-----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, V2sCSYn6w4h7JThlO31nHwzLiX4QUwvIfBxveUH5WKFi42XDurXe2GsAI7XQhQ1s gBs6XAcMuTX55Ww4//F3lA== 0000012927-99-000017.txt : 19990517 0000012927-99-000017.hdr.sgml : 19990517 ACCESSION NUMBER: 0000012927-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOEING CO CENTRAL INDEX KEY: 0000012927 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT [3721] IRS NUMBER: 910425694 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00442 FILM NUMBER: 99622383 BUSINESS ADDRESS: STREET 1: P O BOX 3707 MS 1F 31 CITY: SEATTLE STATE: WA ZIP: 98124 BUSINESS PHONE: 2066552121 MAIL ADDRESS: STREET 1: 7755 EAST MARGINAL WAY SOUTH CITY: SEATTLE STATE: WA ZIP: 98108 FORMER COMPANY: FORMER CONFORMED NAME: BOEING AIRPLANE CO DATE OF NAME CHANGE: 19730725 10-Q 1 FORM 10-Q FOR THE PERIOD ENDING MARCH 31, 1999 1 ............................................................................... ............................................................................... SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 Commission file number 1-442 THE BOEING COMPANY 7755 East Marginal Way South Seattle, Washington 98108 Telephone: (206) 655-2121 State of incorporation: Delaware IRS identification number: 91-0425694 The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. As of April 30, 1999, there were 974,071,189 shares of common stock, $5.00 par value, issued and outstanding. 1 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in millions except per share data) (Unaudited) Three months ended March 31 - ------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------ Sales and other operating revenues $14,392 $12,945 Cost of products and services 12,763 11,777 - ------------------------------------------------------------------------------ Gross profit 1,629 1,168 Equity in income (loss) from joint ventures 8 (47) General and administrative expense 491 493 Research and development expense 361 487 Share-based plans expense 46 22 - ------------------------------------------------------------------------------ Operating earnings 739 119 Other income, principally interest 40 67 Interest and debt expense 109 113 - ------------------------------------------------------------------------------ Earnings before income taxes 670 73 Income taxes 201 23 - ------------------------------------------------------------------------------ Net earnings $ 469 $ 50 ============================================================================== Basic earnings per share $.50 $.05 ============================================================================== Diluted earnings per share $.50 $.05 ============================================================================== Cash dividends per share $.14 $.14 ============================================================================== See notes to consolidated financial statements. 2 3 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Dollars in millions except per share data) March 31 December 31 1999 1998 - ------------------------------------------------------------------------------ (Unaudited) Assets - ------------------------------------------------------------------------------ Cash and cash equivalents $ 2,398 $ 2,183 Short-term investments 276 279 Accounts receivable 3,491 3,288 Current portion of customer and commercial financing 630 781 Deferred income taxes 1,488 1,495 Inventories, net of advances and progress billings 8,997 8,349 - ------------------------------------------------------------------------------ Total current assets 17,280 16,375 Customer and commercial financing 5,067 4,930 Property, plant and equipment, net 8,584 8,589 Deferred income taxes 405 411 Goodwill 2,291 2,312 Prepaid pension expense 3,530 3,513 Other assets 539 542 - ------------------------------------------------------------------------------ $37,696 $36,672 ============================================================================== Liabilities and Shareholders' Equity - ------------------------------------------------------------------------------ Accounts payable and other liabilities $11,147 $10,733 Advances in excess of related costs 1,358 1,251 Income taxes payable 609 569 Short-term debt and current portion of long-term debt 821 869 - ------------------------------------------------------------------------------ Total current liabilities 13,935 13,422 Accrued retiree health care 4,852 4,831 Long-term debt 6,162 6,103 Shareholders' equity: Common shares, par value $5.00 - 1,200,000,000 shares authorized; 1,011,870,159 shares issued 5,059 5,059 Additional paid-in capital 1,263 1,147 Treasury shares, at cost - 38,101,416 and 35,845,731 (1,397) (1,321) Retained earnings 9,175 8,706 Accumulated other comprehensive income (23) (23) Unearned compensation (15) (17) ShareValue Trust shares - 38,322,210 and 38,166,601 (1,315) (1,235) - ------------------------------------------------------------------------------ Total shareholders' equity 12,747 12,316 - ------------------------------------------------------------------------------ $37,696 $36,672 ============================================================================== See notes to consolidated financial statements. 3 4 THE BOEING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) (Unaudited) Three months ended March 31 - ------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------ Cash flows - operating activities: Net earnings $ 469 $ 50 Adjustments to reconcile net earnings to net cash provided by operating activities: Share-based plans 46 22 Depreciation and amortization 402 408 Changes in assets and liabilities - Short-term investments 3 275 Accounts receivable (203) (178) Inventories, net of advances and progress billings (648) (188) Accounts payable and other liabilities 551 40 Advances in excess of related costs 107 (21) Income taxes payable and deferred 53 23 Other (20) (42) Accrued retiree health care 21 (1) - ------------------------------------------------------------------------------ Net cash provided by operating activities 781 388 - ------------------------------------------------------------------------------ Cash flows - investing activities: Customer financing and properties on lease - additions (472) (349) Customer financing and properties on lease - reductions 436 273 Property, plant and equipment, net additions (320) (490) - ------------------------------------------------------------------------------ Net cash used by investing activities (356) (566) - ------------------------------------------------------------------------------ Cash flows - financing activities: New borrowings 79 384 Debt repayments (68) (389) Common shares purchased (103) (33) Stock options exercised, other 19 30 Dividends paid (137) (142) - ------------------------------------------------------------------------------ Net cash used by financing activities (210) (150) - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 215 (328) Cash and cash equivalents at beginning of year 2,183 4,420 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of first quarter $2,398 $4,092 ============================================================================== See notes to consolidated financial statements. 