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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, 1999
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, 1999, there were 960,437,667 shares of common stock, $5.00 par
value, issued and outstanding.
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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
- ------------------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------
Sales and other operating revenues $29,524 $26,334 $15,132 $13,389
Cost of products and services 26,181 23,757 13,418 11,980
- ------------------------------------------------------------------------------
Gross profit 3,343 2,577 1,714 1,409
Equity in income (loss) from joint ventures 12 (43) 4 4
General and administrative expense 1,016 960 525 467
Research and development expense 711 976 350 489
Share-based plans expense 96 63 50 41
- ------------------------------------------------------------------------------
Operating earnings 1,532 535 793 416
Other income, principally interest 375 131 335 64
Interest and debt expense (219) (227) (110) (114)
- ------------------------------------------------------------------------------
Earnings before income taxes 1,688 439 1,018 366
Income taxes 518 131 317 108
- ------------------------------------------------------------------------------
Net earnings $ 1,170 $ 308 $ 701 $ 258
==============================================================================
Basic earnings per share $1.25 $.32 $.75 $.26
==============================================================================
Diluted earnings per share $1.24 $.31 $.75 $.26
==============================================================================
Cash dividends per share $ .28 $.28 $.14 $.14
==============================================================================
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)
June 30 December 31
1999 1998
- ------------------------------------------------------------------------------
Assets (Unaudited)
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 2,777 $ 2,183
Short-term investments 225 279
Accounts receivable 3,698 3,288
Current portion of customer and commercial financing 609 781
Deferred income taxes 1,503 1,495
Inventories, net of advances and progress billings 8,631 8,349
- ------------------------------------------------------------------------------
Total current assets 17,443 16,375
Customer and commercial financing 5,038 4,930
Property, plant and equipment, net 8,601 8,589
Deferred income taxes 397 411
Goodwill 2,270 2,312
Prepaid pension expense 3,544 3,513
Other assets 768 542
- ------------------------------------------------------------------------------
$38,061 $36,672
==============================================================================
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------
Accounts payable and other liabilities $11,681 $10,733
Advances in excess of related costs 1,203 1,251
Income taxes payable 721 569
Short-term debt and current portion of long-term debt 810 869
- ------------------------------------------------------------------------------
Total current liabilities 14,415 13,422
Accrued retiree health care 4,873 4,831
Long-term debt 6,097 6,103
Shareholders' equity:
Common shares, par value $5.00 -
1,200,000,000 shares authorized;
Shares issued - 1,011,870,159 and 1,011,870,159 5,059 5,059
Additional paid-in capital 1,653 1,147
Treasury shares, at cost - 50,535,444 and 35,845,731 (1,938) (1,321)
Retained earnings 9,605 8,706
Accumulated other comprehensive income (23) (23)
Unearned compensation (14) (17)
ShareValue Trust shares - 38,445,046 and 38,166,601 (1,666) (1,235)
- ------------------------------------------------------------------------------
Total shareholders' equity 12,676 12,316
- ------------------------------------------------------------------------------
$38,061 $36,672
==============================================================================
See notes to consolidated financial statements.
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THE BOEING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six months ended
June 30
- ------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------
Cash flows - operating activities:
Net earnings $1,170 $ 308
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Share-based plans 96 63
Depreciation and amortization 802 804
Changes in assets and liabilities -
Short-term investments 54 427
Accounts receivable (410) (114)
Inventories, net of advances and progress billings (282) (1,225)
Accounts payable and other liabilities 950 (85)
Advances in excess of related costs (48) (218)
Income taxes payable and deferred 158 197
Other (268) (77)
Accrued retiree health care 42 (4)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 2,264 76
- ------------------------------------------------------------------------------
Cash flows - investing activities:
Customer financing and properties on lease, additions (934) (451)
Customer financing and properties on lease, reductions 911 368
Property, plant and equipment, net additions (674) (836)
- ------------------------------------------------------------------------------
Net cash used by investing activities (697) (919)
- ------------------------------------------------------------------------------
Cash flows - financing activities:
New borrowings 145 414
Debt repayments (210) (465)
Common shares purchased (676) (115)
Stock options exercised, other 41 26
Dividends paid (273) (283)
- ------------------------------------------------------------------------------
Net cash used by financing activities (973) (423)
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 594 (1,266)
Cash and cash equivalents at beginning of year 2,183 4,420
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of 2nd quarter $2,777 $3,154
==============================================================================
See notes to consolidated financial statements.
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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, 1999, 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 1998 Annual
Report. Certain reclassifications have been made to prior periods to conform
with current reporting.
Note 2 - Recognition of First Quarter 1998 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
represented 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 at
the end of the first quarter of 1998 represented the amount by which the
estimated production costs exceed the estimated revenue for the first 400 units
of the program. The current accounting quantity for the Next-Generation 737
program is 1,200 units. As of June 30, 1999, cumulative Next-Generation 737
airplane deliveries totaled 307.
Note 3 - Earnings per Share
The weighted average number of shares outstanding (in millions) used to compute
earnings per share for the periods ended June 30, 1999 and 1998, are as follows:
First Six Months Second Quarter
---------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Basic shares 934.2 973.2 931.3 972.9
Diluted shares 942.6 984.7 940.5 984.8
Basic earnings per share are calculated based on the weighted average number of
shares outstanding, excluding treasury shares and the outstanding shares held by
the ShareValue Trust. Diluted earnings per share are calculated based on that
same number of shares plus additional dilutive shares representing stock
distributable under stock option plans computed using the treasury stock method
plus contingently issuable shares from other share-based plans.
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Note 4 - Income Taxes
The effective income tax provision rate of 30.7% for the first six months of
1999 is lower than the statutory federal rate principally due to Foreign Sales
Corporation tax benefits and current-year research and development tax credits.
Partially offsetting this reduction from the statutory federal rate are state
income taxes and non-deductibility of goodwill. Net income tax payments
(refunds) were $563 and $(34) for the six months ended June 30, 1999 and 1998.
In the second quarter the Internal Revenue Service (IRS) and the Company
reached a partial agreement on an IRS examination of the years 1988 through
1991. As a result of the partial agreement between the Company and the IRS
for these years, refunds and payments of tax and interest were due to or
payable by the Company. Second quarter net earnings included the net interest
income of $289 pretax associated with this partial agreement, amounting to
$.19 per share after tax.
