-----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, Adv+0MpBs1soEcondgsoxhHjHHJQ+QY0E2Qt4bOAZprxrtImfa7RNYwmb42ySnpE TqWVLXYqq0xiAOuwH1SEjg== 0000012927-99-000010.txt : 19990308 0000012927-99-000010.hdr.sgml : 19990308 ACCESSION NUMBER: 0000012927-99-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990305 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-K SEC ACT: SEC FILE NUMBER: 001-00442 FILM NUMBER: 99557693 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-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 1 ................................................................................ ................................................................................ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 1-442 THE BOEING COMPANY 7755 East Marginal Way South Seattle, Washington 98108 Telephone: (206) 655-2121 State of incorporation: Delaware IRS identification number: 91-0425694 Securities registered pursuant to Section 12(b) of the Act: Class of Security: Registered on -------------------------- ----------------------- Common Stock, $5 par value New York Stock Exchange The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. A disclosure of one delinquent filer pursuant to Item 405 of Regulation S-K will be contained in the registrant's definitive proxy statement incorporated by reference in Part III of this Form 10-K. As of February 1, 1999, there were 937,962,070 common shares outstanding held by nonaffiliates of the registrant, and the aggregate market value of the common shares (based upon the closing price of these shares on the New York Stock Exchange) was approximately $31.9 billion. Part I and Part II incorporate information by reference to certain portions of the Company's 1998 Annual Report to Shareholders. Part III incorporates information by reference to the registrant's definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year. 1 Exhibit Index on Page 27 2 PART I Item 1. Business The Boeing Company, together with its subsidiaries (herein referred to as the "Company"), is one of the world's major aerospace firms. The Company operates in three principal segments: commercial airplanes, military aircraft and missiles, and space and communications. Commercial airplanes operations - conducted through Boeing Commercial Airplanes Group - involve development, production and marketing of commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide. In 1998 the information, space and defense systems operations of the Company were reorganized into two groups: the Military Aircraft and Missile Systems Group and the Space and Communications Group. The Military Aircraft and Missiles segment is involved in the research, development, production, modification and support of the following products and related systems: military aircraft, including fighter, transport and attack aircraft; helicopters; and missiles. The Space and Communications segment is involved in the research, development, production, modification and support of the following products and related systems: space systems; missile defense systems; satellite launching vehicles; rocket engines; and information and battle management systems. Revenues, earnings from operations and other financial data of the Company's business segments for the three years ended December 31, 1998, are set forth on pages 50-52 of the Company's 1998 Annual Report to Shareholders and are incorporated herein by reference. On August 1, 1997, McDonnell Douglas Corporation merged with a subsidiary of the Company through a stock-for-stock exchange in which 1.3 shares of Company stock were issued for each share of McDonnell Douglas stock outstanding, and as a result, McDonnell Douglas became a subsidiary of the Company. The Company issued 277.3 million shares of common stock in connection with the merger. The combined company is operating under the name of The Boeing Company. The merger is accounted for as a pooling of interests. Accordingly, except for adjustments to reflect conformed accounting policies, the historical results of operations of the two companies have been combined, and no acquisition revaluation or goodwill was recorded. The merger was subject to approval by the United States Federal Trade Commission and the European Commission. Future requirements or obligations associated with obtaining these approvals are not expected to have a material impact on future operations or liquidity of the Company. On December 6, 1996, the Company acquired Rockwell's aerospace and defense business by issuing 9.15 million shares (18.30 million shares after the June 1997 2-for-1 stock split) of common stock valued at $875 million and assuming debt valued at $2,180 million. This transaction has been accounted for under the purchase method. The assets and liabilities have been recorded at fair value, with excess purchase price recorded as goodwill. With respect to the Commercial Airplanes segment, the Company is a leading producer of commercial aircraft and offers a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of 2 3 domestic and foreign airlines. This family of commercial jet aircraft currently includes the 717, 737, MD-80, MD-90 and 757 standard-body models and the 767, MD-11, 777 and 747 wide-body models. The MD-80 and MD-90 aircraft will not be produced after early 2000. Final delivery of the MD-11 aircraft will be in 2001. The worldwide market for commercial jet aircraft is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth, both in developed and emerging countries, and political stability. Demand for the Company's commercial aircraft is further influenced by airline industry profitability, world trade policies, government-to-government relations, environmental constraints imposed upon aircraft operations, technological changes, and price and other competitive factors. Commercial jet aircraft are normally sold on a firm fixed-price basis with an indexed price escalation clause. The Company's ability to deliver jet aircraft on schedule is dependent upon a variety of factors, including execution of internal performance plans, availability of raw materials, performance of suppliers and subcontractors, and regulatory certification. The introduction of new commercial aircraft programs and major derivatives involves increased risks associated with meeting development, production and certification schedules. The Company's commercial aircraft sales are subject to intense competition, including foreign companies that are nationally owned or subsidized. To meet competition, the Company maintains a program directed toward continually enhancing the performance and capability of its products and has a family of commercial aircraft to meet varied and changing airline requirements. Since the 1970s, the Company has achieved more than a 70% share of the available commercial jet aircraft market. The Company continually evaluates opportunities to improve current models, and assesses the marketplace to ensure that its family of commercial jet aircraft is well positioned to meet future requirements of the airline industry. The fundamental strategy is to maintain a broad product line responsive to changing market conditions by maximizing commonality among the Boeing family of commercial aircraft. Additionally, the Company is determined to continue to lead the industry in customer satisfaction by offering products with the highest standards of quality, safety, technical excellence, economic performance and in- service support. The major focus of commercial aircraft development activities over the past three years has been the 777 wide-body twinjet, the 737-600/700/800/900 Next- Generation 737 family of short-to-medium-range jetliners, and the 717-200 (formerly the MD-95) program. The first delivery of the 777 occurred in May 1995. Development of the 777-200ER extended-range version of the 777 began in 1995 and continued in 1996, with certification and first delivery in early 1997. The increased-capacity version 777-300 began deliveries in May 1998. The certification and initial deliveries of the 737-700, the first of four new 737 derivative models, occurred in December 1997. The 737-800, a larger version, delivered in early 1998, and initial delivery of the smallest version, the 737- 600, occurred in late 1998. The 737-900, the longest member of the Next- Generation 737 family, received its initial order in late 1997 with first delivery scheduled for 2001. The Next-Generation 737 models are also being used by Boeing Business Jets, a collaboration between the Company and General Electric, to pursue the business travel market. Certification and first delivery of the Boeing Business Jet occurred in late 1998. In 1996 the Company launched a new version of the 757 twinjet. The new 757-300, with approximately 20% more 3 4 seating, will have about 10% lower seat-mile operating cost than the -200, which already has the lowest seat-mile operating cost in its market segment. First delivery is scheduled for early 1999. In 1997 the Company began offering for sale a new extended-range version of the 767. The 767-400ER, a stretched version of the 767-300ER, will be capable of carrying over 300 passengers in a two-class configuration and is scheduled to enter commercial service in the year 2000. The 717-200 is currently in development, with first delivery scheduled for mid-1999. The Company has been working with some of the world's largest airlines to explore the development of aircraft capable of carrying more than 500 passengers over longer ranges than the current 747 family. However, sufficient market demand has not developed to justify committing the very substantial investment levels required to develop either an all new aircraft or significantly larger versions of the 747. The timing of a decision to proceed with a 747 derivative aircraft and the development schedule depend on customer demand and the Company's ability to achieve favorable long-term financial returns on the substantial development costs that would be required. Other new products under consideration include larger and longer-range versions of the 777. The Company's acquisition of the defense and space units of Rockwell and the merger with McDonnell Douglas have created a large and diversified group of business units in information, space and defense systems. The major trends that shape the current environment of this business include significant but relatively flat U.S. Government defense and space budgets; rapid expansion of information and communication technologies; the need for low cost, assured access to space; and a convergence of military, civil and commercial markets. The U.S. Government, principally through the Department of Defense (DoD) and NASA, remains the primary customer of this business. DoD procurement funding levels are expected to remain essentially flat on an inflation-adjusted basis. The Company's DoD programs are subject to uncertain future funding levels, which can result in the stretch-out or termination of some programs. NASA's budget is also expected to remain relatively flat over the next several years. The Company's Military Aircraft and Missiles and Space and Communications business segments are highly sensitive to changes in national priorities and U.S. Government defense and space budgets. The principal contributors to 1998 Military Aircraft and Missiles segment revenues included the C-17, F-15, F/A-18 C/D, F/A-18 E/F, and AH-64 Apache. The principal contributors to 1998 Space and Communications segment revenues included the International Space Station, E-3 AWACS (Airborne Warning and Control System) updates and 767 AWACS, and the Delta II space launcher. Classified projects for the U.S. Government also continued to contribute to both segments' revenues. Since 1994, a significant percentage of the Military Aircraft and Missiles and Space and Communications segments business has been in developmental programs under cost-reimbursement-type contracts, which generally have lower profit margins than fixed-price-type contracts. The current major developmental programs include the International Space Station, F/A-18 E/F, F-22 Fighter, Joint Strike Fighter, V-22 Osprey tiltrotor aircraft, and the RAH-66 Comanche helicopter and the National Missile Defense (NMD) Lead System Integration (LSI). The F/A-18 E/F and V-22 Osprey tiltrotor aircraft programs have entered into low-rate initial production, and the F-22 Raptor has received long-lead funding for low-rate initial production. The information and communication market addressed by the Space and Communications business segment is projected by industry analysts to grow 4 5 sevenfold over the next ten years. The majority of the projected growth in information and communication will be in the commercial marketplace, and the Government's requirements are expected to be increasingly met by these commercial systems. The Company's involvement in several ventures will provide opportunities for significant market penetration. The segment continues to selectively pursue commercial-type business opportunities where it can utilize its technical and large-scale integration capabilities. Such business pursuits, which are outside the traditional U.S. Government contracting environment, are expected to require increased levels of company-sponsored research and development expenditures. The U.S. Government defense market environment is one in which continued intense competition among defense contractors can be expected, especially in light of U.S. Government budget constraints. The Company's ability to successfully compete for and retain such business is highly dependent on its technical excellence, demonstrated management proficiency, strategic alliances, and cost-effective performance. The acquisition and merger consolidations among U.S. aerospace companies have resulted in three principal prime contractors for the DoD and NASA, including the Company. As a result of the extensive consolidation in the defense and space industry, the Company and its major competitors are also partners or major suppliers to each other on various programs. The Company and Lockheed Martin are 50/50 partners in United Space Alliance (USA), which is responsible for all ground processing of the Space Shuttle fleet and for space-related operations with the United States Air Force. USA also performs the modification, testing and checkout operations required to ready the Space Shuttle for launch. Although the joint venture operations are not included in the Company's consolidated statements, the Company's proportionate share of joint venture earnings is recognized in income. Research and development expense amounted to $1.9 billion, $1.9 billion and $1.6 billion in 1998, 1997 and 1996, respectively. Based on current programs and plans, research and development expense for 1999 is expected to be in the $1.6 billion to $1.8 billion range. The Company's backlog of firm contractual orders (in billions) at December 31 follows: 1998 1997 ==== ==== Commercial Airplanes $86.1 $93.8 Military Aircraft and Missiles 17.0 Space and Communications 9.8 ------ Information, Space and Defense Systems 26.8 27.8 ------ ------ Total contractual backlog $112.9 $121.6 ====== ====== Not included in contractual backlog are purchase options and announced orders for which definitive contracts have not been executed and orders from customers that have filed for bankruptcy protection. Additionally, U.S. Government and foreign military firm backlog is limited to amounts obligated to contracts. Unobligated contract funding not included in backlog at December 31, 1998 and 1997, totaled $23.5 billion and $26.1 billion. 5 6 In evaluating the Company's contractual backlog for commercial customers, certain risk factors should be considered. Approximately 17% of the commercial aircraft backlog units are scheduled for delivery beyond 2001. Changes in the economic environment and the financial condition of airlines sometimes result in customer requests for rescheduling or cancellation of contractual orders. Contracts with the U.S. Government are subject to termination for default or for convenience by the Government if deemed in its best interests. Contracts that are terminated for convenience generally provide for payments to a contractor for its costs and a proportionate share of profit for work accomplished through the date of termination. Contracts that are terminated for default generally provide that the Government pays only for the work it has accepted, can require the contractor to pay the difference between the original contract price and the cost to reprocure the contract items net of the value of the work accepted from the original contractor, and can hold a contractor liable for damages. The Company is highly dependent on the availability of essential materials, parts and subassemblies from its suppliers and subcontractors. The most important raw materials required for the Company's aerospace products are aluminum (sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites (including carbon and boron). Although alternative sources generally exist for these raw materials, qualification of the sources could take a year or more. Many major components and product equipment items are procured or subcontracted on a sole-source basis with a number of domestic and foreign companies. The Company is dependent upon the ability of its large number of suppliers and subcontractors to meet performance specifications, quality standards, and delivery schedules at anticipated costs, and their failure to do so would adversely affect production schedules and contract profitability, while jeopardizing the ability of the Company to fulfill commitments to its customers. The Company maintains an extensive qualification and performance surveillance system to control risk associated with such reliance on third parties. Production problems on the commercial aircraft programs reached unexpected levels late in the third quarter of 1997. During this period, the Company was in the midst of an unprecedented production rate buildup for the 7-series commercial aircraft programs, and experienced a number of challenges, including raw material shortages, internal and supplier parts shortages, and productivity inefficiencies associated with adding thousands of new employees. These factors resulted in significant out-of-sequence work. The breadth and complexity of the entire commercial aircraft production process, especially during this time of substantial production rate increases, presented a situation where disrupted process flows caused major inefficiencies throughout the entire process chain. The 747 and 737 production lines were halted for approximately one month early in the fourth quarter of 1997. The recovery plan continued throughout 1998. While the Company owns numerous patents and has licenses under patents owned by others relating to its products and their manufacture, it does not believe that its business would be materially affected by the expiration of any patents or termination of any patent license agreements. The Company has no trademarks, franchises or concessions that are considered to be of material importance to the conduct of its business. The Company is subject to federal, state and local laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. The Company believes its policies, practices and 6 7 procedures are properly designed to prevent unreasonable risk of environmental damage and the consequent financial liability to the Company. Compliance with environmental laws and regulations requires continuing management effort and expenditures by the Company. Compliance with environmental laws and regulations has not had in the past, and, the Company believes, will not have in the future, material effects on the capital expenditures, earnings or competitive position of the Company. (See Item 3,"Legal Proceedings", for additional information regarding environmental regulation.) The Company is subject to business and cost classification regulations associated with its U.S. Government defense and space contracts. Violations can result in civil, criminal or administrative proceedings involving fines, compensatory and treble damages, restitution, forfeitures, and suspension or debarment from Government contracts. Sales outside the United States (principally export sales from domestic operations) by geographic area are included on page 50 of the Company's 1998 Annual Report to Shareholders and incorporated herein by reference. Less than 1% of total sales were derived from non-U.S. operations of the Company for each of the three years in the period ended December 31, 1998. Approximately 41% of the Company's contractual backlog value at December 31, 1998, was with non-U.S. customers. Sales outside the United States are influenced by U.S. Government foreign policy, international relationships, and trade policies of governments worldwide. Relative profitability is not significantly different from that experienced in the domestic market. Approximately 37% of combined accounts receivable and customer and commercial financing consisted of amounts due from customers outside the United States. Substantially all of these amounts are payable in U.S. dollars, and, in management's opinion, related risks are adequately covered by allowance for losses. The Company has not experienced materially adverse financial consequences as a result of sales and financing activities outside the United States. The Company's workforce level at January 28, 1999, was approximately 227,000, including approximately 4,000 in Canada and 2,100 in Australia. The year-end 1999 workforce level is projected to be in the range of 200,000 to 210,000. 7 8 Item 2. Properties The locations and floor areas of the Company's principal operating properties at January 1, 1999, are indicated in the following table. Floor Area (Thousands of square feet) Company- Owned Leased ======== ======= United States Greater Seattle, Washington 45,477 4,239 Greater Southern California 20,113 2,157 Wichita, Kansas 12,124 1,359 Greater St. Louis, Missouri 9,082 2,443 Greater Philadelphia, Pennsylvania 3,388 31 Huntsville - Decatur, Alabama 2,157 177 Mesa, Arizona 1,997 39 San Antonio, Texas 1,203 Portland, Oregon 1,092 55 Greater Cape Canaveral, Florida 712 Irving - Corinth - Richardson, Texas 504 90 Oakridge, Tennessee 493 Spokane, Washington 394 48 Duluth, Georgia 380 Greater Vienna - Arlington - Reston, Virginia 358 518 Greater Houston, Texas 329 188 Moses Lake, Washington 252 Salt Lake City, Utah 227 70 Chicago, Illinois 204 Macon, Georgia 198 107 Tulsa - McAlester, Oklahoma 166 1,793 Glasgow, Montana 152 Melbourne, Arkansas 97 46 Heath, Ohio 782 Australia Greater Melbourne, Victoria 803 191 Canada Toronto, Ontario 1,881 Winnipeg, Manitoba 522 96 Arnprior, Ontario 162 69 With the exception of the Glasgow Industrial Airport located in Glasgow, Montana, which is company-owned, runways and taxiways used by the Company are located on airport properties owned by others and are used by the Company jointly with others. The Company's rights to use such facilities are provided for under long-term leases with municipal, county or other government authorities. In addition, the U.S. Government furnishes the Company certain office space, installations and equipment at Government bases for use in connection with various contract activities. Facilities at the major locations support all principal industry segments. Work related to a given program may be assigned to various locations, based upon periodic review of shop loads and production capability. 8 9 Because of the acquisition of the aerospace and defense units of Rockwell and the merger with McDonnell Douglas, the Company is in the process of re- evaluating facilities to consolidate redundant activities. Properties and land that do not meet long-term business requirements will be sold. The Company's principal properties are well maintained and in good operating condition. Unused or under-utilized facilities are not considered significant. A new facility in Decatur, Alabama, is planned for completion during 1999 to meet the needs of the Evolved Expendable Launch Vehicle program. All other existing facilities are sufficient to meet the Company's near-term operating requirements. Item 3. Legal Proceedings Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant legal proceedings are related to matters covered by insurance. Major contingencies are discussed below. The Company is subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. Due in part to their complexity and pervasiveness, such requirements have resulted in the Company being involved with related legal proceedings, claims and remediation obligations since the 1980s. The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company's policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred. The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company's financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings exclusive of special charges. Such accruals as of December 31, 1998, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities. Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company's financial position or operating results and cash flow trends. 9 10 The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the Government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company believes, based upon all available information, that the outcome of any such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations. 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 December 31, 1998, 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 December 19, 1995, the U.S. Court of Federal Claims ordered that the Government's termination of the A-12 contract for default be converted to a termination for convenience of the Government. On December 13, 1996, the Court issued an opinion confirming its prior no-loss adjustment and no-profit recovery order. On December 5, 1997, the Court issued an opinion confirming its preliminary holding that plaintiffs were entitled to certain adjustments to the contract funding, increasing the plaintiffs' possible recovery to $1,200 million. On March 31, 1998, the Court entered a judgment, pursuant to a March 30, 1998, opinion and order, determining that plaintiffs were entitled to be paid that amount, plus statutory interest from June 26, 1991, until paid. Although the Government has appealed the resulting judgment, the Company believes the judgment will be sustained. Final resolution of the A-12 litigation will depend on such appeals and possible further litigation, or negotiations, with the Government. If sustained, however, the expected damages judgment, including interest, could result in pretax income that would more than offset the loss provision established in 1990. On October 31, 1997, a federal securities lawsuit was filed against the Company in the U.S. District Court for the Western District of Washington in Seattle. The lawsuit names as defendants the Company and three of its executive officers. Additional lawsuits of a similar nature have been filed. The plaintiffs in each lawsuit 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 10 11 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 June 6, 1998, sixteen 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 the U.S. District Court for the Western District of Washington (Washington Class Action) alleging, on the basis of race, discrimination in 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 have worked for the three companies during the past few years. Also, on July 31, 1998, seven African American employees of the helicopter division of the Military Aircraft and Missile Systems Group in Philadelphia filed an action in the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia Class Action) alleging, on the basis of race, discrimination 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. In September 1998, the Court denied plaintiffs' motion seeking class certification, but allowed plaintiffs to renew their motion upon completion of class discovery. On January 25, 1999, the U.S. District Court in the Western District of Washington entered an order preliminarily approving a proposed Consent Decree, which settles both the Washington Class Action and the Philadelphia Class Action, along with a multi-plaintiff racial discrimination lawsuit. The order, "inter alia", conditionally certified a nationwide class of 20,000 current and former African American Boeing (includes all U.S. subsidiaries and former McDonnell Douglas Corporation and Rockwell International) employees. If approved by the Court, the Company will pay $15 million allocated in the following manner: 1) $3.77 million to 39 Named Plaintiffs, with an average of $30,000 and not more than $50,000; 31 Individual Plaintiffs, with an average of $20,000 and not more than $50,000; and 194 specifically identified settlement class members, with an average of $10,000 and not more than $15,000; all of whom must sign a release to obtain any money, with the individual amount reverting to the Company if no release is signed; 2) $3.53 million to the remaining approximately 20,000 class members, who must file a sworn claim form that will be reviewed by an independent claims arbitrator who will determine the amount each class member receives on the basis of a points formula, and each class member must also sign a release for any money received; 3) $3.65 million to pay for systems changes, training, consultants, and notice to class members; and 4) $3.0 million in fees and costs to Class Counsel in the state of Washington for pre-decree litigation work, $750,000 for post-decree work including implementation of the Consent Decree, $100,000 for expenses related to informing class members about the proposed Consent Decree, and $200,000 to Philadelphia counsel. The Company will devise systems changes that will inform hourly employee class members about the promotion selection process, and which employee was awarded a certain promotion; provide training and other programs to assist employees with career development; employ a consultant to assess these system changes; implement across the system a revised first-level management selection process and revised internal complaint process; and implement enforcement procedures to maintain a harassment-free workplace. 