4 5 THE BOEING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) Note 1 - Consolidated Interim Financial Statements The consolidated interim financial statements included in this report have been prepared by the Company without audit. In the opinion of management, all adjustments necessary for a fair presentation are reflected in the interim financial statements. Such adjustments are of a normal and recurring nature. The results of operations for the period ended March 31, 1999, are not necessarily indicative of the operating results for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 1998 Annual Report. Certain reclassifications have been made to prior periods to conform with current reporting. Note 2 - Subsequent Events On April 30, 1999, the government of Greece announced its intention to purchase more than 50 Lockheed Martin F-16 aircraft and 15 Dassault Mirage 2000-5 aircraft. As a result of this announcement, the Company has determined that there is an impairment of certain F-15 program inventory costs incurred in support of a potential sale to the government of Greece. A pretax charge of approximately $45 is expected to be recorded in the second quarter of 1999 relating to this impairment. Note 3 - Recognition of First Quarter 1998 Forward Loss for the Next-Generation 737 Program During the first quarter of 1998, the Company recognized a forward loss pretax charge of $350 attributable to the Next-Generation 737 program. This charge represented an increase to the forward loss charge of $700 recognized by the Company in the third quarter of 1997. The cumulative forward loss of $1,050 at the end of the first quarter of 1998 represented the amount by which the estimated production costs exceed the estimated revenue for the first 400 units of the program. The current accounting quantity for the Next-Generation 737 program is 1,200 units. As of March 31, 1999, cumulative Next-Generation 737 airplane deliveries totaled 229. Note 4 - Earnings per Share The weighted average number of shares outstanding (in millions) used to compute earnings per share for the periods ended March 31, 1999 and 1998, are as follows: First Quarter ------------- 1999 1998 ---- ---- Basic shares 937.4 973.6 Diluted shares 945.2 985.1 5 6 Note 4 - Earnings per Share (continued) 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. Note 5 - Income Taxes The effective income tax provision rate of 30.0% for the first three months of 1999 is lower than the statutory federal rate principally due to Foreign Sales Corporation tax benefits and current-year research and development tax credits. Partially offsetting this reduction from the statutory federal rate are state income taxes and non-deductibility of goodwill. Net income tax payments (refunds) were $168 and $(2) for the three months ended March 31, 1999 and 1998. Note 6 - Accounts Receivable Accounts receivable consisted of the following: March 31 December 31 1999 1998 - ------------------------------------------------------------------------------ U.S. Government contracts $2,154 $2,058 Other 1,337 1,230 - ------------------------------------------------------------------------------ $3,491 $3,288 ============================================================================== Note 7 - Inventories Inventories consisted of the following: March 31 December 31 1999 1998 - ------------------------------------------------------------------------------ Commercial aircraft programs and long-term contracts in progress $ 23,981 $ 24,812 Commercial spare parts, general stock materials and other 2,204 2,162 - ------------------------------------------------------------------------------ 26,185 26,974 Less advances and progress billings (17,188) (18,625) - ------------------------------------------------------------------------------ $ 8,997 $ 8,349 ============================================================================== Inventory costs at March 31, 1999, included unamortized tooling of $1,841 and $761 relating to the 777 and Next-Generation 737 programs, and excess deferred production costs of $1,755 and $541 relating to the 777 and Next-Generation 737 programs. 6 7 Note 8 - Customer and Commercial Financing Customer and commercial financing consisted of the following: March 31 December 31 1999 1998 - ------------------------------------------------------------------------------ Aircraft financing Notes receivable $ 809 $ 859 Investment in sales-type/financing leases 1,279 1,325 Operating lease equipment, at cost, less accumulated depreciation of $218 and $195 2,213 2,201 Commercial equipment financing Notes receivable 553 534 Investment in sales-type/financing leases 608 548 Operating lease equipment, at cost, less accumulated depreciation of $127 and $129 498 510 - ------------------------------------------------------------------------------ Less valuation allowance (263) (266) - ------------------------------------------------------------------------------ $5,697 $5,711 ============================================================================== Financing for aircraft is collateralized by security in the related asset, and historically the Company has not experienced a problem in accessing such collateral when necessary. Commercial equipment financing also includes amounts attributable to regional aircraft, principally with fewer than 80 seats. Note 9 - Accounts Payable and Other Liabilities Accounts payable and other liabilities consisted of the following: March 31 December 31 1999 1998 - ------------------------------------------------------------------------------ Accounts payable $ 5,588 $ 5,263 Accrued compensation and employee benefit costs 2,604 2,326 Lease and other deposits 473 539 Other 2,482 2,605 - ------------------------------------------------------------------------------ $11,147 $10,733 ============================================================================== 7 8 Note 10 - Debt Short- and long-term debt consisted of the following: March 31 December 31 1999 1998 - ------------------------------------------------------------------------------ Unsecured debentures and notes: 8 7/8% due Sep. 15, 1999 $ 302 $ 304 8.25% due Jul. 1, 2000 200 200 8 3/8% due Feb. 15, 2001 179 180 7.565% due Mar. 30, 2002 53 54 9.25% due Apr. 1, 2002 120 120 6 3/4% due Sep. 15, 2002 298 298 6.35% due Jun. 15, 2003 300 299 7 7/8% due Feb. 15, 2005 208 208 6 5/8% due Jun. 1, 2005 292 292 6.875% due Nov. 1, 2006 248 248 8 1/10% due Nov. 15, 2006 175 175 9.75% due Apr. 1, 2012 348 348 8 3/4% due Aug. 15, 2021 398 398 7.95% due Aug. 15, 2024 300 300 7 1/4% due Jun. 15, 2025 247 247 8 3/4% due Sep. 15, 2031 248 248 8 5/8% due Nov. 15, 2031 173 173 6 5/8% due Feb. 15, 2038 300 300 7.50% due Aug. 15, 2042 100 100 7 7/8% due Apr. 15, 2043 173 173 6 7/8% due Oct. 15, 2043 125 125 Senior debt securities, 6.0% - 9.4%, due through 2011 51 55 Senior medium-term notes, 5.5% - 13.6%, due through 2017 1,375 1,320 Subordinated medium-term notes, 5.5% - 8.3%, due through 2004 45 55 Capital lease obligations due through 2008 420 433 Other notes 305 319 - ------------------------------------------------------------------------------ $6,983 $6,972 ============================================================================== The Company has $2,400 currently available under credit line agreements with a group of commercial banks. The Company has complied with the restrictive covenants contained in various debt agreements. In addition, Boeing Capital Corporation, a corporation wholly owned by the Company, has $240 available, but unused, under a credit line agreement with a group of commercial banks. Total debt interest, including amounts capitalized, was $131 and $130 for the three-month periods ended March 31, 1999 and 1998, and interest payments were $156 and $149, respectively. 8 9 Note 11 - Shareholders' Equity Changes in shareholders' equity for the three-month periods ended March 31, 1999 and 1998, consisted of the following: - ------------------------------------------------------------------------------ 1999 1998 (Shares in thousands) Shares Amount Shares Amount - ------------------------------------------------------------------------------ Common stock Beginning balance - January 1 1,011,870 $ 5,059 1,000,030 $ 5,000 Shares issued for the ShareValue Trust 11,253 56 Shares issued for incentive stock plans 510 3 - ------------------------------------------------------------------------------ Ending balance - March 31 1,011,870 $ 5,059 1,011,793 $ 5,059 ============================================================================== Additional paid-in capital Beginning balance - January 1 $ 1,147 $ 1,090 Share-based compensation 46 22 Treasury shares issued for incentive stock plans, net (12) (9) Tax benefit related to incentive stock plans 2 7 Stock appreciation rights expired or surrendered 5 Shares issued for the ShareValue Trust 494 ShareValue Trust market value adjustment 80 135 - ------------------------------------------------------------------------------ Ending balance - March 31 $ 1,263 $ 1,744 ============================================================================== Treasury stock Beginning balance - January 1 35,846 $(1,321) 165 $ (9) Treasury shares issued for incentive stock plans, net (714) 27 (497) 25 Treasury shares acquired 2,969 (103) 656 (33) - ------------------------------------------------------------------------------ Ending balance - March 31 38,101 $(1,397) 324 $ (17) ============================================================================== Retained earnings Beginning balance - January 1 $ 8,706 $ 8,147 Net earnings 469 50 - ------------------------------------------------------------------------------ Ending balance - March 31 $ 9,175 $ 8,197 ============================================================================== Accumulated other comprehensive income Beginning balance - January 1 $ (23) - ------------------------------------------------------------------------------ Ending balance - March 31 $ (23) ============================================================================== Unearned compensation Beginning balance - January 1 $ (17) $ (20) Forfeitures 1 3 Amortization 1 1 - ------------------------------------------------------------------------------ Ending balance - March 31 $ (15) $ (16) ============================================================================== 9 10 Note 11 - Shareholders' Equity (continued) Changes in shareholders' equity for the three-month periods ended March 31, 1999 and 1998, consisted of the following: - ------------------------------------------------------------------------------ 1999 1998 (Shares in thousands) Shares Amount Shares Amount - ------------------------------------------------------------------------------ ShareValue Trust Beginning balance - January 1 38,167 $(1,235) 26,385 $(1,255) Shares acquired from dividend reinvestment 155 100 Shares issued from common stock 11,253 (550) Market value adjustment (80) (135) - ------------------------------------------------------------------------------ Ending balance - March 31 38,322 $(1,315) 37,738 $(1,940) ============================================================================== For the quarters ended March 31, 1999 and 1998, the Company did not incur items to be reported in comprehensive income that were not already included in the reported net earnings. As a result, comprehensive income and net earnings were the same for these periods. Note 12 - Share-Based Compensation Beginning in the first quarter of 1998, the Company adopted the expense recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which principally applies to Performance Share awards, the ShareValue Trust plan, and stock options. Performance Shares are stock units that are convertible to common stock contingent upon stock price performance. If, at any time up to five years after award, the stock price reaches and maintains a price equal to 161.0% of the stock price at the date of the award (representing a growth rate of 10% compounded annually for five years), 25% of the Performance Shares awarded are convertible to common stock. Likewise, at stock prices equal to 168.5%, 176.2%, 182.4%, 192.5% and 201.1% of the stock price at the date of award, the cumulative portion of awarded Performance Shares convertible to common stock are 40%, 55%, 75%, 100% and 125%, respectively. Performance Share awards not converted to common stock expire five years after the date of the award; however, the Compensation Committee of the Board of Directors may, in its discretion, allow vesting of up to 100% of the target Performance Shares if the Company's total shareholder return (stock price appreciation plus dividends) during the five-year performance period exceeds the average total shareholder return of the S&P 500 over the same period. In the first quarter of 1999, the Company awarded to executive management 5.2 million Performance Shares at an issue price of $36.25. The total number of Performance Shares outstanding as of March 31, 1999, was 9.1 million. 