Note 5 - Accounts Receivable
Accounts receivable consisted of the following:
June 30 December 31
1999 1998
- ------------------------------------------------------------------------------
U.S. Government contracts $1,865 $2,058
Other 1,833 1,230
- ------------------------------------------------------------------------------
$3,698 $3,288
==============================================================================
Note 6 - Inventories
Inventories consisted of the following:
June 30 December 31
1999 1998
- ------------------------------------------------------------------------------
Commercial aircraft programs
and long-term contracts in progress $ 22,505 $ 24,812
Commercial spare parts, general stock
materials and other 2,158 2,162
- ------------------------------------------------------------------------------
24,663 26,974
Less advances and progress billings (16,032) (18,625)
- ------------------------------------------------------------------------------
$ 8,631 $ 8,349
==============================================================================
Inventory costs at June 30, 1999, included unamortized tooling of $1,702 and
$701 relating to the 777 and Next-Generation 737 programs, and excess deferred
production costs of $1,649 and $624 relating to the 777 and Next-Generation 737
programs.
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Note 7 - Customer and Commercial Financing
Customer and commercial financing consisted of the following:
June 30 December 31
1999 1998
- ------------------------------------------------------------------------------
Aircraft financing
Notes receivable $ 635 $ 859
Investment in sales-type/financing leases 1,267 1,325
Operating lease equipment, at cost,
less accumulated depreciation of $228 and $195 2,228 2,201
Commercial equipment financing
Notes receivable 617 534
Investment in sales-type/financing leases 590 548
Operating lease equipment, at cost,
less accumulated depreciation of $120 and $129 514 510
- ------------------------------------------------------------------------------
Less valuation allowance (204) (266)
- ------------------------------------------------------------------------------
$5,647 $5,711
==============================================================================
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. Commercial equipment financing also includes amounts
attributable to regional aircraft, principally with fewer than 80 seats.
The change in the valuation allowance for the first six months of 1999
consisted of the following:
Valuation
Allowance
- ------------------------------------------------------------------------------
Beginning balance - December 31, 1998 $ (266)
Charged to costs and expenses (24)
Reduction in customer and commercial financing assets 86
- ------------------------------------------------------------------------------
Ending balance - June 30, 1999 $ (204)
==============================================================================
Note 8 - Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following:
June 30 December 31
1999 1998
- ------------------------------------------------------------------------------
Accounts payable $ 5,419 $ 5,263
Accrued compensation and employee benefit costs 2,478 2,326
Lease and other deposits 446 539
Other 3,338 2,605
- ------------------------------------------------------------------------------
$11,681 $10,733
==============================================================================
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Note 9 - Debt
Short- and long-term debt consisted of the following:
June 30 December 31
1999 1998
- ------------------------------------------------------------------------------
Unsecured debentures and notes:
8 7/8% due Sep. 15, 1999 $ 300 $ 304
8.25% due Jul. 1, 2000 200 200
8 3/8% due Feb. 15, 2001 178 180
7.565% due Mar. 30, 2002 53 54
9.25% due Apr. 1, 2002 120 120
6 3/4% due Sep. 15, 2002 298 298
6.35% due Jun. 15, 2003 300 299
7 7/8% due Feb. 15, 2005 207 208
6 5/8% due Jun. 1, 2005 293 292
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 300 300
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,
6.0% - 9.4%, due through 2011 48 55
Senior medium-term notes,
5.5% - 13.6%, due through 2017 1,351 1,320
Subordinated medium-term notes,
5.5% - 8.3%, due through 2004 45 55
Capital lease obligations due through 2008 408 433
Other notes 271 319
- ------------------------------------------------------------------------------
$6,907 $6,972
==============================================================================
The Company has $2,400 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 $261 and $260 for the six-
month periods ended June 30, 1999 and 1998, and interest payments were $239 and
$221, respectively.
During the fourth quarter of 1997, Boeing Capital Corporation (BCC), a
corporation wholly owned by the Company, filed a shelf registration statement
with the Securities and Exchange Commission (SEC) for up to $1,200 aggregate
principal amount of debt securities. As of June 30, 1999, BCC issued $716 of
the $1,200 medium-term notes authorized. On July 7, 1999, BCC filed with the
SEC a Form S-3 Registration Statement for a public shelf registration of
$2,500 of its debt securities.
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Note 10 - Shareholders' Equity
Changes in shareholders' equity for the six-month periods ended June 30, 1999
and 1998, consisted of the following:
- ------------------------------------------------------------------------------
1999 1998
(Shares in thousands) Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Common stock
Beginning balance - January 1 1,011,870 $ 5,059 1,000,030 $ 5,000
Shares issued for the ShareValue Trust 11,253 56
Shares issued for incentive stock plans 587 3
- ------------------------------------------------------------------------------
Ending balance - June 30 1,011,870 $ 5,059 1,011,870 $ 5,059
==============================================================================
Additional paid-in capital
Beginning balance - January 1 $ 1,147 $ 1,090
Share-based compensation 96 41
Treasury shares issued for
incentive stock plans, net (26) (27)
Tax benefit related to incentive
stock plans 5 12
Stock appreciation rights expired
or surrendered 6
Shares issued for the ShareValue Trust 494
ShareValue Trust market value adjustment 431 (118)
- ------------------------------------------------------------------------------
Ending balance - June 30 $ 1,653 $ 1,498
==============================================================================
Treasury stock
Beginning balance - January 1 35,846 $(1,321) 165 $ (9)
Treasury shares issued for incentive
stock plans, net (1,597) 59 (1,084) 55
Treasury shares acquired 16,286 (676) 2,277 (115)
- ------------------------------------------------------------------------------
Ending balance - June 30 50,535 $(1,938) 1,358 $ (69)
==============================================================================
Retained earnings
Beginning balance - January 1 $ 8,706 $ 8,147
Net earnings 1,170 308
Cash dividends declared (271) (285)
- ------------------------------------------------------------------------------
Ending balance - June 30 $ 9,605 $ 8,170
==============================================================================
Accumulated other comprehensive income
Beginning balance - January 1 $ (23)
- ------------------------------------------------------------------------------
Ending balance - June 30 $ (23)
==============================================================================
Unearned compensation
Beginning balance - January 1 $ (17) $ (20)
Forfeitures 2 3
Amortization 1 1
- ------------------------------------------------------------------------------
Ending balance - June 30 $ (14) $ (16)
==============================================================================
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Note 10 - Shareholders' Equity (continued)
Changes in shareholders' equity for the six-month periods ended June 30, 1999
and 1998, consisted of the following:
- ------------------------------------------------------------------------------
1999 1998
(Shares in thousands) Shares Amount Shares Amount
- ------------------------------------------------------------------------------
ShareValue Trust
Beginning balance - January 1 38,167 $(1,235) 26,385 $(1,255)
Shares acquired from dividend
reinvestment 278 215
Shares issued from common stock 11,253 (550)
Market value adjustment (431) 118
- ------------------------------------------------------------------------------
Ending balance - June 30 38,445 $(1,666) 37,853 $(1,687)
==============================================================================
For the six months ended June 30, 1999 and 1998, the Company did not incur items
to be reported in comprehensive income that were not already included in the
reported net earnings. As a result, comprehensive income and net earnings were
the same for these periods.
