<PAGE> 1
..............................................................................
..............................................................................
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1998
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
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.
As of July 31, 1998, there were 1,010,703,645 shares of common stock, $5.00
par value, issued and outstanding.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except per share data)
(Unaudited)
Six months ended Three months ended
June 30 June 30
- ------------------------------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------
Sales and other operating revenues $26,330 $22,702 $13,389 $12,343
Operating costs and expenses 23,814 19,174 11,976 10,499
General and administrative expense 960 973 467 508
Research and development expense 976 1,008 489 529
Share-based plans 63 2 41 100
- ------------------------------------------------------------------------------
25,813 21,157 12,973 11,636
- ------------------------------------------------------------------------------
Earnings from operations 517 1,545 416 707
Other income, principally interest 149 183 64 80
Interest and debt expense (227) (243) (114) (112)
- ------------------------------------------------------------------------------
Earnings before income taxes 439 1,485 366 675
Income taxes 131 469 108 199
- ------------------------------------------------------------------------------
Net earnings $ 308 $ 1,016 $ 258 $ 476
==============================================================================
Basic earnings per share $.32 $1.05 $.26 $.49
==============================================================================
Diluted earnings per share $.31 $1.03 $.26 $.48
==============================================================================
Cash dividends per share $.28 $.28 $.14 $.14
==============================================================================
See notes to consolidated financial statements.
2
<PAGE> 3
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions except per share data)
June 30 December 31
1998 1997
- ------------------------------------------------------------------------------
(Unaudited)
Assets
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 3,154 $ 4,420
Short-term investments 302 729
Accounts receivable 3,235 3,121
Current portion of customer and commercial financing 227 261
Deferred income taxes 1,715 1,765
Inventories, net of advances and progress billings 10,192 8,967
- ------------------------------------------------------------------------------
Total current assets 18,825 19,263
Customer and commercial financing 4,403 4,339
Property, plant and equipment, net 8,528 8,391
Deferred income taxes 145 15
Goodwill 2,353 2,395
Prepaid pension expense 3,363 3,271
Other assets 325 350
- ------------------------------------------------------------------------------
$37,942 $38,024
==============================================================================
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------
Accounts payable and other liabilities $11,460 $11,548
Advances in excess of related costs 1,357 1,575
Income taxes payable 575 298
Short-term debt and current portion of long-term debt 365 731
- ------------------------------------------------------------------------------
Total current liabilities 13,757 14,152
Accrued retiree health care 4,792 4,796
Long-term debt 6,438 6,123
Shareholders' equity:
Common shares, par value $5.00 -
1,200,000 shares authorized;
Shares issued - 1,011,870,159 and 1,000,029,538 5,059 5,000
Additional paid-in capital 1,498 1,090
Treasury shares, at cost - 1,358,045 and 164,667 (69) (9)
Retained earnings 8,170 8,147
Unearned compensation (16) (20)
ShareValue Trust shares - 37,852,557 and 26,385,260 (1,687) (1,255)
- ------------------------------------------------------------------------------
Total shareholders' equity 12,955 12,953
- ------------------------------------------------------------------------------
$37,942 $38,024
==============================================================================
See notes to consolidated financial statements.
3
<PAGE> 4
THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six months ended
June 30
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Cash flows - operating activities:
Net earnings $ 308 $ 1,016
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Share-based plans 63 2
Depreciation and amortization 804 731
Changes in assets and liabilities -
Short-term investments 427 (85)
Accounts receivable (114) (128)
Inventories, net of advances and
progress billings (1,225) (973)
Accounts payable and other liabilities (85) 958
Advances in excess of related costs (218) 166
Income taxes payable and deferred 197 318
Other assets (77) (363)
Accrued retiree health care (4) 3
- ------------------------------------------------------------------------------
Net cash provided by operating activities 76 1,645
- ------------------------------------------------------------------------------
Cash flows - investing activities:
Customer financing and properties on lease - additions (451) (598)
Customer financing and properties on lease - reductions 368 432
Property, plant and equipment, net additions (836) (672)
- ------------------------------------------------------------------------------
Net cash used by investing activities (919) (838)
- ------------------------------------------------------------------------------
Cash flows - financing activities:
New borrowings 414 78
Debt repayments (465) (524)
Common shares purchased (115) (99)
Stock options exercised, other 26 101
Dividends paid (283) (252)
- ------------------------------------------------------------------------------
Net cash used by financing activities (423) (696)
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,266) 111
Cash and cash equivalents at beginning of year 4,420 5,469
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of 2nd quarter $ 3,154 $ 5,580
==============================================================================
See notes to consolidated financial statements.
4
<PAGE> 5
THE BOEING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 1 - Consolidated Interim Financial Statements
The consolidated interim financial statements included in this report have been
prepared by the Company without audit. In the opinion of management, all
adjustments necessary for a fair presentation are reflected in the interim
financial statements. Such adjustments are of a normal and recurring nature.
The results of operations for the period ended June 30, 1998, are not
necessarily indicative of the operating results for the full year. The interim
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
1997 Annual Report. Certain reclassifications have been made to prior periods
to conform with current reporting.
Note 2 - Recognition of Additional Forward Loss for the Next-Generation 737
Program
During the first quarter of 1998, the Company recognized a forward loss pretax
charge of $350 attributable to the Next-Generation 737 program. This charge
represents an increase to the forward loss charge of $700 recognized by the
Company in the third quarter of 1997. The cumulative forward loss of $1,050
represents the amount by which the estimated production costs exceed the
estimated revenue for the first 400 units of the program. The additional
forward loss resulted principally from additional retrofit activity costs
attributable to flight test and certification requirements, as well as the
costs of increased resources to reduce out-of-sequence work and process flow
risks. As of June 30, 1998, the Company had delivered 53 Next-Generation 737
airplanes.
Note 3 - Earnings per Share
The weighted average number of shares (in millions) used for computing earnings
per share for the periods ended June 30, 1998 and 1997, are as follows:
First Six Months Second Quarter
1998 1997 1998 1997
---------------- ---------------
Basic shares 973.2 967.8 972.9 967.9
Diluted shares 984.7 982.5 984.8 981.8
Basic earnings per share are calculated based on the weighted average number of
shares outstanding, excluding the outstanding shares held by the ShareValue
Trust. Diluted earnings per share are calculated based on the same number of
shares plus additional shares representing stock distributable under share-
based plans computed using the treasury stock method.
5
<PAGE> 6
Note 4 - Income Taxes
The effective income tax provision rate of 29.8% for the first six months of
1998 is lower than the statutory federal rate principally due to Foreign Sales
Corporation tax benefits. Partially offsetting this reduction from the
statutory federal rate are state income taxes and non-deductible goodwill. Net
income tax payments (refunds) were ($34) and $118 for the six months ended June
30, 1998 and 1997.
