Stock. The Trustee may make blocks of Boeing Common Stock available at
appropriate discounts. The Trustee shall refrain from sales of Boeing
Common Stock on any trading day in which the most recent sales price is 5%
less than the opening price of the Boeing Common Stock. To facilitate any
such sales, the Company shall register sales of Boeing Common Stock by the
Trust under the Securities Act of 1933, as amended, pursuant to the terms
and conditions of the Stock Purchase and Restriction Agreement.
5.7 Indemnification
(a) To the extent lawfully allowable, the Company shall and
hereby does indemnify and hold harmless the Trustee from and against any
claims, demands, actions, administrative or other proceedings, causes of
action, liability, loss, costs, damage or expense (including reasonable
attorneys' fees), which may be asserted against it, in any way arising out
of or incurred as a result of its action or failure to act in connection
with the operation and administration of the Trust; provided that such
indemnification shall not apply to the extent that the Trustee has acted in
willful or negligent violation of applicable law or its duties under the
142 of 156
<PAGE> 143
Trust Agreement or in bad faith. The Trustee shall be under no liability
to any person for any loss of any kind that may result by reason of (i) any
action taken by it in accordance with any direction of the Committee
pursuant to Section 3 or 5.4 of the Trust Agreement, (ii) its failure to
exercise any power or authority or to take any action hereunder because of
the failure of the Committee to provide information to the Trustee, as
provided for in the Trust Agreement, or (iii) any act or omission of the
Committee with respect to its duties under the Trust Agreement. The
Trustee shall be fully protected in acting upon any instrument, certificate
or paper delivered by the Committee, the administrator of the Plan or any
Participant or beneficiary and believed in good faith by the Trustee to be
genuine and to be signed or presented by the proper person or persons, and
the Trustee shall be under no duty to make any investigation or inquiry as
to any statement contained in any such writing, but may accept the same as
conclusive evidence of the truth and accuracy of the statements therein
contained. The indemnity provided by this Section 5.7 shall survive the
termination of the Trust Agreement.
(b) The Company may, but shall not be required to, maintain
liability insurance to insure its obligations hereunder. If any payments
made by the Company or the Trust pursuant to this indemnity are covered by
insurance, the Company or the Trust (as applicable) shall be subrogated to
the rights of the indemnified party against the insurance company.
(c) Without limiting the generality of the foregoing, the
Company may, at the request of the Trustee, advance to the Trustee
reasonable amounts of expenses, including reasonable attorneys' fees and
expenses, that the Trustee advises have been incurred in connection with
its investigation or defense of any claim, demand, action, cause of action,
administrative or other proceeding arising out of or in connection with the
Trustee's performance of its duties under the Trust Agreement.
(d) Any amounts due the Trustee pursuant to the
indemnification provisions of clause (a) of this Section 5.7, and any
advances made by the Company to the Trustee pursuant to clause (c) of this
Section 5.7, shall at the request of the Committee be reimbursed to the
Company from the assets of the Trust, pursuant to Section 4.2 of the Trust
Agreement.
5.8 General Duty to Communicate to Committee
The Trustee shall promptly notify the Committee of all communications
with or from any government agency or with respect to any legal proceeding
with regard to the Trust and with or from any Participants concerning their
entitlements under the Plan or the Trust Agreement.
6. Accounts and Reports of Trustee
6.1 Records and Accounts of Trustee
The Trustee shall maintain accurate and detailed records and accounts
of all transactions of the Trust, which shall be available at all
reasonable times for inspection or audit by any person designated by the
Company and which shall be retained as required by applicable law.
6.2 Reports of Trustee
The Trustee shall prepare and present to the Committee a report for
the period ending on the last day of each calendar month, and for such
shorter periods as the Committee may reasonably request, listing all
securities and other property acquired or disposed of and all receipts,
disbursements and other transactions effected by the Trust after the date
of the Trustee's last account, and further listing all cash, securities and
other property held by the Trust, together with the value thereof, as
determined by the Trustee as of the end of such period. Boeing Common
Stock held as part of the Trust shall be valued at its Fair Market Value
for the last day of the Year or the period covered by the report, except
143 of 156
<PAGE> 144
that if such day is not a trading day, for the next preceding trading day.