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.
Performance Shares are stock units that are convertible to common stock
contingent upon stock price performance. If, at any time up to five years after
award, the stock price reaches and maintains a price equal to 161.0% of the
stock price at the date of the award (representing a growth rate of 10%
compounded annually for five years), 25% of the Performance Shares awarded are
convertible to common stock. Likewise, at stock prices equal to 168.5%, 176.2%,
182.4%, 192.5% and 201.1% of the stock price at the date of award, the
cumulative portion of awarded Performance Shares convertible to common stock are
40%, 55%, 75%, 100% and 125%, respectively. Performance Share awards not
converted to common stock expire five years after the date of the award;
however, the Compensation Committee of the Board of Directors may, in its
discretion, allow vesting of up to 100% of the target Performance Shares if the
Company's total shareholder return (stock price appreciation plus dividends)
during the five-year performance period exceeds the average total shareholder
return of the S&P 500 over the same period.
In the first six months of 1999, the Company awarded to executive management 5.2
million Performance Shares at an issue price of $36.25. The total number of
Performance Shares outstanding as of June 30, 1999, was 8.4 million.
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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.
In 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, 1999, 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 July 1, 1999, the United States Court of Appeals for the Federal Circuit
reversed a March 31, 1998, judgment of the United States Court of Federal Claims
for the Team. The 1998 judgment was based on a determination that the
Government had not exercised the required discretion before issuing a
termination for default. It converted the termination to a termination for
convenience, and determined the Team was entitled to be paid $1,200, plus
statutory interest from June 26, 1991, until paid. The Court of Appeals
remanded the case to the Court of Federal Claims for a determination as to
whether the Government is able to sustain the burden of showing a default was
justified and other proceedings. Final resolution of the A-12 litigation will
depend on such litigation and possible further appeals, or negotiations with
the Government.
In the Company's opinion, the loss provision continues to provide adequately
for the reasonably possible reduction in value of A-12 net contracts in
process as of June 30, 1999, as a result of a termination of the contract for
the convenience of the Government. The Company has been provided with an
opinion of outside counsel that (i) the Government's termination of the
contract for default was contrary to law and fact, (ii) the rights and
obligations of the Company are the same as if the termination had been issued
for the convenience of the Government, and (iii) subject to prevailing on the
issue that the termination is properly one for the convenience of the
Government, the probable recovery by the Company is not less than $250.
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Note 12 - Contingencies (continued)
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 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 Military Aircraft and Missiles 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.
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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
1999 1998 1999 1998
- ------------------------------------------------------------------------------
Revenues:
Commercial Airplanes $19,890 $16,791 $10,109 $ 8,704
Military Aircraft and Missiles 6,177 5,901 3,210 2,952
Space and Communications 3,282 3,582 1,739 1,759
Customer and Commercial Financing / Other 384 405 197 206
Accounting differences / eliminations (209) (345) (123) (232)
- ------------------------------------------------------------------------------
Operating revenues $29,524 $26,334 $15,132 $13,389
==============================================================================
Earnings (loss):
Commercial Airplanes $ 817 $ (178) $ 435 $ (201)
Military Aircraft and Missiles 690 552 368 300
Space and Communications 155 165 94 121
Customer and Commercial Financing / Other 219 235 117 111
Accounting differences / eliminations (120) (50) (91) 201
Share-based plans (96) (63) (50) (41)
Other unallocated expense (133) (126) (80) (75)
- ------------------------------------------------------------------------------
Operating earnings 1,532 535 793 416
Other income, principally interest 375 131 335 64
Interest and debt expense (219) (227) (110) (114)
- ------------------------------------------------------------------------------
Earnings before income taxes 1,688 439 1,018 366
Income taxes 518 131 317 108
- ------------------------------------------------------------------------------
Net earnings $ 1,170 $ 308 $ 701 $ 258
==============================================================================
Research and development:
Commercial Airplanes $ 366 $ 564 $ 184 $ 281
Military Aircraft and Missiles 119 137 57 66
Space and Communications 226 275 109 142
- ------------------------------------------------------------------------------
Total research and development expense $ 711 $ 976 $ 350 $ 489
==============================================================================
For internal reporting purposes, the Company records Commercial Airplanes
revenue for airplanes transferred to other segments, and such transfers may
include airplanes accounted for as operating leases that are considered
transferred to the Customer and Commercial Financing / Other segment. The
revenue for these transfers is eliminated in the 'Accounting differences /
eliminations' caption.
13
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Note 13 - Business Segment Data (continued)
The Company records cost of sales for 7-series commercial airplane programs
under the program method of accounting described in Note 1 to the audited
consolidated financial statements included in the Company's 1998 Annual
Report. For internal measurement purposes, the Commercial Airplanes segment
records cost of sales based on the cost of specific units delivered, and to
the extent that inventoriable costs exceed estimated revenue, a loss is not
recognized until delivery is made, which is not in accordance with generally
accepted accounting principles. The adjustment between the internal
measurement method and the program accounting method of recording cost of
sales is included in the 'Accounting differences / eliminations' caption of
net earnings. This adjustment totaled $(9) and $(57) for the six months ended
June 30, 1999 and 1998.
The 'Accounting differences / eliminations' caption of net earnings also
includes the impact of cost measurement differences between generally accepted
accounting principles and federal cost accounting standards. This includes the
following: the difference between pension costs recognized under SFAS No. 87,
Employers' Accounting for Pensions, and under federal cost accounting
standards, principally on a funding basis; the differences between retiree
health care costs recognized under SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, and under federal cost accounting
standards, principally on a cash basis; and the differences in timing of cost
recognition related to certain activities, such as facilities consolidation,
undertaken as a result of mergers and acquisitions whereby such costs are
expensed under generally accepted accounting principles and deferred under
federal cost accounting standards. Additionally, the amortization of costs
capitalized in accordance with SFAS No. 34, Capitalization of Interest Cost,
is included in the 'Accounting differences / eliminations' caption.
14
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Revenue
- -------
Sales of $29.5 billion for the first six months of 1999 were 12% higher than
sales for the comparable period of 1998. A total of 313 commercial jet aircraft
were delivered, compared with 245 in the first six months of 1998.
Approximately 620 commercial aircraft deliveries are currently projected for the
full year 1999, compared with 559 in 1998. Total sales for 1999 are projected
to be in the $58 billion range, compared with $56 billion in 1998.