11 12 Pursuant to the Court's order, notice to the class members shall be published and claim forms shall be mailed to class members prior to the end of February 1999. Class members will have until April 23, 1999, to file their claim forms, objections, and/or requests to opt out of the settlement. A hearing is set for May 26, 1999, to determine the fairness of the proposed Consent Decree, and if so determined, for the Court to approve the Consent Decree. The Company believes that the proposed Consent Decree, if approved, will not have a materially adverse effect on its earnings, cash flow or financial position. 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 and its Foreign Sales Corporation 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. Income taxes have been settled with the Internal Revenue Service (IRS) for all years through 1978, and IRS examinations have been completed through 1987. In connection with these examinations, the Company disagrees with IRS proposed adjustments, and the years 1979 through 1987 are in litigation. The Company has also 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. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the quarter ended December 31, 1998. 12 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information required by this item is included on page 78 and the inside back cover of the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. Item 6. Selected Financial Data Information required by this item is included on page 76 of the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information required by this item is included on pages 34-48 of the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The following consolidated financial statements and supplementary data, included in the Company's 1998 Annual Report to Shareholders on the pages indicated, are incorporated herein by reference: Consolidated Statements of Operations - years ended December 31, 1998, 1997 and 1996: Page 53. Consolidated Statements of Financial Position - December 31, 1998 and 1997: Page 54. Consolidated Statements of Cash Flows - years ended December 31, 1998, 1997 and 1996: Page 55. Consolidated Statements of Shareholders' Equity - December 31, 1998, 1997 and 1996: Pages 56-57. Notes to Consolidated Financial Statements: Pages 58-73. Independent Auditors' Report: Page 74. Supplementary data regarding quarterly results of operations: Page 75. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 13 14 PART III Item 10. Directors and Executive Officers of the Registrant Executive Officers No family relationships exist among any of the executive officers, directors or director nominees. The executive officers of the Company as of February 15, 1999, are as follows: Positions and offices held and business Name Age experience ================================================================================ Philip M. Condit 57 Chairman of the Board since February 1997. Chief Executive Officer since April 1996. Director since August 1992. President from August 1992 through January 1997. Harry C. Stonecipher 62 President and Chief Operating Officer of the Company and Director since August 1997. Prior thereto, President and Chief Executive Officer of McDonnell Douglas Corporation from 1994. Prior thereto, Chairman of the Board, President, and Chief Executive Officer of Sundstrand Corporation from 1991. James F. Albaugh 48 Senior Vice President of the Company and President of Space and Communications Group from September 1998. Prior thereto, President of Boeing Space Transportation from April 1998. Prior thereto, President of Rocketdyne Propulsion and Power, now a business of Space and Communications Group from March 1997. Prior thereto, Vice President - Operations, Rocketdyne Propulsion and Power since 1994. Theodore J. Collins 62 Senior Vice President and General Counsel of the Company since February 1997. Prior thereto, Vice President and General Counsel from 1986. Corporate Secretary from December 1997 through April 1998. James B. Dagnon 59 Senior Vice President - People since May 1997. Prior thereto, Senior Vice President - Employee Relations, Burlington Northern Santa Fe from 1995. Prior thereto, Executive Vice President, Burlington Northern from 1992. Christopher W. Hansen 50 Senior Vice President for Washington, D.C., Operations since December 31, 1998. Prior thereto, Vice President - Government Affairs from August 1997 and Vice President - U.S. Government Affairs from March 1997. Prior thereto, Staff Vice President of the Washington, D.C., office from September 1994 and Staff Vice President of Congressional Affairs from January 1994. 14 15 Positions and offices held and business Name Age experience ================================================================================ Deborah C. Hopkins 44 Senior Vice President and Chief Financial Officer since December 1998. Prior thereto, Vice President of Finance and Chief Financial Officer for General Motors Europe from October 1997. Prior thereto, General Auditor for General Motors from November 1995. Prior thereto, Vice President and General Manager Worldwide Information Systems from August 1995. Prior thereto, Vice President and Corporate Controller and Chief Accounting Officer for Unisys Corporation from January 1993. Alan R. Mulally 53 Senior Vice President of the Company since February 1997 and President of Boeing Commercial Airplanes Group since September 1998. Prior thereto, President of Boeing Information, Space & Defense Systems from August 1997 through August 1998. Prior thereto, President of Boeing Defense & Space Group from January 1997. Prior thereto, Senior Vice President of Airplane Development and Definition, Boeing Commercial Airplane Group from 1994. James F. Palmer 49 Senior Vice President of the Company and President of Boeing Shared Services Group since August 1997. Prior thereto, Senior Vice President and Chief Financial Officer of McDonnell Douglas Corporation from July 1995. Prior thereto, Vice President and Treasurer of McDonnell Douglas Corporation from 1993. Michael M. Sears 51 Senior Vice President of the Company and President of Military Aircraft and Missiles Systems Group since September 1998. Prior thereto, Executive Vice President of Boeing Information, Space & Defense Systems, and President of McDonnell Aircraft and Missile Systems from August 1997. Prior thereto, President of McDonnell Douglas Aerospace from February 1997. Prior thereto, President of Douglas Aircraft Company from April 1996. Prior thereto, Vice President and General Manager of the F/A-18 program, McDonnell Douglas Aerospace from 1991. 15 16 Positions and offices held and business Name Age experience ================================================================================ John D. Warner 59 Senior Vice President and Chief Administrative Officer of the Company since August 1997. Prior thereto, Senior Vice President from February 1997. Prior thereto, President of Boeing Information and Support Services from April 1995. Prior thereto, President Boeing Services from July 1993. Other information required by Item 10 involving the identification and election of directors is incorporated herein by reference to the registrant's definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year. Item 11. Executive Compensation * Item 12. Security Ownership of Certain Beneficial Owners and Management * Item 13. Certain Relationships and Related Transactions * * Information required by Items 11, 12, and 13 is incorporated herein by reference to the registrant's definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) List of documents filed as part of this report: 1. Financial Statements All consolidated financial statements of the Company as set forth under Item 8 of this report on Form l0-K. 2. Financial Statement Schedules Schedule Description Page -------- ----------- ---- II Valuation and Qualifying Accounts 25 The auditors' report with respect to the above-listed financial statement schedule appears on pages 21-24 of this report. All other financial statements and schedules not listed are omitted either because they are not applicable, not required, or the required information is included in the consolidated financial statements. 16 17 3. Exhibits (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession. (i) Agreement and Plan of Merger dated as of July 31, 1996, among Rockwell International Corporation, The Boeing Company and Boeing NA, Inc. (Exhibit 2.1 to the Company's Registration Statement on Form S-4 (File No. 333-15001) filed October 29, 1996 (herein referred to as "Form S-4").) (ii) Agreement and Plan of Merger, dated as of December 14, 1996, among The Boeing Company, West Acquisition Corp. and McDonnell Douglas Corporation. (Exhibit (2)(ii) to the Company's Annual Report on Form 10-K (File No. 1-442) for the year ended December 31, 1996, herein referred to as "1996 Form 10-K").) (3) Articles of Incorporation and By-Laws. (i) Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on August 14, 1997. (Exhibit (3)(iii) to the Company's Form 10-Q for the quarter ended June 30, 1997.) (ii) By-Laws, as amended and restated on August 26, 1996. (Exhibit (3)(i) to the Form S-4.) (4) Instruments Defining the Rights of Security Holders, Including Indentures. (i) Indenture, dated as of August 15, 1991, between the Company and The Chase Manhattan Bank (National Association), Trustee. (Exhibit (4) to the Company's Current Report on Form 8-K (File No. 1-442) dated August 27, 1991.) (10) Material Contracts. The Boeing Company Bank Credit Agreements. (i) U.S. $ One Billion Five Hundred Million 7-Year Bank Credit Agreement among The Boeing Company, as Borrower, the Banks party thereto, Citibank, N.A., as Administrative Agent, and The Chase Manhattan Bank, as Syndication Agent, dated as of December 8, 1997. (Exhibit (10)(i) to the Company's Annual Report on Form 10-K (File No. 1-442) for the year ended December 31, 1997 (herein referred to as "1997 Form 10-K").) (ii) U.S. $ One Billion Five Hundred Million 364-Day Bank Credit Agreement among The Boeing Company, as Borrower, the Banks party thereto, Citibank, N.A., as Administrative Agent, and The Chase Manhattan Bank, as Syndication Agent, as amended on September 30, 1998. (Exhibit (10)(i) of the Company's Form 10-Q for the quarter ended September 30, 1998 (herein referred to as "3rd Quarter 1998 Form 10-Q").) Management Contracts and Compensatory Plans. (iii) 1984 Stock Option Plan. (a) Plan, as amended February 23, 1987, and August 28, 1989. (Exhibit (10)(iii)(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (herein referred to as "1995 Form 10-K").) 17 18 (b) Forms of stock option agreements. (Exhibit (10)(vi)(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (herein referred to as "1992 Form 10-K").) (iv) 1988 Stock Option Plan. (a) Plan, as amended on December 14, 1992. (Exhibit (10)(vii) (a) of the 1992 Form 10-K.) (b) Form of Notice of Terms of Stock Option Grant. (Exhibit (10)(vii)(b) of the 1992 Form 10-K.) (v) 1992 Stock Option Plan for Nonemployee Directors. (a) Plan. (Exhibit (19) of the Company's Form 10-Q for the quarter ended March 31, 1992.) (b) Form of Stock Option Agreement. (Exhibit (10)(viii)(b) of the 1992 Form 10-K.) (vi) Supplemental Benefit Plan for Employees of The Boeing Company, as amended on February 22, 1998. (Exhibit (10)(i) of the Company's Form 10-Q for the quarter ended March 31, 1998 (herein referred to as "1st Quarter 1998 Form 10-Q").) (vii) Supplemental Retirement Plan for Executives of The Boeing Company. (Exhibit (10)(ii) of the Company's Form 10-Q for the quarter ended September 30, 1997.) (viii) Deferred Compensation Plan for Employees of The Boeing Company, as amended on February 23, 1998. (Exhibit (10)(ii) to the 1st Quarter 1998 Form 10-Q.) (ix) Deferred Compensation Plan for Directors of The Boeing Company, as amended on October 28, 1996. (Exhibit 10.1 to the Form S-4.) (x) 1993 Incentive Stock Plan for Employees. (a) Plan, as amended on December 13, 1993. (Exhibit (10)(ix)(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (herein referred to as "1993 Form 10-K").) (b) Form of Notice of Stock Option Grant. (i) Regular Annual Grant. (Exhibit (10)(ix)(b)(i) to the 1993 Form 10-K.) (ii) Supplemental Grant. (Exhibit (10)(ix)(b)(ii) to the 1993 Form 10-K.) (xi) Incentive Compensation Plan for Officers and Employees of the Company and Subsidiaries, as amended on April 28, 1997. (Exhibit (10)(i) to the Company's Form 10-Q for the quarter ended March 31, 1997.) (xii) 1997 Incentive Stock Plan, as amended on June 29, 1998. (Exhibit (10) of the Company's Form 10-Q for the quarter ended June 30, 1998.) (xiii) SAR Deferral Arrangements of the Company. (a) Form of SAR Deferral Agreement. (Exhibit (10)(xii)(a) to the 1995 Form 10-K.) (b) Plan for Employees, as amended. (Exhibit (10)(xii)(b) to the 1995 Form 10-K.) (c) Form of SAR deferral election notice. (Exhibit (10)(xiv)(c) to the 1992 Form 10-K.) (xiv) Employment Agreement with Harry C. Stonecipher dated August 1, 1997. (Exhibit (10)(i) to the Company's Form 10-Q for the quarter ended June 30, 1997.) (xv) Boeing Company Executive Layoff Benefits Plan, as amended on October 26, 1998. Filed herewith. 18 19 (xvi) The McDonnell Douglas 1994 Performance and Equity Incentive Plan. (Exhibit 99.1 of Registration Statement No. 333-32567 on Form S-8 filed on July 31, 1997.) (xvii) The McDonnell Douglas Incentive Award Plan as amended and restated July 20, 1990. (Exhibit 99.2 of Registration Statement No. 333-32567 on Form S-8 filed on July 31, 1997.) (xviii) The Boeing Company ShareValue Program, as amended on December 20, 1996. (Exhibit (10)(xiii) to the 1996 Form 10-K.) (xix) Stock Purchase and Restriction Agreement dated as of July 1, 1996, between The Boeing Company and Wachovia Bank of North Carolina, N.A. as Trustee, under the ShareValue Trust Agreement dated as of July 1, 1996. (Exhibit 10.20 to the Form S-4.) (xx) Consultant Services Agreement between the Company and Boyd E. Givan, dated August 26, 1998, with an amendment in the form of a letter from the Company dated September 14, 1998. (Exhibit (10)(ii) to the 3rd quarter 1998 Form 10-Q). (xxi) Settlement and Release Agreement with Ronald B. Woodard, dated October 31, 1998. Filed herewith. (xxii) Terms of Employment Agreement with Deborah C. Hopkins, dated November 10, 1998. Filed herewith. (12) Computation of Ratio of Earnings to Fixed Charges. Page 26. (13) Portions of the 1998 Annual Report to Shareholders incorporated by reference herein. Filed herewith. (21) List of Company Subsidiaries. Pages 105-109. (24) Independent Auditors' Consent and Report on Financial Statement Schedule for use in connection with filings of Form S-8 under the Securities Act of 1933. Page 21. (99) Additional Exhibits (i) Commercial Program Method of Accounting. (Exhibit (99)(i) to the 1997 Form 10-K.) (ii) Post-Merger Combined Statements of Operations and Financial Position. (Exhibit (99)(i) to the Company's Form 10-Q for the quarter ended June 30, 1997.) (b) Reports on Form 8-K filed during quarter ended December 31, 1998: None. 19 20 Signatures Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated. THE BOEING COMPANY (Registrant) By: /s/ Philip M. Condit By: /s/ Harry C. Stonecipher ---------------------------------- --------------------------------- Philip M. Condit - Chairman of the Harry C. Stonecipher - President, Board, Chief Executive Officer Chief Operating Officer and and Director Director By: /s/ Deborah C. Hopkins By: /s/ Gary W. Beil ---------------------------------- --------------------------------- Deborah C. Hopkins - Senior Vice Gary W. Beil - Vice President President and Chief Financial and Controller Officer Date: February 22, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ John H. Biggs /s/ John F. McDonnell - -------------------------------- --------------------------------- John H. Biggs - Director John F. McDonnell - Director /s/ John E. Bryson /s/ William J. Perry - -------------------------------- --------------------------------- John E. Bryson - Director William J. Perry - Director /s/ Kenneth M. Duberstein /s/ Donald E. Petersen - -------------------------------- --------------------------------- Kenneth M. Duberstein - Director Donald E. Petersen - Director /s/ John B. Fery /s/ Charles M. Pigott - -------------------------------- --------------------------------- John B. Fery - Director Charles M. Pigott - Director /s/ Paul E. Gray /s/ Rozanne L. Ridgway - -------------------------------- --------------------------------- Paul E. Gray - Director Rozanne L. Ridgway - Director /s/ George H. Weyerhaeuser --------------------------------- George H. Weyerhaeuser - Director Date: February 22, 1999 20 21 INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders The Boeing Company Seattle, Washington We consent to the incorporation by reference in Registration Statement Nos. 2- 48576, 33-25332, 33-31434, 33-43854, 33-58798, 333-03191, 333-16363, 333-26867, 333-32461, 333-32491, 333-32499, and 333-32567 of The Boeing Company on Form S-8 of our reports dated January 26, 1999, appearing in and incorporated by reference in the Annual Report on Form 10-K of The Boeing Company for the year ended December 31, 1998. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of The Boeing Company listed in Item 14(a)2 in this Annual Report on Form 10-K for the year ended December 31, 1998. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Seattle, Washington March 1, 1999 21 22 Consent of Independent Auditors We consent to the use of our report dated January 22, 1997, with respect to the consolidated statements of operations, shareholders' equity, and cash flows of McDonnell Douglas Corporation and consolidated subsidiaries (MDC) for the year ended December 31, 1996 (not separately presented herein), in the Form 10-K for the year ended December 31, 1998, of The Boeing Company, which is incorporated by reference in Registration Statement Nos. 2-48576, 33-25332, 33-31434, 33-43854, 33-58798, 333-03191, 333-16363, 333-26867, 333-32461, 333-32499, 333-32491, and 333-32567 of The Boeing Company on Form S-8. We also consent to the inclusion herein of our report dated January 22, 1997, with respect to the financial statement schedule (Schedule II) of MDC for the year ended December 31, 1996 (not separately presented herein), in the Form 10-K for the year ended December 31, 1998 of The Boeing Company filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP St. Louis, Missouri March 1, 1999 22 23 Report of Ernst & Young LLP, Independent Auditors Shareholders and Board of Directors McDonnell Douglas Corporation We have audited the consolidated statements of operations, shareholders' equity, and cash flows of McDonnell Douglas Corporation and consolidated subsidiaries (MDC) for the year ended December 31, 1996 (not separately presented herein). These financial statements are the responsibility of MDC's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of MDC's operations and MDC's cash flow for the year ended December 31, 1996 (not separately presented herein) in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP St. Louis, Missouri January 22, 1997 23 24 Report of Ernst & Young LLP, Independent Auditors Shareholders and Board of Directors McDonnell Douglas Corporation We have audited the consolidated statements of operations, shareholders' equity, and cash flows of McDonnell Douglas Corporation and consolidated subsidiaries (MDC) for the year ended December 31, 1996 (not separately presented herein). Our audit also included the financial statement schedule (Schedule II) of MDC for the year ended December 31, 1996 (not presented separately herein), which is included in the related schedules of The Boeing Company in this Form 10-K. This schedule is the responsibility of MDC's management. Our responsibility is to express an opinion on our audit. In our opinion, the financial statement schedule of MDC referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP St. Louis, Missouri January 22, 1997 24 25 SCHEDULE II - Valuation and Qualifying Accounts The Boeing Company and Subsidiaries Allowance for Doubtful Accounts and Customer Financing (Deducted from assets to which they apply) (Dollars in millions) 1998 1997 1996 ============================================================================== Balance at January 1 $233 $184 $172 Increase due to acquisition of Rockwell aerospace and defense business 6 Charged to costs and expenses 60 53 19 Deductions from reserves (accounts charged off) (4) (4) (13) ----- ----- ----- Balance at December 31 $289 $233 $184 ===== ===== ===== 25 26 EXHIBIT (12) - Computation of Ratio of Earnings to Fixed Charges The Boeing Company and Subsidiaries (Dollars in millions) Year ended December 31, ---------------------------------------- 1998 1997 1996 1995 1994 ==== ==== ==== ==== ==== Earnings before federal taxes on income $1,397 $(341) $2,480 $(412) $2,110 Fixed charges excluding capitalized interest 507 552 463 427 437 Amortization of previously capitalized interest 75 97 80 59 52 Net adjustment for earnings of affiliates (18) 4 (1) (5) (3) ------ ------ ------ ------ ------ Earnings available for fixed charges $1,961 $ 312 $3,022 $ 69 $2,596 ====== ====== ====== ====== ====== Fixed charges: Interest expense $ 453 $ 513 $ 393 $ 376 $ 379 Interest capitalized during the period 65 61 58 65 87 Rentals deemed representative of an interest factor 54 39 70 51 59 ------ ------ ------ ------ ------ Total fixed charges $ 572 $ 613 $ 521 $ 492 $ 525 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 3.4 .5 5.8 .1 5.0 ====== ====== ====== ====== ====== 26 27 EXHIBITS FILED WITH THIS REPORT ON FORM 10-K Commission File Number 1-442 THE BOEING COMPANY Exhibit Index Annual Report to Share- Form holders 10-K Exhibit Description Page Page - ------------------------------------------------------------------------------ (10) (xv) Boeing Company Executive Layoff Benefits Plan, as amended on October 26, 1998 95 (10) (xxii) Settlement and Release Agreement with Ronald B. Woodard, dated October 31, 1998 104 (10) (xxiii) Terms of Employment Agreement with Deborah C. Hopkins, dated November 10, 1998 107 (12) Computation of Ratio of Earnings to Fixed Charges 26 (13) Portions of the 1998 Annual Report to Shareholders incorporated by reference in Part I and Part II 28 Market for registrant's Common Equity and related Stockholder Matters * 93 Management's Discussion and Analysis of Financial Position and Results of Operations 34 28 Consolidated Statements of Operations 53 57 Consolidated Statements of Financial Position 54 58 Consolidated Statements of Cash Flows 55 59 Consolidated Statements of Shareholders' Equity 56 60 Notes to Consolidated Financial Statements 58 66 Independent Auditor's Report 74 117 Supplementary Data Regarding Quarterly Financial Data 75 90 Selected Financial Data Five-Year Summary 76 91 (21) List of Subsidiaries 110 (24) Independent Auditors; Consent and Report on Financial Statement Schedule for use in connection with filings of Form S-8 under the Securities Act of 1933. 21, 22 Appendix of graphic and image material pursuant to Rule 304(a) of regulation S-T 115 * Listed on inside back cover of annual report 27 28 Exhibit (13) Portions of the 1998 Annual Report to Shareholders Incorporated by Reference in Part I and Part II MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS, FINANCIAL CONDITION AND BUSINESS ENVIRONMENT MERGER WITH MCDONNELL DOUGLAS CORPORATION On August 1, 1997, McDonnell Douglas Corporation merged with the Company through a stock-for-stock exchange in which 1.3 shares of Company stock were issued for each share of McDonnell Douglas stock outstanding. The merger has been accounted for as a pooling of interests, and the discussion and analysis that follows reflects the combined results of operations and financial condition of the merged companies. INFORMATION, SPACE AND DEFENSE SYSTEMS SEGMENT REPORTING In 1998 the Information, Space and Defense Systems Group of the Company was reorganized into two groups: the Military Aircraft and Missile Systems Group and the Space and Communications Group, which will be reported as separate business segments for 1998 and on. RESULTS OF OPERATIONS - --------------------- REVENUES Operating revenues for 1998 were $56.2 billion, compared with $45.8 billion in 1997 and $35.5 billion in 1996. The higher revenues for both 1998 and 1997 reflect the increased deliveries in both the Commercial Airplanes and the Information, Space and Defense Systems segments. The 1998 and 1997 revenues include the operations of the aerospace and defense units acquired from Rockwell International Corporation in December 1996. Revenues by industry segment: [Graphic and image material item Number 1 See appendix on page 115 for description.] |-----------------------------------------------------------------------------| | | | FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY | | | | Certain statements in this release contain "forward-looking" information | | that involves risk and uncertainty, including projections for year 2000 | | date conversion, production rates, deliveries, customer financing, sales, | | revenues, margins, earnings, cash, scheduled launches of products, research | | and development expense, inventory turn rates, employment, asset | | utilization, and other trend projections. This forward-looking information | | is based upon a number of assumptions, including assumptions regarding | | demand, internal performance, customer financing, customer, supplier and | | subcontractor performance, customer model and feature selections, | | government policies and actions, and price escalation. Actual future | | results and trends may differ materially depending on a variety of factors, | | including the Company's successful execution of internal performance plans, | | including research and development, production recovery, production rate | | increases and decreases, production system initiatives and other | | cost-reduction efforts; the cyclical nature of the Company's business; | 28 29 | 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 key | | suppliers, subcontractors and customers; customer model and feature | | 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; price escalation trends; changing priorities or | | reductions in the U.S. Government defense and space budgets; termination | | of government contracts due to unilateral government action or failure to | | perform; and legal proceedings. | | | |-----------------------------------------------------------------------------| Commercial Airplanes Commercial Airplanes products and services accounted for 63%, 59% and 56% of total operating revenues for the years 1998, 1997 and 1996, respectively. Total commercial jet aircraft deliveries by model, including deliveries under operating lease, which are identified by the number in parentheses, were as follows: 1998 1997 1996 - -------------------------------------------- 737 Classic 116(6) 132 76 737 NG 165 3 - 747 53(3) 39 26 757 50 46 42 767 47 41 42 777 74 59 32 MD-80 8(4) 16(7) 12(1) MD-90 34 26(5) 24(2) MD-11 12(2) 12(1) 15(2) - -------------------------------------------- Total 559 374 269 ============================================ The MD-80 and MD-90 aircraft will not be produced after early 2000. Final delivery of the MD-11 aircraft will be in 2001. First delivery of the 717 aircraft (formerly the MD-95) is scheduled for mid-1999. Total commercial aircraft deliveries for 1999 are currently projected to be in the range of 620 aircraft, including approximately 360 777s and Next-Generation 737s. Based on current plans, Commercial Airplanes revenues for 1999 are expected to be in the $38 billion range. Total commercial aircraft deliveries for 2000 are currently projected to be in the range of 480 aircraft. Commercial aircraft transportation trends are discussed in the Commercial Airplanes Business Environment and Trends section on pages 44 - 46. Commercial Airplanes sales by geographic region: [Graphic and image material item Number 2 See appendix on page 115 for description.] 29 30 Information, Space and Defense Systems Information, Space and Defense Systems segment revenues were $19.9 billion in 1998, compared with $18.1 billion in 1997 and $14.9 billion in 1996. The 1998 revenues of $19.9 billion are composed of $13.0 billion for Military Aircraft and Missiles and $6.9 billion for Space and Communications. Revenues for 1998 and 1997 include the aerospace and defense operations acquired from Rockwell in 1996. A 14-week labor strike at the St. Louis, Missouri, facilities delayed certain deliveries in 1996, principally involving military aircraft. The Company's Information, Space and Defense Systems business is broadly diversified, and no program accounted for more than 15% of total 1996-1998 segment revenues. The principal contributors to 1998 Information, Space and Defense Systems revenues included the Military Aircraft and Missiles programs of C-17, F-15, F/A-18 C/D, F/A-18 E/F, and AH-64 Apache; and the Space and Communications programs of the International Space Station, E-3 AWACS (Airborne Warning and Control System) updates and 767 AWACS, and the Delta II space launcher. Classified projects for the U.S. Government also continued to contribute to revenues. Deliveries of selected production units were as follows: 1998 1997 1996 - -------------------------------------------- C-17 10 7 6 F-15 39 19 11 F/A-18 C/D 29 46 32 F/A-18 C/D Kits - 20 9 T-45TS 16 11 9 CH-47 18 1 - 757/C-32A 4 - - 767 AWACS 2 - - Delta II 13 12 11 Delta III 1 - - Military Aircraft and Missiles segment revenues for 1999 are projected to be in the $12 billion range, and 1999 revenues for Space and Communications are projected to be in the $7 billion range. Segment business trends are discussed in the Information, Space and Defense Systems Business Environment and Trends section on pages 46 and 47. Customer and Commercial Financing/Other Operating revenues in the Customer and Commercial Financing/Other segment were $730 million in 1998, compared with $746 million in 1997 and $603 million in 1996. The major revenue components include commercial aircraft financing and commercial equipment leasing. Additional information about revenues and earnings contributions by business segment is presented on pages 52 - 56. . . . . . . . . Based on current schedules and plans, the Company projects total 1999 revenues to be approximately $58 billion. 