Note 5 - Accounts Receivable
Accounts receivable consisted of the following:
June 30 December 31
1998 1997
- ------------------------------------------------------------------------------
U.S. Government contracts $2,280 $2,053
Other 955 1,068
- ------------------------------------------------------------------------------
$3,235 $3,121
==============================================================================
Note 6 - Inventories
Inventories consisted of the following:
June 30 December 31
1998 1997
- ------------------------------------------------------------------------------
Commercial aircraft programs
and long-term contracts in progress $ 26,874 $ 26,566
Commercial spare parts, general stock
materials and other 2,414 1,869
- ------------------------------------------------------------------------------
29,288 28,435
Less advances and progress billings (19,096) (19,468)
- ------------------------------------------------------------------------------
$ 10,192 $ 8,967
==============================================================================
6
<PAGE> 7
Note 7 - Customer and Commercial Financing
Customer and commercial financing consisted of the following:
June 30 December 31
1998 1997
- ------------------------------------------------------------------------------
Aircraft financing
Notes receivable $ 684 $ 651
Investment in sales-type/financing leases 1,520 1,646
Operating lease equipment, at cost,
less accumulated depreciation
of $257 and $254 1,457 1,289
Commercial equipment financing
Notes receivable 370 313
Investment in sales-type/financing leases 390 407
Operating lease equipment, at cost,
less accumulated depreciation
of $101 and $96 422 502
- ------------------------------------------------------------------------------
Less valuation allowance (213) (208)
- ------------------------------------------------------------------------------
$4,630 $4,600
==============================================================================
Financing for aircraft is collateralized by security in the related asset, and
historically the Company has not experienced a problem in accessing such
collateral when necessary.
Note 8 - Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following:
June 30 December 31
1998 1997
- ------------------------------------------------------------------------------
Accounts payable $ 5,644 $ 5,609
Accrued compensation and employee benefit costs 2,432 2,154
Lease and other deposits 764 819
Other 2,620 2,966
- ------------------------------------------------------------------------------
$11,460 $11,548
==============================================================================
7
<PAGE> 8
Note 9 - Debt
Short- and long-term debt consisted of the following:
June 30 December 31
1998 1997
- ------------------------------------------------------------------------------
Unsecured debentures and notes:
7 5/8% due Feb. 17, 1998 $ - $ 301
8 7/8% due Sep. 15, 1999 308 311
8.25% due Jul. 1, 2000 200 200
8 3/8% due Feb. 15, 2001 181 182
9.25% due Apr. 1, 2002 120 120
6 3/4% due Sep. 15, 2002 298 297
6.35% due Jun. 15, 2003 300 299
7 7/8% due Feb. 15, 2005 208 209
6 5/8% due Jun. 1, 2005 292 291
6.875% due Nov. 1, 2006 248 248
8 1/10% due Nov. 15, 2006 175 175
9.75% due Apr. 1, 2012 348 348
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
6 5/8% due Feb. 15, 2038 297
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
Senior debt securities,
5.0% - 9.4%, due through 2011 91 148
Senior medium-term notes,
5.5% - 13.6%, due through 2017 1,159 1,129
Subordinated medium-term notes,
6.1% - 9.4%, due through 2004 70 70
Capital lease obligations due through 2008 479 500
Other notes 265 262
- ------------------------------------------------------------------------------
$6,803 $6,854
==============================================================================
The Company has $3,000 currently available under credit line agreements with a
group of commercial banks. The Company has complied with the restrictive
covenants contained in various debt agreements. In addition, Boeing Capital
Corporation, a corporation wholly owned by the Company, has $240 available, but
unused, under a credit line agreement with a group of commercial banks.
Total debt interest, including amounts capitalized, was $260 and $278 for the
six-month periods ended June 30, 1998 and 1997, and interest payments were $221
and $285, respectively.
8
<PAGE> 9
Note 10 - Shareholders' Equity
Changes in shareholders' equity for the six-month periods ended June 30, 1998
and 1997, consisted of the following:
(Shares in thousands)
- ------------------------------------------------------------------------------
1998 1997
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Common Stock
Beginning balance - January 1 1,000,030 $ 5,000 993,348 $ 4,967
Shares issued for the ShareValue Trust 11,253 56
Shares issued for incentive stock plans 587 3 1,413 7
- ------------------------------------------------------------------------------
Ending balance - June 30 1,011,870 $ 5,059 994,761 $ 4,974
==============================================================================
Additional paid-in capital
Beginning balance - January 1 $ 1,090 $ 920
Share-based compensation, net of tax impact 41
Treasury shares issued for incentive
stock plans, net (27) (47)
Shares issued for incentive plans 31
Tax benefit related to incentive stock plans 12 26
Stock appreciation rights expired or surrendered 6 5
Shares issued for the ShareValue Trust 494
ShareValue Trust market value adjustment (118) 2
- ------------------------------------------------------------------------------
Ending balance - June 30 $ 1,498 $ 937
==============================================================================
Treasury stock
Beginning balance - January 1 165 $ (9) 30 $ (1)
Treasury shares issued for incentive
stock plans, net (1,084) 55 (1,228) 99
Treasury shares acquired 2,277 (115) 1,216 (99)
Shares transferred from ShareValue Trust 3
- ------------------------------------------------------------------------------
Ending balance - June 30 1,358 $ (69) 21 $ (1)
==============================================================================
Retained earnings
Beginning balance - January 1 $ 8,147 $ 8,896
Net earnings 308 1,016
Cash dividends declared (285) (252)
- ------------------------------------------------------------------------------
Ending balance - June 30 $ 8,170 $ 9,660
==============================================================================
Unearned compensation
Beginning balance - January 1 $ (20) $ (22)
New issuances (29)
Forfeitures 3
Amortization 1 12
- ------------------------------------------------------------------------------
Ending balance - June 30 $ (16) $ (39)
==============================================================================
9
<PAGE> 10
Note 10 - Shareholders' Equity (continued)
Changes in shareholders' equity for the six-month periods ended June 30, 1998
and 1997, consisted of the following:
(Shares in thousands)
- ------------------------------------------------------------------------------
1998 1997
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
ShareValue Trust
Beginning balance - January 1 26,385 $(1,255) 26,120 $(1,258)
Shares transferred to treasury stock (3)
Shares acquired from dividend reinvestment 215 133
Shares issued from common stock 11,253 (550)
Market value adjustment 118 (2)
Accrual of distributable appreciation 2
- ------------------------------------------------------------------------------
Ending balance - June 30 37,853 $(1,687) 26,250 $(1,258)
==============================================================================
Comprehensive income and net earnings were the same for the six-month periods
identified above.
Note 11 - Share-Based Compensation
Beginning in the first quarter of 1998, the Company adopted the expense
recognition provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, which applies to Performance
Share awards, the ShareValue Trust plan, and stock options.