Commercial jet aircraft deliveries were as follows:
Six Months 2nd Quarter
-------------------------------------------------------------
Model 1999 1998 1999 1998
-------------------------------------------------------------
737 25 67 11 33
737 Next-Generation 139 50 78 38
747 26 21 12 9
757 36 23 19 12
767 25 24 14 14
777 45 37 22 17
MD-80 8 (8) 3 6 (6) 1
MD-90 6 14 1 10
MD-11 3 6 (2) 2 3 (1)
-------------------------------------------------------------
Total 313 245 165 137
=============================================================
===============================================================================
| Forward-Looking Information Is Subject to Risk and Uncertainty |
| Certain statements in this report contain "forward-looking" information |
| that involves risk and uncertainty, including projections for deliveries, |
| customer financing, sales, revenues, operating margins, earnings, cash, |
| research and development expense, taxes, work force, disposition of |
| certain Company businesses, 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; customer model selections; |
| government policies and actions; price escalation; successful negotiation |
| of contracts with the Company's labor unions and favorable outcomes of |
| certain pending sales campaigns, supplier contract negotiations and asset |
| dispositions. 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 research and development, |
| production recovery, production rate increases and decreases, production |
| system initiatives, asset management plans, procurement plans, other |
| cost-reduction efforts, and Y2K readiness plans; 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 Company's commercial |
| aircraft by the U.S. Government and foreign governments; other regulatory |
| uncertainties; collective bargaining labor disputes; performance issues with|
15
<PAGE> 16
| key suppliers, subcontractors and customers; customer model selections; |
| 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; real estate market fluctuations in areas where Company|
| facilities are located; price escalation trends; changing priorities or |
| reductions in the U.S. Government or foreign 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 1998. |
===============================================================================
Commercial jet aircraft deliveries included deliveries under operating lease,
which are identified by parentheses in the previous table. Aircraft accounted
for as operating leases have minimal revenue recorded at the time of delivery.
Military Aircraft and Missiles segment deliveries included the following:
Six Months 2nd Quarter
-------------------------------------------------------------
Model 1999 1998 1999 1998
-------------------------------------------------------------
C-17 5 4 3 2
F-15 21 13 12 6
F/A-18 C/D 14 16 8 6
F/A-18 E/F 6 - 4 -
T-45TS 6 7 3 3
CH-47 7 6 4 3
757-C-32A - 2 - 2
The F/A-18 E/F aircraft are under a cost-type contract; sales are recognized as
work progresses rather than upon delivery.
Space and Communications segment deliveries included the following:
Six Months 2nd Quarter
-------------------------------------------------------------
Model 1999 1998 1999 1998
-------------------------------------------------------------
767 AWACS 2 2 - -
Delta II 5 7 3 3
Delta III 1 - 1 -
Earnings
- --------
Net earnings for the second quarter of 1999 were $701 million, compared with
$258 million for the same period last year. In the second quarter the Internal
Revenue Service (IRS) and the Company reached a partial agreement on an IRS
examination of the years 1988 through 1991. As a result of the partial
agreement between the Company and the IRS for these years, refunds and payments
of tax and interest were due to or payable by the Company. Second quarter net
earnings included the net interest income of $289 million pretax associated with
this partial agreement, amounting to $.19 per share after tax.
16
<PAGE> 17
Research and development expense totaled $350 million for the quarter, compared
with $489 million for the same period of 1998. Commercial Airplanes segment
research and development expense of $184 million for second quarter 1999 was
lower than the $281 million expense for second quarter 1998, principally due to
reduced spending attributable to the 767-400ER, 757-300 and 737 Next-Generation
models. Based on current programs and schedules, research and development
expense for the full year 1999 is projected to be in the $1.4 billion to $1.6
billion range, compared with $1.9 billion in 1998.
Income taxes have been settled with the IRS for all years through 1978, and all
IRS examinations have been completed through 1991. Issues not resolved at the
IRS examination stage are either in appeals with the IRS or are being litigated.
The Company has filed refund claims for additional research and development tax
credits, primarily in relation to its fixed-price government development
programs. Successful resolutions will result in increased income to the
Company.
In December 1996, The Boeing Company filed suit in the U.S. District Court for
the Western District of Washington for the refund of over $400 million in
federal income taxes and related interest. The suit challenged the IRS method
of allocating research and development costs for the purpose of determining tax
incentive benefits on export sales through the Company's Domestic International
Sales Corporation (DISC) and its Foreign Sales Corporation (FSC) for the years
1979 through 1987. In September 1998, the District Court granted the Company's
motion for summary judgment. The U.S. Department of Justice has appealed this
decision. If the Company were to prevail, the refund would include interest
computed to the payment date. The issue could affect tax computations for
subsequent years; however, the financial impact would depend on the final
resolution of audits for those years.
The Company has significant financing assets and off-balance-sheet commitments
that are impacted by the market value of various jet aircraft, including the
MD-11 trijet model. The Company believes that it has appropriately assessed
the impact of aircraft market values on accounting for such commitments and
financing assets. A significant deterioration in the MD-11 market value,
however, could result in the requirement to adjust related reserves. The
Company will continue to monitor this market.
Operating Earnings
- ------------------
Commercial Airplanes
Second-quarter 1999 commercial jet aircraft deliveries totaled 165, compared
with 137 in the same period in 1998. The overall Commercial Airplanes segment
operating profit margin, based on the unit cost of airplanes delivered, was
approximately 4.3 percent for the second quarter of 1999, compared with negative
2.3 percent for the same period in 1998. This improved margin was principally
attributable to further cost improvement on Next-Generation 737s and 777s, a
greater number of deliveries, and reduced research and development spending in
the second quarter of 1999, compared with the same period in 1998.
The Company continues to closely monitor the economic situation in Asia, which
has the potential to impact future deliveries, particularly widebody models.
Production will continue to be adjusted to reflect customer requirements and the
Company's capabilities.
17
<PAGE> 18
Military Aircraft and Missiles
Military Aircraft and Missiles segment second-quarter 1999 operating earnings
were $368 million, a 23 percent increase over the $300 million operating
earnings for the same period in 1998. The segment's operating margin was 11.5
percent for the quarter, up from 10.2 percent in the comparable period for 1998.
Second quarter 1999 included a pretax charge of approximately $45 million
related to a decision by the government of Greece to forego the purchase of F-15
aircraft. The charge was principally offset by increased deliveries of fighter
and transport aircraft.
Firm orders of F-15s will continue production through early 2000. The Company
currently has significant exposure related to long-lead requirements for the
F-15 program for deliveries in 2000 and beyond. The government of Israel
announced on July 18, 1999, its intention to purchase 50 Lockheed Martin F-16
aircraft; however, the Company's contract proposal with the government of Israel
to purchase F-15 aircraft will remain in effect through August 20, 1999. The
Company is actively pursuing F-15 aircraft sales to the U.S. Government and
other foreign countries. The Company has made arrangements with F-15 program
suppliers and subcontractors to remain active through August 31, 1999, in
support of any potential sale. A purchase commitment in the near term will be
required to mitigate an earnings impact.