30 31 EARNINGS Net earnings for the three years include a significant special charge in addition to earnings fluctuations associated with the Company's share-based plans as summarized below (net of income tax): (Dollars in millions) 1998 1997 1996 - ---------------------------------------------------- Comparative net earnings before special charges and share-based plans $1,216 $ 632 $1,905 Special charges principally associated with Douglas products (MD-series aircraft) (876) Share-based plans (96) 66 (87) - ---------------------------------------------------- Net earnings (loss) $1,120 $(178) $1,818 ==================================================== In the fourth quarter of 1997, the Company completed an assessment of the financial impact of its post-merger strategy decisions related to its McDonnell Douglas Corporation commercial aircraft product lines, and recorded a special pretax charge of $1,400 million, or $876 million after tax, relative to these decisions. The charge principally represented an inventory valuation adjustment based on post-merger assessments of the market conditions and related program decisions. Also included in the charge were valuation adjustments in connection with customer financing assets and commitments. The share-based plans are discussed Note 16 to the consolidated financial statements on pages 81 - 84. Comparative net earnings (exclusive of special charges and share-based plans): [Graphic and image material item Number 3 See appendix on page 115 for description.] Comparative earnings of $1,216 million for 1998 were $584 million higher than for 1997 primarily due to higher commercial aircraft deliveries in 1998, a higher loss recognized in 1997 for the Next-Generation 737 ($218 million after tax), merger-related expenses of $120 million in 1997, and prior years' defense-related partnership research and development tax credits amounting to $57 million recognized in 1998. Additionally, interest income was lower in 1998. Comparative net earnings for 1997 were $1,273 million lower than for 1996 primarily due to commercial aircraft production inefficiencies associated with significant production rate increases. Additionally, 1997 results included increased research and development spending ($182 million after tax), merger-related expenses, and increased interest and debt expense ($75 million after tax). Partially offsetting these factors were the earnings associated with the higher sales levels in 1997 and increased interest income of $25 million after tax. The 1996 results included $199 million of after-tax income related to the settlement of certain Information, Space and Defense Systems segment contract issues and recognition of prior years' tax benefits. 31 32 Based on current plans and schedules, total Company net earnings for 1999, including share-based plans, are expected to be in the range of $1.5 billion to $1.8 billion, excluding potential favorable tax claim settlements. Operating results trends are not significantly influenced by the effect of changing prices since most of the Company's business is performed under contract. OPERATING PROFIT Commercial Airplanes The 1998 Commercial Airplanes segment earnings from operations margin, exclusive of research and development expense, forward losses, and valuation adjustments, was 4% for 1998, compared with approximately 5% for 1997 (excluding special charges) and more than 10% for 1996. Segment revenues and earnings are presented on page 55. The low overall Commercial Airplanes operating profit margins for 1998 and 1997 were due to production problems, the model mix of aircraft deliveries, lower price-escalation trends and continued pricing pressures. Production problems experienced on the commercial aircraft programs reached unexpected levels late in the third quarter of 1997. During this period, the Company was in the midst of an unprecedented production rate build-up for the 7-series commercial aircraft programs, and experienced a number of challenges, including raw material shortages, internal and supplier parts shortages, and productivity inefficiencies associated with adding thousands of new employees. These factors resulted in significant out-of-sequence work. The breadth and complexity of the entire commercial aircraft production process, especially during this time of substantial production rate increases, presented a situation where disrupted process flows caused major inefficiencies throughout the entire process chain. The 747 and 737 production lines were halted for approximately one month early in the fourth quarter of 1997. The recovery plan continued throughout 1998. The Company delivered 74 777 aircraft in 1998, compared with 59 in 1997, and 165 Next-Generation 737 models (737-600/700/800) in 1998, compared with 3 in 1997. New commercial jet aircraft programs normally have lower gross profit margins due to initial tooling amortization and higher unit production costs in the early years of a program averaged over the initial production quantity. A pretax forward loss of $350 million was recognized in the first quarter of 1998 in addition to the $700 million recognized in the third quarter of 1997 for the Next-Generation 737 program. Consequently, there was no gross profit for the Next-Generation 737 program in 1998. Deliveries of the 777 and the Next-Generation 737 will constitute a much larger proportion of Commercial Airplanes sales in 1999 than they did in 1998. With respect to the 717 program, for which deliveries begin in 1999, no gross profit will be initially recognized. The Company has significant exposures related to the 717 program, principally related to supplier commitments beyond firm backlog. 32 33 The commercial jet aircraft market and the airline industry remain extremely competitive. Competitive pressures and increased lower-fare personal travel have combined to cause a long-term downward trend in passenger revenue yields worldwide (measured in real terms). Over the past five years, airplane capacity increases in the United States have lagged air travel growth, resulting in stable or increasing passenger yields. In Asia, slowing economies, reduced business travel, and currency devaluations are contributing to sharply lower yields. These factors result in continued price pressure on the Company's products. Major productivity gains are essential to ensure a favorable market position at acceptable profit margins. The overall Commercial Airplanes segment operating profit margin for 1998 was 0.2% and is currently projected to be in the 2% to 3% range for 1999. Information, Space and Defense Systems Information, Space and Defense Systems segment operating profits for 1998, 1997 and 1996 are presented on page 55. The operating profits include the impact of joint venture losses which were driven by development costs expensed as incurred, amounting to $127 million, $102 million and $53 million, respectively. The costs were primarily associated with the Sea Launch program, (a commercial satellite launch venture with Norwegian, Russian and Ukrainian partners) and the Civil Tiltrotor program (a collaboration with Bell Helicopter Textron, Inc., to build a commercial variant of the V-22). In 1998 the Company announced that it would exit the market for commercial helicopters. As part of that strategic decision, the Company transferred its interest in the Civil Tiltrotor program to Bell Helicopter Textron in early 1998. Also, in the first quarter of 1999, the Company sold the MD 500, MD 600 and MD Explorer light commercial helicopter product lines to RDM Holding, Inc., a European-based industrial group. Segment operating profits for 1996 included $114 million of pretax earnings related to the settlement of various contract issues. Excluding joint venture losses and settlement of contract issues, the Information, Space and Defense Systems segment operating margin before research and development was approximately 12.7% in 1998 and 12% for each of the years 1997 and 1996. A significant percentage of Information, Space and Defense Systems segment business has been in developmental programs under cost-reimbursement-type contracts, which generally have lower profit margins than fixed-price-type contracts. Current major developmental programs include the International Space Station, F/A-18 E/F, F-22 Fighter, Joint Strike Fighter, V-22 Osprey tiltrotor aircraft, the RAH-66 Comanche helicopter, and the National Missile Defense (NMD) Lead System Integration (LSI). The F/A-18 E/F and V-22 Osprey tiltrotor aircraft programs are currently transitioning to low-rate initial production, and the F-22 Raptor has received long-lead funding for low-rate initial production. Although program expenditures are normally committed based on orders under contract, the Company currently has significant exposure related to long-lead requirements for the F-15 program for deliveries beyond 2000. Joint venture losses will continue in 1999, principally from development and administrative costs on the Sea Launch program. 33 34 The Sea Launch assembly and command ship and the launch platform were completed in June 1998. Boeing is a 40% partner in Sea Launch with RSC Energia (25%) from Russia, Kvaerner Maritime (20%) from Norway, and KB Yuzhnoye/PO Yuzhmach (15%) from Ukraine. The first launch from this sea-based platform will be a demonstration payload. Hughes Space & Communications International, Inc., and Space Systems/Loral are the first Sea Launch customers, with announced orders for 18 launches plus options. Technical failure on the initial launch could substantially impair the prospect for additional customers' acceptance and could consequently result in significant reduction to the value of the Sea Launch program assets. Ongoing viability of the Sea Launch program will depend on consistent launch reliability. The Company and Lockheed Martin are 50/50 partners in United Space Alliance, which is responsible for all ground processing of the Space Shuttle fleet and for space-related operations with the U.S. Air Force. United Space Alliance also performs the modification, testing and checkout operations required to ready the Space Shuttle for launch. Although the joint venture operations are not included in the Company's consolidated statements, the Company's proportionate share of joint venture earnings is recognized in income. The Military Aircraft and Missiles segment operating profit margin for 1998 was 9.9% and is currently projected to be in the 9.5% to 10.5% range in 1999. The Space and Communications segment operating profit margin for 1998 was 3.6%, and is projected to be in the 4% to 5% range for 1999. RESEARCH AND DEVELOPMENT Research and development expenditures charged directly to earnings include design, developmental and related test activities for new and derivative commercial jet aircraft, other company-sponsored product development, and basic research and development, including amounts allocable as overhead costs on U.S. Government contracts. Research and development expense: [Graphic and image material item Number 4 See appendix on page 116 for description.] In 1998 total research and development expense was $1.9 billion, about the same as in 1997. A decline in the Commercial Airplanes segment research and development expense was largely offset by an increase in the Space and Communications segment. Research and development expense had increased in 1997 by $291 million relative to 1996, primarily due to the inclusion of the aerospace and defense units acquired from Rockwell in 1996, and spending in commercial space and communications activities. Commercial Airplanes research and development expense for 1997 was approximately the same as in 1996. Research and development expense by segment is included on page 55. 34 35 Commercial Airplanes The principal commercial aircraft developmental programs during the 1996-1998 period were the 777 wide-body twinjet, the Next-Generation 737 family, and the 717 program. The first delivery of the 777 occurred in May 1995. Development of the 777-200ER extended-range version of the 777 began in 1995 and continued in 1996, with certification and first delivery in early 1997. First delivery of the increased-capacity 777-300 derivative occurred in May 1998. Certification and first deliveries of the 737-700, the first of four new 737 derivative models, occurred in December 1997. Certification and first delivery of the 737-800 and 737-600 occurred in 1998. The 737-900, the longest member of the Next-Generation 737 family, received its first order in late 1997, with first delivery scheduled for 2001. The 757-300, a stretched derivative of the 757-200, is scheduled for first delivery in early 1999; and the 767-400ER, a stretched version of the 767-300ER, is scheduled for first delivery in 2000. The 717-200 is currently in development, with first delivery scheduled for mid-1999. The following chart summarizes the time horizon between go-ahead and certification/first delivery for major Commercial Airplanes derivatives and programs. [Graphic and image material item Number 5 See appendix on page 116 for description.] Information, Space and Defense Systems The Information, Space and Defense Systems segment continues to selectively pursue commercial business opportunities where it can use its technical and large-scale integration capabilities. Such business pursuits, which are outside the traditional U.S. Government contracting environment, are expected to require significant levels of research and development expenditures over the next few years. The segment's commercial developmental programs include the Delta family of launch vehicles. . . . . . . . Total Company research and development expenditures for 1999 will be influenced by the timing of commercial aircraft derivative programs and commercial space and communication activities. Based on current programs and plans, research and development expense for 1999 is expected to be in the $1.6 billion to $1.8 billion range, with about half related to the Commercial Airplanes segment. Research and development activities are further discussed in the Strategic Investments for Long-Term Value section on pages 49 and 51. INCOME TAXES The 1998 effective income tax rate of 19.8% reflects the settlement of prior years' defense-related partnership research and development tax credits of $57 million, as well as Foreign Sales Corporation tax benefits of $130 million. The income tax provision for 1997 is a tax credit resulting from application of the tax rate to a pretax loss. The relatively high effective 1997 income tax rate of 47.8% reflects additional benefits, principally Foreign Sales Corporation tax benefits of $79 million. These benefits were partially offset by the nondeductibility of goodwill and merger costs. 35 36 The 1996 effective income tax rate of 26.7% reflects tax benefits of $125 million related to prior years, as well as Foreign Sales Corporation tax benefits of $110 million. Over the past three years, excluding tax benefits related to prior periods and the impact of special charges, the effective income tax rate has been about 30%. The Company expects the comparable 1999 rate to continue to be in that range. Additional information relating to income taxes is found in Note 11 to the consolidated financial statements on pages 74 and 75. LABOR NEGOTIATIONS AND WORKFORCE LEVELS As of December 31, 1998, the Company's principal collective bargaining agreements were with the International Association of Machinists and Aerospace Workers (IAM) representing 30% of employees (current agreements expiring September 1999, October 1999, and May 2001), Seattle Professional Engineering Employees Association (SPEEA) representing 12% of employees (current agreements expiring December 1999), the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) representing 6% of employees (current agreements expiring June 1999, September 1999, and April 2000), and Southern California Professional Engineering Association (SCPEA) representing 2% of employees (current agreement expiring March 2001). The Company believes that bargaining agreements in the best interest of both the represented employees and the Company are attainable, and the Company's stated objective is to reach a settlement without disruption. The effects of a strike on the results of operations and financial position are uncertain, but could be material depending on the strike duration. The Company's workforce level at December 31, 1998, was 231,000. The year-end 1999 workforce level is projected to be in the range of 200,000 to 210,000. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In 1998, Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued. The Company plans to adopt this statement beginning in the year 2000. Adoption of this standard is not expected to have a significant impact on the financial results of the Company. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The primary factors that affect the Company's investment requirements and liquidity position, other than operating results associated with current sales activity, include the timing of new and derivative programs requiring both high developmental expenditures and initial inventory buildup; cyclical growth and expansion requirements; customer financing assistance; the timing of federal income tax payments; and the Company's stock repurchase plan. 36 37 CASH FLOW SUMMARY Following is a summary of Company cash flows based on changes in cash and short-term investments. This cash flow summary is not intended to replace the Consolidated Statements of Cash Flows on page 59 that are prepared in accordance with generally accepted accounting principles, but is intended to highlight and facilitate understanding of the principal cash flow elements. (Dollars in billions) 1998 1997 1996 - ------------------------------------------------------------ Net earnings (loss) $ 1.1 $(0.2) $ 1.8 Non-cash charges to earnings (a) 1.8 2.8 1.5 - ------------------------------------------------------------ Net earnings adjusted for certain non-cash items 2.9 2.6 3.3 Change in gross inventory (b) 1.5 (4.9) (1.9) Change in customer advances (c) (0.9) 3.9 2.2 Net changes in receivables, liabilities and deferred income taxes (d) (1.2) 0.7 1.1 Facilities and equipment expenditures (1.6) (1.4) (1.0) Change in customer and commercial financing (e) (1.2) (0.9) 0.3 Pension income (expense) variance to funding (0.3) (0.3) (0.2) - ------------------------------------------------------------ Cash flows from operating and investing activities (0.8) (0.3) 3.8 Change in debt (f) 0.1 (0.6) (0.1) Net shares issued (acquired) (g) (1.3) 0.3 (0.5) ShareValue Trust shares acquired (h) (0.9) Cash dividends (0.6) (0.6) (0.5) - ------------------------------------------------------------ Increase (decrease) in cash and short-term investments $(2.6) $(1.2) $ 1.8 ============================================================ Cash and short-term investments at end of year $ 2.5 $ 5.1 $ 6.3 ============================================================ (a) Non-cash charges to earnings as presented here consist of depreciation, amortization, retiree health care accruals, share-based plans, and the special charges in 1997 for Douglas products programs. The Company has not funded retiree health care accruals and, at this time, has no plan to fund these accruals in the future. The share-based plans do not impact current or future cash flow, except for the associated positive cash flow tax implications. The special charges associated with the Douglas products programs principally involved inventory balance valuation adjustments. (b) Inventory associated with the 777 program increased substantially in 1996 and 1997, and declined in 1998 due to amortization of initial tooling and deferred production costs. Inventory balances on the 747, 757 and 767 commercial jet programs increased in 1997 and 1998 due to increased production rates. Additionally, production and tooling inventory increased on the new 737-600/700/800/900 program in 1996, 1997 and 1998. 37 38 (c) The increases and decreases in commercial customer advances during 1996, 1997 and 1998 were broadly distributed among the commercial jet programs, and generally correspond to orders and production rate levels. With regard to Information, Space and Defense Systems segment activity, the ratio of progress billings to gross inventory did not significantly change during this period. (d) Over the three-year period 1996-1998, changes in accounts receivable, accounts payable, other liabilities and deferred taxes resulted in a net increase in cash of $0.6 billion. This was largely attributable to increases in accounts payable and other liabilities of $1.2 billion, mostly as a result of increased business activity, partially offset by income taxes payable and deferred of $0.4 billion. Excluding potential tax claim settlements discussed in Note 11 to the financial statements, federal income tax payments over the next three years are projected to substantially exceed income tax expense due to anticipated completion of contracts executed under prior tax regulations. (e) The changes in customer financing balances have been largely driven by commercial aircraft market conditions and the ability of the Company to sell customer financing assets. Over the three-year period 1996-1998, the Company generated $3.9 billion of cash from principal repayments and by selling customer financing receivables and operating lease assets. Over the same period, additions to customer financing amounted to $5.8 billion. As of December 31, 1998, the Company had outstanding commitments of approximately $6.2 billion to arrange or provide financing related to aircraft on order or under option for deliveries scheduled through the year 2004. Not all these commitments are likely to be used; however, a significant portion of these commitments is with parties with relatively low credit ratings. See Note 19 to the financial statements concerning concentration of credit risk. The Company will continue to sell financing assets from time to time when capital markets are favorable in order to maintain maximum capital resource flexibility. Outstanding loans and commitments are primarily secured by the underlying aircraft. (f) Debt amounting to $301 million matured in 1998, and $300 million was added with maturity in 2038. In 1997, debt amounting to $637 million matured, and the Company also retired $230 million of debt through a tender offer for the 9.25% notes due April 1, 2002. Additionally, Boeing Capital Corporation, a corporation wholly owned by the Company, issued $511 million of debt in 1998 and $225 million in 1997. (g) In the third quarter of 1998, the Company announced a share repurchase program to buy up to 15% of the Company's outstanding shares of common stock. In 1998 the Company repurchased 35.2 million shares of stock (approximately 3.5% of outstanding stock) for $1.3 billion. (h) Total funding of the ShareValue Trust was $1.7 billion; however, a portion of the funding was accomplished through the transfer of treasury shares and the issuance of new shares. 38 39 CAPITAL RESOURCES The Company has unsecured long-term debt obligations of $6.1 billion. Approximately $650 million matures in 1999, and the balance has an average maturity of 16 years. Total long-term debt as of year-end 1998 amounted to 33% of total capital (shareholders' equity plus borrowings). The Company has substantial additional long-term borrowing capability. Revolving credit line agreements with a group of major banks, totaling $2.64 billion, remain available but unused. The Company believes its internally generated liquidity, together with access to external capital resources, will be sufficient to satisfy existing commitments and plans, and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise, and to continue to repurchase Company stock per the share repurchase program. CONTINGENT ITEMS The Company is subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. Due in part to their complexity and pervasiveness, such requirements have resulted in the Company being involved with related legal proceedings, claims and remediation obligations since the 1980s. The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company's policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred. The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company's financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings exclusive of special charges. Such accruals as of December 31, 1998, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities. Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company's financial position or operating results and cash flow trends. 39 40 The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the Government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company believes, based upon all available information, that the outcome of any such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations. 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 December 31, 1998, 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 December 19, 1995, the U.S. Court of Federal Claims ordered that the Government's termination of the A-12 contract for default be converted to a termination for convenience of the Government. On December 13, 1996, the court issued an opinion confirming its prior no-loss adjustment and no-profit recovery order. On December 5, 1997, the Court issued an opinion confirming its preliminary holding that plaintiffs were entitled to certain adjustments to the contract funding, increasing the plaintiffs' possible recovery to $1,200 million. On March 31, 1998, the Court entered a judgment, pursuant to a March 30, 1998, opinion and order, determining that plaintiffs were entitled to be paid that amount, plus statutory interest from June 26, 1991, until paid. Although the Government has appealed the resulting judgment, the Company believes the judgment will be sustained. Final resolution of the A-12 litigation will depend on such appeals and possible further litigation, or negotiations, with the Government. If sustained, however, the expected damages judgment, including interest, could result in pretax income that would more than offset the $350 million loss provision established in 1990. On October 31, 1997, a federal securities lawsuit was filed against the Company in the U.S. District Court for the Western District of Washington in Seattle. The lawsuit names as defendants the Company and three of its executive officers. Additional lawsuits of a similar nature have been filed. The plaintiffs in each lawsuit 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 40 41 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 June 6, 1998, sixteen 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 the U.S. District Court for the Western District of Washington (Washington Class Action) alleging, on the basis of race, discrimination in 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 have worked for the three companies during the past few years. Also, on July 31, 1998, seven African American employees of the helicopter division of the Military Aircraft and Missile Systems Group in Philadelphia filed an action in the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia Class Action) alleging, on the basis of race, discrimination 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. In September 1998, the Court denied plaintiffs' motion seeking class certification, but allowed plaintiffs to renew their motion upon completion of class discovery. On January 25, 1999, the U.S. District Court in the Western District of Washington entered an order preliminarily approving a proposed Consent Decree, which settles both the Washington Class Action and the Philadelphia Class Action, along with a multi-plaintiff racial discrimination lawsuit. The order, inter alia, conditionally certified a nationwide class of 20,000 current and former African American Boeing (including all U.S. subsidiaries and former McDonnell Douglas Corporation and Rockwell International) employees. If approved by the Court, the Company will pay $15 million allocated in a manner described in the proposed Consent Decree. The Company will devise systems changes that will inform hourly employee class members about the promotion selection process, and which employee was awarded a certain promotion; provide training and other programs to assist employees with career development; employ a consultant to assess these system changes; implement across the system a revised first-level management selection process and revised internal complaint process; and implement enforcement procedures to maintain a harassment-free workplace. A hearing is set for May 26, 1999, to determine the fairness of the proposed Consent Decree and, if so determined, for the Court to approve the Consent Decree. The Company believes that the proposed Consent Decree, if approved, will not have a materially adverse effect on its earnings, cash flow or financial position. 