10 11 Note 13 - 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. 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 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. 11 12 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 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 Corporation) 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. Objections to the proposed settlement have been filed. 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 material adverse effect on its earnings, cash flow or financial position. 12 13 On June 21, 1994, a lawsuit was filed against McDonnell Douglas Corporation ("MDC") in the U.S. District Court for the Northern District of Oklahoma alleging a violation of the Employee Retirement Income Security Act ("ERISA"). The lawsuit was certified as a class action consisting of all employees of MDC at its Tulsa location as of December 3, 1993, and who were vested in one of two retirement plans offered at that location. It alleges that a significant factor in the closing of the Tulsa facility in 1994 was savings in pension and health care costs that could be achieved through closing the plant. The plaintiffs seek unspecified damages to compensate class members for the alleged loss of benefits. MDC's motion for summary judgment was denied in late 1998. Trial was conducted on the liability issues in April 1999. The Company believes that the allegations are without merit and that the outcome of this lawsuit will not have a material adverse effect on its earnings, cash flow or financial position. 13 14 Note 14 - Business Segment Data Segment information for revenues, earnings, and research and development consisted of the following: - ------------------------------------------------------------------------------ Three months ended 1999 1998 - ------------------------------------------------------------------------------ Revenues: Commercial Airplanes $ 9,781 $ 8,087 Military Aircraft and Missiles 2,967 2,949 Space and Communications 1,543 1,823 Customer and Commercial Financing / Other 187 199 Accounting differences / eliminations (86) (113) - ------------------------------------------------------------------------------ Operating revenues $14,392 $12,945 ============================================================================== Net earnings: Commercial Airplanes $ 382 $ 23 Military Aircraft and Missiles 322 252 Space and Communications 61 44 Customer and Commercial Financing / Other 102 124 Accounting differences / eliminations (29) (251) Share-based plans expense (46) (22) Other unallocated expense (53) (51) - ------------------------------------------------------------------------------ Operating earnings $ 739 $ 119 ============================================================================== Other income, principally interest 40 67 Interest and debt expense (109) (113) - ------------------------------------------------------------------------------ Earnings before income taxes 670 73 Income taxes (201) (23) - ------------------------------------------------------------------------------ Net earnings $ 469 $ 50 ============================================================================== Research and development: Commercial Airplanes $ 182 $ 283 Military Aircraft and Missiles 62 71 Space and Communications 117 133 - ------------------------------------------------------------------------------ Total research and development expense $ 361 $ 487 ============================================================================== For internal reporting purposes, the Company records Commercial Airplanes revenue for airplanes transferred to other segments, and such transfers may include airplanes accounted for as operating leases that are considered transferred to the Customer and Commercial Financing / Other segment. The revenue for these transfers is eliminated in the 'Accounting differences / eliminations' caption. 14 15 Note 14 - Business Segment Data (continued) The Company records cost of sales for 7-series commercial airplane programs under the program method of accounting described in Note 1 to the audited consolidated financial statements included in the Company's 1998 Annual Report. For internal measurement purposes, the Commercial Airplanes segment records cost of sales based on the cost of specific units delivered, and to the extent that inventoriable costs exceed estimated revenue, a loss is not recognized until delivery is made, which is not in accordance with generally accepted accounting principles. The adjustment between the internal measurement method and the program accounting method of recording cost of sales is included in the 'Accounting differences / eliminations' caption of net earnings. This adjustment totaled $28 and $(254) for the three months ended March 31, 1999 and 1998. The 'Accounting differences / eliminations' caption of net earnings also includes the impact of cost measurement differences between generally accepted accounting principles and federal cost accounting standards. This includes the following: the difference between pension costs recognized under SFAS No. 87, Employers' Accounting for Pensions, and under federal cost accounting standards, principally on a funding basis; the differences between retiree health care costs recognized under SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and under federal cost accounting standards, principally on a cash basis; and the differences in timing of cost recognition related to certain activities, such as facilities consolidation, undertaken as a result of mergers and acquisitions whereby such costs are expensed under generally accepted accounting principles and deferred under federal cost accounting standards. Additionally, the amortization of costs capitalized in accordance with SFAS No. 34, Capitalization of Interest Cost, is included in the 'Accounting differences / eliminations' caption. 