On February 23, 1998, the Company awarded approximately 3.9 million Performance
Shares to executive management. Performance Shares are convertible to common
stock at the time the stock price reaches and maintains certain threshold
levels for 20 consecutive days. These threshold levels represent predetermined
compound five-year growth rates relative to the stock price on the date of the
award. In accordance with SFAS No. 123, the Company will recognize the
associated expense over the five-year award period.
The ShareValue Trust is a 14-year irrevocable trust that holds Boeing common
stock, receives dividends, and distributes to employees appreciation in value
above a 3% per annum threshold rate of return. The expense recognition method
for the ShareValue Trust plan under SFAS No. 123 is based upon the fair value
of the total expected distributions, determined by applying an option pricing
model. The fair value of the expected distributions under the option pricing
model is recognized over the life of the plan regardless of actual
distributions. On June 30, 1998, the first investment period of the trust
ended with a fund appreciation insufficient to generate a distribution to
employees. The end of the second investment period and the next potential
distribution date is June 30, 2000.
The Company granted stock options during the second quarter of 1998, and
recognized $10 million of expense in accordance with the provisions of SFAS No.
123.
10
<PAGE> 11
Note 12 - 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.
On January 7, 1991, the U.S. Navy notified the Company and General Dynamics
Corporation (the Team) that it was terminating for default the Team's contract
for development and initial production of the A-12 aircraft. The Team filed a
legal action to contest the Navy's default termination, to assert its rights to
convert the termination to one for "the convenience of the Government," and to
obtain payment for work done and costs incurred on the A-12 contract but not
paid to date. At June 30, 1998, inventories included approximately $581 of
recorded costs on the A-12 contract, against which the Company has established
a loss provision of $350. The amount of the provision, which was established
in 1990, was based on the Company's belief, supported by an opinion of outside
counsel, that the termination for default would be converted to a termination
for convenience, that the Team would establish a claim for contract adjustments
for a minimum of $250, that there was a range of reasonably possible results on
termination for convenience, and that it was prudent to provide for what the
Company then believed was the upper range of possible loss on termination for
convenience, which was $350.
On December 19, 1995, the U.S. Court of Federal Claims ordered that the
Government's termination of the A-12 contract for default be converted to a
termination for convenience of the Government. On December 13, 1996, the Court
issued an opinion confirming its prior no-loss adjustment and no-profit
recovery order. On December 5, 1997, the Court issued an opinion confirming
its preliminary holding that plaintiffs were entitled to certain adjustments
to the contract funding, increasing the plaintiffs' possible recovery to
$1,200. On March 31, 1998, the Court entered a judgment, pursuant to a March
30 opinion and order, determining that plaintiffs were entitled to be paid
that amount, plus statutory interest from June 26, 1991, until paid.
Although the Government has appealed the resulting judgment, the Company
believes the judgment will be sustained. Final resolution of the A-12
litigation will depend on such appeals and possible further litigation, or
negotiations, with the Government. If sustained, however, the expected damages
judgment, including interest, could result in pretax income that would more
than offset the loss provision established in 1990.
On October 31, 1997, a federal securities lawsuit was filed against the Company
in the U.S. District Court for the Western District of Washington, in Seattle.
The lawsuit names as defendants the Company and three of its executive
officers. Additional lawsuits of a similar nature have been filed in the same
court. These lawsuits were consolidated on February 24, 1998. The plaintiffs
seek to represent a class of purchasers of Boeing stock between July 21, 1997,
and October 22, 1997, (the "Class Period"), including recipients of Boeing
stock in the McDonnell Douglas merger. July 21, 1997, was the date on which
the Company announced its second quarter results, and October 22, 1997, was
the date on which the Company announced charges to earnings associated with
production problems being experienced on commercial aircraft programs. The
lawsuits generally allege that the defendants desired to keep the Company's
share price as high as possible in order to ensure that the McDonnell Douglas
shareholders would approve the merger and, in the case of two of the
individual defendants, to benefit directly from the sale of Boeing stock
11
<PAGE> 12
during the Class Period. The plaintiffs seek compensatory damages and treble
damages. The Company believes that the allegations are without merit and that
the outcome of these lawsuits will not have a material adverse effect on its
earnings, cash flow or financial position.
On March 27, 1997, Gerald Verdine filed an action in California state court
alleging claims based on race and age discrimination, retaliation, and breach
of contract against the Douglas Aircraft Company. On July 7, 1998, a jury
returned a verdict against the Company on the retaliation and breach of
contract claims but reached no decision on the other claims. The jury awarded
Verdine $2 in economic and non-economic damages and $26 in punitive damages.
The Company has filed post-trial motions to reverse the judgment, seek a new
trial on all issues, or seek a reduction in the amount of damages.
On June 6, 1998, sixteen (16) African American employees of The Boeing Company,
previously employed at several distinct units of The Boeing Company, McDonnell
Douglas Corporation and Rockwell International Corporation, filed a complaint
in U.S. District Court for the Western District of Washington alleging
discrimination on the basis of race in connection with promotions and
training. The plaintiffs also allege retaliation and harassment and seek,
among other things, an order certifying a class of all African American
employees who are currently working or worked for the three companies over the
past few years. Also, on July 31, 1998, seven African American employees of
the helicopter division of the Aircraft & Missile group in Philadelphia filed
an action in the U.S. District Court for the Eastern District of Pennsylvania
alleging discrimination on the basis of race in compensation, promotions and
terminations. The complaint also alleges retaliation at that division.
Plaintiffs are seeking an order certifying a class of all African American
employees of The Boeing Company. The Company believes that the outcome of the
lawsuits will not have a material adverse effect on its earnings, cash flow or
financial position.
12
<PAGE> 13
Note 13 - Business Segment Data
Segment information for revenues, earnings, and research and development
consisted of the following:
Six months ended Three months ended
June 30 June 30
- ------------------------------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------
Revenues:
Commercial Aircraft $16,432 $13,819 $ 8,466 $ 7,937
Information, Space and Defense Systems 9,483 8,528 4,711 4,208
Customer and Commercial Financing, Other 415 355 212 198
- ------------------------------------------------------------------------------
Operating revenues $26,330 $22,702 $13,389 $12,343
==============================================================================
Earnings (loss) from operations:
Commercial Aircraft $ (261) $ 777 $ (10) $ 468
Information, Space and Defense Systems 717 626 421 261
Customer and Commercial Financing, Other 243 232 117 138
Unallocated expense (119) (88) (71) (60)
Share-based plans (63) (2) (41) (100)
- ------------------------------------------------------------------------------
Operating earnings $ 517 $ 1,545 $ 416 $ 707
- ------------------------------------------------------------------------------
Other income, principally interest 149 183 64 80
Interest and debt expense (227) (243) (114) (112)
- ------------------------------------------------------------------------------
Earnings before income taxes $ 439 $ 1,485 $ 366 $ 675
==============================================================================
Net earnings $ 308 $ 1,016 $ 258 $ 476
==============================================================================
Research and development:
Commercial Aircraft $ 564 $ 694 $ 281 $ 358
Information, Space and Defense Systems 412 314 208 171
- ------------------------------------------------------------------------------
Total research and development expense $ 976 $ 1,008 $ 489 $ 529
==============================================================================
Unallocated expense includes goodwill amortization, capitalized interest
amortization, certain unallocated actuarial costs, and corporate costs not
allocated to other internal reporting entities.