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 and its Foreign Sales Corporation for the 41 42 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. Income taxes have been settled with the Internal Revenue Service (IRS) for all years through 1978, and IRS examinations have been completed through 1987. In connection with these examinations, the Company disagrees with IRS proposed adjustments, and the years 1979 through 1987 are in litigation. The Company has also 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. YEAR 2000 (Y2K) DATE CONVERSION The Y2K issue exists because many computer systems, applications and assets use two-digit date fields 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 and operations information incorrectly. State of readiness: The Company recognized this challenge early, and major operating units started work 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 embedded systems, facilities and factory floor systems. Each operating unit has responsibility for its own conversion, in line with overall guidance and oversight provided by a corporate-level steering committee. The Company has largely completed remediation of systems to meet safety and business continuity concerns and has a plan in place that targets deployment of Y2K-ready systems companywide by July 31, 1999. The Company is continuing to emphasize the safety and quality of Boeing products and to clarify that Y2K is a business challenge and not limited to computers. The Company is capitalizing on its history of integrating complex systems, has an experienced Y2K team in place headed by the Company's chief information officer, and is working to ensure supplier and customer readiness as appropriate. The Company has identified approximately 14,000 computing systems and assessed them for Y2K readiness. More than 90% of the systems were made Y2K-ready by December 31, 1998. The status of each of the remaining systems will be specifically tracked and monitored. The schedule is for IT and non-IT systems to complete conversion, testing and deployment by July 31, 1999. A companywide, coordinated process to assess supplier readiness began in the second quarter of 1998. The Company is unable to definitively determine that all major suppliers will reach a Y2K-ready status that will ensure no production disruption from suppliers. Costs to address Y2K issues: The Company's Y2K conversion efforts have not been budgeted and tracked as separate projects, but have occurred in 42 43 conjunction with normal sustaining activities. Total application-sustaining IT costs have averaged approximately $350 million per year over the last three years. Y2K conversion efforts have averaged approximately 10% of total sustaining IT costs for these years, and are expected to represent a lower percentage in 1999. In addition to these sustaining costs, discretely identifiable costs associated with Y2K conversion activities are expected to total $16 million. The costs of non-IT conversion efforts have also been incurred in conjunction with normal sustaining activities. The Company does not expect a reduction in the costs of these sustaining activities when Y2K conversion activities are completed because normal sustaining activities will be ongoing. Reprioritizing sustaining activities to support Y2K conversion activities has not had, and is not expected to have, an adverse impact on operations. Risks associated with Y2K issues: The Company believes there is low risk of any internal critical system, embedded system, or other critical asset not being Y2K-ready by the end of 1999. The Company continues to assess its risk exposure attributable to external factors and suppliers, including suppliers outside the United States. Although the Company has no reason to conclude that any specific supplier represents a risk, the most reasonably likely worst-case Y2K scenario would entail production disruption due to inability of suppliers, some of whom represent the sole source for certain items, to deliver critical parts. The Company is unable to quantify such a scenario, but it could potentially result in a material adverse impact on results of operations, liquidity or financial position of the Company. Contingency plans for suppliers and mission critical systems impacted by Y2K issues are currently being developed. Where appropriate, these plans will include leveraging the existing communications and transportation infrastructure created by the Company's Disaster Preparedness Program, which is designed to respond to disaster scenarios caused by natural, technological and manmade factors. Boeing continues to work closely with local, state and federal emergency management organizations to ensure that coordinated plans are in place in case infrastructure problems occur in the year 2000. MARKET RISK EXPOSURE 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 December 31, 1998, the notional value of such derivatives was $395 million, with a net unrealized gain of $2 million. Less than 1% of receipts and expenditures are contracted in foreign currencies, and the Company does not consider the market risk exposure relating to currency exchange to be material. 43 44 COMMERCIAL AIRPLANES BUSINESS ENVIRONMENT AND TRENDS - ---------------------------------------------------- The worldwide market for commercial jet aircraft is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth, both in developed and emerging countries, and political stability. Demand for the Company's commercial aircraft is further influenced by airline industry profitability, world trade policies, government-to-government relations, environmental constraints imposed upon aircraft operations, technological changes, and price and other competitive factors. GLOBAL ECONOMIC AND PASSENGER TRAFFIC TRENDS As the world economy improved in this decade, airline passenger traffic increased. For the five-year period 1994-1998, the average annual growth rate for worldwide passenger traffic was approximately 6.0%. The Company's 20-year forecast of the average long-term growth rate in passenger traffic is approximately 4.7% annually, based on projected average worldwide annual economic real growth of 2.9% over the 20-year period. Based on global economic growth projections over the long term, and taking into consideration increasing utilization levels of the worldwide aircraft fleet and requirements to replace older aircraft, the Company projects the total commercial jet aircraft market over the next 20 years at more than $1,000 billion in 1998 dollars. ASIA-PACIFIC ECONOMIES Results in 1998 for Asia-Pacific airlines were mixed. Recessions are now under way throughout Asia, impacting the economies of Japan, Malaysia, the Philippines, Hong Kong, Singapore, Indonesia, Thailand and South Korea. Air travel declined in a number of regional markets. Passenger load factors declined and some airlines reported net losses. With growth in the region lower than past forecasts, airlines, including those in China, are reassessing the number and timing of aircraft contracted to deliver during the next several years. AIRLINE PROFITABILITY Through a combination of passenger traffic growth, improved revenue, lower fuel costs and aggressive cost control measures, the airline industry as a whole significantly improved operating profitability and net earnings over the past few years. The industry realized a substantial positive level of earnings over the four-year period 1995-1998. The outlook for passenger traffic growth in 1999 is generally positive, especially in the United States, Europe, Latin America and for trans-Atlantic flights. Continued profitability levels depend on sustained economic growth, limited wage increases, and capacity additions in line with traffic increases. 44 45 AIRLINE DEREGULATION Worldwide, the airline industry has experienced progressive deregulation of domestic markets and increasing liberalization of international markets. Twenty years ago virtually all air travel took place within a framework of domestic and international regulatory oversight. Since then, several countries, most notably the United States, Australia, Japan and the countries in Western Europe, have eliminated restrictive regulations for domestic airline markets and promoted a more open-market climate for international services. Currently, more than half of all air travel takes place within an open-market environment. These trends are expected to continue, but at varying rates in different parts of the world. Liberalization of government regulations, together with increased aircraft range capabilities, gives airlines greater freedom to pursue optimal fleet-mix strategies. This increased flexibility allows the airlines to accommodate traffic growth by selecting the best mix of flight frequencies and aircraft size and capabilities for their route systems. In intercontinental markets, more liberal bilateral air service agreements provide an important stimulus to opening new city-pair markets, which favor increased flight frequency over capacity growth. In parallel with regulatory liberalization, developments in improving aircraft range performance will continue to allow airlines to expand the number of direct city-to-city routes, thus reducing the reliance on indirect routes through central hubs that require larger capacity aircraft. INDUSTRY COMPETITIVENESS AND WORLD TRADE POLICIES Over the past ten years, the Company (including McDonnell Douglas) has maintained, on average, approximately a two-thirds share of the available commercial jet aircraft market. Airbus Industrie is an aggressive competitor seeking to increase market share. This market environment has resulted in intense pressures on pricing and other competitive factors. The Company's focus on improving processes and other cost reduction efforts is intended to enhance its ability to pursue pricing strategies that enable the Company to maintain leadership at satisfactory margins. The Company's extensive customer support services network for airlines throughout the world plays a key role in maintaining high customer satisfaction. On-line access is available to all airline customers for engineering drawings, parts lists, service bulletins and maintenance manuals. Over the past five years, sales outside the United States have accounted for approximately 62% of the Company's total Commercial Airplanes sales; approximately 45% of the Commercial Airplanes contractual backlog at year-end 1998 was with customers based outside the United States. Continued access to global markets is extremely important to the Company's future ability to fully realize its sales potential and projected long-term investment returns. In 1992 the U.S. Government and the European Community announced agreement on interpreting the commercial aircraft code of the General Agreement on Tariffs and Trade (GATT). The 1992 agreement bans government production subsidies and limits development support in the form of loans to 33% of development costs. The Company prefers a ban on all government subsidies for commercial airplane programs, and views the controls embodied in the 1992 agreement as an important step in limiting future government subsidies to Airbus Industrie. The announced 45 46 intention by the four Airbus partners to transform the Airbus consortium into a commercial company may remove Airbus operations from government control and increase financial transparency. The World Trade Organization (WTO), based in Geneva, promotes open and non- discriminatory trade among its members. It administers an improved subsidies code, applicable to all members, that provides important protections against injurious subsidies by governments. It also uses improved dispute settlement procedures to resolve disagreements among nations. The 1992 bilateral United States-European Union agreement and the WTO subsidies code constitute the basic limits on government supports of development costs. Governments and companies in Asia and the former Soviet Union are seeking to develop or expand aircraft design and manufacturing capabilities through teaming arrangements with each other or current manufacturers. The Company continues to explore ways to expand its global presence in this environment. In spite of the current Asian economic difficulties, Company forecasts indicate that the airlines in China represent a significant potential market for commercial jet aircraft over the next 20 years. However, if government and trade relations between the United States and China deteriorate significantly, the Company's ability to sell commercial aircraft to airlines in China could be severely constrained. The Company continues to support the Asia Pacific Economic Cooperation (APEC) forum to promote open trade and investment in the region. For other countries in Asia, economic growth must return if the potential of the region is to be realized. Airlines in Russia and other states in the former Soviet Union operate a limited but increasing number of western-built aircraft. Because of slow economic growth, high customs duties, a shortage of foreign exchange, and legal and financing constraints, new aircraft orders have not been significant. The Company expects that the airlines and the aircraft manufacturing industry in this region will eventually be integrated into the international economy. SUMMARY Although near-term market uncertainties remain, particularly with respect to the economic situation in certain Asian countries and open market access, the long-term market outlook appears favorable. The Company is well positioned in all segments of the commercial jet aircraft market, and intends to remain the airline industry's preferred supplier through emphasis on product offerings and customer service that provide the best overall value in the industry. INFORMATION, SPACE AND DEFENSE SYSTEMS BUSINESS ENVIRONMENT AND TRENDS - ---------------------------------------------------------------------- The Company's acquisition of the defense and space units of Rockwell and the merger with McDonnell Douglas have created a large and diversified business segment in Information, Space and Defense Systems. Boeing is the world's largest producer of military aircraft, the principal contractor for NASA, and the second largest U.S. Department of Defense (DoD) supplier. The Company's programs are well balanced between current production and upgrade activities and major development programs with large potential production quantities. 46 47 GENERAL ENVIRONMENT The major trends that continue to shape the current Information, Space and Defense Systems segment business environment include significant but relatively flat DoD and NASA budgets; rapid expansion of information and communication technologies and market demand; and a convergence among military, civil and commercial markets. The DoD remains the principal customer of this business segment, and DoD procurement funding levels are expected to remain essentially flat on an inflation-adjusted basis. The Company's DoD programs are subject to uncertain future funding levels, which can result in the stretch-out or termination of some programs. Congressional adoption of proposed DoD procurement reforms is believed to be important to the future funding levels available for the Company's defense products. Domestically, continuing demands for peacekeeping operations are driving high usage of equipment, and the aging of equipment is creating operating cost affordability pressures. However, there is insufficient DoD budget to adequately modernize equipment and maintain a high level of readiness. These factors contribute to awareness in Congress that the DoD budget may need to be increased. NASA's budget is also expected to remain relatively flat over the next several years. To generate additional procurement funds, NASA is likely to continue to outsource many of its operational functions. A modest decline is forecast for the defense and space budgets of other countries. Current economic problems in certain Asian countries have resulted in the deferral of some modernization investments in defense. Sales of defense systems to allies in the Persian Gulf region will continue to be paced by regional tensions and oil revenues. In Europe, defense budgets are projected to gradually decline. Overall the Company faces strong competition in all market segments. The acquisition and merger consolidations among U.S. aerospace companies have resulted in three principal prime contractors for the DoD and NASA, including the Company. While there may be some further niche acquisitions at the prime contractor level, the major area for further consolidation is likely to be among subcontractors to the primes. Lockheed Martin and Raytheon are the Company's primary U.S. competitors for this business segment, although in certain commercial markets Loral and Hughes are also principal competitors. As a result of the extensive consolidation in the defense and space industry, the Company and its major competitors are also partners with or major suppliers to each other on various programs. The consolidation and rationalization of the European defense and space companies has been proceeding for several years, mainly within individual nations. Cross-border mergers in the form of joint ventures have been largely confined to individual market segments, such as satellites or missiles. Encouragement by the governments of France, Germany and the United Kingdom may result in broader mergers to create larger European companies. Internationally, the largest European aerospace companies compete in many of the same market segments with the Company's products and services. At the same time, these companies are also potential teaming partners. 47 48 BUSINESS SEGMENT PRODUCT LINES The newly formed Military Aircraft and Missiles segment produces tactical fighters, trainers, helicopters, military transports, tankers, strike missiles, and special purpose airplanes for the U.S. and foreign governments. The basic strategy is to provide a competitive product in every selected market segment. This business segment has several programs that are now in production for the DoD, such as the C-17 Transport, F/A-18 E/F, T-45 Trainer and V-22 Tiltrotor. Other programs include those that are still in development, such as the F-22 fighter and RAH-66, or in competitive development, such as the Joint Strike Fighter. Despite expected modest declines in global defense budgets, there continues to be strong international demand for military aircraft and missiles. Foreign sales approved by the U.S. Government are extending some product lines, such as the F-15 fighter, the Harpoon missile and the AH-64 and CH-47 helicopters. Based on these trends, moderate growth in this business segment is expected. The newly formed Space and Communications segment participates in both government and commercial markets, including launch services, orbital systems and exploration, information and battle management systems, and missile defense systems. The most significant market force affecting the launch services business is the projected growth in the commercial market for launches of communication satellites to low-earth orbit. The basic strategy is to provide a full family of space launch vehicles. The Space and Communications segment is well positioned with the Delta family and Sea Launch commercial launch vehicles, and is the prime contractor for NASA's Space Shuttle program. The orbital systems and exploration market will be flat to slightly declining. Currently the major focus in this area is the International Space Station. The Company is the prime contractor for the program's development phase, and is positioned to continue as prime contractor throughout its lifetime in orbit. Investments are being made as well to assist NASA in its space exploration initiatives. The addressable market components of the global information and communications industry are valued at approximately $20 billion in 1998 dollars and are forecast to grow sevenfold over the next decade. An element of the Space and Communications segment's long-term growth is tied to the growth in this global market. The Company's involvement in several ventures will provide opportunities for significant market penetration. Company programs that provide leverage in this market include the Global Positioning System (GPS) and the Airborne Warning and Control System (AWACS). This large-scale systems integration experience, coupled with alliances and company-funded initiatives, well positions the Company for the future in the information and communications marketplace. The missile defense market offers Boeing the potential to become the leading U.S. systems contractor for ballistic and cruise missile defense, and also to make significant inroads in providing similar systems to Europe, Japan and other governments. 48 49 STRATEGIC INVESTMENTS FOR LONG-TERM VALUE - ----------------------------------------- Over the past several years, the Company has made significant internal investments to meet future airline product requirements, to achieve production efficiencies, and to aggressively pursue new Space and Communications business opportunities. Although constraining earnings and requiring substantial resources in the near term, these investments are building long-term value by streamlining operations and positioning the Company to maintain its aerospace industry leadership. NEW PRODUCT DEVELOPMENT The Company continually evaluates opportunities to improve current aircraft models, and assesses the marketplace to ensure that its family of commercial jet aircraft is well positioned to meet future requirements of the airline industry. The fundamental strategy is to maintain a broad product line that is responsive to changing market conditions by maximizing commonality among the Boeing family of commercial aircraft. Additionally, the Company is determined to continue to lead the industry in customer satisfaction by offering products with the highest standards of quality, safety, technical excellence, economic performance and in-service support. New business opportunities being pursued or studied include both military and commercial applications. On the military side, the Company continues to assess potential applications using the Company's commercial aircraft, particularly the 767 and 737. In the commercial space arena, the Company is leading the Sea Launch team to offer highly automated commercial satellite launching from a seagoing launch platform. First launch is currently scheduled for March 1999. The Company is investing in the development of the Delta IV family of expendable launch vehicles. These product offerings provide access to significant portions of the space launch market not previously available with the Delta II rocket. This investment, coupled with the U.S. Air Force Evolved Expendable Launch Vehicle program, positions the Company for potential market share gains. In information and communications-related activities, the Company is evaluating several ventures with potential for hardware development. Satellite technology investments leverage ongoing government space programs. Company-sponsored research products are also available for use in commercial communication systems with a variety of customers. 49 50 MAJOR PROCESS IMPROVEMENTS The Company remains strongly committed to becoming a world-class leader in all aspects of its business and to maintaining a strong focus on customer needs, including product capabilities, technology, in-service economics and product support. Major long-term productivity gains are being aggressively pursued, with substantial resources invested in education and training, restructuring of processes, new technology, and organizational realignment. The 777, the Next-Generation 737, the Joint Strike Fighter, and other recent commercial and government developmental programs included early commitment of resources for integrated product teams, design interface with customer representatives, use of advanced three-dimensional digital product definition and digital pre-assembly computer applications, and increased use of automated manufacturing processes. Although these measures have required significant current investments, substantial long-term benefits are anticipated from reductions in design changes and rework, and improved quality of internally manufactured and supplier parts. A major initiative to simplify and streamline our commercial aircraft configuration controls and production systems continues to be implemented. Nineteen parts fabrication factories are now running on the new manufacturing resource management systems, and sales teams and customers are now using a new tool that allows them to more efficiently configure aircraft to customer specifications. Based on current plans, Commercial Airplanes segment engineering and assembly factories will be fully implemented over the next two years. The Military Aircraft and Missiles segment and the Space and Communications segment continue to aggressively pursue important process improvements through integrated product teams that provide cost-effective solutions and maintain technological superiority. Phantom Works, the advanced research and development organization of Boeing, focuses on improving the Company's competitive position through innovative technologies, improved processes and creation of new products. The Company continues to assess potential opportunities for improved use and consolidation of facilities across all parts of the Company and to focus on those capabilities and processes that contribute to our core competencies resulting in a competitive advantage. Future decisions regarding facilities conversions or consolidations will be based on long-term business objectives. Within the Military Aircraft and Missiles and Space and Communications segments, major restructuring activities will be contingent on demonstration of cost savings for U.S. Government programs and the Company. The Company is pursuing the means to significantly reduce new product development cost and flow time. Initiatives that have come out of this effort include the formation of the Creation Center, which is tied closely with Phantom Works, and other comparable efforts. Another initiative is the migration to platforms and platform teams modeled, to some degree, after Chrysler and other benchmarked companies. Other initiatives include design tool automation integrated with manufacturing, improved loads models, and decision support methodologies. 50 51 During 1998 the structure for realization of synergies across the Company was developed in the form of companywide Process Councils. These Councils consist of the leaders of key processes from each of the operating groups, as well as Phantom Works, and rapidly share best practices and combine efforts to meet needs across the Company. Process Councils have been established for Define, Manufacturing, Quality and Procurement processes. 51 52 SEGMENT INFORMATION The Company is organized based on the products and services that it offers. Under this organizational structure, the Company operates in three principal areas: Commercial Airplanes, Military Aircraft and Missiles, and Space and Communications. Commercial Airplanes operations principally involve development, production and marketing of commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide. Military Aircraft and Missiles operations principally involve research, development, production, modification and support of the following products and related systems: military aircraft, both land-based and aircraft-carrier-based, including fighter, transport and attack aircraft with wide mission capability, and vertical/short takeoff and landing capability; helicopters and missiles. Space and Communications operations principally involve research, development, production, modification and support of the following products and related systems: space systems; missile defense systems; satellite launching vehicles; rocket engines; and information and battle management systems. Although some Military Aircraft and Missiles and Space and Communications products are contracted in the commercial environment, the primary customer is the U.S. Government. The Customer and Commercial Financing/Other segment is primarily engaged in the financing of commercial and private aircraft, commercial equipment, and real estate. The Commercial Airplanes segment is subject to both operational and external business-environment risks. Operational risks that can seriously disrupt the Company's ability to make timely delivery of its commercial jet aircraft and meet its contractual commitments include execution of internal performance plans, product performance risks associated with regulatory certifications of the Company's commercial aircraft by the U.S. Government and foreign governments, other regulatory uncertainties, collective bargaining labor disputes, and performance issues with key suppliers and subcontractors. While the Company's principal operations are in the United States, Canada, and Australia, some key suppliers and subcontractors are located in Europe and Japan. External business-environment risks include adverse governmental export and import policies, factors that result in significant and prolonged disruption to air travel worldwide, and other factors that affect the economic viability of the commercial airline industry. Examples of factors relating to external business-environment risks include the volatility of aircraft fuel prices, global trade policies, worldwide political stability and economic growth, escalation trends inherent in pricing the Company's aircraft, and a competitive industry structure which results in market pressure to reduce product prices. In addition to the foregoing risks associated with the Commercial Airplanes segment, the Military Aircraft and Missiles segment and the Space and Communications segment are subject to changing priorities or reductions in the U.S. Government defense and space budget, and termination of government contracts due to unilateral government action (termination for convenience) or failure to perform (termination for default). Civil, criminal or administrative proceedings involving fines, compensatory and treble damages, restitution, forfeiture and suspension or debarment from government contracts may result from violations of business and cost classification regulations on U.S. Government contracts. 