15 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Revenue - ------- Sales of $14.4 billion for the first three months of 1999 were 11 percent higher than sales for the comparable period of 1998. A total of 148 commercial jet aircraft were delivered, compared with 108 in the first three months of 1998. Approximately 620 commercial aircraft deliveries are currently projected for the full year 1999, compared with a total of 559 in 1998. Total sales for 1999 are projected to be in the $58 billion range, compared with $56 billion in 1998. Commercial jet aircraft deliveries were as follows: First Three Months --------------------------------------------------------- Model 1999 1998 --------------------------------------------------------- 737 14 34 737 Next-Generation 61 12 747 14 12 757 17 11 767 11 10 777 23 20 MD-80 2 (2) 2 MD-90 5 4 MD-11 1 3 (1) --------------------------------------------------------- Total 148 108 ========================================================= Commercial jet aircraft deliveries included deliveries under operating lease, which are identified by parentheses in the above table. No revenue is recorded at time of delivery for aircraft accounted for as operating leases. ============================================================================== | Forward-Looking Information Is Subject to Risk and Uncertainty | | Certain statements in this report (including the projections that follow) | | contain "forward-looking" information that involves risk and uncertainty, | | including projections for production rates, deliveries, customer | | financing, sales, revenues, operating margins, earnings, cash, scheduled | | launches of products, research and development expense, inventory turn | | rates, tax rates, employment, asset utilization, other trend projections, | | and Y2K readiness. 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 selections; government policies and actions; | | price-escalation; successful negotiation of contracts with the Company's | | labor unions and favorable outcomes of certain pending sales campaigns. | | 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 | 16 17 | recovery, production rate increases and decreases, production system | | initiatives, other cost-reduction efforts, and Y2K readiness plans; the | | cyclical nature of the Company's business; volatility of the market for | | certain products; continued integration of McDonnell Douglas Corporation; | | product performance risks associated with regulatory certifications of the | | Company's commercial aircraft by the U.S. Government and foreign | | governments; other regulatory uncertainties; collective bargaining labor | | disputes; performance issues with key suppliers, subcontractors and | | customers; customer model selections; governmental export and import | | policies; factors that result in significant and prolonged disruption to | | air travel worldwide; global trade policies; worldwide political stability | | and economic conditions, particularly in Asia; price escalation trends; | | changing priorities or reductions in the U.S. Government or foreign | | government defense and space budgets; termination of government contracts | | due to unilateral government action or failure to perform; and legal | | proceedings. Additional information regarding these factors is contained | | in the Company's Annual Report on Form 10-K for the year ended 1998. | ============================================================================== Military Aircraft and Missiles and Space and Communications deliveries included the following: First Three Months --------------------------------------------------------- 1999 1998 --------------------------------------------------------- Military Aircraft and Missiles C-17 2 2 F-15 9 7 F/A-18 C/D 6 10 F/A-18 E/F 2 - T-45TS 3 4 CH-47 3 3 Space and Communications 767 AWACS 2 2 Delta II 2 4 The F/A-18 E/F aircraft are under a cost-type contract; sales are recognized as work progresses rather than upon delivery. Earnings - -------- Net earnings of $469 million for the first quarter of 1999 reflect increased operating margins in each of the three operating units. Comparable net earnings for the same period of 1998 were $50 million, which included after-tax charges of approximately $219 million forward loss on the Next-Generation 737 program. 17 18 Research and development expense totaled $361 million for the quarter, compared with $487 million for the same period of 1998. Commercial Airplanes segment research and development expense for first quarter 1999 was $182 million, compared to $283 million for first quarter 1998. The reduced expenditures were primarily due to reduced spending on the Next-Generation 737 models; the increased-capacity version 777-300, which first delivered in second quarter 1998; and the 757-300, a stretched derivative of the 757-200, which will begin deliveries in second quarter 1999. Expenditures continue for the 767-400ER, a stretched version of the 767-300ER, with deliveries scheduled to begin in the year 2000. The 717-200 continues in development, with flight test scheduled to begin later this year and first delivery planned for third quarter 1999. Military Aircraft and Missiles segment and Space and Communications segment had lower levels of development expense, compared with the first quarter of 1998. Based on current programs and schedules, research and development expense for the full year 1999 is projected to be in the $1.5 billion to $1.7 billion range, compared with $1.9 billion in 1998. The income tax provision for first quarter 1999 of 30.0% is lower than the 31.5% for the same period in 1998 due principally to an increase in Foreign Sales Corporation tax benefits in 1999. 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 additionally 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 has significant financing assets and off-balance-sheet commitments that are impacted by the market value of various jet aircraft, including the MD-11 trijet model. The Company believes that it has appropriately assessed the impact of aircraft market values on accounting for such commitments and financing assets. A significant deterioration in the MD-11 market value, however, could result in the requirement to adjust related reserves. The Company will continue to monitor this market. 