In addition to the foregoing, the report shall contain such information
regarding Trust assets and transactions as the Committee in its discretion
may reasonably request.
6.3 Final Report
In the event of the resignation or removal of a Trustee hereunder,
the Committee may request, and the Trustee shall with reasonable promptness
submit, for the period ending on the effective date of such resignation or
removal, a report similar in form and purpose to that described in
Section 6.2 of the Trust Agreement.
7. Succession of Trustee
7.1 Resignation of Trustee
The Trustee or any successor thereto may resign as Trustee hereunder
at any time upon delivering a written notice of such resignation, to take
effect 60 days after the delivery thereof to the Committee, unless the
Committee accepts shorter notice; provided that no such resignation shall
be effective until a successor Trustee has assumed the office of Trustee
hereunder.
7.2 Removal of Trustee
The Trustee or any successor thereto may be removed by the Committee
by delivering to the Trustee so removed an instrument executed by the
Committee. Such removal shall take effect at the date specified in such
instrument, which shall not be less than 60 days after delivery of the
instrument, unless the Trustee accepts shorter notice; provided that no
such removal shall be effective until a successor Trustee has assumed the
office of Trustee hereunder.
7.3 Appointment of Successor Trustee
Whenever the Trustee or any successor thereto shall resign or be
removed or a vacancy in the position shall otherwise occur, the Committee
shall use its best efforts to appoint a successor Trustee as soon as
practicable after receipt by the Committee of a notice described in
Section 7.1 of the Trust Agreement, or the delivery to the Trustee of an
instrument described in Section 7.2 of the Trust Agreement, as the case may
be, but in no event more than 75 days after receipt or delivery, as the
case may be, of such notice. A successor Trustee's appointment shall not
become effective until such successor shall accept such appointment by
delivering its acceptance in writing to the Committee. If a successor is
not appointed within such 75-day period, the Trustee, at the Committee's
expense, may petition a court of competent jurisdiction for appointment of
a successor. In any event, only a corporation with trust powers under
applicable law, which is not an affiliate of the Company, may be a
successor trustee hereunder.
7.4 Succession to Trust Assets
The title to all property held hereunder shall vest in any successor
Trustee acting pursuant to the provisions hereof without the execution or
filing of any further instrument, but a resigning or removed Trustee shall
execute all instruments and do all acts necessary to vest title in the
successor Trustee. Each successor Trustee shall have, exercise and enjoy
all of the powers, both discretionary and ministerial, herein conferred
upon its predecessor. A successor Trustee shall not be obliged to examine
or review the accounts, records or acts of, or property delivered by, any
previous Trustee and shall not be responsible for any action or any failure
to act on the part of any previous Trustee.
144 of 156
<PAGE> 145
7.5 Continuation of Trust
In no event shall the legal disability, resignation or removal of a
Trustee terminate the Trust, but the Committee shall forthwith appoint a
successor Trustee in accordance with Section 7.3 of the Trust Agreement to
carry out the terms of the Trust.
7.6 Changes to Organization of Trustee
In the event that any corporate Trustee hereunder shall be converted
into, shall merge or consolidate with, or shall sell or transfer
substantially all of its assets and business to, another corporation, state
or federal, the corporation resulting from such conversion, merger or
consolidation, or the corporation to which such sale or transfer shall be
made, shall thereafter become and be the Trustee under the Trust with the
same effect as though originally so named but only if such corporation is
qualified to be a successor trustee hereunder.
8. Amendment, Revocation or Termination
8.1 Amendments
The Committee may amend the Trust Agreement at any time and from time
to time with the written consent of the Trustee, but only (a) to extend the
term of the Trust Agreement or (b) to the extent such amendment is required
by law or is necessary or desirable to (i) prevent adverse tax consequences
to Participants or the Company, (ii) provide for financial reporting
treatment deemed appropriate and desirable by the Committee, or (iii) cure
administrative deficiencies; provided that no amendment may change the
duties of the Trustee without the Trustee's consent, which consent shall
not be unreasonably withheld.