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenue
- -------
Sales of $26.3 billion for the first six months of 1998 were 16% higher than
sales for the comparable period of 1997. A total of 245 commercial jet
aircraft were delivered, compared with 183 in the first six months of 1997.
Approximately 550 commercial aircraft deliveries, including 230 of the newer-
model 737s and 777s, are currently projected for the full year 1998, compared
with 374 in 1997. Total sales for 1998 are projected to be in the $56 billion
range, compared with $45.8 billion in 1997.
Commercial jet aircraft deliveries were as follows:
Six Months 2nd Quarter
- ------------------------------------------------------------------------------
Model 1998 1997 1998 1997
- ------------------------------------------------------------------------------
737 67 60 33 35
737 Next-Generation 50 - 38 -
747 21 22 9 12
757 23 24 12 12
767 24 23 14 12
777 37 31 17 21
MD-80 3 8 (1) 1 8 (1)
MD-90 14 11 (2) 10 4
MD-11 6 (2) 4 3 (1) 2
- ------------------------------------------------------------------------------
Total 245 183 137 106
==============================================================================
Commercial jet aircraft deliveries included deliveries under operating lease,
which are identified by parentheses in the above table. Aircraft accounted
for as operating leases have minimal revenue recorded at the time of delivery.
==============================================================================
| Forward-Looking Information Is Subject to Risk and Uncertainty |
| Certain statements in this release contain "forward-looking" information |
| that involves risk and uncertainty, including projections for production |
| rates, deliveries, customer financing, sales, revenues, margins, earnings, |
| cash, research and development expense, employment, asset utilization, and |
| other trend projections. This forward-looking information is based upon a |
| number of assumptions, including assumptions regarding demand, internal |
| performance, customer financing, supplier and subcontractor performance, |
| government policies and actions, and escalation. Actual future results |
| and trends may differ materially depending on a variety of factors, |
| including the Company's successful execution of internal performance plans,|
| including production recovery and production rate increases; the cyclical |
| nature of the Company's business; volatility of the market for certain |
| products; continued integration of McDonnell Douglas Corporation; product |
| performance risks associated with regulatory certifications of the |
14
<PAGE> 15
| Company's commercial aircraft by the U.S. Government and foreign |
| governments; other regulatory uncertainties; collective bargaining labor |
| disputes; performance issues with key suppliers, subcontractors and |
| customers; governmental export and import policies; factors that result in |
| significant and prolonged disruption to air travel worldwide; global trade |
| policies; worldwide political stability and economic conditions, |
| particularly in Asia; price escalation trends; changing priorities or |
| reductions in the U.S. Government defense and space budgets; termination |
| of government contracts due to unilateral government action or failure to |
| perform; and legal proceedings. Additional information regarding these |
| factors is contained in the Company's Annual Report on Form 10-K for the |
| year ended 1997 and Form 10-Q for the quarterly period ended March 31, |
| 1998. |
==============================================================================
Information, Space and Defense Systems deliveries included the following:
Six Months 2nd Quarter
- ------------------------------------------------------------------------------
Model 1998 1997 1998 1997
- ------------------------------------------------------------------------------
C-17 4 3 2 1
F-15 13 7 6 5
F/A-18 C/D 16 23 6 12
F/A-18 C/D Kits - 4 - 1
T-45TS 7 3 3 3
CH-47 6 - 3 -
767 AWACS 2 - - -
757-C32A 2 - 2 -
Delta II 7 4 3 2
Earnings
- --------
Net earnings of $308 million for the first half of 1998 reflect the reduced
commercial aircraft profit margins, including the $219 million after-tax loss
on the Next-Generation 737 recorded in the first quarter and $78 million in
after-tax charges relating to the planned termination of the MD-11 program
and additional late delivery costs associated with Next-Generation 737
aircraft. Comparable net earnings for the same period of 1997 were $1,016
million.
Development continues on the 757-300, a stretched derivative of the 757-200,
which is scheduled to be delivered in early 1999; the 767-400ER, a stretched
version of the 767-300ER, which is scheduled to be delivered in the year 2000;
and the increased-capacity version 777-300, with certification and first
delivery scheduled for mid-1998. The 717-200 program (formerly the MD-95)
continues in development, with flight test scheduled to begin later this year
and first delivery planned for mid-1999. The Information, Space and Defense
Systems segment had a higher level of development expense on commercial space
and communication activities, including the Delta family of launch vehicles
and other business opportunities, compared with the 1997 first quarter.
15
<PAGE> 16
Research and development expense totaled $976 million for the first half,
compared with $1,008 million for the same period of 1997. Commercial Aircraft
research and development expense for the first half of 1998 was lower than for
the first half of 1997, principally due to reduced spending on the Next-
Generation 737 models. Based on current programs and plans, research and
development expense for 1998 is expected to be in the $1.9 billion to $2.0
billion range, compared with $1.9 billion in 1997.
The income tax provision for the first half of 1998 of 29.8% is lower than the
31.6% for the same period in 1997 due principally to an increase in Foreign
Sales Corporation tax benefits in 1998.
Operating Profit
- ----------------
Commercial Aircraft Programs
The higher sales for the first half and second quarter of 1998 were
principally due to the increased level of commercial aircraft deliveries. A
total of 247 jet aircraft were delivered, including two 757-C32A aircraft,
compared with 183 in the first half of 1997. Although commercial aircraft
deliveries and sales were higher, the overall profit margin for the commercial
aircraft segment was significantly lower due to the model mix of deliveries,
production inefficiencies associated with the rapid increase in the commercial
aircraft production rates, continued pricing pressures and lower
price-escalation trends. With regard to model mix, most of the sales increase
was attributable to the new 777 and Next-Generation 737 programs. New
commercial aircraft programs have lower operating profit margins due to higher
unit production costs in the early years of a program. Additionally, because
of production inefficiencies, extensive changes resulting from flight test and
certification requirements, and lower revenue due to the mix of models and
lower price escalation, the Next-Generation 737 program has been in a loss
position based on the initial program accounting quantity of 400 units.