18 19 Operating Profit - ---------------- Commercial Airplanes Segment A total of 148 commercial jet aircraft were delivered, compared with 108 in the first quarter of 1998. The overall Commercial Airplanes segment operating profit margin, based on the unit cost of airplanes delivered, was approximately 3.9 percent for the first three months of 1999, compared with approximately 0.3 percent for the same period in 1998. This improved margin was principally attributable to a greater number of deliveries, further improvement in the learning curve for Next-Generation 737s and 777s and reduced research and development spending in the first quarter of 1999, compared with the same period in 1998. The projected segment operating margin range for 1999 is in the range of 2 percent to 3 percent, reflecting the impact of an increasingly higher percentage of new commercial airplane program deliveries, continued pricing pressures and lower price- escalation trends. In the first quarter, the 757-300 received certification from both the U.S. and European aviation authorities. Launch customer Condor-Flugdienst of Germany took first delivery of the 757-300 in March. The 717-200 continues in flight test, with certification and the first delivery expected in the third quarter. Fuel consumption data from the 717-200 flight test certification program show fuel burn improvements of as much as 5 percent. The Company continues to closely monitor the economic situation in Asia, which has the potential to impact future deliveries, particularly widebody models. Production will continue to be adjusted to reflect customer requirements and the Company's capabilities. Military Aircraft and Missiles Segment Operating revenues of $3.0 billion for the first quarter 1999 were about the same as first quarter 1998. The segment operating margin was 10.9 percent in the quarter of 1999, compared with 8.5 percent for the same period in 1998. The 1999 first quarter results included a favorable contract settlement related to prior years amounting to approximately $31 million after tax. The 1998 first quarter results included joint venture development costs associated with the Bell Boeing 609 Civil Tiltrotor program, which the Company transferred to Bell Helicopter Textron on March 1, 1998. Firm orders on F-15s will continue production through early 2000. The Company currently has significant exposure related to long-lead requirements for the F-15 program for deliveries in 2000 and beyond. A potential customer is evaluating the F-15 to meet its requirements for this time period. Such a commitment will be required to mitigate an earnings impact due to this exposure. A recent decision by the government of Greece to procure aircraft other than F-15s is expected to result in a pretax charge of approximately $45 million in the second quarter of 1999, and has reduced the anticipated base of customers likely to order aircraft beyond the current production. 19 20 Space and Communications Segment Operating revenues for the first quarter of 1999 were $1.5 billion, $0.3 billion lower than the same period in 1998. The revenue decrease was primarily due to fewer Delta II deliveries and a reduced level of activity on several cost- reimbursement-type contracts. The segment operating margin was 4.0 percent, which is higher when compared with 2.4 percent for the first quarter of 1998, due to a reduced level of research and development spending and joint venture development costs. During the first quarter, Space and Communications delivered the final two of four 767 Airborne Warning and Control System (AWACS) aircraft to the government of Japan. In March the world's first commercial rocket launch from a floating platform at sea was successfully completed by Sea Launch. Boeing is a 40 percent partner in Sea Launch with RSC Energia (25 percent) from Russia, Kvaerner Maritime (20 percent) from Norway, and KB Yuzhnoye / PO Yuzhmash (15 percent) from Ukraine. Currently, Sea Launch has firm contracts for 16 launches and will begin commercial operations later this year. Customer and Commercial Financing / Other Segment Revenues consist principally of interest from financing receivables and lease income from operating lease equipment. Segment earnings additionally reflect depreciation on leased equipment and expenses recorded against the valuation allowance. No interest expense on debt is included in Customer and Commercial Financing / Other segment earnings. Liquidity and Capital Resources - ------------------------------- The Company's financial liquidity position remains strong, with cash and short-term investments totaling $2.7 billion at March 31, 1999, after repurchasing 3.0 million shares for $103 million during the first quarter. To date the Company has repurchased 38.2 million shares for $1.4 billion. Total long-term debt is at 35% of total shareholders' equity plus debt. Revolving credit line agreements with a group of major banks, totaling $2.64 billion, remain available but unused. Backlog - ------- Contractual backlog of unfilled orders (which excludes purchase options and announced orders for which definitive contracts have not been executed, and unobligated Government contract funding) was as follows (dollars in billions): March 31 Dec. 31 1999 1998 ------------------------------------------------------------- Commercial Airplanes $ 84.1 $ 86.1 Military Aircraft and Missiles 20.1 17.0 Space and Communications 9.6 9.8 ------------------------------------------------------------- Total $113.8 $112.9 ============================================================= Unobligated U.S. Government contract funding not included in backlog totaled $20.7 billion at March 31, 1999, and $23.5 billion at December 31, 1998. 