8.2 Revocability
The Trust shall be irrevocable, and the Trust Fund shall be held for
the exclusive purpose of providing distributions to the Participants and
their beneficiaries and defraying expenses of the Trust in accordance with
the provisions of the Trust Agreement, until the date on which all
Participant Distributions for all Investment Periods and all amounts
required to be paid from the Trust pursuant to Section 4 of the Trust
Agreement shall have been paid in full.
8.3 Termination
The Trust Termination Date shall be the earlier of (a) December 31,
2008, unless the Trust Agreement is amended prior to that date to extend
its term, or (b) the date on which the Trust no longer holds any assets.
Any assets remaining in the Trust after completion of all Participant
Distributions for all Investment Periods, and after payment of all of the
Trustee's fees and expenses and all other amounts required to be paid from
the Trust pursuant to Section 4 of the Trust Agreement, shall be
transferred to the Company.
8.4 Merger
In the event of any merger, consolidation or reorganization of the
Company in which the Company is not the surviving corporation, (a) the
successor corporation shall become the grantor of the Trust, (b) the assets
of the Trust shall be subject to the claims of the creditors of the
successor corporation in accordance with Section 1.4 of the Trust
Agreement, and (c) the provisions of the Trust that apply to Boeing Common
Stock (including, without limitation, the provisions of Section 3 of the
Trust Agreement) shall apply to the stock of the successor corporation held
hereunder.
145 of 156
<PAGE> 146
8.5 Form of Amendment
Any amendment of the Trust Agreement shall be evidenced by an
instrument in writing signed by an authorized officer of the Company,
certifying that said amendment or termination has been authorized and
directed by the Committee and, in the case of any amendment, shall be
consented to by signature of an authorized officer of the Trustee, if
required by Section 8.1 of the Trust Agreement.
9. Miscellaneous
9.1 Notices to the Company and Trustee
All notices, requests or other communications required or permitted
to be delivered hereunder shall be in writing, delivered by registered or
certified mail, return receipt requested, as follows:
To the Company or the Committee:
The Boeing Company
7755 East Marginal Way
Seattle, WA 98108
Attention: Corporate Secretary
MS 10-13
To the Trustee:
Wachovia Bank of North Carolina, N.A.
301 N. Main Street
Winston-Salem, NC 27102
Any party hereto may from time to time, by written notice given as
aforesaid, designate any other address to which notices, requests or other
communications addressed to it shall be sent.
9.2 Trust Agreement Not Subject to ERISA
The Trust Agreement is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), because it is
neither an employee pension benefit plan nor an employee welfare benefit
plan under the terms of ERISA.
9.3 No Rights in Trust Fund
No participant in the Plan, or any other person, shall have any
right, title or interest in or to any assets of the Trust or any Fund,
except to the extent of any right to receive Participant Distributions to
the extent specifically set forth in the Plan and in the Trust Agreement.
Benefits payable to Plan participants and their beneficiaries under this
Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
9.4 Protection of Persons Dealing With the Trustee
No person dealing with the Trustee shall be required or entitled to
monitor the application of any money paid or property delivered to the
Trustee, or determine whether or not the Trustee is acting pursuant to
authorities granted to it hereunder or to authorizations or directions
herein required.
9.5 Tax Status of Trust
The Trust is intended to be a grantor trust of which the Company is
the grantor, within the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Code, and shall be construed accordingly. For federal
income tax purposes, the Company, as grantor hereunder, shall be treated as
the owner of the entire Trust and trust assets as provided in Section 671
et seq. of the Code. Until advised otherwise by the Company, the Trustee
may presume that the Trust is so characterized for federal income tax
purposes and shall make all filings of tax returns, if any, on that
presumption. Participants and their beneficiaries shall have no preferred
146 of 156
<PAGE> 147
claim on, or any beneficial ownership interest in, any assets of the Trust
but shall have mere unsecured contractual rights against the Company and
the Participating Subsidiaries. The Trust shall constitute an unfunded
arrangement and shall not affect the status of the Plan as an unfunded plan
under the Code. Notwithstanding any other provision hereof, the Company
shall have the right, in a nonfiduciary capacity and without the approval
or consent of any person in a fiduciary capacity, to exercise the power of
administration set forth in Section 675(4)(C) of the Code with respect to
all assets of the Trust.