Significant progress has been made on the production recovery plan for the
Next-Generation 737 program. Based on that progress and certain long-term
production replanning that extends well beyond the firm orders of over 800
Next-Generation 737 aircraft, the program accounting quantity was extended
consistent with other established programs. However, no gross profit will be
recorded on the Next-Generation 737 program prior to finalization of the
production replanning and successful execution of the Next-Generation 737
production rate increase from 14 aircraft per month to 21 per month late in
1998. Production schedule challenges associated with this rate increase and
general production efficiencies will continue to be aggressively managed, but
significant performance risks remain.
Operating profit margins on all commercial aircraft models continue to be
affected by lower price-escalation trends and price pressures. The Company
sells its products at base prices plus indexed changes for employment cost and
producer price changes. Such changes have been significantly less than
anticipated over the last two years.
Effective July 1, 1998, Boeing increased the base prices for most of its
commercial aircraft and has revised the price-escalation formula to be more
compatible with the competition. The Company does not expect an impact to
revenues and profits before the year 2000 as a result of these changes, due to
16
<PAGE> 17
the significant number of orders already placed by customers for delivery in
the next two years.
The Company recently announced its plans to phase out MD-11 production, with
the last delivery scheduled in the first quarter of 2000. This decision was
made after months of assessing future sales prospects for the MD-11 jetliner,
and determining that there is insufficient market demand to warrant continued
production. The second quarter results include a valuation adjustment for
assets and liabilities associated with the MD-11 program.
Commercial jet aircraft deliveries for 1998 are currently expected to be about
550 aircraft, including approximately 230 of the newer-model 737s and 777s.
The delivery quantity is dependent on performing to the production plan and
delivering the majority of approximately 20 aircraft currently in storage,
which are principally associated with Asian customers affected by the economic
recession in the region. The 747 production rate will increase from four to
five airplanes per month and the 777 program will increase from five to seven
airplanes per month in the third quarter of 1998. These wide-body production
rate increases and a large number of 747 freighters in the second half of 1998
represent performance and schedule risks that are being closely monitored.
The Company continues to assess the economic situation in Asia, which has the
potential to impact future deliveries, particularly wide-body models. The 747
production rate is currently scheduled to be reduced in mid-1999 from five
aircraft per month to three and a half per month. Production will continue to
be adjusted to reflect customer requirements and the Company's capabilities.
The overall Commercial Aircraft segment operating profit margin, exclusive of
the additional Next-Generation 737 forward loss and MD-11 valuation
adjustment, was 1.3% for the first six months of 1998, compared with 5.6% for
the same period in 1997. The lower margin was attributable to the production
inefficiencies associated with the rapid increase in production rates, the
model mix of aircraft deliveries that included six more 777s and 50
Next-Generation 737s in the first half of 1998 than during the same period in
1997, and continued pricing pressure. Margins for the balance of 1998 will
continue to reflect the relatively high percentage of 777 and Next-Generation
737 deliveries and previously announced production inefficiencies, continued
pricing pressures, and lower price-escalation trends. No gross profit will be
recognized for the Next-Generation 737 program prior to finalization of the
production replanning and successful execution of the Next-Generation 737
production rate increase from 14 aircraft per month to 21 per month late in
1998. Commercial Aircraft research and development expense for the first six
months of 1998 was lower on the Next-Generation 737 models than for the same
period in 1997.
Information, Space and Defense Systems (ISDS) Programs
Sales in the first six months of 1998 were 11% higher than the same period of
1997, principally due to increased military aircraft deliveries and three
additional Delta II launch vehicles. Information, Space and Defense Systems
segment operating revenues for the first half of 1998 were $9.5 billion, an
increase of $1.0 billion, compared with the same period in 1997. The segment
consists of four business units: McDonnell Aircraft and Missile Systems,
Information and Communications Systems, Space Transportation, and Phantom
Works, with first-half operating revenues of 60%, 19%, 18% and 3%,
respectively, of total segment revenues. Total ISDS sales for the year are
expected to be in the $19 billion to $20 billion range.
17
<PAGE> 18
The overall Information, Space and Defense Systems segment operating profit
margin was 7.6% in the first half of 1998, compared with 7.3% for the same
period in 1997. Operating margins increased due to improved performance on
production programs, partially offset by increased research and development
expense and joint venture development costs ($72 million in 1998, compared
with $40 million in 1997) for the Sea Launch and Civil Tiltrotor programs.
The Information, Space and Defense Systems segment had a higher level of
development expense on commercial space and communication activities,
including the Delta family of launch vehicles and other business
opportunities, compared with the first half of 1997.
The Company previously announced a strategic decision to exit the market for
commercial helicopters. As part of that strategy, the Company transferred its
interest in the Bell Boeing 609 Civil Tiltrotor to Bell Helicopter Textron and
has assumed a minor subcontractor role in the development program. Due to
regulatory concerns, Boeing and Bell have jointly agreed to suspend efforts to
sell the Boeing MD-500 and MD-600 single-engine helicopter lines to Bell
Helicopter. The Company is seeking to find other potential buyers for its
light commercial helicopter lines.
In the second quarter, the Company announced it would remain as a founding
industrial partner and investor in the Teledesic venture and intends to assume
a role in launch services and system integration on the program. The Company
remains committed to investing a minimum value of $100 million in Teledesic.
The Company also announced it will be the systems integrator and prime
contractor as well as an equity investor in Ellipso. Ellipso is a satellite-
based data and telecommunication venture that will bring affordable fixed,
mobile and airborne voice and data telecommunications to new markets
worldwide. Ellipso will focus on telephone service, but also will provide
digital data transfer, fax, paging, voice mail, messaging and geopositioning
services.
Liquidity and Capital Resources
- -------------------------------
The Company's financial liquidity position remains strong, with cash and
short-term investments totaling $3.5 billion at June 30, 1998, and total long-
term debt at 34% of total shareholders' equity plus debt. The Company
continues to maintain its $3.0 billion revolving credit line.
Backlog
- -------
Contractual backlog of unfilled orders (which excludes purchase options and
announced orders for which definitive contracts have not been executed, and
unobligated Government contract funding) was as follows (dollars in billions):
June 30 Mar. 31 Dec. 31
- ------------------------------------------------------------------------------
1998 1998 1997
- ------------------------------------------------------------------------------
Commercial Aircraft $ 91.8 $ 92.4 $ 93.8
Information, Space and Defense Systems 30.0 28.5 27.8
- ------------------------------------------------------------------------------
Total contractual backlog $121.8 $120.9 $121.6
==============================================================================
Unobligated U.S. Government contract funding not included in backlog totaled
$24.9 billion at June 30, 1998, compared with $23.4 billion at March 31, 1998,
and $26.1 billion at December 31, 1997.
18
<PAGE> 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has financial instruments that are subject to interest rate risk,
principally short-term investments, fixed-rate notes receivable attributable to
customer financing, and debt obligations issued at a fixed rate. Historically,
the Company has not experienced material gains or losses due to interest rate
changes when selling short-term investments or fixed-rate notes receivable.