52 53 As of December 31, 1998, the Company's principal collective bargaining agreements were with the International Association of Machinists and Aerospace Workers (IAM) representing 30% of employees (current agreements expiring September 1999, October 1999, and May 2001), Seattle Professional Engineering Employees Association (SPEEA) representing 12% of employees (current agreements expiring December 1999), the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) representing 6% of employees (current agreements expiring June 1999, September 1999, and April 2000), and Southern California Professional Engineering Association (SCPEA) representing 2% of employees (current agreement expiring March 2001). Sales by geographic area consisted of the following: (Dollars in millions) Year ended December 31, 1998 1997 1996 =========================================================== Asia, other than China $14,065 $11,437 $ 8,470 China 1,572 1,265 951 Europe 8,646 7,237 4,198 Oceania 844 1,078 821 Africa 702 192 156 Western Hemisphere, other than the United States 701 228 466 - ----------------------------------------------------------- 26,530 21,437 15,062 United States 29,624 24,363 20,391 - ----------------------------------------------------------- Total sales $56,154 $45,800 $35,453 =========================================================== Military Aircraft and Missiles segment and Space and Communications segment combined sales were approximately 16%, 19% and 29% of total sales in Europe for 1998, 1997 and 1996, respectively. Defense sales were approximately 19%, 19% and 22% of total sales in Asia, excluding China, for the same respective years. Exclusive of these amounts, Military Aircraft and Missiles segment and Space and Communications segment sales were principally to the U.S. Government. The information in the following tables is derived directly from the segments' internal financial reporting used for corporate management purposes. The expenses, assets and liabilities attributable to corporate activity are not allocated to the operating segments. Less than 2% of operating assets are located outside of the United States. Customer and Commercial Financing/Other segment revenues consist principally of interest from financing receivables and lease income from operating lease equipment, and segment earnings additionally reflect depreciation on leased equipment and expenses recorded against the valuation allowance presented in Note 8. No interest expense on debt is included in Customer and Commercial Financing/Other segment earnings. Accounting differences principally result from differences in cost measurements under generally accepted accounting principals. Accounting differences include 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 difference between retiree health care costs recognized under SFAS No. 106, Employers' Accounting for 53 54 Postretirement Benefits Other Than Pensions, and under federal cost accounting standards, principally on a cash basis; and amortization of costs capitalized in accordance with SFAS No. 34, Capitalization of Interest Costs. The costs attributable to share-based plans are not allocated. Other unallocated costs include corporate costs not allocated to the operating segments, including goodwill amortization. Unallocated assets primarily consist of cash and short-term investments, prepaid pension expense, goodwill, deferred tax assets, and capitalized interest. Unallocated liabilities include various accrued employee compensation and benefit liabilities, including accrued retiree health care, taxes payable, and debentures and notes payable. Unallocated capital expenditures and depreciation relate primarily to shared services assets. Sales are not recorded for inter-segment transactions. Losses from operations for 1997 include the impact of the valuation adjustment described in Note 3 on page 69. In 1998 the Information, Space and Defense Systems Group of the Company was reorganized into two groups: the Military Aircraft and Missile Systems Group and the Space and Communications Group, which will be reported as separate business segments for 1998 and on. It is not practicable to determine the Military Aircraft and Missiles and Space and Communications breakout of the Information, Space and Defense Systems segment information for 1997 and 1996 presented below. 54 55 (Dollars in millions) Net earnings (loss) Revenues ---------------------- ---------------------- Year ended December 31, 1998 1997 1996 1998 1997 1996 ============================================================================== Commercial Airplanes $ 63 $(1,837) $ 956 $35,545 $26,929 $19,916 Military Aircraft and Missiles 1,283 12,990 Space and Communications 248 6,889 ----- ------ Information, Space and Defense Systems 1,531 1,317 1,387 19,879 18,125 14,934 Customer and Commercial Financing/Other 367 381 329 730 746 603 Accounting differences 43 71 68 Share-based plans (153) 99 (133) Other unallocated costs (284) (287) (122) - ------------------------------------------------------------------------------ Earnings (loss) from operations 1,567 (256) 2,485 Other income, principally interest 283 428 388 Interest and debt expense (453) (513) (393) - ------------------------------------------------------------------------------ Earnings (loss) before taxes 1,397 (341) 2,480 Income taxes (benefit) 277 (163) 662 - ------------------------------------------------------------------------------ $1,120 $(178) $1,818 $56,154 $45,800 $35,453 ============================================================================== Segment information (continued) (Dollars in millions) Depreciation and Research and Development Amortization ------------------------ ---------------------- Year ended December 31, 1998 1997 1996 1998 1997 1996 ============================================================================== Commercial Airplanes $1,021 $1,208 $1,156 $ 628 $ 570 $ 605 Military Aircraft and Missiles 304 208 Space and Communications 570 142 ---- ---- Information, Space and Defense Systems 874 716 477 350 365 299 Customer and Commercial Financing/Other 135 91 110 Unallocated 509 432 252 - ------------------------------------------------------------------------------ $1,895 $1,924 $1,633 $ 1,622 $ 1,458 $ 1,266 ============================================================================== 55 56 Assets Liabilities at December 31 at December 31 ---------------------- ---------------------- 1998 1997 1996 1998 1997 1996 ============================================================================== Commercial Airplanes $12,568 $12,763 $12,484 $6,127 $6,917 $ 5,824 Military Aircraft and Missiles 3,560 743 Space and Communications 3,032 1,335 ----- ----- Information, Space and Defense Systems 6,592 6,597 6,785 2,078 2,379 2,361 Customer and Commercial Financing/Other 5,751 4,716 3,903 301 396 286 Unallocated 11,761 13,948 14,708 15,850 15,379 15,907 - ------------------------------------------------------------------------------ $36,672 $38,024 $37,880 $24,356 $25,071 $24,378 ============================================================================== Contractual backlog at Capital expenditures, net December 31 (unaudited) ------------------------- ----------------------- Year ended December 31, 1998 1997 1996 1998 1997 1996 ============================================================================== Commercial Airplanes $ 754 $ 531 $ 336 $ 86,057 $ 93,788 $ 86,151 Military Aircraft and Missiles 198 17,007 Space and Communications 273 9,832 --- ------ Information, Space and Defense Systems 471 463 304 26,839 27,852 28,022 Customer and Commercial Financing/Other 1 1 1 Unallocated 358 396 330 - ------------------------------------------------------------------------------ $ 1,584 $ 1,391 $ 971 $112,896 $121,640 $114,173 ============================================================================== 56 57 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in millions except per share data) Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------- Sales and other operating revenues $56,154 $45,800 $35,453 Operating costs and expenses 50,546 40,644 29,383 General and administrative expense 1,993 2,187 1,819 Research and development expense 1,895 1,924 1,633 Share-based plans 153 (99) 133 Special charges 1,400 - ------------------------------------------------------------------------------- Earnings (loss) from operations 1,567 (256) 2,485 Other income, principally interest 283 428 388 Interest and debt expense (453) (513) (393) - ------------------------------------------------------------------------------- Earnings (loss) before income taxes 1,397 (341) 2,480 Income taxes (benefit) 277 (163) 662 - ------------------------------------------------------------------------------- Net earnings (loss) $ 1,120 $ (178) $ 1,818 =============================================================================== Earnings (loss) per share Basic $ 1.16 $ (.18) $ 1.88 Diluted $ 1.15 $ (.18) $ 1.85 =============================================================================== Cash dividends per share $ .56 $ .56 $ .55 =============================================================================== See notes to consolidated financial statements. 57 58 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Dollars in millions except per share data) December 31, 1998 1997 - ------------------------------------------------------------------------------- Assets - ------------------------------------------------------------------------------- Cash and cash equivalents $ 2,183 $ 4,420 Short-term investments 279 729 Accounts receivable 3,288 3,121 Current portion of customer and commercial financing 781 261 Deferred income taxes 1,495 1,765 Inventories, net of advances and progress billings 8,349 8,967 - ------------------------------------------------------------------------------- Total current assets 16,375 19,263 Customer and commercial financing 4,930 4,339 Property, plant and equipment, net 8,589 8,391 Deferred income taxes 411 15 Goodwill 2,312 2,395 Prepaid pension expense 3,513 3,271 Other assets 542 350 - ------------------------------------------------------------------------------- $36,672 $38,024 =============================================================================== Liabilities and Shareholders' Equity - ------------------------------------------------------------------------------- Accounts payable and other liabilities $10,733 $11,548 Advances in excess of related costs 1,251 1,575 Income taxes payable 569 298 Short-term debt and current portion of long-term debt 869 731 - ------------------------------------------------------------------------------- Total current liabilities 13,422 14,152 Accrued retiree health care 4,831 4,796 Long-term debt 6,103 6,123 Shareholders' equity: Common shares, par value $5.00 - 1,200,000,000 shares authorized; Shares issued - 1,011,870,159 and 1,000,029,538 5,059 5,000 Other equity accounts 7,257 7,953 - ------------------------------------------------------------------------------- Total shareholders' equity 12,316 12,953 - ------------------------------------------------------------------------------- $36,672 $38,024 =============================================================================== See notes to consolidated financial statements. 58 59 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Cash flows - operating activities: Net earnings (loss) $ 1,120 $ (178) $ 1,818 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Special charges 1,400 Share-based plans 153 (99) 133 Depreciation 1,517 1,354 1,241 Amortization of goodwill and intangibles 105 104 25 Changes in assets and liabilities - Short-term investments 450 154 (874) Accounts receivable (167) (251) 182 Inventories, net of advances and progress billings 618 (1,008) 306 Accounts payable and other liabilities (806) 1,490 514 Advances in excess of related costs (324) (139) 441 Income taxes payable and deferred 145 (451) (55) Other (479) (272) (246) Accrued retiree health care 35 (4) 126 - ------------------------------------------------------------------------------ Net cash provided by operating activities 2,367 2,100 3,611 - ------------------------------------------------------------------------------ Cash flows - investing activities: Customer and commercial financing-additions (2,660) (1,889) (1,212) Customer and commercial financing-reductions 1,418 1,030 1,482 Property, plant and equipment, net additions (1,584) (1,391) (971) Other 15 - ------------------------------------------------------------------------------ Net cash used by investing activities (2,826) (2,250) (686) - ------------------------------------------------------------------------------ Cash flows - financing activities: New borrowings 811 232 1,051 Debt repayments (693) (867) (1,160) ShareValue Trust (891) Common shares purchased (1,397) (141) (718) Common shares issued 268 Stock options exercised, other 65 166 215 Dividends paid (564) (557) (480) - ------------------------------------------------------------------------------ Net cash used by financing activities (1,778) (899) (1,983) - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (2,237) (1,049) 942 Cash and cash equivalents at beginning of year 4,420 5,469 4,527 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 2,183 $ 4,420 $ 5,469 ============================================================================== See notes to consolidated financial statements. 59 60 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Additional Treasury Stock (Dollars in millions / --------------- Paid-in --------------- Shares in thousands) Shares Amount Capital Shares Amount ============================================================================== Balance December 31, 1995 989,255 $4,946 $ - 10,608 $ (209) Shares repurchased (19,055) (95) (383) Shares issued for acquisition of Rockwell aerospace and defense business 18,309 92 784 Shares issued for ShareValue Trust 3,466 17 209 Shares acquired for original ShareValue Trust funding Shares issued for incentive stock plans 1,373 7 Treasury shares transferred to ShareValue Trust (2,964) 58 Treasury shares issued for incentive stock plans, net 27 (7,614) 150 Tax benefit related to incentive stock plans 58 Stock appreciation rights expired or surrendered 9 ShareValue Trust market value adjustment 216 Shares acquired from dividend reinvestment Accrued distributable appreciation New issuances - unearned compensation Amortization and forfeitures - unearned compensation Net earnings Cash dividends declared - ------------------------------------------------------------------------------ Balance December 31, 1996 993,348 $4,967 $ 920 30 (1) - ------------------------------------------------------------------------------ 60 61 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED) Common Stock Additional Treasury Stock (Dollars in millions / --------------- Paid-in --------------- Shares in thousands) Shares Amount Capital Shares Amount ============================================================================== Shares issued 4,550 23 245 Shares issued for incentive stock plans 2,132 10 Treasury shares acquired 2,710 (141) Treasury shares issued for incentive stock plans, net (20) (2,580) 133 Tax benefit related to incentive stock plans 41 Stock appreciation rights expired or surrendered 6 ShareValue Trust market value adjustment (102) Shares transferred from ShareValue Trust 5 Shares acquired from dividend reinvestment Accrued distributable appreciation New issuances - unearned compensation Amortization and forfeitures - unearned compensation Net loss Cash dividends declared - ------------------------------------------------------------------------------ Balance December 31, 1997 1,000,030 $5,000 $ 1,090 165 $ (9) - ------------------------------------------------------------------------------ Shares issued for ShareValue Trust 11,253 56 494 Shares issued for incentive stock plans 587 3 Share-based compensation 153 Treasury shares acquired 37,473 (1,397) Treasury shares issued for incentive stock plans, net (43) (1,792) 85 Tax benefit related to incentive stock plans 18 Stock appreciation rights expired or surrendered 5 ShareValue Trust market value adjustment (570) Shares acquired from dividend reinvestment Amortization and forfeitures - unearned compensation Net earnings Cash dividends declared Minimum pension liability adjustment, net of tax of $14 - ------------------------------------------------------------------------------ Balance December 31, 1998 1,011,870 $5,059 $ 1,147 35,846 $(1,321) ============================================================================== See notes to consolidated financial statements. 61 62 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED) ShareValue Trust (Dollars in millions / ---------------- Unearned Shares in thousands) Shares Amount Compensation ================================================================== Balance December 31, 1995 $ - $(18) Shares repurchased Shares issued for acquisition of Rockwell aerospace and defense business Shares issued for ShareValue Trust Shares acquired for original ShareValue Trust funding 26,032 (1,171) Shares issued for incentive stock plans Treasury shares transferred to ShareValue Trust Treasury shares issued for incentive stock plans, net Tax benefit related to incentive stock plans Stock appreciation rights expired or surrendered ShareValue Trust market value adjustment (216) Shares acquired from dividend reinvestment 88 (4) Accrued distributable appreciation 133 New issuances - unearned compensation (20) Amortization and forfeitures - unearned compensation 16 Net earnings Cash dividends declared - ------------------------------------------------------------------ Balance December 31, 1996 26,120 $(1,258) $(22) - ------------------------------------------------------------------ 62 63 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED) ShareValue Trust (Dollars in millions / ---------------- Unearned Shares in thousands) Shares Amount Compensation ================================================================== Shares issued Shares issued for incentive stock plans Treasury shares acquired Treasury shares issued for incentive stock plans, net Tax benefit related to incentive stock plans Stock appreciation rights expired or surrendered ShareValue Trust market value adjustment 102 Shares transferred from ShareValue Trust (5) Shares acquired from dividend reinvestment 270 Accrued distributable appreciation (99) New issuances - unearned compensation (29) Amortization and forfeitures - unearned compensation 31 Net loss Cash dividends declared - ------------------------------------------------------------------ Balance December 31, 1997 26,385 $(1,255) $(20) - ------------------------------------------------------------------ Shares issued for ShareValue Trust 11,253 (550) Shares issued for incentive stock plans Share-based compensation Treasury shares acquired Treasury shares issued for incentive stock plans, net Tax benefit related to incentive stock plans Stock appreciation rights expired or surrendered ShareValue Trust market value adjustment 570 Shares acquired from dividend reinvestment 529 Amortization and forfeitures - unearned compensation 3 Net earnings Cash dividends declared Minimum pension liability adjustment, net of tax of $14 - ------------------------------------------------------------------ Balance December 31, 1998 38,167 $(1,235) $(17) ================================================================== See notes to consolidated financial statements. 63 64 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED) Accumulated Other (Dollars in millions / Comprehensive Retained Comprehensive Shares in thousands) Income Earnings Income =================================================================== Balance December 31, 1995 $ - $7,808 Shares repurchased (233) Shares issued for acquisition of Rockwell aerospace and defense business Shares issued for ShareValue Trust Shares acquired for original ShareValue Trust funding Shares issued for incentive stock plans Treasury shares transferred to ShareValue Trust Treasury shares issued for incentive stock plans, net Tax benefit related to incentive stock plans Stock appreciation rights expired or surrendered ShareValue Trust market value adjustment Shares acquired from dividend reinvestment Accrued distributable appreciation New issuances - unearned compensation Amortization and forfeitures - unearned compensation Net earnings 1,818 $1,818 Cash dividends declared (497) - ------------------------------------------------------------------- Balance December 31, 1996 $ - $8,896 $1,818 - ------------------------------------------------------============= 64 65 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (CONTINUED) Accumulated Other (Dollars in millions / Comprehensive Retained Comprehensive Shares in thousands) Income Earnings Income =================================================================== Shares issued Shares issued for incentive stock plans Treasury shares acquired Treasury shares issued for incentive stock plans, net Tax benefit related to incentive stock plans Stock appreciation rights expired or surrendered ShareValue Trust market value adjustment Shares transferred from ShareValue Trust Shares acquired from dividend reinvestment Accrued distributable appreciation New issuances - unearned compensation Amortization and forfeitures - unearned compensation Net loss (178) $(178) Cash dividends declared (571) - ------------------------------------------------------------------- Balance December 31, 1997 $ - $8,147 $(178) - ------------------------------------------------------============= Shares issued for ShareValue Trust Shares issued for incentive stock plans Share-based compensation Treasury shares acquired Treasury shares issued for incentive stock plans, net Tax benefit related to incentive stock plans Stock appreciation rights expired or surrendered ShareValue Trust market value adjustment Shares acquired from dividend reinvestment Amortization and forfeitures - unearned compensation Net earnings 1,120 $1,120 Cash dividends declared (561) Minimum pension liability adjustment, net of tax of $14 (23) (23) - ------------------------------------------------------------------ Balance December 31, 1998 $(23) $8,706 $1,097 ================================================================== See notes to consolidated financial statements. 65 66 THE BOEING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1998, 1997 and 1996 (Dollars in millions except per share data) Note 1 Summary of Significant Accounting Policies - ------------------------------------------ Principles of consolidation The consolidated financial statements include the accounts of all majority- owned subsidiaries. Investments in joint ventures in which the Company does not have control, but has the ability to exercise significant influence over the operating and financial policies, are accounted for under the equity method. Accordingly, the Company's share of net earnings and losses from these ventures is included in the consolidated statements of operations. Intercompany profits, transactions and balances have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions and estimates that directly affect the amounts reported in the consolidated financial statements. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are addressed in these notes to the consolidated financial statements. Sales and other operating revenues Sales under fixed-price-type contracts are generally recognized as deliveries are made or at the completion of contractual billing milestones. For certain fixed-price contracts that require substantial performance over an extended period before deliveries begin, sales are recorded based upon attainment of scheduled performance milestones. Sales under cost-reimbursement contracts are recorded as costs are incurred. Certain U.S. Government contracts contain profit incentives based upon performance relative to predetermined targets. Incentives based on cost performance are recorded currently, and other incentives and fee awards are recorded when the amounts can be reasonably estimated. Commercial aircraft sales are recorded as deliveries are made unless transfer of risk and rewards of ownership is not sufficient. Income associated with customer financing activities is included in sales and other operating revenues. Contract and program accounting In the Military Aircraft and Missiles segment and Space and Communications segment, operations principally consist of performing work under contract, predominantly for the U.S. Government and foreign governments. Cost of sales for such contracts is determined based on the estimated average total contract cost and revenue. Commercial aircraft programs are planned, committed and facilitized based on long-term delivery forecasts, normally for quantities in excess of firm contractually firm orders. Cost of sales for the 737, 747, 757, 767 and 777 commercial aircraft programs is determined under the program method of accounting based on estimated average total cost and revenue for the current program quantity. The program method of accounting effectively amortizes or averages tooling and special equipment costs, as well as unit production, costs, over the program quantity. Because of the higher unit production costs experienced at the beginning of a new program and the substantial investment required for initial 66 67 tooling and special equipment, new commercial jet aircraft programs normally have lower operating profit margins than established programs. The initial program quantities for the 777 program and the 737-600/700/800/900 (Next- Generation 737) programs had been established at 400 units, the same initial program quantity as used for the 747, 757 and 767 programs. Deliveries for the 777 program began in 1995, and deliveries for the Next-Generation 737 program began in 1997. The estimated program average costs and revenues are reviewed and reassessed quarterly, and changes in estimates are recognized over current and future deliveries constituting the program quantity. Cost of sales for the MD-80, MD-90 and MD-11 aircraft programs is determined on a specific-unit cost method. To the extent that inventoriable costs are expected to exceed the total estimated sales price, charges are made to current earnings to reduce inventoried costs to estimated realizable value. Inventories Inventoried costs on commercial aircraft programs and long-term contracts include direct engineering, production and tooling costs, and applicable overhead, not in excess of estimated realizable value. In accordance with industry practice, inventoried costs include amounts relating to programs and contracts with long production cycles, a portion of which is not expected to be realized within one year. Commercial spare parts and general stock materials are stated at average cost not in excess of realizable value. Share-based plans In 1998 the Company adopted the expense recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The Company values stock options issued based upon an option-pricing model and recognizes this value as an expense over the period in which the options vest. Potential distribution from the ShareValue Trust, described in Note 16, have been valued based upon an option-pricing model, with the related expense recognized over the life of the trust. Share-based expense associated with Performance Shares described in Note 16 is determined based on the market value of the Company's stock at the time of the award applied to the maximum number of shares contingently issuable based on stock price, and is amortized over a five-year award period. Performance Shares were first issued in 1998. Prior to 1998, the Company recognized no expense for stock options, and ShareValue Trust expense was determined based on the change in the distributable market value of the trust. Share-based plans expenses for stock options, the ShareValue Trust, Performance Shares and other share-based awards are offset by a credit to additional paid-in capital. Interest expense Interest and debt expense is presented net of amounts capitalized. Interest expense is subject to capitalization as a construction-period cost of property, plant and equipment and of commercial program tooling. Income taxes Federal, state and foreign income taxes are computed at current tax rates, less tax credits. Taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, plus changes in deferred tax assets and liabilities that arise because of temporary differences between the time when items of income and expense are recognized for financial reporting and income tax purposes. 