9.6 Governing Law
The Trust Agreement shall be construed according to the laws of the
State of Washington, without regard to conflict of law rules.
9.7 Severability
If any provision of the Trust Agreement shall be held illegal,
invalid or unenforceable for any reason, such provision shall not affect
the remaining parts hereof, but the Trust Agreement shall be construed and
enforced as if said provision had never been inserted herein.
9.8 Headings
Headings and subheadings in the Trust Agreement are inserted for
reference only and are not to be considered in construction of the
provisions of the Trust.
IN WITNESS WHEREOF, the Company and the Trustee have caused the Trust
Agreement to be signed, and their seals affixed hereto, by their authorized
officers all as of the day, month and year first above written.
THE BOEING COMPANY
By_____________________________
Its___________________________
WACHOVIA BANK OF NORTH CAROLINA, N.A.
By_____________________________
Its___________________________
147 of 156
<PAGE> 148
Exhibit (99) Additional Exhibits (i)
Commercial Program Method of Accounting
148 of 156
<PAGE> 149
EXHIBIT (99)
Commercial Program Method of Accounting
The Company's accounting practice relative to its major commercial aircraft
programs is a method of accounting developed through industry practice beginning
in the 1960s, but is not specifically addressed in formal accounting standards
such as statements of financial accounting standards by the Financial Accounting
Standards Board. Although this specialized accounting method is not
specifically addressed in existing standards, in 1974 the Securities and
Exchange Commission (SEC) codified, through Accounting Series Release No. 164,
specifically delineated disclosure requirements for the program method of
accounting, following the SEC's formal due process procedures.
The Company's commercial aircraft program method of accounting is described in
Note 1, "Summary of Significant Accounting Policies - Contract and Program
Accounting," to the Consolidated Financial Statements filed under the Form
10-K for the fiscal year ended December 31, 1996. The relevant disclosure in
Note 1 is as follows:
Commercial jet aircraft programs are planned, committed and facilitized based
on long-term delivery forecasts, normally for quantities in excess of
contractually firm orders. Cost of sales for all commercial jet aircraft
programs is determined based on estimated average total cost and revenue for
the current program commitment quantity. For new commercial jet aircraft
programs, the program quantity is initially based on an established number of
units representing what is believed to be a conservative market projection.
Program commitment quantities generally represent deliveries for the next
three to five years, although the initial program quantity for new programs
will normally include orders and deliveries over periods up to ten years. The
initial program quantity for the new 777 program has been established at 400
units, the same initial program quantity as for the 747 program in 1969 and
for the 767 and 757 programs in 1982. The commercial program method of
accounting, an industry-developed practice adopted by the Company in the 1960s
and applied to its all commercial jet aircraft programs since that time,
requires the demonstrated ability to reliably estimate and manage the
cost-revenue relationship for the defined program quantity. The program
method of accounting effectively amortizes or averages tooling and special
equipment costs, as well as unit production costs, over the program
quantity. Because of the higher unit production costs experienced at the
beginning of a new program and the substantial investment required for
initial tooling and special equipment, new commercial jet aircraft programs
normally have lower operating profit margins than established programs. The
estimated program average costs and revenues are reviewed and reassessed
quarterly, and changes in estimates are recognized over current and future
deliveries comprising the program quantity.
Related disclosures are included in Note 4, "Inventories," to the Consolidated
Financial Statements filed under the Form 10-K for the fiscal year ended
December 31, 1996. Specific disclosures are limited to those programs for
which deferred production costs in excess of estimated average cost of
deliveries or unamortized tooling costs not recoverable from existing firm
orders are material in amount.