Additionally, the Company uses interest rate swaps to manage exposure to
interest rate changes. Based on the current holdings of short-term investments
and fixed-rate notes, as well as underlying swaps, the exposure to interest
rate risk is not material. Fixed-rate debt obligations issued by the Company
are generally not callable until maturity.
The Company is subject to foreign currency exchange rate risk relating to
receipts from customers and payments to suppliers in foreign currencies. As a
general policy, the Company substantially hedges foreign currency commitments
of future payments and receipts by purchasing foreign currency-forward
contracts. As of June 30, 1998, the notional value of such derivatives was
$453 million, with a net unrealized gain of $3 million. Less than one percent
of receipts and expenditures are contracted in foreign currencies, and the
market risk exposure relating to currency exchange is not material.
REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated statement of financial position as of June 30, 1998, the
consolidated statements of operations for the six-month periods ended June 30,
1998 and 1997, and the consolidated statements of cash flows for the six-month
periods ended June 30, 1998 and 1997, have been reviewed by the registrant's
independent accountants, Deloitte & Touche LLP, whose report covering their
review of the financial statements follows.
Deloitte & Touche LLP was furnished the report of other independent accountants
concerning the review of the interim financial information of McDonnell Douglas
Corporation for the six-month period ended June 30, 1997. This independent
accountants' review report also follows.
19
<PAGE> 20
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
The Boeing Company
Seattle, Washington
We have reviewed the accompanying condensed consolidated statement of financial
position of The Boeing Company and subsidiaries (the "Company") as of June 30,
1998, the related condensed consolidated statements of operations for the
three- and six-month periods ended June 30, 1998 and 1997, and the related
condensed consolidated statements of cash flows for the six-month periods
ended June 30, 1998 and 1997. These financial statements are the
responsibility of the Company's management. The accompanying 1997 condensed
consolidated financial statements give retroactive effect to the merger of the
Company and McDonnell Douglas Corporation ("McDonnell Douglas"), which has
been accounted for as a pooling of interests. We were furnished with the
report of other accountants on their review of the interim financial
information of McDonnell Douglas for the three- and six-month periods
ended June 30, 1997; total McDonnell Douglas revenues constituted 29% and 30%
of consolidated total revenues for such periods, respectively.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review and the reports of other accountants, we are not aware of
any material modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of the Company as
of December 31, 1997, and the related consolidated statements of operations
and cash flows for the year then ended (not presented herein); and in our
report dated January 27, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying consolidated statements of financial position as of
December 31, 1997, is fairly stated, in all material respects, in relation to
the consolidated statement of financial position from which it has been
derived.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
July 23, 1998
20
<PAGE> 21
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Shareholders and Board of Directors
McDonnell Douglas Corporation
We have reviewed the condensed consolidated balance sheet of McDonnell Douglas
Corporation and consolidated subsidiaries (MDC) as of June 30, 1997, and the
related condensed consolidated statements of earnings for the three-month and
six-month periods ended June 30, 1997 and 1996, and the condensed consolidated
statement of cash flows for the six-month periods ended June 30, 1997 and 1996
(not separately presented herein). These financial statements are the
responsibility of MDC's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of MDC as of December 31, 1996, and
the related consolidated statement of operations, shareholders' equity, and
cash flows for the year then ended (not separately presented herein), and in
our report dated January 22, 1997, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the condensed consolidated balance sheet as of December 31, 1996,
(not separately presened herein) is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been derived.
July 16, 1997
/s/ Ernst & Young LLP
Ernst & Young LLP
St. Louis, Missouri
21
<PAGE> 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 12 to the Consolidated Financial Statements for a discussion
of current legal proceedings involving the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Material Contracts.
Management Contracts and Compensatory Plans.
1997 Incentive Stock Plan, as amended June 29,
1998. Filed herewith.
(15) Letters from independent accountants regarding
unaudited interim financial information. Page 23.
(27) Financial Data Schedule for the three-month period
ending June 30, 1998. Filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was filed to report, under Item 5, events
of April 6 and April 10, 1998.
- - - - - - -
SIGNATURE
Pursuant to the requirements 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.
THE BOEING COMPANY
--------------------------------
(Registrant)
August 11, 1998 /s/ Gary W. Beil
---------------- --------------------------------
(Date) Gary W. Beil
Vice President and Controller
22
<PAGE> 23
EXHIBIT (15)
Letter from Independent Accountants Regarding
Unaudited Interim Financial Information
The Boeing Company and Subsidiaries
The consolidated statement of financial position as of June 30, 1998, the
consolidated statements of operations for the three-month periods ended June
30, 1998 and 1997, and the statements of cash flows for the three-month periods
ended June 30, 1998 and 1997, have been reviewed by the registrant's
independent accountants, Deloitte & Touche LLP, whose letter regarding such
unaudited interim financial information follows.
Deloitte & Touche LLP was furnished the report of other independent accountants
regarding such unaudited interim financial information of McDonnell Douglas
Corporation for the three-month period ended June 30, 1997. This independent
accountants' letter also follows.
23
<PAGE> 24
August 11, 1998
The Boeing Company
Seattle, Washington
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of The Boeing Company and subsidiaries (the "Company") for the
three- and six-month periods ended June 30, 1998, and 1997 as indicated
in our report dated July 23, 1998; because we did not perform an audit, we
expressed no opinion on that information. The 1997 information gives
retroactive effect to the 1997 merger of the Company and McDonnell Douglas
Corporation ("McDonnell Douglas"), which has been accounted for as a pooling of
interests. We were furnished with the reports of other accountants on their
review of the interim financial statements of McDonnell Douglas for the
respective three- and six-month periods ended June 30, 1997.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is
incorporated by reference in Registration Statement Nos. 2-48576, 33-25332,
33-31434, 33-43854, 33-58798, 333-03191, 333-16363, 333-26867, 333-32461, 333-
32499, 333-32491, and 333-32567 of The Boeing Company on Form S-8.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
24
<PAGE> 25
August 11, 1998
Board of Directors and Shareholders
The Boeing Company
Seattle, Washington
We are aware of the inclusion in the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 of The Boeing Company, which is incorporated by
reference in Registration Statement Nos. 2-48576, 33-25332, 33-31434, 33-
43854, 33-58798, 333-03191, 333-16363, 333-26867, 333-32461, 333-32499,
333-32491, and 333-32567 of The Boeing Company on Form S-8, of our report
dated July 16, 1997, related to the condensed consolidated financial
statements of McDonnell Douglas Corporation and consolidated subsidiaries, not
separately presented herein, for the quarter ended June 30, 1997.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the registration
statement prepared or certified by accountants within the meaning of Sections 7
or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
Ernst & Young LLP
St. Louis, Missouri
25
<PAGE> 26
Exhibit (10)
The Boeing Company 1997 Incentive Stock Plan
(as Amended and Restated Effective June 29, 1998)
1. Purpose
The purpose of this 1997 Incentive Stock Plan (the "Plan") is to attract,
retain and motivate key employees, officers, consultants, agents, advisors and
independent contractors of The Boeing Company (the "Company") by providing them
the opportunity to acquire a proprietary interest in the Company and to link
their interests and efforts to the long-term interests of the Company's
shareholders.