20 21 Year 2000 (Y2K) Date Conversion - ------------------------------- The Y2K issue exists because many systems, including computer, embedded, facilities, and factory floor production equipment utilize a two-digit date field to designate a year. As the century date change occurs, date- sensitive systems may recognize the year 2000 as the year 1900, or not at all. This inability to recognize or properly treat the year 2000 may cause systems to process financial or operations information incorrectly. State of readiness: The Company recognized this challenge early, and each operating group started working on the problem in 1993. The Company's Y2K strategy, to make systems "Y2K-ready," includes a common companywide focus on policies, methods and correction tools, and coordination with customers and suppliers. This focus has been on all systems potentially impacted by the Y2K issue, including information technology (IT) systems and non-IT systems, such as embedded, facilities and factory floor systems. Each operating group has responsibility for its own conversion, in line with overall guidance and oversight provided by a corporate-level steering committee. The Company is capitalizing on its history of integrating large complex systems, and has an experienced Y2K team and Program Management Office in place headed by the Company's chief information officer. Since 1993 the Company has identified approximately 14,000 systems and assessed each for Y2K readiness. More than 90% of the systems were made Y2K-ready by December 31, 1998. The majority of the remaining systems will be completed 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 be Y2K-ready, but is preparing contingency plans to mitigate the impact of performance failures by major suppliers. Costs to address Y2K issues: The Company's Y2K conversion efforts have not been budgeted and tracked as independent projects, but have occurred in conjunction with normal sustaining activities. The Company estimates that Y2K conversion efforts have averaged annually approximately $35 million over the last three years, representing on average approximately 10% of the total application-sustaining IT costs during that period. Y2K conversion costs are expected to represent a lower percentage of total application- sustaining IT costs in 1999. In addition to these sustaining costs, the discretely identifiable costs associated with Y2K conversion activities are expected to total $16 million. The Company does not expect a reduction in sustaining costs when Y2K conversion activities are completed because normal sustaining activities will be ongoing. Reprioritizing sustaining activities to support Y2K has not had, and is not expected to have, an adverse impact on operations. Risks associated with Y2K issues: Due to the Company's early recognition and start on resolving the Y2K issue, the Company believes there is low risk of any internal critical system, 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. Additionally, the Company is working with its customers and suppliers, conducting test scenarios to ensure Y2K readiness. 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 to deliver critical parts. 21 22 The Company's contingency planning has been divided into two phases: Phase I - Develop a Corporate Business Continuity and Contingency Plan; and Phase II - Implement Business Continuity and Contingency Plan through the Site Transition Plan. Phase I is complete. The Company has developed a risk assessment-based Year 2000 Business Continuity and Contingency Plan consistent with the Company's computing disaster preparedness goal, which is to "reduce vulnerability and enhance risk management." Where appropriate, this plan leverages existing Company system and supplier contingency and disaster recovery planning. This contingency planning incorporates information from leading information technology organizations in the industry and government, including the U.S. General Accounting Office (GAO) guideline, "Year 2000 Computing Crisis: Business Continuity and Contingency Planning," dated August 1998. The plan provides a structured approach to assist operating groups with business continuity and contingency planning. Phase II - Implement Business Continuity and Contingency Plan through the Site Transition Plan - - is ongoing. A Site Year 2000 Transition Plan template has been developed which encompasses the specific staffing and contingency plans for before, during and after the Year 2000 rollover, as well as depicting the major elements required to complete the plan. Each operating group is responsible for developing and implementing a Site Year 2000 Transition Plan, and report monthly status to executive management. Where applicable, the contingency operations will employ the Company Disaster Preparedness Methodology. The Company continues to work closely with local, state, and federal emergency management organizations to ensure that coordinated plans are in place should infrastructure problems occur in the year 2000. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has financial instruments that are subject to interest rate risk, principally short-term investments, fixed-rate notes receivable attributable to customer financing, and debt obligations issued at a fixed rate. Historically, the Company has not experienced material gains or losses due to interest rate changes when selling short-term investments or fixed-rate notes receivable. Additionally, the Company uses interest rate swaps to manage exposure to interest rate changes. Based on the current holdings of short-term investments and fixed-rate notes, as well as underlying swaps, the exposure to interest rate risk is not material. Fixed-rate debt obligations issued by the Company are generally not callable until maturity. The Company is subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. As a general policy, the Company substantially hedges foreign currency commitments of future payments and receipts by purchasing foreign currency-forward contracts. As of March 31, 1999, the notional value of such derivatives was $586 million, with a net unrealized loss of $7 million. Less than two percent of receipts and expenditures are contracted in foreign currencies, and the market risk exposure relating to currency exchange is not material. 22 23 REVIEW BY INDEPENDENT ACCOUNTANTS The consolidated statement of financial position as of March 31, 1999, the consolidated statements of operations for the three-month periods ended March 31, 1999 and 1998, and the consolidated statements of cash flows for the three-month periods ended March 31, 1999 and 1998, have been reviewed by the registrant's independent accountants, Deloitte & Touche LLP, whose report covering their review of the financial statements follows. 23 24 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Shareholders The Boeing Company Seattle, Washington We have reviewed the accompanying condensed consolidated statement of financial position of The Boeing Company and subsidiaries (the "Company") as of March 31, 1999, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated statement of financial position of the Company as of December 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 26, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived. /s/ Deloitte & Touche LLP Seattle, Washington April 15, 1999 24 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant legal proceedings are related to matters covered by insurance. 