149 of 156
<PAGE> 150
The accounting theory underlying the program method of accounting is essentially
the same as "contract accounting," which is addressed in the AICPA Statement
of Position 81-1. The important difference in methodology is the definitional
size of the "accounting contract" over which costs are averaged. The program
"accounting contract" is not limited to production units under contract (as is
normally the case with contract accounting), but rather is often based on a
quantity in excess of the units covered by firm backlog. The Company began
using the program method of accounting over 30 years ago, and has applied the
accounting method to all its major commercial programs (707, 727, 737, 747, 757,
767 and 777), and only its major commercial programs.
The program method of accounting was originally applied by the Company in
connection with the 707 program to provide an appropriate matching of sales and
cost of sales. The Company believes the application of the program method of
accounting is appropriate only under certain circumstances, typically for
production programs having the following characteristics:
(a) The production program represents a major commitment of the Company
based on an evaluation of the estimated overall rate of return or
profitability of the program as a whole. (Initial contractual
orders are normally not adequate to allow for recovery of the
related production costs.)
(b) Initial and early production stages require investment of substantial
resources relative to the Company's financial position. Due to the
nature of the production item (generally involving high technology,
labor intensive processes), earlier production units require
substantially more effort (labor and non-labor resources) than
subsequent units such that an improvement curve benefit will be
realized with significant cost implications over a period of several
years. Design and fabrication of special tools and equipment are
commonly necessary, for which virtually no economic benefits can be
realized other than in connection with the particular production
program.
(c) Because of market constraints or competitive factors, the substantial
investment of resources can only be recovered over a several-year
market quantity. Sales prices are principally market determined,
and are relatively constant in real terms over the program life.
(d) Because of the substantial and long-term investment of resources
necessary for such production programs, which normally includes
significant pre-production design and developmental costs, the market
will have no more than a few producers for that basic product.
Proposed criteria for use of the program method of accounting were documented in
a 1980 AICPA Task Force draft of a proposed Statement of Position on "Program
Accounting." The Company believes that the proposed criteria for use, as
outlined below, provide appropriate guidance:
150 of 156
<PAGE> 151
Criteria for Use of Program Accounting
1) The program method of accounting may be used in circumstances in which a
contractor has invested substantial resources to design and produce multiple
units of a product that
o requires substantial research and development as well as
initial production tooling and facility costs unique to its production,
o is based on anticipation of decreasing unit costs arising
from the effects of a learning curve,
o requires a substantial period to produce the number of units
in the program, and
o is intended to be sold on the basis of level pricing, which
requires that the pricing of the product, except for the effects of
changes in the general price level, will be level over all units or
will correlate closely with changes in the specific prices of direct
costs of production.
2) At the beginning of a program the Company will have identified a number of
anticipated customers, but will have obtained firm contracts for the
production and delivery of a number of units of the product that will not,
by themselves, permit recovery of the initial and early investment in the
production effort. The program accounting method may be used only if a
contractor
o can demonstrate a demand for the product expressed in a number
of units, or a range of the number of units, over the program's
estimated sales life that will permit recovery of costs incurred under
the program,
o has previously financed and produced similar products,
o has documented its ability to finance and produce the program
product, and
o is able to make reasonably dependable estimates of (a) the
number of units to be produced and sold, (b) the length of time to
produce and sell them, and (c) their associated production costs,
revenues and gross margin.
The Company believes that the above stringent criteria are necessary for the
appropriate application of program accounting, and the Company's use of program
accounting is consistent with these criteria.
