-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L13PPQtvbdvkSC9caaVl54RF0+NcvJeyH+rshFzmwqhWPxkkn/WgvhZjclMZEKqb F57HAMFx+jjFMVjfjqy6Eg== 0000012927-99-000022.txt : 19990813 0000012927-99-000022.hdr.sgml : 19990813 ACCESSION NUMBER: 0000012927-99-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOEING CO CENTRAL INDEX KEY: 0000012927 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT [3721] IRS NUMBER: 910425694 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00442 FILM NUMBER: 99685625 BUSINESS ADDRESS: STREET 1: P O BOX 3707 MS 1F 31 CITY: SEATTLE STATE: WA ZIP: 98124 BUSINESS PHONE: 2066552121 MAIL ADDRESS: STREET 1: 7755 EAST MARGINAL WAY SOUTH CITY: SEATTLE STATE: WA ZIP: 98108 FORMER COMPANY: FORMER CONFORMED NAME: BOEING AIRPLANE CO DATE OF NAME CHANGE: 19730725 10-Q 1 FORM 10-Q FOR THE PERIOD ENDING JUNE 30, 1999 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, 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. 1 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 - ------------------------------------------------------------------------------ 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. 2 3 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. 3 4 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. 4 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, 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. 5 6 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. 6 7 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 ============================================================================== 7 8 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. 8 9 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) ============================================================================== 9 10 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. 10 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. 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. 11 12 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. 12 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 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 14 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 15 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 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 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 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 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 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 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 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 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 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 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 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 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 EX-27 2 ART. 5 FDS FOR 2ND QUARTER 1999 FORM 10-Q
5 1,000,000 6-MOS DEC-31-1999 JUN-30-1999 2,777 225 4,951 246 8,631 17,443 20,480 11,879 38,061 14,415 6,907 0 0 5,059 7,617 38,061 29,524 29,524 0 27,908 84 50 219 1,688 518 1,170 0 0 0 1,170 1.25 1.24
-----END PRIVACY-ENHANCED MESSAGE-----