2. Plan Administration
2.1 The Compensation Committee
The Plan shall be administered by the Compensation Committee (the "Committee")
of the Company's Board of Directors (the "Board"). Except for the terms and
conditions explicitly set forth in the Plan, the Committee shall have the
authority, in its sole discretion, to determine all matters relating to awards
under the Plan, including selection of the individuals to be granted awards,
the type of awards granted, the number of shares of the Company's common stock
(the "Common Stock") subject to an award, all terms, conditions, restrictions
and limitations, if any, of an award, and the terms of any award agreement or
notice.
2.2 Other Plans
The Committee shall also have authority to grant awards as an alternative to or
as the form of payment for grants or rights earned or due under other
compensation plans or arrangements of the Company, including the plan of any
entity acquired by the Company.
2.3 Delegation to Stock Plan Committee
Except for the power to amend the Plan as provided in Section 12, the Board or
the Committee, in its sole discretion, may delegate the Committee's authority
and duties under the Plan to the Stock Plan Committee of the Board or to such
other committee appointed by the Board consisting of one or more senior
executive officers of the Company who are also members of the Board, under such
conditions and limitations as the Board or the Committee may from time to time
establish, except that only the Committee may make any determinations regarding
awards to participants who are subject to Section 16 of the Securities Exchange
Act of 1934, as amended (the "1934 Act").
2.4 Finality of Committee Determinations
All decisions made by the Committee or its delegate pursuant to the provisions
of the Plan and all determinations and selections made by the Committee or its
delegate pursuant to such provisions and related orders or resolutions of the
Board shall be final and conclusive.
26
<PAGE> 27
3. Eligibility
Awards may be granted under the Plan to those officers and employees of the
Company as the Committee, the Board or a delegate designated in accordance with
Section 2.3 from time to time selects. Awards may also be made to consultants,
agents, advisors and independent contractors who provide services to the
Company. Individuals who are not employees of the Company may not be granted
Incentive Stock Options (as defined in Section 6.2). For purposes of this
Section 3, the "Company," with respect to all awards under the Plan other than
Incentive Stock Options, includes any entity that is directly or indirectly
controlled by the Company or any entity in which the Company has a significant
equity interest, as determined by the Committee. With respect to Incentive
Stock Options, the "Company" includes any parent or subsidiary of the Company
in accordance with Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").
4. Shares Subject to the Plan
4.1 Number and Source
The stock offered under the Plan shall be shares of Common Stock and may be
unissued shares or shares now held or subsequently acquired by the Company as
treasury shares, as the Board, or a Board committee to which the Board may
delegate such authority, may from time to time determine. Subject to adjustment
as provided in Sections 4.3 and 5, the aggregate number of shares that may be
issued under the Plan shall not exceed thirty million (30,000,000). Subject to
adjustment as provided in Sections 4.3 and 5, the aggregate number of shares
that may be issued under awards granted pursuant to Section 6.4 that are not
subject to restrictions based on the achievement of specified performance goals
shall not exceed six million (6,000,000). The aggregate number of shares that
may be covered by awards granted to any one individual in any one calendar year
shall not exceed one million two hundred thousand (1,200,000).
4.2 Shares Available
Any shares subject to an award granted under the Plan that is forfeited,
terminated or canceled or, in the case of awards granted under Section 6.4, any
shares that do not vest shall again be available for the granting of awards
under the Plan. In instances where a stock appreciation right is settled in
cash, the shares covered by such award shall remain available for the granting
of other awards. Likewise, the payment of cash dividends and dividend
equivalents paid in cash in conjunction with outstanding awards shall not be
counted against the shares available for issuance.
4.3 Acquisitions
The Board, in its sole discretion, may increase the aggregate number of shares
of Common Stock to be delivered under Section 4.1 by up to three million
(3,000,000) shares in the event the Company acquires any other corporation or
business entity and the Company agrees to assume the acquired entity's
obligations for outstanding stock options or stock grant commitments or
otherwise grants awards to individuals in connection with such acquisition.
27
<PAGE> 28
5. Adjustment of Shares Available
The aggregate numbers and kind of shares available for awards under the Plan,
the maximum number and kind of shares that may be subject to awards to any
individual under the Plan, the number and kind of shares covered by each
outstanding award, and the exercise price per share (but not the total price)
for stock options, stock appreciation rights or similar awards outstanding
under the Plan shall all be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from any
split-up, combination or exchange of shares, consolidation, spin-off or
recapitalization of shares or any like capital adjustment or the payment of any
stock dividend.
6. Awards
6.1 Types of Awards
The Committee shall have the authority, in its sole discretion, to determine
the type or types of awards to be granted under the Plan. Such awards may
include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options (as defined in Section 6.2), stock appreciation rights or restricted
stock awards. Such awards may be granted either alone, in addition to or in
tandem with any other type of award granted under the Plan.
6.2 Stock Options
The Committee may grant stock options, designated as "Incentive Stock Options,"
which comply with the provisions of Section 422 of the Code or any successor
statutory provision, or "Nonqualified Stock Options." The price at which shares
may be purchased upon exercise of a particular option shall be determined by
the Committee but shall not be less than 100% of the Fair Market Value of such
shares at the time such option is granted. For purposes of the Plan, "Fair
Market Value" as to a particular day equals the mean of the high and low per
share trading prices for the Common Stock as reported for such day in The Wall
Street Journal or such other source as the Committee deems reliable. The
Committee shall set the term of each stock option, but no Incentive Stock
Option shall be exercisable more than 10 years after the date such option is
granted and, to the extent the aggregate Fair Market Value (determined as of
the date the option is granted) of Common Stock with respect to which Incentive
Stock Options granted to a particular individual become exercisable for the
first time during any calendar year (under the Plan and all other stock option
plans of the Company) exceeds $100,000 (or such corresponding amount as may be
set by the Code), such options shall be treated as Nonqualified Stock Options.
6.3 Stock Appreciation Rights
The Committee may grant stock appreciation rights to individuals, either in
tandem with stock options that have been or are granted under the Plan or with
respect to a number of shares on which an option is not granted. A stock
appreciation right shall entitle the holder to receive, with respect to each
share of stock as to which the right is exercised, payment in an amount equal
to the excess of the share's Fair Market Value on the date the right is
exercised over its Fair Market Value on the date the right was granted. Such
28
<PAGE> 29
payment may be made in cash or in shares of Common Stock valued at the Fair
Market Value as of the date of the surrender, or partly in cash and partly in
shares of Common Stock, as determined by the Committee in its sole discretion.