151 of 156
<PAGE> 152
EXHIBIT (21) - List of Company Subsidiaries (Continued)
The Boeing Company and Subsidiaries
(All Wholly-Owned)
Place of Date of
Name Incorporation Incorporation
- -------------------------------------------------------------------------
ACN 004 471 078 PTY LIMITED Australia 1960
AeroSpace Technologies of Australia
Limited Australia 1986
Aileron Inc. Delaware 1989
Aldford Limited Bermuda 1993
Aldford-1 Corporation Delaware 1993
Amwell Limited Bermuda 1993
Amwell-1 Corporation Delaware 1993
Andsell Limited Bermuda 1993
Andsell-1 Corporation Delaware 1993
ARGOSystems, Inc. California 1969
Arneway Limited Bermuda 1993
Arneway-1 Corporation Delaware 1993
Astro Limited Bermuda 1975
Astro-II, Inc. Vermont 1984
Autonetics, Inc. Delaware 1958
BCS Richland, Inc. Washington 1975
BE&C Engineers, Inc. Delaware 1978
BNA International Systems, Inc. Delaware 1974
BNA Operations International, Inc. Delaware 1996
Beaufoy Limited Bermuda 1993
Beaufoy-1 Corporation Delaware 1993
Boeing Aerospace Operations, Inc. Washington 1972
Boeing Australia Limited Australia 1986
Boeing Agri-Industrial Company Oregon 1973
Boeing Aircraft Holding Company Delaware 1984
Boeing Canada Technology Ltd. Ontario 1929
Boeing China, Inc. Delaware 1986
Boeing Commercial Space Company Delaware 1987
Boeing Constructors, Inc. Texas 1970
Boeing Defence UK Limited England 1976
BOEING DEFENSE & SPACE-CORINTH CO. Delaware 1987
BOEING DEFENSE & SPACE-IRVING CO. Delaware 1979
Boeing Defense & Space - Oak Ridge,
Inc. Delaware 1980
Boeing Domestic Sales Corporation Washington 1974
Boeing Equipment Holding Company Washington 1968
Boeing Financial Corporation Washington 1965
Boeing Georgia, Inc. Delaware 1980
Boeing Information Services, Inc. Delaware 1981
Boeing International Corporation Delaware 1953
Boeing International Logistics Spares,
Inc. Delaware 1996
Boeing International Sales Corporation Washington 1971
Boeing Investment Company, Inc. Delaware 1985
152 of 156
<PAGE> 153
EXHIBIT (21) - List of Company Subsidiaries (Continued)
The Boeing Company and Subsidiaries
(All Wholly-Owned)
Place of Date of
Name Incorporation Incorporation
- --------------------------------------------------------------------------
Boeing Leasing Company Delaware 1988
Boeing Louisiana, Inc. Delaware 1986
Boeing Middle East Limited Delaware 1982
Boeing Nevada, Inc. Delaware 1989
Boeing North American Services, Inc. Texas 1973
Boeing North American Space Alliance
Company Delaware 1995
Boeing North American Space
Enterprises Canada, Inc. Canada 1996
Boeing North American Space
Operations Company Delaware 1983
Boeing North American, Inc. Delaware 1928
Boeing of Canada Ltd. Delaware 1986
Boeing Offset Company, Inc. Delaware 1985
Boeing Operations International,
Incorporated Delaware 1981
Boeing Precision Gear, Inc. Delaware 1994
Boeing Sales Corporation Guam 1984
Boeing Sales Corporation, Limited Bermuda 1993
Boeing Technology International, Inc. Washington 1973
Braham Limited Bermuda 1993
Braham-1 Corporation Delaware 1993
Canard Holdings, Inc. Delaware 1996
Gainford Limited Bermuda 1993
Gainford-1 Corporation Delaware 1993
Gaucho-1 Inc. Delaware 1994
GAUCHO-2 Inc. Delaware 1994
Grape Corporation Delaware 1993
Grape Limited Bermuda 1993
Hanway Corporation Delaware 1993
Longacres Park, Inc. Washington 1948
Montana Aviation Research Company Delaware 1991
North American Aviation, Inc. Delaware 1967
RGL-1 Corporation Delaware 1993
RGL-2 Corporation Delaware 1993
RGL-3 Corporation Delaware 1993
RGL-4 Corporation Delaware 1993
RGL-5 Corporation Delaware 1993
153 of 156
<PAGE> 154
EXHIBIT (21) - List of Company Subsidiaries (Continued)
The Boeing Company and Subsidiaries
(All Wholly-Owned)
Place of Date of
Name Incorporation Incorporation