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 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. 25 26 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 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 Corporation) 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. Objections to the proposed settlement have been filed. 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. 26 27 On June 21, 1994, a lawsuit was filed against McDonnell Douglas Corporation ("MDC") in the U.S. District Court for the Northern District of Oklahoma alleging a violation of the Employee Retirement Income Security Act ("ERISA"). The lawsuit was certified as a class action consisting of all employees of MDC at its Tulsa location as of December 3, 1993, and who were vested in one of two retirement plans offered at that location. It alleges that a significant factor in the closing of the Tulsa facility in 1994 was savings in pension and health care costs that could be achieved through closing the plant. The plaintiffs seek unspecified damages to compensate class members for the alleged loss of benefits. MDC's motion for summary judgment was denied late in 1998. Trial was conducted on the liability issues in April 1999. The Company believes that the allegations are without merit and that the outcome of this lawsuit will not have a material adverse effect on its earnings, cash flow or financial position. 27 28 Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on April 26, 1999. (b) At the Annual Meeting, in an uncontested election, four nominees of the Board of Directors were elected directors for three-year terms expiring on the date of the annual meeting in 2002. The votes were as follows: For Withheld ----------- ---------- Philip M. Condit 751,659,606 49,179,422 Kenneth M. Duberstein 778,095,333 22,743,695 John B. Fery 761,424,383 39,414,645 Lewis E. Platt 777,821,524 23,017,504 The terms of the following directors continued after the annual meeting: John H. Biggs John F. McDonnell Rozanne L. Ridgway John E. Bryson William J. Perry Harry C. Stonecipher Paul E. Gray Charles M. Pigott (c) The results of voting on Proposals 2 through 6 were as follows: 2. A shareholder proposal asking the Board to establish a committee to develop criteria for the bidding, acceptance and implementation of military contracts failed to receive a majority of the votes present. # of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 34,984,076 3.74% 5.90% 6.29% Against 520,965,798 55.64% 87.85% 93.71% Abstain 37,089,612 3.96% 6.25% Broker non-votes 207,799,542 22.19% 3. A shareholder proposal requesting the Board to adopt human rights criteria for its business operations in or with the People's Republic of China failed to receive a majority of the votes present. # of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 37,804,513 4.04% 6.37% 6.79% Against 518,845,289 55.42% 87.49% 93.21% Abstain 36,389,591 3.89% 6.14% Broker non-votes 207,799,635 22.19% 4. A shareholder proposal recommending cumulative voting in the election of directors failed to receive a majority of the votes present. # of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 150,395,918 16.06% 25.36% 26.53% Against 416,524,028 44.49% 70.24% 73.47% Abstain 26,097,344 2.79% 4.40% Broker non-votes 207,821,738 22.20% 28 29 5. A shareholder proposal requesting creation of the position of independent lead director failed to receive a majority of the votes present. # of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 129,702,278 13.85% 21.87% 22.43% Against 448,530,284 47.91% 75.63% 77.57% Abstain 14,827,838 1.58% 2.50% Broker non-votes 207,778,628 22.19% 6. A shareholder proposal recommending annual election of the entire Board of Directors failed to receive a majority of the votes present. # of % of Eligible % of Votes % of Votes Votes Votes Present For or Against ----------- ------------- ---------- -------------- For 295,872,502 31.60% 49.89% 51.01% Against 284,195,404 30.35% 47.92% 48.99% Abstain 12,957,025 1.38% 2.18% Broker non-votes 207,814,097 22.20% Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (15) Letter from independent accountants regarding unaudited interim financial information. Page 30. (27) Financial Data Schedule for the three-month period ending March 31, 1999. Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter covered by this report. - - - - - - - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE BOEING COMPANY ------------------------------ (Registrant) May 10, 1999 /s/ Laurette T. Koellner -------------- -------------------------------- (Date) Laurette T. Koellner Vice President and Controller 29 30 EXHIBIT (15) Letter from Independent Accountants Regarding Unaudited Interim Financial Information The Boeing Company and Subsidiaries The consolidated statement of financial position as of March 31, 1999, the consolidated statements of operations for the three-month periods ended March 31, 1999 and 1998, and the statements of cash flows for the three- month periods ended March 31, 1999 and 1998, have been reviewed by the registrant's independent accountants, Deloitte & Touche LLP, whose letter regarding such unaudited interim financial information follows. May 12, 1999 The Boeing Company Seattle, Washington We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of The Boeing Company and subsidiaries (the "Company") for the three-month periods ended March 31, 1999 and 1998 as indicated in our report dated April 15, 1999; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated by reference in Registration Statement Nos. 2-48576, 33- 25332, 33-31434, 33-43854, 33-58798, 333-03191, 333-16363, 333-26867, 333- 32461, 333-32491, 333-32499, and 333-32567 of The Boeing Company on Form S-8. We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of any registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Seattle, Washington 30 EX-27 2 ART. 5 FDS FOR 1ST QUARTER 1999 FORM 10-Q
5 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 2,398 276 4,854 248 8,997 17,280 20,376 11,792 37,696 13,935 6,983 0 0 5,059 7,688 37,696 14,392 14,392 0 13,605 46 2 109 670 201 469 0 0 0 469 .50 .50
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