67 68 Postretirement benefits The Company's funding policy for pension plans is to contribute, at a minimum, the statutorily required amount to an irrevocable trust. Benefits under the plans are generally based on age at retirement, the employee's annual earnings indexed at the U.S. Treasury 30-year bond rate, and years of service. The actuarial cost method used in determining the net periodic pension cost is the projected unit credit method. Cash and cash equivalents Cash and cash equivalents consist of highly liquid instruments, such as certificates of deposit, time deposits, treasury notes and other money market instruments, which generally have maturities of less than three months. Short-term investments Short-term investments, consisting principally of U.S. Government Treasury obligations, are classified as trading securities with unrealized gains and losses reflected in other income. Property, plant and equipment Property, plant and equipment are recorded at cost, including applicable construction-period interest, and depreciated principally over the following estimated useful lives: new buildings and land improvements, from 20 to 45 years; and machinery and equipment, from 3 to 13 years. The principal methods of depreciation are as follows: buildings and land improvements, 150% declining balance; and machinery and equipment, sum-of-the-years' digits. Goodwill Goodwill, representing the excess of acquisition costs over the fair value of net assets of businesses purchased, is being amortized by the straight-line method over 30 years. Recoverability of the unamortized goodwill balance is based upon assessment of related operational cash flows. Note 2 Mergers and Acquisitions - ------------------------ Merger with McDonnell Douglas Corporation On August 1, 1997, McDonnell Douglas Corporation merged with the Company through a stock-for-stock exchange in which 1.3 shares of Company stock were issued for each share of McDonnell Douglas stock outstanding. The Company issued 277.3 million shares in connection with the merger. The merger is accounted for as a pooling of interests. Accordingly, except for adjustments to reflect conformed accounting policies, the historical results of operations of the two companies have been combined, and no acquisition revaluation or goodwill was recorded. The merger was subject to approval by the United States Federal Trade Commission and the European Commission. Future requirements or obligations associated with obtaining these approvals are not expected to have a material impact on future operations or liquidity of the Company. Acquisition of Rockwell Aerospace and Defense Business On December 6, 1996, the Company acquired Rockwell's aerospace and defense business by issuing 9.2 million shares of common stock valued at $875 and assuming debt valued at $2,180. This transaction has been accounted for under the purchase method. The assets and liabilities have been recorded at fair value with excess purchase price recorded as goodwill. 68 69 Note 3 Special Charges - Douglas Products Valuation Adjustment - ---------------------------------- In the fourth quarter of 1997, the Company completed an assessment of the financial impact of its post-merger strategy decisions related to its McDonnell Douglas Corporation commercial aircraft product lines and recorded a special charge of $1,400 relative to these decisions. The charge principally represents an inventory valuation adjustment based on post-merger assessments of the market conditions and related program decisions and commitments. Also included in the charge were valuation adjustments in connection with customer financing assets. The applicable programs currently in production are the MD-11 trijet and the MD- 80 and MD-90 twinjets. Additionally, the MD-95 twinjet, now referred to as the 717 model program, is currently in development, with first delivery scheduled for 1999. The MD-80 and MD-90 twinjets and the MD-11 trijet will continue to be produced through 2000. Note 4 Earnings from Joint Ventures - ---------------------------- Operating costs and expenses in the Consolidated Statements of Operations include costs of $127, $102 and $53 for the years ending December 31, 1998, 1997 and 1996, respectively, representing the Company's share of losses from joint venture arrangements in the developmental stages accounted for under the equity method. The Company's principal joint venture arrangement in the developmental stages is a 40% partnership in the Sea Launch program, a commercial satellite launch venture with Norwegian, Russian and Ukrainian partners. Additionally, the Company recognized income of $60, $59 and $2 for the years ending December 31, 1998, 1997 and 1996, respectively, attributable to non-developmental joint venture arrangements. The Company's 50% partnership with Lockheed Martin in United Space Alliance is the principal non- developmental joint venture arrangement. United Space Alliance is responsible for all ground processing of the Space Shuttle fleet and for space-related operations with the U.S. Air Force. Note 5 Earnings per Share - ------------------ The weighted average number of shares outstanding (in millions) used to compute basic earnings per share were 966.9, 970.1 and 968.7 for the years ended December 31, 1998, 1997 and 1996, respectively. The weighted average number of shares outstanding (in millions) used to compute diluted earnings per share were 976.7, 970.1 and 981.9 for the same respective years. 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. Because 1997 results reflected a net loss from continuing operations, both basic and diluted earnings per share were calculated based on the same weighted average number of shares for that year. 69 70 Note 6 Accounts Receivable - ------------------- Accounts receivable at December 31 consisted of the following: 1998 1997 - ------------------------------------------------------------------------------ U.S. Government contracts $2,058 $2,053 Other 1,230 1,068 - ------------------------------------------------------------------------------ $3,288 $3,121 ============================================================================== Accounts receivable included the following as of December 31, 1998 and 1997, respectively: amounts not currently billable of $381 and $587 relating primarily to sales values recorded upon attainment of performance milestones that differ from contractual billing milestones and withholds on U.S. Government contracts ($109 and $161 not expected to be collected within one year); $93 and $341 relating to claims and other amounts on U.S. Government contracts subject to future settlement ($66 and $333 not expected to be collected within one year); and $48 and $62 of other receivables not expected to be collected within one year. Note 7 Inventory - --------- Inventories at December 31 consisted of the following: 1998 1997 - ------------------------------------------------------------------------------ Commercial aircraft programs and long-term contracts in progress $ 24,812 $ 26,566 Commercial spare parts, general stock materials and other 2,162 1,869 - ------------------------------------------------------------------------------ 26,974 28,435 Less advances and progress billings (18,625) (19,468) - ------------------------------------------------------------------------------ $ 8,349 $ 8,967 ============================================================================== As of December 31, 1998, there were no significant excess deferred production costs (inventory production costs incurred on in-process and delivered units in excess of the estimated average cost of such units determined as described in Note 1) or unamortized tooling costs not recoverable from existing firm orders for commercial programs other than the 777 and the Next-Generation 737 programs. The program quantity for the 777 and the Next-Generation 737 programs for determining cost of sales based on estimated average total cost (including inventory production costs and tooling) and revenue was initially established at 400 units. In 1998 the accounting quantity for the Next-Generation 737 program was extended beyond the initial program quantity. The current accounting quantity for the Next-Generation 737 program is 1,200 units. 70 71 Inventory costs at December 31, 1998, included unamortized tooling of $2,022 and $760 relating to the 777 and Next-Generation 737 programs, and excess deferred production costs of $1,654 and $329 relating to the 777 and Next- Generation 737 programs. Inventory costs at December 31, 1997, included unamortized tooling of $2,678 and $809 relating to the 777 and Next-Generation 737 programs, and excess deferred production costs of $2,384 relating to the 777 program. Firm backlog for both the 777 and Next-Generation 737 programs is sufficient to recover all significant amounts of excess deferred production costs as of December 31, 1998; however, such deferred costs are recognized over the current program accounting quantity in effect at the date of reporting. Interest capitalized as construction-period tooling costs amounted to $20, $33 and $30 in 1998, 1997 and 1996, respectively. As of December 31, 1998 and 1997, inventory balances included $231 subject to claims or other uncertainties primarily relating to the A-12 program. See Note 21. The estimates underlying the average costs of deliveries reflected in the inventory valuations may differ materially from amounts eventually realized for the reasons outlined in Note 22. Note 8 Customer and Commercial Financing - --------------------------------- Customer and commercial financing at December 31 consisted of the following: 1998 1997 - ------------------------------------------------------------------------------ Aircraft financing Notes receivable $ 859 $ 647 Investment in sales-type/ financing leases 1,325 1,517 Operating lease equipment, at cost, less accumulated depreciation of $195 and $230 2,201 1,220 Commercial equipment financing Notes receivable 534 317 Investment in sales-type/ financing leases 548 536 Operating lease equipment, at cost, less accumulated depreciation of $129 and $120 510 571 - ------------------------------------------------------------------------------ Less valuation allowance (266) (208) - ------------------------------------------------------------------------------ $5,711 $4,600 ============================================================================== Customer and commercial financing assets that are leased by the Company under capital leases and have been subleased to others totaled $333 and $342 as of December 31, 1998 and 1997. Commercial equipment financing under operating lease consists principally of real property, highway vehicles, machine tools and production equipment. Commercial equipment financing also includes amounts attributable to regional aircraft, principally with fewer than 80 seats. 71 72 Scheduled payments on customer and commercial financing are as follows: Sales-type/ Operating Principal Financing Lease Lease Payments on Payments Payments Year Notes Receivable Receivable Receivable - ------------------------------------------------------------------------------ 1999 $346 $522 $240 2000 280 225 161 2001 92 216 146 2002 126 187 136 2003 87 175 132 Beyond 2003 462 1,037 1,107 The components of investment in sales-type/financing leases at December 31 were as follows: 1998 1997 - ------------------------------------------------------------------------------ Minimum lease payments receivable $2,362 $ 2,754 Estimated residual value of leased assets 438 519 Unearned income (927) (1,220) - ------------------------------------------------------------------------------ $1,873 $ 2,053 ============================================================================== The Company has entered into interest rate swaps with third-party investors whereby the interest rate terms differ from the terms in the original receivable. These interest rate swaps related to $62 of customer financing receivables as of December 31, 1998. Interest rate swaps on financing receivables are settled on the same dates interest is due on the underlying receivables and principally swap the interest rate from a fixed to a variable rate. Interest rates on fixed-rate notes ranged from 5.06% to 12.43%, and effective interest rates on variable-rate notes ranged from 0.03% to 4.50% above the London Interbank Offered Rate (LIBOR). Sales and other operating revenues included interest income associated with notes receivable and sales-type/financing leases of $205, $217 and $195 for 1998, 1997 and 1996, respectively. Financing for aircraft is collateralized by security in the related asset, and historically the Company has not experienced a problem in accessing such collateral. The operating lease aircraft category includes new and used jet and commuter aircraft, spare engines and spare parts. The valuation allowance is subject to change depending on estimates of collectability and realizability of the customer financing balances. 72 73 Note 9 Property, Plant and Equipment - ----------------------------- Property, plant and equipment at December 31 consisted of the following: 1998 1997 - ------------------------------------------------------------------------------ Land $ 499 $ 530 Buildings 8,244 8,133 Machinery and equipment 10,521 9,940 Construction in progress 977 691 - ------------------------------------------------------------------------------ 20,241 19,294 Less accumulated depreciation (11,652) (10,903) - ------------------------------------------------------------------------------ $ 8,589 $ 8,391 ============================================================================== Depreciation expense was $1,386, $1,266 and $1,132 for 1998, 1997 and 1996, respectively. Interest capitalized as construction-period property, plant and equipment costs amounted to $45, $28 and $28 in 1998, 1997 and 1996, respectively. Rental expense for leased properties was $349, $308 and $242 for 1998, 1997 and 1996, respectively. These expenses, substantially all minimum rentals, are net of sublease income. Minimum rental payments under operating leases with initial or remaining terms of one year or more aggregated $737 at December 31, 1998. Payments, net of sublease amounts, due during the next five years are as follows: 1999 2000 2001 2002 2003 ---------------------------------------- $192 $148 $100 $78 $66 ======================================== Note 10 Goodwill - -------- As of December 31, goodwill associated with the December 1996 acquisition of Rockwell's aerospace and defense business units consisted of the following: 1998 1997 - ------------------------------------------------------------------------------ Goodwill $2,486 $2,486 Less cumulative amortization (174) (91) - ------------------------------------------------------------------------------ $2,312 $2,395 ============================================================================== 73 74 Note 11 Income Taxes - ------------ The provision for taxes on income consisted of the following: Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ U.S. Federal Taxes paid or currently payable $ 370 $ 103 $689 Change in deferred taxes (124) (253) (78) - ------------------------------------------------------------------------------ 246 (150) 611 State Taxes paid or currently payable 33 9 57 Change in deferred taxes (2) (22) (6) - ------------------------------------------------------------------------------ 31 (13) 51 - ------------------------------------------------------------------------------ Income tax provision (benefit) $ 277 $(163) $662 ============================================================================== The following is a reconciliation of the income tax provision (benefit) computed by applying the U.S. federal statutory rate of 35 percent to the recorded income tax provision: 1998 1997 1996 - ------------------------------------------------------------------------------ U.S. federal statutory tax $ 489 $(119) $ 868 Foreign Sales Corporation tax benefit (130) (79) (110) Research benefit (70) (8) (4) Prior years' research benefit settlement (57) Prior years' investment tax credit (95) Prior years' tax adjustment (8) (23) (30) Nondeductibility of goodwill and merger costs 31 71 2 State income tax provision, net of effect on U.S. federal tax 31 (9) 31 Other provision adjustments (9) 4 - ------------------------------------------------------------------------------ Income tax provision (benefit) $ 277 $(163) $ 662 ============================================================================== 74 75 The deferred tax assets, net of deferred tax liabilities, resulted from temporary tax differences associated with the following: Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Inventory and long-term contract methods of income recognition $ 800 $ 1,186 $ 999 Pension benefit accruals (1,179) (1,152) (1,026) Retiree health care accruals 1,771 1,806 1,712 Other employee benefits accruals 415 318 339 Customer and commercial financing 99 (378) (519) - ------------------------------------------------------------------------------ Net deferred tax assets $ 1,906 $ 1,780 $ 1,505 ============================================================================== The temporary tax differences associated with inventory and long-term contract methods of income recognition encompass related costing differences, including timing and depreciation differences. Valuation allowances were not required due to the nature of and circumstances associated with the temporary tax differences. Income taxes have been settled with the Internal Revenue Service (IRS) for all years through 1978, and IRS examinations have been completed through 1987. In connection with these examinations, the Company disagrees with IRS proposed adjustments, and the years 1979 through 1987 are in litigation. The Company has also 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 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 these years. The Company believes adequate provision has been made for all open years. Income tax payments were $85, $219 and $648 in 1998, 1997 and 1996, respectively. 75 76 Note 12 Accounts Payable and Other Liabilities - -------------------------------------- Accounts payable and other liabilities at December 31 consisted of the following: 1998 1997 - ------------------------------------------------------------------------------ Accounts payable $ 5,263 $ 5,609 Accrued compensation and employee benefit costs 2,326 2,154 Lease and other deposits 539 819 Other 2,605 2,966 - ------------------------------------------------------------------------------ $10,733 $11,548 ============================================================================== Note 13 Debt - ---- Debt at December 31 consisted of the following: 1998 1997 - ------------------------------------------------------------------------------ Unsecured debentures and notes: 7 5/8% due Feb. 17, 1998 $ - $ 301 8 7/8% due Sep. 15, 1999 304 311 8.25% due Jul. 1, 2000 200 200 8 3/8% due Feb. 15, 2001 180 182 7.565% due Mar. 30, 2002 54 9.25% due Apr. 1, 2002 120 120 6 3/4% due Sep. 15, 2002 298 297 6.35% due Jun. 15, 2003 299 299 7 7/8% due Feb. 15, 2005 208 209 6 5/8% due Jun. 1, 2005 292 291 6.875% due Nov. 1, 2006 248 248 8 1/10% due Nov. 15, 2006 175 175 9.75% due Apr. 1, 2012 348 348 8 3/4% due Aug. 15, 2021 398 398 7.95% due Aug. 15, 2024 300 300 7 1/4% due Jun. 15, 2025 247 247 8 3/4% due Sep. 15, 2031 248 248 8 5/8% due Nov. 15, 2031 173 173 6 5/8% due Feb. 15, 2038 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 55 148 Senior medium-term notes, 5.5% - 13.6%, due through 2017 1,320 1,129 Subordinated medium-term notes, 5.5% - 8.3%, due through 2004 55 70 Capital lease obligations, due through 2008 433 500 Other notes 319 262 - ------------------------------------------------------------------------------ $6,972 $6,854 ============================================================================== 76 77 The $300 debentures due August 15, 2024, are redeemable at the holder's option on August 15, 2012. All other debentures and notes are not redeemable prior to maturity. Maturities of long-term debt for the next five years are as follows: 1999 2000 2001 2002 2003 ---------------------------------------- $650 $429 $442 $684 $519 ======================================== 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. 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 for up to $1,200 aggregate principal amount of debt securities. As of December 31, 1998, $571 has been drawn on this shelf registration. In addition, BCC has $240 available but unused under a credit line agreement with a group of commercial banks. At December 31, 1998 and 1997, borrowings under commercial paper and uncommitted short-term bank facilities totaling $172 and $98 were supported by available unused commitments under the revolving credit agreement. Total consolidated debt attributable to BCC amounted to $1,971 and $1,798 as of December 31, 1998 and 1997. The $100 notes due August 15, 2042, with a stated rate of 7.50% were issued to a private investor in connection with an interest rate swap arrangement that resulted in an effective synthetic rate of 7.865%. The swap arrangement results in semi-annual interest rate payments at LIBOR, and is scheduled to settle when the underlying note matures. Additionally, BCC has interest rate swaps totaling $350 relating to capital lease obligations and $80 relating to medium-term notes. The swaps attributable to capital lease obligations have a receive rate that is floating based on LIBOR, and a pay rate that is fixed. Of the swaps attributable to medium-term notes, $50 have a receive rate that is fixed, and a pay rate that is floating based on LIBOR; and $30 have a receive rate that is floating based on LIBOR, and a pay rate that is fixed. Interest rate swaps on these capital lease obligations and medium-term notes are settled on the same dates interest is due on the underlying obligations. BCC has available approximately $60 in uncommitted, short-term bank credit facilities whereby the Company may borrow, at interest rates which are negotiated at the time of the borrowings, upon such terms as the Company and the banks may mutually agree. At December 31, 1998 and 1997, borrowings on these credit facilities totaled $50 and $18. Total debt interest, including amounts capitalized, was $520, $573 and $450 for the years ended December 31, 1998, 1997 and 1996, and interest payments were $514, $588 and $436, respectively. Note 14 Postretirement Plans - -------------------- The following table reconciles the funded status of both pensions and other postretirement benefits (OPB), principally retiree health care, to the balance on the Consolidated Statements of Financial Position. Plan assets consist primarily of equities, fixed income obligations and cash equivalents. Boeing 77 78 stock represents less than 1% of the fair value of plan assets. The pension benefit obligations and plan assets shown in the table are valued as of September 30. Other Pensions Postretirement Benefits -------------- ----------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------ Benefit obligation Beginning balance $25,845 $24,212 $ 4,008 $ 3,742 Service cost 573 506 81 86 Interest cost 1,793 1,727 271 274 Plan participants' contributions 1 1 Amendments 489 4 Actuarial loss 1,862 815 330 143 Benefits paid (1,676) (1,420) (272) (237) - ------------------------------------------------------------------------------ Ending balance $28,887 $25,845 $ 4,418 $ 4,008 ============================================================================== Plan assets - fair value Beginning balance $33,119 $28,259 Actual return on plan assets 1,146 5,932 Company contributions 18 345 Plan participants' contributions 1 1 Benefits paid (1,659) (1,409) Exchange rate adjustment (16) (9) - ------------------------------------------------------------------------------ Ending balance $32,609 $33,119 ============================================================================== Reconciliation of funded status to net amount recognized Funded status - plan assets in excess of (less than) benefit obligation $ 3,722 $ 7,274 $(4,418) $(4,008) Unrecognized net actuarial gain (1,699) (4,938) (21) (352) Unrecognized prior service costs 1,491 1,066 (392) (436) Unrecognized net transition asset (241) (331) - ------------------------------------------------------------------------------ Net amount recognized $ 3,273 $ 3,071 $(4,831) $(4,796) ============================================================================== Amount recognized in statement of financial position Prepaid benefit cost $ 3,513 $ 3,271 Intangible asset 105 Accumulated other comprehensive income 37 Accrued benefit liability (382) (200) $(4,831) $(4,796) - ------------------------------------------------------------------------------ Net amount recognized $3,273 $3,071 $ (4,831) $(4,796) ============================================================================== 78 79 Components of net periodic benefit costs and other supplemental information were as follows: Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Components of net periodic benefit cost - Pensions Service cost $ 573 $ 506 $ 429 Interest cost 1,793 1,727 1,161 Expected return on plan assets (2,507) (2,163) (1,397) Amortization of transition asset (86) (86) Amortization of prior service cost 101 101 Recognized net actuarial loss (gain) 5 (20) 2 - ------------------------------------------------------------------------------ Net periodic benefit cost (income) $ (121) $ 65 $ 195 ============================================================================== Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Components of net periodic benefit cost - OPB Service cost $ 81 $ 86 $ 97 Interest cost 271 274 219 Amortization of prior service cost (45) (45) (45) Recognized net actuarial loss (gain) (16) (22) 17 - ------------------------------------------------------------------------------ Net periodic benefit cost $ 291 $ 293 $ 288 ============================================================================== Weighted average assumptions as of December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Discount rate: pensions and OPB 6.50% 7.00% 7.36% Expected return on plan assets 8.75% 8.33% 8.46% Rate of compensation increase 4.50% 5.00% 5.07% Effect of 1% change in assumed health care costs 1998 1997 1996 - ------------------------------------------------------------------------------ Effect on total of service and interest cost 1% increase $ 44 $ 43 $ 41 1% decrease (39) (38) (36) Effect on postretirement benefit obligation 1% increase 452 410 377 1% decrease (406) (368) (336) The Company has various noncontributory plans covering substantially all employees. All major pension plans are funded and have plan assets that exceed accumulated benefit obligations. Certain of the pension plans provide that, in the event there is a change in control of the Company which is not approved by the Board of Directors and the 79 80 plans are terminated within five years thereafter, the assets in the plans first will be used to provide the level of retirement benefits required by the Employee Retirement Income Security Act, and then any surplus will be used to fund a trust to continue present and future payments under the postretirement medical and life insurance benefits in the Company's group insurance programs. The Company has an agreement with the Government with respect to certain of the Company pension plans. Under the agreement, should the Company terminate any of the plans under conditions in which the plan's assets exceed that plan's obligations, the Government will be entitled to a fair allocation of any of the plan's assets based on plan contributions that were reimbursed under Government contracts. Also, the Revenue Reconciliation Act of 1990 imposes a 20% nondeductible excise tax on the gross assets reverted if the Company establishes a qualified replacement plan or amends the terminating plan to provide for benefit increases; otherwise, a 50% tax is applied. Any net amount retained by the Company is treated as taxable income. Effective January 1, 1999, two new pension plans were created for the salaried, non-represented employees of pre-merger Boeing and McDonnell Douglas. Assets and liabilities associated with benefits earned through 1998 were transferred to the new plans, which provide substantially the same benefit levels as the prior plans. The change in projected benefit obligations as a result of establishing the two plans is $420, which is reflected in the "amendments" line in the table above that reconciles the benefit obligation balance. The Company has certain unfunded and partially funded plans with a projected benefit obligation of $688 and $387; plan assets of $243 and $56; and unrecognized prior services costs and actuarial losses of $240 and $131 as of December 31, 1998 and 1997. The net provision for these plans was $52 and $49 for 1998 and 1997. The principal defined contribution plans are the Company-sponsored 401(k) plans and a funded plan for unused sick leave. The provision for these defined contribution plans in 1998, 1997 and 1996 was $417, $361 and $287, respectively. The Company's postretirement benefits other than pensions consist principally of health care coverage for eligible retirees and qualifying dependents and, to a lesser extent, life insurance for certain groups of retirees. Retiree health care is provided principally until age 65 for approximately half those retirees who are eligible for health care coverage. Certain employee groups, including employees covered by most United Auto Workers bargaining agreements, are provided lifetime health care coverage. Benefit costs were calculated based on assumed cost growth for retiree health care costs of a 6.9% annual rate for 1998, decreasing to a 4.5% annual growth rate by 2010. Note 15 Shareholders' Equity - -------------------- In August 1998, the Board of Directors approved a resolution authorizing management to repurchase up to 15% of the Company's issued and outstanding stock as of June 30, 1998 (excluding shares held by the ShareValue Trust), which would amount to 145,899,000 shares. As of December 31, 1998, 35,195,000 shares had been repurchased pursuant to this resolution. Twenty million shares of authorized preferred stock remain unissued. 