- --------------------------------------------------------------------------
RGL-6 Corporation Delaware 1993
Rainier Aircraft Leasing, Inc. Delaware 1992
Rocketdyne, Inc. Delaware 1958
Rocketdyne Technical Services Company Delaware 1986
VC-X 757, Inc. Delaware 1996
West Acquisition Corp. Maryland 1996
Wingspan, Inc. Delaware 1994
2433265 Manitoba Ltd. Manitoba 1989
692567 Ontario Limited Ontario 1986
757UA, Inc. Delaware 1989
767ER, Inc. Delaware 1987
154 of 156
<PAGE> 155
Appendix of graphic and image material pursuant
to Rule 304(a) of Regulation S-T
Graphic and image material item Number 1
Sales by industry segment:
A bar chart for the five years 1992-1996 indicating sales by industry
segment (Dollars in billions):
1992 1993 1994 1995 1996
Commercial Aircraft 24.133 20.568 16.851 13.933 16.904
Defense and Space 6.051 4.870 5.073 5.582 5.777
Total 30.184 25.438 21.924 19.515 22.681
Graphic and image material item Number 2
Commercial sales by geographic region:
A bar chart for the five years 1992-1996 indicating sales by type of
customer (Dollars in billions):
1992 1993 1994 1995 1996
United States 7.205 6.371 5.490 6.813 7.675
Asia 6.772 8.741 7.215 4.658 6.650
Europe 6.953 4.416 2.994 1.381 1.918
Oceania 1.908 0.631 0.884 0.482 0.349
Other 1.295 0.409 0.268 0.599 0.312
Total 24.133 20.568 16.851 13.933 16.904
Graphic and image material item Number 3
Net earnings:
A bar chart of net earnings for the five years 1992-1996 (Dollars in
billions):
1992 - 1.554(a); 1993 - 1.244; 1994 - 0.856; 1995 - 0.783(b): 1996 - 1.182(c)
(a) Exclusive of the cumulative effect of the accounting change for retiree
health care. Net earnings including the effect were $552.
(b) Exclusive of $600 pretax charge associated with a special retirement
program. Net earnings including the effect were $393.
(c) Includes $133 pretax charge for the ShareValue Trust distributable
appreciation. Net earnings excluding the charge were $1,182.
155 of 156
<PAGE> 156
Graphic and image material item Number 4
Research and development expensed:
A bar chart of research and development expensed for the five
years 1992-1996 (Dollars in billions):
1992 - 1.846; 1993 - 1.661; 1994 - 1.704; 1995 - 1.267; 1996 - 1.200
Graphic and image material item Number 5
Backlog:
A bar chart for the five years 1992-1996 indicating contractual backlog
(Dollars in billions):
1992 1993 1994 1995 1996
Commercial Aircraft 81.991 69.000 60.614 66.540 79.152
Defense and Space 5.939 4.528 5.696 5.805 8.522
Total 87.930 73.528 66.310 72.345 87.674
Graphic and image material item Number 6
Customer financing -- net changes:
A bar chart for the five years 1992-1996 indicating customer financing -
net additions (Dollars in billions):
1992 1993 1994 1995 1996
Net additions 1.140 0.934 0.205 (1.399) (1.062)
Graphic and image material item Number 7
Procurement budget - Department of Defense and NASA:
A bar chart for the six years 1991 - 1996 indicating Procurement budgets -
Department of Defense and NASA (Dollars in billions):
1991 - 121.9; 1992 - 113.9; 1993 - 105.1; 1994 - 93.3; 1995 - 92.5; 1996 - 91.5
156 of 156
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,375
<SECURITIES> 883
<RECEIVABLES> 2,284
<ALLOWANCES> 116
<INVENTORY> 6,939
<CURRENT-ASSETS> 15,080
<PP&E> 14,651
<DEPRECIATION> 7,838
<TOTAL-ASSETS> 27,254
<CURRENT-LIABILITIES> 8,642
<BONDS> 3,993
<COMMON> 1,802
0
0
<OTHER-SE> 9,139
<TOTAL-LIABILITY-AND-EQUITY> 27,254
<SALES> 22,681
<TOTAL-REVENUES> 22,681
<CGS> 0
<TOTAL-COSTS> 21,327
<OTHER-EXPENSES> 133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145
<INCOME-PRETAX> 1,363
<INCOME-TAX> 268
<INCOME-CONTINUING> 1,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,095
<EPS-PRIMARY> 3.19
<EPS-DILUTED> 3.19
</TABLE>