In June, the Company delivered the seventh production model of the new F/A-18
E/F Super Hornet to the U.S. Navy. A month ahead of schedule, it joins six
others in an operational evaluation that continues into the fall. The Super
Hornet program remains on cost and on schedule, and successfully concluded its
development flight test program. Production of the Company's two X-32 Joint
Strike Fighter (JSF) concept demonstrators continued to exceed program
milestones. The Company successfully mated the wing and fuselage of the first
JSF aircraft and delivered the forebody of the second significantly ahead of
schedule, below cost and under weight. The U.S. Government has stepped up
procurement of two Boeing guided munitions that performed extremely well in the
recent air campaign in Kosovo - production of the Joint Direct Attack Munition
has been accelerated and the Conventional Air Launched Cruise Missile conversion
line has been restarted.
Space and Communications
Space and Communications segment second-quarter 1999 operating earnings were $94
million, compared with $121 million operating earnings for the same period in
1998. The segment's operating margin for the second quarter was 5.4 percent,
compared with 6.9 percent for the same period in 1998, which reflected a
contract adjustment.
During the quarter, four additional launch service orders were confirmed for Sea
Launch, a sea-based launch system in which Boeing is a 40 percent partner. The
manifest now consists of 19 confirmed launches. Following the successful
demonstration launch in March, the next Sea Launch mission is scheduled later
this summer for customer DIRECTV, Inc.
18
<PAGE> 19
On July 23, 1999, the Company completed the sale of Boeing Information Services,
which provides the federal government with information and systems integration
services, to Science Applications International Corporation. The transaction
will result in a pretax gain of approximately $95 million. This action is part
of the Company's continuing efforts to focus on and grow its core businesses.
It follows the Company's sale earlier this year of the commercial helicopter
product line, and the announced sale of a technical services operation and an
electronic warfare business.
Customer and Commercial Financing / Other
Revenues consist principally of interest from financing receivables and lease
income from operating lease equipment. Segment earnings additionally reflect
depreciation on leased equipment and expenses recorded against the valuation
allowance. No interest expense on debt is included in Customer and Commercial
Financing / Other segment earnings.
Liquidity and Capital Resources
- -------------------------------
The Company's financial liquidity position remains strong, with cash and short-
term investments totaling $3.0 billion at June 30, 1999, after repurchasing 16.3
million shares for $676 million during the first six months of 1999. To date
the Company has repurchased 51.5 million shares for $2.0 billion under a share
repurchase plan approved by the Board of Directors. Total long-term debt is at
35% of total shareholders' equity plus debt. Revolving credit line agreements
with a group of major banks, totaling $2.64 billion, remain available but
unused.
Backlog
- -------
Contractual backlog of unfilled orders (which excludes purchase options and
announced orders for which definitive contracts have not been executed, and
unobligated U.S. Government contract funding) was as follows (dollars in
billions):
June 30 Mar. 31 Dec. 31
-------------------------------------------------------------
1999 1999 1998
-------------------------------------------------------------
Commercial Airplanes $ 76.9 $ 84.1 $ 86.1
Military Aircraft and Missiles 18.0 20.1 17.0
Space and Communications 9.5 9.6 9.8
-------------------------------------------------------------
Total contractual backlog $104.4 $113.8 $112.9
=============================================================
Unobligated U.S. Government contract funding not included in backlog totaled
$20.1 billion at June 30, 1999, compared with $20.7 billion at March 31, 1999,
and $23.5 billion at December 31, 1998.
19
<PAGE> 20
Year 2000 (Y2K) Date Conversion
- -------------------------------
The Y2K issue exists because many systems, including computer, product-embedded,
facilities, and factory floor production equipment systems, utilize a two-digit
date field to designate a year. As the century date change occurs, date-
sensitive systems may recognize the year 2000 as the year 1900, or not at all.
This inability to recognize or properly treat the year 2000 may cause systems to
process financial or operations information incorrectly.
State of readiness: The Company recognized this challenge early, and each
operating group started working on the problem in 1993. The Company's Y2K
strategy, to make systems "Y2K-ready," includes a common companywide focus on
policies, methods and correction tools, and coordination with customers and
suppliers. This focus has been on all systems potentially impacted by the Y2K
issue, including information technology (IT) systems and non-IT systems, such as
product-embedded, facilities and factory floor systems. Each operating group
has responsibility for its own conversion, in line with overall guidance and
oversight provided by a corporate-level steering committee.
The Company has capitalized on its history of integrating large complex systems,
and has an experienced Y2K team and Program Management Office, headed by the
Company's chief information officer. Since 1993 the Company has identified,
assessed and remediated, if necessary, over 53,000 IT and non-IT systems for Y2K
readiness. These systems are now substantially Y2K ready, with the exception of
a very few systems that are anticipated to be ready by September 30, 1999.
A companywide, coordinated process to assess supplier readiness began in the
second quarter of 1998. This process encompasses four major activities: survey
of suppliers, assessment of supplier preparedness, risk mitigation, and
contingency planning. The first two activities were completed in 1998 and the
remaining activities are scheduled for completion during the third and fourth
quarters, respectively, of 1999. The Company is currently developing
contingency plans for all high-risk suppliers to mitigate the impact.
Costs to address Y2K issues: The Company's Y2K conversion efforts have not been
budgeted and tracked as independent projects, but have occurred in conjunction
with normal sustaining activities. The Company estimates that IT Y2K conversion
efforts represent the majority of conversion efforts, and have averaged annually
approximately $35 million over the last three years, representing on average
approximately 10% of the total application-sustaining IT costs during that
period. Y2K conversion costs are expected to represent a lower percentage of
total application-sustaining IT costs in 1999. In addition to these sustaining
costs, the discretely identifiable IT costs associated with Y2K conversion
activities are expected to total $16 million. The Company does not expect a
reduction in sustaining costs when Y2K conversion activities are completed
because normal sustaining activities will be ongoing. Reprioritizing sustaining
activities to support Y2K has not had, and is not expected to have, an adverse
impact on operations.
20
<PAGE> 21
Risks associated with Y2K issues: Due to the Company's early recognition and
start on resolving the Y2K issue, the Company believes there is low risk of any
internal critical system, product-embedded system, or other critical Company
asset not being Y2K-ready by the end of 1999. The Company continues to assess
its risk exposure due to external factors and suppliers, including suppliers
outside the United States. Additionally, the Company is working with its
customers and suppliers, conducting test scenarios to assess Y2K readiness.
Although the Company has no reason to conclude that any specific supplier
represents a significant risk, the most reasonably likely worst-case Y2K
scenario would entail production disruption due to inability of suppliers to
deliver critical parts.