80 81 Note 16 Share-Based Plans - ----------------- The Share-based plans expense caption on the Consolidated Statements of Operations represents the total expense recognized for all company plans that are payable only in stock. These plans are described below. In 1998 the Company adopted the expense recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Had the Company not adopted SFAS No. 123, 1998 net earnings would have been $1,229, and basic and diluted earnings per share would have been $1.27 and $1.26. The following table compares 1997 and 1996 results as reported to the results had the Company adopted the expense recognition provision of SFAS No. 123: 1997 1996 - ------------------------------------------------------------------------------ Net earnings (loss) As reported $(178) $1,818 Pro forma under SFAS No. 123 (332) 1,852 - ------------------------------------------------------------------------------ Basic earnings (loss) per share As reported $(.18) $ 1.88 Pro forma under SFAS No. 123 (.34) 1.91 - ------------------------------------------------------------------------------ Diluted earnings (loss) per share As reported $(.18) $ 1.85 Pro forma under SFAS No. 123 (.34) 1.89 - ------------------------------------------------------------------------------ Performance Shares 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 Shares 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. As of December 31, 1998, the following number of Performance Shares were outstanding: 3,586,268 at an issue price of $50 11/16 and an expiration date of February 23, 2003; and 45,771 at an issue price of $33 9/16 and an expiration date of December 14, 2003. The Company recognized a share-based expense of $38 in 1998 attributable to Performance Shares. Other stock unit awards The total number of stock unit awards that are convertible only to common stock and not contingent upon stock price were 1,161,652, 301,631 and 376,628 as of December 31, 1998, 1997 and 1996, respectively. 81 82 ShareValue Trust The ShareValue Trust, established effective July 1, 1996, is a 14-year irrevocable trust that holds Boeing common stock, receives dividends, and distributes to employees appreciation in value above a 3% per annum threshold rate of return. As of December 31, 1998, the Trust had acquired 26,025,460 shares of the Company's common stock, equivalent to $1,150 of market value based upon the average price per share on June 28, 1996, which was $44 3/16, plus 11,253,197 shares of stock, equivalent to $550 of market value based upon the average price per share on January 1, 1998, which was $48 7/8. The Trust has additionally acquired 887,944 shares representing reinvested dividends, net of shares used to pay the nominal administrative costs borne by the Trust. Two investment periods began on July 1, 1996. One period was established with a duration of two years through June 30, 1998, and the other with a duration of four years through June 30, 2000. Each period was allocated one-half of the total shares. At the end of each initial investment period, a new four-year investment period will begin, resulting in overlapping periods with potential distributions every two years. The Trust fund market value after distribution will be the base from which the distributable market value appreciation over the threshold for the succeeding investment period will be determined. On June 30, 1998, the first investment period of the Trust ended with a fund appreciation insufficient to generate a distribution to employees. The ShareValue Trust is accounted for as a contra-equity account and stated at market value. Market value adjustments are offset to additional paid-in capital. The Company recognized a share-based expense of $72, $(99) and $133 for the years 1998, 1997 and 1996, respectively, attributable to the ShareValue Program. The 1998 ShareValue Trust expense was calculated under the provisions of SFAS No. 123. Stock options The Company's 1997 Incentive Stock Plan permits the grant of stock options, stock appreciation rights (SARs) and restricted stock awards (denominated in stock or stock units) to any employee of the Company or its subsidiaries. Under the terms of the plan, 30,000,000 shares are authorized for issuance upon exercise of options, as payment of SARs and as restricted stock awards, of which no more than an aggregate of 6,000,000 shares are available for issuance as restricted stock awards and no more than an aggregate of 3,000,000 shares are available for issuance as restricted stock that is subject to restrictions based on continuous employment for less than three years. This authorization for issuance under the 1997 plan will terminate on April 30, 2007. As of December 31, 1998, no SARs have been granted under the 1997 plan. The 1993 Incentive Stock Plan permitted the grant of options, SARs and stock to employees of the Company or its subsidiaries. The 1988 and 1984 stock option plans permitted the grant of options or SARs to officers or other key employees of the Company or its subsidiaries. No further grants may be awarded under these three plans. Options and SARs have been granted with an exercise price equal to the fair market value of the Company's stock on the date of grant and expire ten years after the grant date. Vesting is generally over a five-year period, with portions of a grant becoming exercisable at one year, three years and five years after the grant date. SARs, which have been granted only under the 1988 and 1984 plans, were granted in tandem with stock options; therefore, exercise of the SAR cancels the related option and exercise of the option cancels the attached SAR. 82 83 In 1994, McDonnell Douglas shareholders approved the 1994 Performance Equity Incentive Plan. Restricted stock issued under this plan prior to 1997 vested upon the merger between McDonnell Douglas and The Boeing Company. As of December 31, 1998, a total of 594,000 shares had been granted, and 454,285 remain restricted. Substantially all compensation relating to these restricted shares is being amortized to expense over a period of six years. Unearned compensation is reflected as a component of shareholders' equity. Information concerning stock options issued to directors, officers and other employees is presented in the following table. 1998 1997 1996 ----------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise (Shares in thousands) Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------ Number of shares under option: Outstanding at beginning of year 27,705 $32.36 26,525 $25.47 28,754 $20.19 Granted 3,772 52.72 6,320 53.16 6,692 40.32 Exercised (2,493) 20.77 (4,502) 21.77 (8,356) 19.34 Canceled or expired (255) 46.35 (223) 47.84 (233) 35.92 Exercised as SARs (76) 19.27 (415) 15.21 (332) 13.70 ------ ------ ------ Outstanding at end of year 28,653 36.03 27,705 32.36 26,525 25.47 ============================================================================== Exercisable at end of year 15,577 $29.57 12,277 $24.09 12,412 $20.13 ============================================================================== As of December 31, 1998, 21,681,000 shares were available for grant under the 1997 Incentive Stock Plan, and 9,548,000 shares were available for grant under the Incentive Compensation Plan. The following table summarizes information about stock options outstanding at December 31, 1998 (shares in thousands). Options Outstanding ------------------------------------------ Weighted Average Weighted Remaining Average Range of Contractual Exercise Exercise Prices Shares Life (years) Price - ------------------------------------------------------------------------------ $10 to $19 4,315 4.5 $16.35 $20 to $29 8,480 5.0 23.32 $30 to $39 1,779 7.1 38.44 $40 to $49 4,598 7.4 41.25 $50 to $59 9,481 8.7 53.37 - ------------------------------------------------------------------------------ 28,653 ============================================================================== 83 84 Options Exercisable ---------------------- Weighted Average Range of Exercise Exercise Prices Shares Price - ------------------------------------------------------------------------------ $10 to $19 3,847 $16.61 $20 to $29 6,673 23.29 $30 to $39 101 37.68 $40 to $49 2,148 41.04 $50 to $59 2,808 53.18 - ------------------------------------------------------------------------------ 15,577 ============================================================================== The Company has determined the weighted average fair values of stock-based arrangements granted, including the ShareValue Trust, during 1998, 1997 and 1996 to be $19.99, $20.67 and $8.39, respectively. The fair values of stock- based compensation awards granted and of potential distributions under the ShareValue Trust arrangement were estimated using a binomial option-pricing model with the following assumptions. Expected Grant --------------------------- Date Option Term Volatility - ------------------------------------------------------------------------------ 1998 4/13/98 9 years 20% - ------------------------------------------------------------------------------ 1997 1/13/97 9 years 19% 2/24/97 9 years 19% - ------------------------------------------------------------------------------ 1996 1/11/96 5 years 17% 7/1/96 2 years 17% 7/1/96 4 years 17% 2/26/96 9 years 21% ============================================================================== Grant Expected Risk-Free Date Dividend Yield Interest Rate - ------------------------------------------------------------------------------ 1998 4/13/98 1.1% 5.9% - ------------------------------------------------------------------------------ 1997 1/13/97 1.1% 6.6% 2/24/97 1.1% 6.6% - ------------------------------------------------------------------------------ 1996 1/11/96 1.3% 5.3% 7/1/96 - 6.3% 7/1/96 - 6.3% 2/26/96 1.2% 6.0% ============================================================================== The Company recognized a share-based expense of $31 in 1998 attributable to stock options with an offset to additional paid-in capital, and recognized no expense in 1997 and 1996. 84 85 Note 17 Derivative Financial Instruments - -------------------------------- The derivative financial instruments held by the Company at December 31, 1998, consisted of simple and specifically tailored interest rate swaps and foreign currency forward contracts. The Company does not trade in derivatives for speculative purposes. The interest rate swaps, which are associated with certain customer financing receivables and long-term debt, are designed to achieve a desired balance of fixed and variable rate positions. These swaps are accounted for as integral components of the associated receivable and debt, with interest accrued and recognized based upon the effective rates. Due to the component nature of these interest rate swaps, there are no associated gains or losses. (See Note 8, Note 13 and Note 20.) Foreign currency forward contracts are entered into to hedge specific receipt and expenditure commitments made in foreign currencies. As of December 31, 1998, the notional amount of foreign currency forward contracts through 2002 denominated in foreign currencies was $395, with unrealized gains, net of unrealized losses, of $2. The Company believes that there is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of derivative financial instruments. Note 18 Financial Instruments with Off-Balance-Sheet Risk - ------------------------------------------------- The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business, principally relating to customer financing activities. Financial instruments with off-balance-sheet risk include financing commitments, credit guarantees, and participation in customer financing receivables with third-party investors that involve interest rate terms different from the underlying receivables. Irrevocable financing commitments related to aircraft on order, including options, scheduled for delivery through 2004 totaled $6,239 and $6,029 as of December 31, 1998 and 1997. The Company anticipates that not all of these commitments will be used and that it will be able to arrange for third-party investors to assume a portion of the remaining commitments, if necessary. The Company has additional commitments to arrange for commercial equipment financing totaling $163 and $132 as of December 31, 1998 and 1997. Participations in customer financing receivables with third-party investors that involve interest rate terms different from the underlying receivables totaled $62 and $64 as of December 31, 1998 and 1997. The Company's maximum exposure to credit-related losses associated with credit guarantees, without regard to collateral, totaled $1,426 ($730 associated with commercial aircraft and collateralized) and $955 ($660 associated with commercial aircraft and collateralized) as of December 31, 1998 and 1997. The Company's maximum exposure to losses associated with asset value guarantees, without regard to collateral, totaled $444 and $470 as of December 31, 1998 and 1997. These asset value guarantees relate to commercial aircraft and are collateralized. 85 86 Note 19 Significant Group Concentrations of Credit Risk - ----------------------------------------------- Financial instruments involving potential credit risk are predominantly with commercial airline customers and the U.S. Government. As of December 31, 1998, off-balance-sheet financial instruments described in Note 18 predominantly related to commercial aircraft customers. Of the $8,999 in accounts receivable and customer financing included in the Consolidated Statements of Financial Position, $4,871 related to commercial aircraft customers and $2,058 related to the U.S. Government. No single commercial airline customer is associated with more than 17% of all financial instruments relating to customer financing. Financing for aircraft is collateralized by security in the related asset, and historically the Company has not experienced a problem in accessing such collateral. Of the $4,871 of commercial accounts receivable and aircraft customer financing, $3,511 related to customers the Company believes have less than investment- grade credit. Similarly, of the $6,239 of irrevocable financing commitments related to aircraft on order including options, $4,067 related to customers the Company believes have less than investment-grade credit. The Company has customer financing and commitments to arrange for future financing with Trans World Airlines (TWA) totaling $2,363. TWA continues to operate under a reorganization plan, confirmed by the U.S. Bankruptcy Court in 1995, which restructured its indebtedness and leasehold obligations to its creditors. In addition, TWA continues to face financial and operational challenges. Further deterioration of TWA's financial condition could adversely affect the performance of customer financing extended to TWA; however, based on the Company's assessment of the underlying collateral position held by the Company, possible future non-performance of financing currently extended to TWA would not have a material adverse impact on the Company's liquidity or results of operations. Note 20 Disclosures about Fair Value of Financial Instruments - ----------------------------------------------------- As of December 31, 1998 and 1997, the carrying amount of accounts receivable was $3,288 and $3,121, and the fair value of accounts receivable was estimated to be $3,239 and $3,033. The lower fair value reflects a discount due to deferred collection for certain receivables that will be collected over an extended period. The carrying value of accounts payable is estimated to approximate fair value. The carrying amount of notes receivable, net of valuation allowance, is estimated to approximate fair value. Although there are generally no quoted market prices available for customer financing notes receivable, the valuation assessments were based on the respective interest rates, risk-related rate spreads and collateral considerations. As of December 31, 1998 and 1997, the carrying amount of debt, net of capital leases, was $6,539 and $6,354, and the fair value of debt, based on current market rates for debt of the same risk and maturities, was estimated at $7,198 and $6,996. The Company's debt, however, is generally not callable until maturity. With regard to financial instruments with off-balance-sheet risk, it is not practicable to estimate the fair value of future financing commitments, and all 86 87 other off-balance-sheet financial instruments are estimated to have only a nominal fair value. The terms and conditions reflected in the outstanding guarantees and commitments for financing assistance are not materially different from those that would have been negotiated as of December 31, 1998. Note 21 Contingencies - ------------- Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant legal proceedings are related to matters covered by insurance. Major contingencies are discussed below. The Company is subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. Due in part to their complexity and pervasiveness, such requirements have resulted in the Company being involved with related legal proceedings, claims and remediation obligations since the 1980s. The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company's policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on conservative estimates of investigation, cleanup and monitoring costs to be incurred. The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company's financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings exclusive of special charges. Such accruals as of December 31, 1998, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities. Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company's financial position or operating results and cash flow trends. The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the Government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company believes, based upon all available information, that the outcome of any such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations. 87 88 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 December 31, 1998, inventories included approximately $581 of recorded costs on the A-12 contract, against which the Company has established a loss provision of $350. The amount of the provision, which was established in 1990, was based on the Company's belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, that the Team would establish a claim for contract adjustments for a minimum of $250, that there was a range of reasonably possible results on termination for convenience, and that it was prudent to provide for what the Company then believed was the upper range of possible loss on termination for convenience, which was $350. On December 19, 1995, the U.S. Court of Federal Claims ordered that the Government's termination of the A-12 contract for default be converted to a termination for convenience of the Government. On December 13, 1996, the court issued an opinion confirming its prior no-loss adjustment and no-profit recovery order. On December 5, 1997, the Court issued an opinion confirming its preliminary holding that plaintiffs were entitled to certain adjustments to the contract funding, increasing the plaintiffs' possible recovery to $1,200. On March 31, 1998, the Court entered a judgment, pursuant to a March 30, 1998, opinion and order, determining that plaintiffs were entitled to be paid that amount, plus statutory interest from June 26, 1991, until paid. Although the Government has appealed the resulting judgment, the Company believes the judgment will be sustained. Final resolution of the A-12 litigation will depend on such appeals and possible further litigation, or negotiations, with the Government. If sustained, however, the expected damages judgment, including interest, could result in pretax income that would more than offset the $350 loss provision established in 1990. On October 31, 1997, a federal securities lawsuit was filed against the Company in the U.S. District Court for the Western District of Washington in Seattle. The lawsuit named as defendants the Company and three of its executive officers. Additional lawsuits of a similar nature have been filed. The plaintiffs in each lawsuit 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 June 6, 1998, sixteen 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 88 89 in the U.S. District Court for the Western District of Washington (Washington Class Action) alleging, on the basis of race, discrimination in 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 have worked for the three companies during the past few years. Also, on July 31, 1998, seven African American employees of the helicopter division of the Military Aircraft and Missile Systems Group in Philadelphia filed an action in the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia Class Action) alleging, on the basis of race, discrimination 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. In September 1998, the Court denied plaintiffs' motion seeking class certification, but allowed plaintiffs to renew their motion upon completion of class discovery. On January 25, 1999, the U.S. District Court in the Western District of Washington entered an order preliminarily approving a proposed Consent Decree, which settles both the Washington Class Action and the Philadelphia Class Action, along with a multi-plaintiff racial discrimination lawsuit. The order, inter alia, conditionally certified a nationwide class of 20,000 current and former African American Boeing (including all U.S. subsidiaries and former McDonnell Douglas Corporation and Rockwell International) employees. If approved by the Court, the Company will pay $15 allocated in a manner described in the proposed Consent Decree. The Company will devise systems changes that will inform hourly employee class members about the promotion selection process, and which employee was awarded a certain promotion; provide training and other programs to assist employees with career development; employ a consultant to assess these system changes; implement across the system a revised first-level management selection process and revised internal complaint process; and implement enforcement procedures to maintain a harassment-free workplace. A hearing is set for May 26, 1999, to determine the fairness of the proposed Consent Decree, and if so determined, for the Court to approve the Consent Decree. The Company believes that the proposed Consent Decree, if approved, will not have a materially adverse effect on its earnings, cash flow or financial position. Note 22 Segment Information - ------------------- Segment information may be found on pages 52 - 56. 89 90 THE BOEING COMPANY AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars in millions except per share data) 1998 1997 ----------------------------------------------------------- Quarter 4th 3rd 2nd 1st 4th 3rd 2nd 1st =============================================================================== Sales and other operating revenues $17,099 $12,721 $13,389 $12,945 $11,727 $11,371 $12,343 $10,359 Earnings from operations 602 430 416 119 (782) (1,019) 707 838 Net earnings 465 347 258 50 (498) (696) 476 540 Basic earnings per share .49 .36 .26 .05 (.51) (.72) .49 .56 Diluted earnings per share .48 .36 .26 .05 (.51) (.72) .48 .55 - ------------------------------------------------------------------------------- Cash dividends per share .14 .14 .14 .14 .14 .14 .14 .14 - ------------------------------------------------------------------------------- Market price: High 44.00 50.13 56.25 54.75 55.25 60.50 58.00 57.25 Low 29.50 30.38 42.13 42.81 43.00 51.31 47.00 49.31 Quarter end 32.63 34.31 44.56 52.13 48.94 54.44 53.06 49.31 =============================================================================== 90 91 THE BOEING COMPANY AND SUBSIDIARIES FIVE-YEAR SUMMARY (Dollars in millions except per share data) 1998 1997 1996 1995 1994 ============================================================================== Operations Sales and other operating revenues Commercial Airplanes $35,545 $26,929 $19,916 $17,511 $19,778 Military Aircraft and Missiles 12,990 Space and Communications 6,889 ------- Information, Space and Defense Systems 19,879 18,125 14,934 14,849 14,676 Customer and Commercial Financing/Other 730 746 603 600 515 - ------------------------------------------------------------------------------ Total $56,154 $45,800 $35,453 $32,960 $34,969 - ------------------------------------------------------------------------------ Net earnings (loss) $ 1,120 $ (178) $ 1,818 $ (36) $ 1,483 Basic earnings (loss) per share (a) 1.16 (.18) 1.88 (.04) 1.50 Diluted earnings (loss) per share (a) 1.15 (.18) 1.85 (.04) 1.48 - ------------------------------------------------------------------------------ Net earnings excluding share-based plans and special charges (b) $ 1,216 $ 632 $ 1,905 $ 1,479 $ 1,483 Diluted earnings per share (a) 1.25 .64 1.94 1.49 1.48 Percent of sales 2.2% 1.4% 5.4% 4.5% 4.2% - ------------------------------------------------------------------------------ Cash dividends paid $ 564 $ 557 $ 480 $ 434 $ 395 Per share .56 .56 .55 .50 .50 - ------------------------------------------------------------------------------ Other income, principally interest 283 428 388 280 194 - ------------------------------------------------------------------------------ Research and development expense 1,895 1,924 1,633 1,674 2,076 General and administrative expense 1,993 2,187 1,819 1,794 1,776 - ------------------------------------------------------------------------------ Additions to plant and equipment, net 1,584 1,391 971 747 883 Depreciation of plant and equipment 1,386 1,266 1,132 1,172 1,294 - ------------------------------------------------------------------------------ Employee salaries and wages 12,074 11,287 9,225 8,688 9,037 Year-end workforce 231,000 238,000 211,000 169,000 183,000 ============================================================================== Financial position at December 31 Total assets $36,672 $38,024 $37,880 $31,877 $32,259 Working capital 2,953 5,111 7,783 7,490 6,299 Net plant and equipment 8,589 8,391 8,266 7,927 8,399 - ------------------------------------------------------------------------------ Cash and short-term investments 2,462 5,149 6,352 4,527 3,064 Total debt 6,972 6,854 7,489 5,401 5,247 Customer and commercial financing assets 5,711 4,600 3,888 4,212 5,408 - ------------------------------------------------------------------------------ 91 92 THE BOEING COMPANY AND SUBSIDIARIES FIVE-YEAR SUMMARY (Continued) (Dollars in millions except per share data) 1998 1997 1996 1995 1994 ============================================================================== Shareholders' equity 12,316 12,953 13,502 12,527 13,173 Per share 13.13 13.31 13.96 12.80 13.37 Common shares outstanding (in millions)(a) 937.9 973.5 967.2 978.6 985.3 ============================================================================== Contractual backlog Commercial Airplanes $ 86,057 $ 93,788 $ 86,151 $73,715 $68,158 Military Aircraft and Missiles 17,007 Space and Communications 9,832 -------- Information, Space and Defense Systems 26,839 27,852 28,022 21,773 18,798 - ------------------------------------------------------------------------------ Total $112,896 $121,640 $114,173 $95,488 $86,956 ============================================================================== Cash dividends have been paid on common stock every year since 1942. (a) Computation excludes outstanding shares held by the ShareValue Trust. (b) Special charges include $600 pretax special retirement charge and $1,838 pretax charge associated with the MD-11 program in 1995, and $1,400 pretax charge associated with Douglas products in 1997. 92 93 Market for Registrant's Common Equity and Related Stockholder Matters THE BOEING COMPANY GENERAL OFFICES The Boeing Company 7755 East Marginal Way South Seattle, WA 98108 (206) 655-2121 TRANSFER AGENT, REGISTRAR AND DIVIDEND PAYING AGENT The transfer agent is responsible for shareholder records, issuance of stock certificates, distribution of dividends and IRS Form 1099. Requests concerning these or other related shareholder matters are most efficiently answered by contacting: BankBoston, N.A. c/o EquiServe, L.P. P.O. Box 8040 Boston, MA 02266-8040 (888) 777-0923 (toll-free for domestic U.S. callers) (781) 575-3400 (call collect for non-U.S. callers) Boeing shareholders can also obtain answers to frequently asked questions (FAQ), such as transfer instructions, direct deposit of dividends, and terms of the Dividend Reinvestment and Stock Purchase Plan through EquiServe's home page at http://www.equiserve.com. ANNUAL MEETING The annual meeting of Boeing shareholders will be held at The Westin Los Angeles Airport Hotel, 5400 West Century Boulevard, Los Angeles, California, at 10:00 a.m. Pacific time on Monday, April 26, 1999. Formal notice of the meeting, proxy statement, form of proxy, and annual report were mailed to shareholders beginning March 19, 1999. ELECTRONIC PROXY RECEIPT AND VOTING Shareholders now have the option of voting their proxies by Internet or telephone, instead of returning their proxy cards through the mail. Instructions are in the proxy statement and attached to the proxy card for the 1999 annual meeting. Registered shareholders can go to http://www.econsent.com/ba to sign up to receive their annual report and proxy statement in an electronic format in the future. Beneficial owners may contact the brokers or banks who hold their stock to find out whether electronic receipt is available. If you choose electronic receipt, you will not receive the paper form of the annual report and proxy statement. Instead, you will receive notice by e-mail when the materials are available on the Internet. WRITTEN INQUIRIES MAY BE SENT TO: Shareholder Services Investor Relations Mail Code 13-08 Mail Code 10-16 The Boeing Company The Boeing Company P.O. Box 3707 P.O. Box 3707 Seattle, WA 98124-2207 Seattle, WA 98124-2207 93 94 COMPANY SHAREHOLDER SERVICES Pre-recorded shareholder information and quarterly earnings data are available toll-free from Boeing Shareholder Services at (800) 457-7723. You may also speak to a Boeing Shareholder Services representative at (206) 655-1990 between 8:00 a.m. and 4:30 p.m. Pacific time. TO REQUEST AN ANNUAL REPORT, PROXY STATEMENT, FORM 10-K, OR FORM 10-Q: Data Shipping The Boeing Company Mail Code 3T-33 P.O. Box 3707 Seattle, WA 98124-2207 or call (425) 393-4964 or (800) 457-7723 BOEING ON THE WORLD WIDE WEB The Boeing home page - http://www.boeing.com - is your entry point for viewing the latest Company information about its products or for viewing electronic versions of the annual report, proxy statement, Form 10-K, or Form 10-Q. DUPLICATE SHAREHOLDER ACCOUNTS Registered shareholders with duplicate accounts may call our transfer agent, EquiServe, for instructions on consolidating those accounts. The Company recommends that registered shareholders always use the same form of their names in all stock transactions to be handled in the same account. Registered shareholders may also ask EquiServe to eliminate excess mailings of annual reports going to shareholders in the same household. CHANGE OF ADDRESS For Boeing registered shareholders: BankBoston, N.A. c/o EquiServe L.P. P.O. Box 8040 Boston, MA 02266-8040 or call (888) 777-0923 For Boeing beneficial owners: Contact your brokerage firm or bank to give notice of your change of address. STOCK EXCHANGES The Company's common stock is traded principally on the New York Stock Exchange; the trading symbol is BA. Boeing common stock is also listed on the Amsterdam, Brussels, London, Swiss and Tokyo stock exchanges. Additionally, the stock is traded, without being listed, on the Boston, Chicago, Cincinnati, Pacific and Philadelphia exchanges. GENERAL AUDITORS Deloitte & Touche LLP 700 Fifth Avenue, Suite 4500 Seattle, Washington 98104-5044 (206) 292-1800 EQUAL OPPORTUNITY EMPLOYER Boeing is an equal opportunity employer and seeks to attract and retain the best-qualified people regardless of race, color, religion, national origin, gender, sexual orientation, age, disability, or status as a disabled or Vietnam Era Veteran. 