The Committee may establish a maximum appreciation value payable for stock
appreciation rights.
6.4 Restricted Stock Awards
(a) The Committee may grant restricted stock awards under the Plan in Common
Stock or denominated in units of Common Stock. The Committee, in its sole
discretion, will make such awards subject to conditions and restrictions, as
set forth in the instrument evidencing the award, which may be based on
continuous service with the Company or the attainment of certain performance
goals related to profits, profit growth, profit-related return ratios, cash
flow or shareholder returns, where such goals may be stated in absolute terms
or relative to comparison companies or indices to be achieved during a period
of time. No more than three million (3,000,000) shares may be issued subject to
restrictions based on continuous employment or services for less than three
years (except where employment or services are terminated because an individual
dies, retires, is laid off or becomes disabled).
(b) The Committee may choose, at the time of granting an award or at any time
thereafter up to the time of payment of the award, to include as part of such
award an entitlement to receive dividends or dividend equivalents, subject to
such terms as the Committee may establish. All dividends or dividend
equivalents that are not paid currently may, in the Committee's sole
discretion, accrue interest and be paid to the participant if, when and to the
extent such award is paid.
6.5 Payment; Deferral
Awards granted under the Plan may be settled through cash payments, the
delivery of Common Stock or the granting of awards or combinations thereof as
the Committee shall determine. Any award settlement, including payment
deferrals, may be subject to such conditions, restrictions and contingencies as
the Committee shall determine. The Committee may permit or require the deferral
of any award payment, subject to such rules and procedures as it may establish,
which may include provisions for the payment or crediting of interest, or
dividend equivalents, including converting such credits to deferred stock unit
equivalents.
7. Option Exercise
7.1 Employment or Service Requirement
Each award agreement or notice for a stock option or stock appreciation right
shall contain a provision that the option or right shall not be exercisable
unless the optionee remains in the Company's employ or service at least 12
months after the granting of the option or right.
7.2 Precondition to Stock Issuance
No shares shall be delivered pursuant to the exercise of any stock option or
stock appreciation right, in whole or in part, until qualified for delivery
29
<PAGE> 30
under such securities laws and regulations as may be deemed by the Committee to
be applicable thereto and until, in the case of the exercise of an option,
payment in full of the option price thereof (in cash or stock as provided in
Section 7.4) is received by the Company. No holder of an option or stock
appreciation right, or any legal representative, legatee or distributee shall
be or be deemed to be a holder of any shares subject to such option or right
unless and until such shares are issued.
7.3 No Fractional Shares
No stock option may at any time be exercised with respect to a fractional
share. No fractional share shall be issued in the event shares are issued
pursuant to the exercise of a stock appreciation right; however, a fractional
stock appreciation right may be exercised for cash.
7.4 Form of Payment
An optionee may exercise a stock option using as the form of payment (a) cash
or cash equivalent (b) stock-for-stock payment (as described in Section 7.5),
(c) any combination of the above or (d) such other means as the Committee may
approve.
7.5 Stock for Stock
An optionee who owns Common Stock may use such shares, the value of which shall
be determined as the Fair Market Value of such shares on the date the stock
option is exercised, as a form of payment to exercise stock options under the
Plan. The Committee, in its sole discretion, may restrict or rescind this right
by notice to optionees. A stock option may be exercised in such manner only by
tendering (actually or by attestation) to the Company whole shares of Common
Stock having a Fair Market Value equal to or less than the exercise price. If
an option is exercised by surrender of stock having a Fair Market Value less
than the exercise price, the optionee must pay the difference in cash.
8. Transferability
The right of any award recipient to exercise an award granted under the Plan
shall, during such recipient's lifetime, be exercisable only by such recipient,
and shall not be assignable or transferable by such recipient other than by
will or the laws of descent and distribution.
9. Withholding Taxes; Other Deductions
The Company shall have the right to deduct from any settlement of an award made
under the Plan, including the delivery or vesting of shares, (a) an amount
sufficient to cover withholding as required by law for any federal, state or
local taxes and (b) any amounts due from the recipient of such award to the
Company or to any subsidiary of the Company or to take such other action as may
be necessary to satisfy any such withholding or other obligations, including
withholding from any other cash amounts due or to become due from the Company
to such recipient an amount equal to such taxes or obligations.
30
<PAGE> 31
10. Termination of Employment or Services
The terms and conditions under which an award may be exercised following
termination of a participant's employment or services with the Company shall be
determined by the Committee; provided, that if a participant's employment or
services terminates for any reason within 12 months of the grant date of a
stock option or stock appreciation right, such option or right shall expire as
of the date of such termination of employment or services and the participant
and the participant's legal representative shall forfeit any and all rights
pertaining to such award.
11. Term of the Plan
The Plan shall become effective as of May 1, 1997 and shall remain in full
force and effect through April 30, 2007, unless sooner terminated by the Board.
After the Plan is terminated, no future awards may be granted but awards
previously granted shall remain outstanding in accordance with their applicable
terms and conditions and the Plan's terms and conditions.
12. Plan Amendment
The Committee or the Board may amend, suspend or terminate the Plan at any
time; provided that no such amendment shall be made without the approval of the
Company's shareholders (a) that would increase the number of shares available
for issuance in accordance with Section 4 or (b) if such approval is required
(i) to comply with Section 422 of the Code with respect to Incentive Stock
Options or (ii) for purposes of Section 162(m) of the Code.
13. Bifurcation of the Plan
Notwithstanding anything in the Plan to the contrary, the Board, in its sole
discretion, may bifurcate the Plan so as to restrict, limit or condition the
use of any provision of the Plan to participants who are officers subject to
Section 16 of the 1934 Act without so restricting, limiting or conditioning the
Plan with respect to other participants.
31
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,154
<SECURITIES> 302
<RECEIVABLES> 4,135
<ALLOWANCES> 239
<INVENTORY> 10,192
<CURRENT-ASSETS> 18,825
<PP&E> 19,865
<DEPRECIATION> 11,337
<TOTAL-ASSETS> 37,942
<CURRENT-LIABILITIES> 13,757
<BONDS> 6,803
0
0
<COMMON> 5,059
<OTHER-SE> 7,896
<TOTAL-LIABILITY-AND-EQUITY> 37,942
<SALES> 26,330
<TOTAL-REVENUES> 26,330
<CGS> 0
<TOTAL-COSTS> 25,813
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 227
<INCOME-PRETAX> 439
<INCOME-TAX> 131
<INCOME-CONTINUING> 308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 308
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
</TABLE>