The Company's contingency planning has been divided into two phases: Phase I -
Develop a Year 2000 Corporate Business Continuity and Contingency Plan; and
Phase II - Implement Business Continuity and Contingency Plan through the Site
Transition Plan. Phase I is complete. The Company has developed a risk
assessment-based Year 2000 Business Continuity and Contingency Plan consistent
with the Company's computing disaster preparedness goal, which is to "reduce
vulnerability and enhance risk management." Where appropriate, this plan
leverages existing Company system and supplier contingency and disaster recovery
planning. This contingency planning incorporates information from leading
information technology organizations in the industry and government, including
the U.S. General Accounting Office (GAO) guideline, "Year 2000 Computing Crisis:
Business Continuity and Contingency Planning," dated August 1998. The plan
provides a structured approach to assist operating groups with business
continuity and contingency planning. Phase II - Implement Business Continuity
and Contingency Plan through the Site Transition Plan - is ongoing. A Site
Year 2000 Transition Plan template has been developed which outlines the
specific staffing and contingency plans for before, during and after the year
2000 rollover, and further describes the major elements required to complete
the plan. Each operating group is developing and implementing a Site Year
2000 Transition Plan. Each group's progress is reported to the Year 2000
Program Management Office on a monthly basis. The Company continues to work
closely with local, state, and federal emergency management organizations to
ensure coordinated plans are in place should infrastructure problems occur in
the year 2000.
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, 1999, the notional value of such derivatives was $529 million,
with a net unrealized gain of $13 million. Less than two percent of receipts
and expenditures are contracted in foreign currencies, and the market risk
exposure relating to currency exchange is not material.
21
<PAGE> 22
REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated statement of financial position as of June 30, 1999, the
consolidated statements of operations for the six-month periods ended June 30,
1999 and 1998, and the consolidated statements of cash flows for the six-month
periods ended June 30, 1999 and 1998, have been reviewed by the registrant's
independent accountants, Deloitte & Touche LLP, whose report covering their
review of the financial statements follows.
22
<PAGE> 23
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,
1999, and the related condensed consolidated statements of operations for the
three- and six-month periods ended June 30, 1999 and 1998, and the related
condensed consolidated statements of cash flows for the six-month periods ended
June 30, 1999 and 1998. These financial statements are the responsibility of
the Company's management.
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, 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, 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated January 26, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated statement of
financial position as of December 31, 1998, 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 15, 1999
23
<PAGE> 24
PART II - OTHER INFORMATION
Item 1. 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.
In 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, 1999, inventories included approximately $581 million
of recorded costs on the A-12 contract, against which the Company has
established a loss provision of $350 million. The amount of the provision,
which was established in 1990, was based on the Company's belief, 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 million, 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 million.
On July 1, 1999, the United States Court of Appeals for the Federal Circuit
reversed a March 31, 1998, judgment of the United States Court of Federal Claims
for the Team. The 1998 judgment was based on a determination that the
Government had not exercised the required discretion before issuing a
termination for default. It converted the termination to a termination for
convenience, and determined the Team was entitled to be paid $1,200 million,
plus statutory interest from June 26, 1991, until paid. The Court of Appeals
remanded the case to the Court of Federal Claims for a determination as to
whether the Government is able to sustain the burden of showing a default was
justified and other proceedings. Final resolution of the A-12 litigation will
depend on such litigation and possible further appeals, or negotiations with
the Government.
In the Company's opinion, the loss provision continues to provide adequately
for the reasonably possible reduction in value of A-12 net contracts in
process as of June 30, 1999, as a result of a termination of the contract for
the convenience of the Government. The Company has been provided with an
opinion of outside counsel that (i) the Government's termination of the
contract for default was contrary to law and fact, (ii) the rights and
obligations of the Company are the same as if the termination had been issued
for the convenience of the Government, and (iii) subject to prevailing on the
issue that the termination is properly one for the convenience of the
Government, the probable recovery by the Company is not less than $250
million.
24
<PAGE> 25
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
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
million in economic and non-economic damages and $26 million 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 Military Aircraft and Missiles 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.
25
<PAGE> 26
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Material Contracts.
o Management Contracts and Compensatory Plans.
Executive Layoff Benefits Plan, as amended June 28,
1999. Filed herewith.
(15) Letter from independent accountants regarding unaudited
interim financial information. Page 27.
(27) Financial Data Schedule for the six-month period ending
June 30, 1999. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
covered by this report.
- - - - - - -
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, 1999 /s/ Laurette T. Koellner
--------------- ---------------------------------------
(Date) Laurette T. Koellner
Vice President and Corporate Controller
26
<PAGE> 27
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, 1999, the
consolidated statements of operations for the three-month periods ended June 30,
1999 and 1998, and the statements of cash flows for the three-month periods
ended June 30, 1999 and 1998, have been reviewed by the registrant's independent
accountants, Deloitte & Touche LLP, whose letter regarding such unaudited
interim financial information follows.
August 11, 1999
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, 1999 and 1998 as indicated in our
report dated July 15, 1999; because we did not perform an audit, we expressed no
opinion on that information.
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, 1999, 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-
32491, 333-32499, 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 any 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
27
EXHIBIT (10)
THE BOEING COMPANY
EXECUTIVE LAYOFF BENEFITS PLAN
Includes Amendment No. 4
July 1999
Table of Contents
-----------------
Page
Introduction 1
Article 1 - Definitions 2
1.1 Affiliate or Subsidiary 2
1.2 Committee 2
1.3 Company 2
1.4 Compensation Committee 2
1.5 Effective Date 2
1.6 Employee 2
1.7 Equivalent Employment 2
1.8 Layoff Benefit 2
1.9 Layoff Event 3
1.10 Plan 3
1.11 Plan Year 3
1.12 Service 3
Article 2 - Eligibility and Layoff Event 4
2.1 Eligibility 4
2.2 Participating Groups 4
2.3 Layoff Events Occurring From Effective
Date Through June 30, 1999 4
2.4 Layoff Events Occurring From July 1, 1999
Through June 30, 2001 5
Article 3 - Layoff Benefit 6
3.1 Layoff Benefit for Layoffs Occurring From Effective
Date Through June 30, 1999 6
3.1A Layoff Benefit for Layoffs Occurring from July 1, 1999
Through June 30, 2001 6
3.2 Payment of Layoff Benefit 6
3.3 Death Benefit 8
Article 4 - Administration 9
4.1 Administration 9
4.2 Committee Liability 9
4.3 Claim Procedure 9
Article 5 - General Provisions 10
5.1 Plan Amendment and Termination 10
5.2 Funding 10
5.3 Benefit Plan Application 10
5.4 Provision Against Anticipation 10
5.5 Employment Status 10
5.6 Facility of Payment 10
5.7 Construction 11
-i-
Introduction
------------
The Boeing Company hereby establishes The Boeing Company Executive Layoff
Benefits Plan to provide for lump sum payments as layoff benefits for its
executive employees as provided in this document.