94 95 THE BOEING COMPANY EXECUTIVE LAYOFF BENEFITS PLAN Includes Amendment No. 3 October 1998 95 96 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 Event 4 Article 3 - Layoff Benefit 6 3.1 Layoff Benefit 6 3.2 Payment of Layoff Benefit 6 3.3 Death Benefit 7 Article 4 - Administration 8 4.1 Administration 8 4.2 Committee Liability 8 4.3 Claim Procedure 8 Article 5 - General Provisions 9 5.1 Plan Amendment and Termination 9 5.2 Funding 9 5.3 Benefit Plan Application 9 5.4 Provision Against Anticipation 9 5.5 Employment Status 9 5.6 Facility of Payment 9 5.7 Construction 10 -i- 96 97 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 (ERISA) and that the plan shall be construed and interpreted in a manner consistent with such intention. 97 98 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. 1.9 "Layoff Event" is defined in Section 2.3 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. 98 99 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 Event 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. 99 100 Article 3 Layoff Benefit 3.1 Layoff Benefit An Employee's Layoff Benefit 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. 3.2 Payment of Layoff Benefit a) Lump Sum Benefit An Employee will receive his or her Layoff Benefit as a lump sum, net of any applicable withholding taxes, to be paid within a reasonable period of time following the Layoff Event. Interest shall not accrue on a 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. In no event will the Layoff Benefit exceed the equivalent of twice the Employee's Annual Compensation during the year immediately preceding the termination of an Employee's service. 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. 100 101 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. 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 death benefit is payable under the Plan. All rights to a Layoff Benefit shall terminate upon the death of the Employee whether or not payment has been made or begun. 101 102 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 will be personally liable by virtue of any contract, agreement, or other instrument made or executed as a member of the Committee, nor for any mistake of judgment made by such member or by any other member, nor for any loss unless resulting from willful misconduct or failure to exercise good faith. 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, except such liabilities and expenses as are due to willful misconduct or failure to exercise good faith. 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. 102 103 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 Committee, the Plan will terminate on September 30, 1999. 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. 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. 103 104 SETTLEMENT AND RELEASE This Settlement and Release ("Agreement") is entered into by and between Ronald B. Woodard (the "Executive") and The Boeing Company (the "Company"). The parties have agreed to enter into this Agreement to resolve any and all issues arising out of or relating in any way to Executive's employment, including but not limited to his termination effective February 1, 1999. 1. The Company agrees to place Executive on an authorized, unpaid leave of absence effective November 16, 1998, from which status Executive will be laid off effective February 1, 1999. 2. The Company agrees to pay Executive a lump sum (less applicable withholdings) of $900,000, to be paid within 30 days of signing this Agreement. 3. The Company agrees to pay to Executive a lump sum (grossed up for taxes) representing the cost to the Company of medical and dental coverage for the Executive and currently-covered dependents for twelve months. 4. Executive will be eligible for a pro-rated bonus payment in 1999 under the Company's Incentive Compensation Plan for Officers and Executives ("ICP") with respect to his service through November 1, 1998. The determination of the size of Executive's bonus will be based on the Company's evaluation of its overall performance for 1998. It is understood that the Executive's bonus will be established by the same method used for the members of the Executive Committee and that Executive's performance index will be established at 1.0. 5. With respect to awards of Career Shares, BSUs under the ICP, and LTIPs which are not yet vested or fully vested, termination of the Executive shall be treated as a "layoff." In addition, the Executive's termination shall be treated as a "layoff" for purposes of vesting any Company Matching Contributions credited to the Executive under the Deferred Compensation Plan for Executives of The Boeing Company. The form of payment with respect to such vested amounts shall be governed by the terms of the respective plans. 6. Any and all stock options held by the Executive shall be exercisable according to the terms under which such options were granted. Any Performance Shares awarded to the Executive shall be forfeited upon the Executive's termination, consistent with the term of those awards. 7. Executive may elect either to keep his Company-provided automobile or to receive from the Company a lump sum payment in the amount of the retail value established by the "Blue Book" reporting firm (grossed up to account for any applicable taxes on such payment). If Executive chooses to retain the vehicle, the Company will transfer title to Executive as soon as practical following his termination. 8. The Company will continue to match contributions made by Executive to the Seattle Symphony Orchestra, the Pacific Northwest Ballet, Tacoma Art Museum and the University of Puget Sound, pursuant to the Executive's most recent pledge agreements made prior to the date of this Agreement, to the extent of contributions actually made by Executive. The Company's contributions made pursuant to this paragraph shall be in the same proportion to Executive's contributions as was in effect at the date of this Agreement, consistent with Company policy regarding matching contributions for executives who are also members of charitable boards of directors. 104 105 9. The Company will pay on behalf of Executive the sum of $43,070.63 (grossed up for taxes), representing a tax liability otherwise due from Executive with respect to a recent exercise of stock options. 10. The Company will provide Executive with financial counseling through September 1999, tax preparation services for his 1998 tax return, and senior executive-level outplacement assistance with Drake Beam Morin through calendar year 1999. 11. Executive agrees to fully cooperate with the Company in the defense of any litigation in which he is called to serve as a witness or to provide information. The Company confirms that Executive is covered by the indemnification protections of Article VII, Section 4 of the Company's by-laws. The Executive shall be entitled to an advancement of all reasonable personal and legal expenses as permitted by such by-laws, provided the Board of Directors of the Company does not determine that advancement of such expenses would violate law or public policy. 12. Executive agrees to refrain from communicating to any other person or entity any proprietary, confidential, and/or trade secret information or data belonging to the Company or entrusted to it by others. In the event of violation of this paragraph, the Company will be entitled to pursue any and all legal and equitable relief against Executive. 13. Commencing November 17, 1998 and terminating on the earlier of (a) November 16, 2000, and (b) the date Executive commences other, full-time employment, Executive agrees to be available, from time to time, to provide consulting services to senior executives of the Company on various aspects of Company business, as requested or authorized by the Chief Executive Officer of the Company. During the term specified above, Company shall pay Executive a retainer of $19,000 per month, such amount to be pro-rated during the first and final months of such term. In addition, Executive will be reimbursed for actual costs incurred for travel and related expenses incurred in the performance of services under this paragraph. Expenses may include first class air travel, lodging, meals, car rental and other customary business expenses; any such expenses must be itemized, and are subject to approval under applicable Company guidelines. Executive shall be solely responsible for any and all income and employment tax obligations associated with payments received under this paragraph, and such amounts shall not be treated as wages for purposes of any Company employee benefit plan or program. 14. In consideration of the foregoing, Executive releases and waives any and all claims he may now or hereafter have against the Company which relate in any way to the terms or conditions of his employment, including but not limited to the termination thereof. This release and waiver covers any claims arising out of any federal, state, or local statute, regulation, or ordinance, including but not limited to any claims arising out of Title VII of the Civil Rights Act of 1964 or the Age Discrimination in Employment Act, and any claim arising out of tort, contract, or common law. 15. Executive acknowledges and agrees that he has the opportunity to consider for twenty-one days whether to enter this Agreement and that he has voluntarily chosen to enter into this Agreement on this date. Executive may revoke this Agreement for a period of seven days following execution of this Agreement, and if not revoked, this Agreement shall become effective following lapse of this seven-day period. Executive acknowledges that he is voluntarily executing this Agreement, that he has not relied on any representations or 105 106 statements not set forth herein or made by the Company's agents or representatives, and that he has been advised to consult an attorney prior to executing this Agreement. 16. The parties agree that they will not disclose or publicize the terms and conditions of, or negotiations leading to, this Agreement to any third party (other than counsel for the parties), except that they may state the matter was settled to the parties' mutual satisfaction. In addition, the Company may make such disclosures concerning the terms of this Agreement as are required for it to meet any legally-required disclosure obligations. 17. In the event any provision of this Agreement is held invalid, all remaining provisions of this Agreement shall continue in full force and effect. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. RONALD B. WOODARD THE BOEING COMPANY /s/ Ronald B. Woodard /s/ James B. Dagnon ____________________________ By_________________________ Sr. V.P. - People Its__________________________ 10/31/98 10/31/98 DATED:_____________________ DATED:_____________________ 106 107 November 10, 1998 Deborah C. Hopkins c/o Gretchen Fitch 646 Kimberly Rd. Birmingham, MI 48009 Dear Deborah, We would be delighted to have you join the Boeing team as Senior Vice President and Chief Financial Officer. The following is a summary of certain terms of this conditional offer of employment. Employment Incentives: - - To welcome you as a key member of the executive team, you will receive a Boeing Performance Share Grant equal to 4.5 times your base salary. - - You will also receive $180,000 of Career Shares - - The Company will also pay you a lump sum (less applicable withholding) of seven hundred and fifty thousand dollars ($750,000) within 30 days of employment with the Company. - - The Company will also provide you with thirteen years of additional service under the Supplemental Executive Retirement Plan, subject to you remaining a Boeing employee until age 62. - - If The Boeing Company terminates your employment for any reason prior to December 31, 2001, other than for an intentional violation of Company policies or practices, you will be entitled to a lump sum payment equal to the base salary wages and target incentive awards you would have earned from the date of termination through December 31, 2001 (less applicable withholding). - - The company will also provide placement assistance for your spouse through calendar year 1999. Deborah C. Hopkins - Page 2 Executive Compensation: - - Your initial annual compensation will be: Base Salary $450,000 Annual Incentive Target $360,000 (80% of base salary) - - Your $360,000 incentive target is guaranteed for 1999. However, depending on business results, the actual value could be higher. 107 108 - - You will participate in Boeing's Long Term Incentive Plans as follows: An annual grant of Performance Shares that have the potential to vest, based on specific stock price performance hurdles, with a grant value of four and one-half times your base salary. An annual grant of Career Shares equal to 20% of your base salary. - - You will also be eligible for the following executive perquisites: Company provided automobile Comprehensive Financial Planning and Counseling You will be assigned a grade level of E1C in the Executive Compensation Program. You will find enclosed a brochure that explains the elements of the program in more detail. In addition, the initial awards of Performance and Career shares, as well as your guaranteed incentive award for 1999, are subject to Compensation Committee approval. You will also find enclosed, employee benefit program information covering our retirement, vacation, sick leave, 401(k) savings and insurance plans. Life, medical and dental insurance plans are effective the first day of the month following your first full calendar month of employment. Relocation assistance will be provided in accordance with the enclosed "New Employee Travel and Moving Allowances Agreement." The Home Sale/Home Purchase Plan will be provided in conjunction with this offer as well. Boeing is strongly committed to maintaining a drug and alcohol free workplace in order to provide for a safe and productive work environment. In order to maintain this environment, Boeing requires a drug-screening Deborah C. Hopkins - Page 3 test as a condition of employment. Please contact Northwest Toxicology as 1- 800-322-3361, request the Client Services Department and identify yourself as a Boeing candidate (the account Number is 210104 and the Location Code is PS). The results of this test will become the confidential information of Boeing. Once you have visited the collection location, please call Marilyn Tilley toll free on 1-800-254-1591 to inform us that collection has occurred. Boeing hires only U.S. citizens and non-citizens lawfully authorized to work in the U.S. As part of your application package, you are required to submit the "Employment Eligibility Verification" (1-9 Form), with proof of your identity and authorization to work. Original documents will be required for verification purposes prior to your hiring into the Company. Questions regarding this procedure should be addressed to the undersigned. To accomplish your entrance on the payroll, it will be necessary to complete pre-employment sign-up prior to your reporting date. Please contact Michael Valliere on 206-655-5086, at your earliest convenience if you have any questions regarding this offer. This contingent offer will remain in effect through November 28, 1998. 108 109 We look forward to your acceptance of this offer and working together at The Boeing Company. Sincerely, /s/ Jim Dagnon James B. Dagnon Enc. 109 110 EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries (Wholly owned unless identified by asterisk) Place of Date of Name Incorporation Incorporation =============================================================================== 2433265 Manitoba Ltd. Manitoba 1989 692567 Ontario Limited Ontario 1986 757UA, Inc. Delaware 1989 767ER, Inc. Delaware 1987 ACN 004 471 078 PTY LIMITED Australia 1960 AeroSpace Technologies of Australia Limited Australia 1986 Aileron Inc. Delaware 1989 Akash, Inc. Delaware 1998 Aldford-1 Corporation Delaware 1993 ARGOSystems, Inc. California 1969 Astro Limited Bermuda 1975 Astro-II, Inc. Vermont 1984 Autonetics, Inc. Delaware 1958 Bahasa Aircraft Corporation Delaware 1993 BCS Richland, Inc. Washington 1975 Beaufoy-1 Corporation Delaware 1993 BNA International Systems, Inc. Delaware 1974 BNA Operations International, Inc. Delaware 1996 BNJ, Inc. Delaware 1998 Boeing - Corinth Co. Delaware 1987 Boeing - Irving Co. Delaware 1979 Boeing - Oak Ridge Co. Delaware 1980 Boeing - Aerospace Hungary Ltd. Hungary 1997 Boeing Aerospace Ltd. Delaware 1980 Boeing Aerospace Operations, Inc. Washington 1972 Boeing Aerospace Poland Poland 1996 Boeing Aerospace Switzerland, Inc. Delaware 1972 Boeing Aerospace - TAMS, Inc. Delaware 1981 Boeing Aerospace - U.K., Ltd. Delaware 1993 Boeing Agri-Industrial Company Oregon 1973 Boeing Aircraft Holding Company Delaware 1984 Boeing Australia Limited Australia 1986 Boeing Canada Inc. Ontario 1929 Boeing Capital Corporation Delaware 1968 Boeing Capital Services Corporation Delaware 1988 Boeing China Technical Services, Inc. Delaware 1985 Boeing China, Inc. Delaware 1986 Boeing Commercial Information and Communication Company Delaware 1997 Boeing Commercial Space Company Delaware 1987 Boeing Constructors, Inc. Texas 1970 Boeing Defence UK Limited England 1976 Boeing Domestic Sales Corporation Washington 1974 110 111 EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries (Wholly owned unless identified by asterisk) Place of Date of Name Incorporation Incorporation =============================================================================== Boeing Enterprises, Inc. Delaware 1997 Boeing Financial Corporation Washington 1965 Boeing Global Services, Inc. Delaware 1998 Boeing Information Services, Inc. Delaware 1981 Boeing International Corporation Delaware 1953 Boeing International Holdings, Ltd. Bermuda 1998 Boeing International Logistics Spares, Inc. Delaware 1996 Boeing International Sales Corporation Washington 1971 Boeing Investment Company, Inc. Delaware 1985 Boeing Leasing Company Delaware 1988 Boeing Logistics Spares, Inc. Delaware 1980 Boeing Middle East Limited Delaware 1982 Boeing Nevada, Inc. Delaware 1989 Boeing North American Services, Inc. Texas 1973 Boeing North American Space Alliance Company Delaware 1995 Boeing North American Space Enterprises Canada, Inc. Canada 1996 Boeing North American Space Operations Company Delaware 1983 Boeing North American, Inc. Delaware 1928 Boeing of Canada Ltd. Delaware 1986 Boeing Offset Company, Inc. Delaware 1985 Boeing Operations International, Incorporated Delaware 1981 Boeing Overseas, Inc. Delaware 1984 Boeing Precision Gear, Inc. Delaware 1994 Boeing Realty Corporation California 1972 Boeing Sales Corporation Guam 1984 Boeing Sales Corporation, Limited Bermuda 1993 Boeing Space Operations Company Delaware 1998 Boeing Spain, Ltd. Delaware 1983 Boeing Support Services, Inc. Delaware 1980 Boeing Technology International, Inc. Washington 1973 Boeing Toronto, Ltd. Canada 1964 Boeing Travel Management Company Delaware 1980 Boeing Worldwide Operations Limited Bermuda 1998 Canard Holdings, Inc. Delaware 1996 CBSA Leasing II, Inc. Delaware 1998 CBSA Leasing, Inc. Delaware 1998 Cougar, Ltd. Delaware 1998 Dillon, Inc. Delaware 1998 Douglas Express Limited Virgin Islands 1996 Douglas Federal Leasing Limited Virgin Islands 1996 Douglas Leasing Inc. Delaware 1996 Douglas Realty Company, Inc. California 1965 Falcon II Leasing Limited Virgin Islands 1998 111 112 EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries (Wholly owned unless identified by asterisk) Place of Date of Name Incorporation Incorporation =============================================================================== Falcon Leasing Limited Virgin Islands 1998 Fine Chemicals Offset Limited British Virgin Islands 1996 Finnish American International Trade, Inc. * Delaware 1988 Gaucho-1 Inc. Delaware 1994 GAUCHO-2 Inc. Delaware 1994 Hanway Corporation Delaware 1993 Kuta-3 Aircraft Corporation, Limited Delaware 1994 Kuta-One Aircraft Corporation, Limited Delaware 1994 Kuta-Three Aircraft Corporation Delaware 1993 Kuta-Two Aircraft Corporation Delaware 1993 Longacres Park, Inc. Washington 1948 Longbow Golf Club Corporation Delaware 1997 McDonnell Douglas (Australia) Pty. Ltd. Delaware 1980 McDonnell Douglas (Singapore) Pte. Ltd. Singapore 1989 McDonnell Douglas Administrative Services, Inc. Missouri 1993 McDonnell Douglas Aerospace (Malaysia) Sdn. Bhd. Malaysia 1993 McDonnell Douglas Aerospace - Middle East Limited Delaware 1993 McDonnell Douglas Aerospace Services Company Delaware 1978 McDonnell Douglas Aircraft Finance Corporation Delaware 1989 McDonnell Douglas Capital Corporation Delaware 1987 McDonnell Douglas Commercial Delta, Inc. Delaware 1988 McDonnell Douglas Corporation Maryland 1939 McDonnell Douglas Dakota Leasing, Inc. Delaware 1996 McDonnell Douglas Express, Inc. Delaware 1996 McDonnell Douglas F-15 Technical Services Company, Inc. Delaware 1978 McDonnell Douglas Finance Corporation - Federal Leasing, Limited Virgin Islands 1994 McDonnell Douglas Finland Oy Finland 1991 McDonnell Douglas Foreign Sales Corporation Virgin Islands 1984 McDonnell Douglas Helicopter Company Delaware 1980 McDonnell Douglas Helicopter Support Services, Inc. Delaware 1984 McDonnell Douglas Indonesia Leasing, Inc. Delaware 1997 McDonnell Douglas Insurance Holdings Corporation Delaware 1989 McDonnell Douglas International Sales Corporation Delaware 1972 McDonnell Douglas Japan, Ltd. Japan 1958 McDonnell Douglas Korea, Ltd. Delaware 1986 112 113 EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries (Wholly owned unless identified by asterisk) Place of Date of Name Incorporation Incorporation =============================================================================== McDonnell Douglas Macedonia Leasing, Inc. Delaware 1997 McDonnell Douglas Middle East, Ltd. Delaware 1989 McDonnell Douglas Overseas Finance Corporation Delaware 1975 McDonnell Douglas Radio Services Corporation Delaware 1973 McDonnell Douglas Services, Inc. Missouri 1980 McDonnell Douglas Support Services - Military, Inc. Delaware 1991 McDonnell Douglas Technical Services Company Delaware 1980 McDonnell Douglas Truck Services, Inc. Delaware 1982 McDonnell Douglas Worldwide, Ltd. British West Indies 1986 MD Computer Sales, Ltd. British West Indies 1986 MD Dakota Leasing, Ltd. Virgin Islands 1996 MD Indonesia Limited Virgin Islands 1997 MD Technical Services International, Inc. Delaware 1991 MD-Air Leasing Limited Virgin Islands 1996 MD-Federal Holding Company Delaware 1996 MDAFC - Nashville Company Delaware 1996 MDC Properties, Inc. Michigan 1979 MDFC - Aircraft Leasing Company Delaware 1995 MDFC - Aircraft Leasing Limited Virgin Islands 1995 MDFC - Aircraft Ltd. Ireland 1995 MDFC - Bali, Limited Virgin Islands 1993 MDFC - Carson Company Delaware 1997 MDFC - Carson Limited Virgin Islands 1996 MDFC - Express Leasing Company Delaware 1995 MDFC - Express Leasing Limited Virgin Islands 1995 MDFC - Jakarta, Limited Virgin Islands 1993 MDFC - Knoxville Company Delaware 1996 MDFC - Knoxville Limited Virgin Islands 1995 MDFC - Lakewood Company Delaware 1996 MDFC - Lakewood Limited Virgin Islands 1996 MDFC - Memphis Company Delaware 1996 MDFC - Memphis Ltd. Virgin Islands 1995 MDFC - Nashville Ltd. Virgin Islands 1995 MDFC - Reno Company Delaware 1996 MDFC - Sierra Company Delaware 1985 MDFC - Spring Limited Virgin Islands 1996 MDFC - Tahoe Company Delaware 1996 MDFC Equipment Leasing Corporation Delaware 1972 MDFC Loan Corporation Delaware 1983 MDRC of Missouri, Inc. Missouri 1989 Montana Aviation Research Company Delaware 1991 Network Information Service Co., Ltd. Japan 1984 North American Aviation, Inc. Delaware 1967 113 114 EXHIBIT (21) - List of Company Subsidiaries The Boeing Company and Subsidiaries (Wholly owned unless identified by asterisk) Place of Date of Name Incorporation Incorporation =============================================================================== Plaza Realty Holdings Corporation Delaware 1986 Processing Properties, Inc. Delaware 1993 Rainier Aircraft Leasing, Inc. Delaware 1992 RGL-1 Corporation Delaware 1993 RGL-2 Corporation Delaware 1993 RGL-3 Corporation Delaware 1993 RGL-4 Corporation Delaware 1993 RGL-5 Corporation Delaware 1993 RGL-6 Corporation Delaware 1993 Rocketdyne Technical Services Company Delaware 1986 Rocketdyne, Inc. Delaware 1958 Sunshine Leasing Company - 1 Delaware 1997 Taiko Leasing, Inc. Delaware 1998 Team Apache Systems, LLC * Delaware 1997 Thayer Leasing Company - 1 Delaware 1997 VC-X 757, Inc. Delaware 1996 Wingspan, Inc. Delaware 1994 114 115 Appendix of graphic and image material pursuant to Rule 304(a) of Regulation S-T Graphic and image material item Number 1 Revenues by industry segment: A bar chart for the five years 1994-1998 indicating revenues by industry segment (Dollars in billions): 1994 1995 1996 1997 1998 Commercial Airplanes 19.778 17.511 19.916 26.929 35.545 ISDS - Military Aircraft and Missiles 12.990 ISDS - Space and Communications 6.889 ------ Information, Space and Defense Systems 14.676 14.849 14.934 18.125 19.879 Customer and Commercial Financing/Other 0.515 0.600 0.603 0.746 0.730 Total 34.969 32.960 35.453 45.800 56.154 Graphic and image material item Number 2 Commercial sales by geographic region: A bar chart for the five years 1994-1998 indicating sales by region of customer (Dollars in billions): 1994 1995 1996 1997 1998 United States 6.044 7.530 8.634 9.625 13.391 Asia, Other than China 6.847 5.256 6.576 9.254 11.337 China 1.284 0.754 0.950 1.265 1.572 Europe 4.545 2.533 2.757 5.886 7.274 Oceania 0.995 0.599 0.536 0.560 0.732 Other 0.291 0.839 0.463 0.339 1.239 Total 20.006 17.511 19.916 26.929 35.545 Graphic and image material item Number 3 Comparative net earnings (exclusive of special charges and share-based plans): A bar chart of net earnings for the five years 1994-1998 (Dollars in billions): 1994 - 1.483; 1995 - 1.479; 1996 - 1.905; 1997 - 632; 1998 - 1.216 115 116 Graphic and image material item Number 4 Research and development expensed by segment: A bar chart of research and development expensed for the five years 1994-1998 (Dollars in billions): 1994 1995 1996 1997 1998 Commercial Airplanes 1.681 1.232 1.156 1.208 1.021 ISDS - Military Aircraft and Missiles 0.304 ISDS - Space and Communications 0.570 ----- Information, Space and Defense Systems 0.395 0.442 0.477 0.716 0.874 Total 2.076 1.674 1.633 1.924 1.895 Graphic and image material item Number 5 Go-ahead and certification/delivery graph: A time line graph indicating go-ahead and certification/delivery for various major airplane programs and derivatives. Go-ahead Certification/Delivery (month/year) (month/year) 777-200 < 1/1995 4/1995 777-200ER < 1/1995 2/1997 777-300 6/1995 6/1998 737-700 < 1/1995 12/1997 737-800 < 1/1995 3/1998 737-600 3/1995 10/1998 737-900 11/1997 1/2001 757-300 9/1996 2/1999 767-400ER 4/1997 4/2000 717-200 10/1995 6/1999 116 117 Independent Auditors' Report Board of Directors and Shareholders, The Boeing Company: We have audited the accompanying consolidated statements of financial position of The Boeing Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of The Boeing Company and McDonnell Douglas Corporation, which has been accounted for as a pooling of interests as described in Note 2 to the consolidated financial statements. We did not audit the statements of operations, shareholders' equity, and cash flows of McDonnell Douglas Corporation for the year ended December 31, 1996, which statements reflect total revenues of $13,834,000,000. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for McDonnell Douglas Corporation for 1996, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Boeing Company and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 16 to the financial statements, The Boeing Company has changed its method of expense recognition for share-based incentive plans in 1998. Deloitte & Touche LLP Seattle, Washington January 26, 1999 117 EX-27 2 ART. 5 FDS FOR 1998 FORM 10-K
5 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 2,183 279 4,681 239 8,349 16,375 20,241 11,652 36,672 13,422 6,972 0 0 5,059 7,257 36,672 56,154 56,154 0 54,434 153 0 453 1,397 277 1,120 0 0 0 1,120 1.16 1.15
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