It is intended that this Plan constitute a welfare benefit severance pay
plan under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and that the plan shall be construed and interpreted in
a manner consistent with such intention.
1
Article 1
Definitions
-----------
1.1 Affiliate or Subsidiary means a member (other than The Boeing Company)
of a controlled group of corporations (as defined in Internal Revenue Code
Section 1563(a) determined without regard to Internal Revenue Code
Sections 1563(a)(4) and (e)(3)(c)), a group of trades or businesses
(whether incorporated or not) which are under common control within the
meaning of Internal Revenue Code Section 414(c), or an affiliated service
group (as defined in Internal Revenue Code Section 414(m) or 414(o)) of
which The Boeing Company is a part.
1.2 Committee means the Employee Benefit Plans Committee (or its successor)
appointed by the Board of Directors of The Boeing Company.
1.3 Company means The Boeing Company, and any Affiliate or Subsidiary which
has adopted the Plan by action of its Board of Directors if such adoption
has been approved by the Compensation Committee or by such corporate
officers as the Compensation Committee may designate.
1.4 Compensation Committee means the Compensation Committee appointed by
the Board of Directors of The Boeing Company.
1.5 Effective Date means the closing date, August 1, 1997, of the Agreement
and Plan of Merger dated as of December 14, 1996 among The Boeing Company,
West Acquisition Corporation, a wholly-owned subsidiary of The Boeing
Company, and McDonnell Douglas Corporation.
1.6 Employee means a person who is employed by the Company including a person
on an approved leave of absence.
1.7 Equivalent Employment means an employment offer made prior to a Layoff
Event
a) at an annual base salary equal to no less than 90% of the Employee's
base salary at the time of the offer,
b) if the Employee is eligible for incentive compensation, with a target
under the applicable incentive compensation plan which is no less than
90% of the Employee's target at the time of the offer,
c) for a job which is located within 70 miles of the normal location of
the Employee's employment at the time of the offer.
1.8 Layoff Benefit is defined in Article 3.
2
1.9 Layoff Event is defined in Section 2.3 and Section 2.4.
1.10 Plan means The Boeing Company Executive Layoff Benefits Plan.
1.11 Plan Year means the calendar year.
1.12 Service shall be determined in the same manner as the service time
calculation under the Company Service Awards Program procedure.
3
Article 2
Eligibility and Layoff Event
----------------------------
2.1 Eligibility
In order to be eligible for a Layoff Benefit, an Employee must meet the
following requirements as of the date of the Layoff Event:
a) The Employee must be a member of a participating group of Employees in
accordance with Section 2.2.
b) The Employee must have at least one year of Service, and
c) A Layoff Event must occur with respect to the Employee.
2.2 Participating Groups
a) Employees of The Boeing Company who are Executive Payroll Employees
shall participate in the Plan.
b) Employees of McDonnell Douglas Corporation, a subsidiary of The Boeing
Company, who are participants in the Senior Executive Performance
Sharing Plan or the Performance Sharing Plan shall participate in the
Plan.
c) The Compensation Committee may, by written resolution, provide for
participation of other Employees as of an effective date specified in
the resolution.
2.3 Layoff Events Occurring From Effective Date Through June 30, 1999
A Layoff Event is an involuntary layoff from employment with the Company
between the Effective Date and June 30, 1999, pursuant to a merger-related
staffing decision, but does not include a layoff if:
a) The Employee becomes employed by the Company or any Affiliate or
Subsidiary of the Company within 90 days of the layoff.
b) The layoff occurs because of a merger, sale, spin-off,
reorganization, or similar transfer of assets or stock, and the
Employee is offered Equivalent Employment with The Boeing Company or
any Affiliate or Subsidiary of the Company.
c) The layoff occurs because of an act of God, natural disaster, or
national emergency.
d) The layoff occurs because of a strike, picketing of the Company's
premises, work stoppage, or any similar action which would interrupt
or interfere with any operation of the Company, or
e) The termination of employment is for any reason other than involuntary
layoff, including, but not limited to, voluntary or temporary layoff,
resignation, dismissal, retirement, death, or leave of absence.
4
2.4 Layoff Events Occurring from July 1, 1999 Through June 30, 2001
For the time period from July 1, 1999 through June 30, 2001, a Layoff
Event is an involuntary layoff from employment with the Company, but does
not include a layoff if:
a) The Employee becomes employed by the Company or any Affiliate or
Subsidiary of the Company within 90 days of the layoff.
b) The layoff occurs (i) because of a merger, sale, spin-off,
reorganization, or similar transfer of assets or stock, or because of a
change in the operator of a facility or a party to a contract, or
because of an outsourcing of work, and (ii) the Employee either
continues in Equivalent Employment (in the case of a stock sale or
similar transaction), or the Employee is offered Equivalent Employment
with the new employer, operator or contractor (or an affiliated
business enterprise).
c) The layoff occurs because of an act of God, natural disaster or
national emergency.
d) The layoff occurs because of a strike, picketing of the Company's
premises, work stoppage or any similar action that would interrupt or
interfere with any operation of the Company.
e) The termination of employment of the Employee for any reason other
than involuntary layoff, such as voluntary or temporary layoff,
completion of a temporary assignment, resignation, dismissal,
retirement, death or leave of absence.
5
Article 3
Layoff Benefit
--------------
3.1 Layoff Benefit for Layoffs Occurring From Effective Date Through
June 30, 1999
The Layoff Benefit for an Employee who incurs a Layoff Event from the
Effective Date through June 30, 1999 is equal to:
a) One year of salary (base salary at time of layoff), plus
b) Incentive target under the Incentive Compensation Plan for Officers
and Employees of The Boeing Company and Subsidiaries or the McDonnell
Douglas Senior Executive Performance Sharing Plan or the Performance
Sharing Plan effective at the time of the Layoff Event, plus
c) The Company paid portion of the cost (grossed up for taxes) for the
current medical and dental coverage for the Employee and dependents for
twelve months, less
d) If applicable, the total of all payments made, or to be made, pursuant
to the Employee's Termination Benefits Agreement; or the Employee
Severance Pay Plans of McDonnell Douglas Corporation (McDonnell
Douglas Finance Corporation or McDonnell Douglas Realty Corporation);
or any other individual employment agreement.
3.1A Layoff Benefit for Layoffs Occurring From July 1, 1999 Through
June 30, 2001
The Layoff Benefit for an Employee who incurs a Layoff Event from
July 1, 1999 through June 30, 2001 is equal to:
a) One year of salary (base salary at the time of layoff), plus
b) The Employee's annual target incentive under the Incentive Compensation
Plan for Officers and Employees of The Boeing Company and Subsidiaries,
multiplied by the Company's actual performance score for the year
during which the Layoff Event occurs, less
c) If applicable, the total of all payments made, or to be made, pursuant
to the Employee's Termination Benefits Agreement, or the Employee
Severance Pay Plan of McDonnell Douglas Corporation (Boeing Capital
Corporation, or McDonnell Douglas Realty Corporation); or any
individual employment, separation or severance agreement.
3.2 Payment of Layoff Benefit
a) Timing of Payment
(1) For Layoff Events occurring on or before June 30, 1999, an
Employee will receive his or her Layoff Benefit as a lump sum,
net of any applicable withholding taxes, to be paid within a
6
reasonable period of time following the Layoff Event. Interest
shall not accrue on a Layoff Benefit regardless of the time of
payment.
(2) For Layoff Events occurring from July 1, 1999 through June
30, 2001, an Employee will receive the portion of the Layoff
Benefit described in Section 3.1A(a) in a lump sum within a
reasonable period of time following the Layoff Event, and the
portion of the Layoff Benefit described in Section 3.1A(b) in a
lump sum in the year following the year of the Layoff Event, and
in the month after the month in which the Compensation Committee
of the Board of Directors of the Company has approved the
performance scores for the Company and operating units. All
such payments shall be net of any and all applicable withholding
taxes, and interest shall not accrue on any portion of the
Layoff Benefit, regardless of the time of payment.
b) Limit on Payment
No Employee shall be paid more than one Layoff Benefit under this Plan.
For a Layoff Event occurring on or before June 30, 1999, in no event
will the Layoff Benefit exceed the equivalent of twice the Employee's
Annual Compensation during the calendar year immediately preceding the
year of an Employee's Layoff Event. For a Layoff Event occurring on or
after July 1, 1999, an Employee's Layoff Benefit shall not be limited
by the preceding sentence.
For purposes of this section, Annual Compensation means the total of
all compensation, including wages, salary, and any other benefit of
monetary value, whether paid in the form of cash or otherwise, which
was paid as consideration for the Employee's service during the year,
or which would have been so paid at the Employee's usual rate of
compensation if the employee had worked a full year.
c) Recovery of Payment
If a Layoff Benefit is paid to an Employee and the Committee determines
that all or part of such payment was not owed under the terms of the
Plan, the Company reserves the right to recover such payment,
including deducting such amounts from any sums due the Employee.
d) Recovery of Debt
If an Employee owes the Company an acknowledged debt, including, but
not limited to, loans, relocation fees, and travel advances, such debt
may be deducted from the Layoff Benefit, subject to applicable state
laws.
7
e) Waiver of Claims
As a condition to receiving the Layoff Benefit described in Section
3.1, the Employee must execute a release of all claims by submitting to
the Company a Waiver and Release form in a form provided by the
Company.
3.3 Death Benefit
No Layoff Benefits are due under the Plan with respect to an Employee
to the extent not received by the Employee prior to his death.
8
Article 4
Administration
--------------
4.1 Administration
a) The Committee will serve as the Plan administrator and named fiduciary
pursuant to ERISA. The Committee will have complete control of the
administration of the Plan, subject to the provisions hereof, with all
powers necessary to enable it to carry out its duties properly in that
respect. Not in limitation, but in amplification of the foregoing, it
will have the power to interpret the Plan, to apply its discretion, and
to determine all questions that may arise hereunder, including all
questions relating to the eligibility of Employees to participate in
the Plan and the amount of benefit to which any Employee may become
entitled. Its decisions upon all matters within the scope of its
authority will be final and binding.
b) The Committee will establish rules and procedures to be followed by
Employees in filing applications for benefits and in other matters
required to administer the Plan.
4.2 Committee Liability
The members of the Committee shall use ordinary care and diligence in the
performance of their duties, but no member shall be personally liable by
virtue of any contract, agreement, or other instrument made or executed by
a member of the Committee, nor for any mistake or judgment made by such
member or by any other member. No member of the Committee will be liable
for the neglect, omission or wrongdoing of any other member or of the
agents or counsel of the Committee. The Company shall indemnify each
member of the Committee against, and hold each member harmless from any
and all expenses and liabilities arising out of, any act or omission to
act as a member of the Committee, to the fullest extent permitted under
the by-laws of the Company.
4.3 Claim Procedure
The Committee shall adopt procedures for the presentation of claims for
benefits and for the review of the denial of such claims by the
Committee. The decision of the Committee upon such review shall be
final, subject to appeal rights provided by law.
9
Article 5
General Provisions
------------------
5.1 Plan Amendment and Termination
The Company, acting through the Compensation Committee, may amend or
terminate the Plan in whole or in part at any time. Such amendments may
include any remedial retroactive changes to comply with the requirements
of any law or regulation issued by any government agency to which the
Company is subject. If not terminated earlier by action of the
Compensation Committee, no benefits will be paid with respect to any
Layoff Event occurring after June 30, 2001, and the Plan will terminate on
March 30, 2002.
5.2 Funding
The Plan shall be unfunded, and Layoff Benefits shall be paid from the
general assets of the Company.
5.3 Benefit Plan Application
Layoff Benefits and periods for which an Employee receives a Layoff
Benefit shall not be considered as compensation or service under any
employee benefit plan or program and shall not be counted toward Service
under this Plan. Layoff Benefits may not be deferred into the Voluntary
Investment Plan or any other cash or deferred arrangement.
5.4 Provision Against Anticipation
No benefit under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, charge, or
other legal process, and any attempt to do so shall be void.
5.5 Employment Status
Nothing contained in the Plan will be deemed to give any Employee the
right to be retained in, or recalled to, the employ of the Company or to
interfere with the rights of the Company to discharge any Employee at any
time.
5.6 Facility of Payment
If any Employee is physically or mentally incapable of giving a valid
receipt for any payment due and no legal representative has been appointed
for such Employee, the Committee may make such payment to any person or
institution maintaining such Employee and the release of such person or
institution will be a valid and complete discharge for such payment. Any
final payment or distribution to any Employee or the legal representative
of the Employee in accordance with the provisions herein will be in full
satisfaction of all claims against the Plan, the Committee, and the
Company arising under or by virtue of the Plan.
10
5.7 Construction
The validity of the Plan or any of its provisions will be determined under
and will be construed according to federal law and, to the extent
permissible, according to the laws of the state of Washington. If any
provision of the Plan is held illegal or invalid for any reason, such
determination will not affect the remaining provisions of the Plan and the
Plan will be construed and enforced as if said illegal or invalid
provision had never been included.
11
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