10-Q 1 0001.txt FORM 10-Q FOR THE PERIOD ENDING JUNE 30, 2000 1 .............................................................................. .............................................................................. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 Commission file number 1-442 THE BOEING COMPANY 7755 East Marginal Way South Seattle, Washington 98108 Telephone: (206) 655-2121 State of incorporation: Delaware IRS identification number: 91-0425694 The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. As of July 31, 2000, there were 897,265,854 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 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in millions except per share data) (Unaudited) Six months ended Three months ended June 30 June 30 ------------------------------------------------------------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------- Sales and other operating revenues $24,751 $29,514 $14,841 $15,122 Cost of products and services 21,491 26,178 12,944 13,420 ------------------------------------------------------------------------------- 3,260 3,336 1,897 1,702 Equity in income (loss) from joint ventures 30 12 (1) 4 General and administrative expense 1,032 1,016 542 525 Research and development expense 663 711 375 350 Gain on dispositions, net 13 7 13 12 Share-based plans expense 127 96 67 50 ------------------------------------------------------------------------------- Operating earnings $ 1,481 $ 1,532 $ 925 $ 793 Other income, principally interest 222 375 73 335 Interest and debt expense (210) (219) (107) (110) ------------------------------------------------------------------------------- Earnings before income taxes 1,493 1,688 891 1,018 Income taxes 455 518 271 317 ------------------------------------------------------------------------------- Net earnings $ 1,038 $ 1,170 $ 620 $ 701 =============================================================================== Basic earnings per share $1.20 $1.25 $.71 $.75 =============================================================================== Diluted earnings per share $1.18 $1.24 $.71 $.75 =============================================================================== Cash dividends per share $ .28 $ .28 $.14 $.14 =============================================================================== See notes to condensed consolidated financial statements. 2 3 THE BOEING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Dollars in millions except per share data) June 30 December 31 2000 1999 ------------------------------------------------------------------------------- Assets (Unaudited) ------------------------------------------------------------------------------- Cash and cash equivalents $ 4,772 $ 3,354 Short-term investments 100 100 Accounts receivable 3,552 3,453 Current portion of customer and commercial financing 319 799 Deferred income taxes 1,906 1,467 Inventories, net of advances and progress billings 6,193 6,539 ------------------------------------------------------------------------------- Total current assets 16,842 15,712 Customer and commercial financing 5,227 5,205 Property, plant and equipment, net 8,070 8,245 Goodwill 2,191 2,233 Prepaid pension expense 4,114 3,845 Other assets 1,033 907 ------------------------------------------------------------------------------- $37,477 $36,147 =============================================================================== Liabilities and Shareholders' Equity ------------------------------------------------------------------------------- Accounts payable and other liabilities $11,318 $11,269 Advances in excess of related costs 1,449 1,215 Income taxes payable 962 420 Short-term debt and current portion of long-term debt 933 752 ------------------------------------------------------------------------------- Total current liabilities 14,662 13,656 Deferred income taxes 141 172 Accrued retiree health care 4,968 4,877 Long-term debt 5,657 5,980 Shareholders' equity: Common shares, par value $5.00 - 1,200,000,000 shares authorized; Shares issued - 1,011,870,159 and 1,011,870,159 5,059 5,059 Additional paid-in capital 1,814 1,684 Treasury shares, at cost - 104,199,201 and 102,356,897 (4,468) (4,161) Retained earnings 11,272 10,487 Accumulated other comprehensive income 4 6 Unearned compensation (10) (12) ShareValue Trust shares - 38,845,646 and 38,696,289 (1,622) (1,601) ------------------------------------------------------------------------------- Total shareholders' equity 12,049 11,462 ------------------------------------------------------------------------------- $37,477 $36,147 =============================================================================== See notes to condensed consolidated financial statements. 3 4 THE BOEING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) (Unaudited) Six months ended June 30 ------------------------------------------------------------------------------- 2000 1999 ------------------------------------------------------------------------------- Cash flows - operating activities: Net earnings $1,038 $1,170 Adjustments to reconcile net earnings to net cash provided by operating activities: Share-based plans 127 96 Depreciation 641 749 Amortization of goodwill and intangibles 57 53 Customer and commercial financing valuation provision 9 20 Gain on dispositions, net (13) (7) Changes in assets and liabilities - Short-term investments 54 Accounts receivable (102) (410) Inventories, net of advances and progress billings 350 (282) Accounts payable and other liabilities 51 950 Advances in excess of related costs 234 (48) Income taxes payable and deferred 72 158 Other (416) (278) Accrued retiree health care 91 42 ------------------------------------------------------------------------------- Net cash provided by operating activities 2,139 2,267 ------------------------------------------------------------------------------- Cash flows - investing activities: Customer financing and properties on lease, additions (669) (927) Customer financing and properties on lease, reductions 1,040 891 Property, plant and equipment, net additions (452) (712) Proceeds from dispositions 75 48 ------------------------------------------------------------------------------- Net cash used by investing activities (6) (700) ------------------------------------------------------------------------------- Cash flows - financing activities: New borrowings 196 145 Debt repayments (338) (210) Common shares purchased (348) (676) Stock options exercised, other 29 41 Dividends paid (254) (273) ------------------------------------------------------------------------------- Net cash used by financing activities (715) (973) ------------------------------------------------------------------------------- Net increase in cash and cash equivalents 1,418 594 Cash and cash equivalents at beginning of year 3,354 2,183 ------------------------------------------------------------------------------- Cash and cash equivalents at end of 2nd quarter $4,772 $2,777 =============================================================================== See notes to condensed consolidated financial statements. 4 5 THE BOEING COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) Note 1 - Condensed Consolidated Interim Financial Statements The condensed consolidated interim financial statements included in this report have been prepared by the Company without audit. In the opinion of management, all adjustments necessary for a fair presentation are reflected in the interim financial statements. Such adjustments are of a normal and recurring nature. The results of operations for the period ended June 30, 2000, 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 1999 Annual Report. Certain reclassifications have been made to prior periods to conform with current reporting. Note 2 - Earnings per Share The weighted average number of shares outstanding (in millions) used to compute earnings per share for the periods ended June 30, 2000 and 1999, are as follows: First Six Months Second Quarter ---------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Basic shares 867.8 934.2 866.6 931.3 Diluted shares 876.9 942.6 876.1 940.5 Basic earnings per share are calculated based on the weighted average number of shares outstanding, excluding treasury shares and the outstanding shares held by the ShareValue Trust. Diluted earnings per share are calculated based on that same number of shares plus additional dilutive shares representing stock distributable under stock option plans computed using the treasury stock method, plus contingently issuable shares from other share-based plans. 5 6 Note 3 - Available for Sale Securities The Company holds certain common stock investments with a readily determinable fair market value. Under Statement of Financial Accounting Standard (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, such equity securities are carried as available for sale and reported at market value. The aggregate value of all available for sale securities held on June 30, 2000, totaled $33, and is included in "other assets" on the condensed Consolidated Statements of Financial Position. The unrealized gains and losses are excluded from earnings and reported in a separate component of shareholders' equity. The gross unrealized holding losses totaled $6 for the period ended June 30, 2000. Note 4 - Income Taxes The effective income tax provision rate of 30.5% for the first six months of 2000 is lower than the statutory federal rate, principally due to Foreign Sales Corporation tax benefits. Partially offsetting this reduction from the statutory federal rate are state income taxes and non-deductibility of goodwill. Net income tax payments were $351 and $563 for the six months ended June 30, 2000 and 1999. Note 5 - Accounts Receivable Accounts receivable consisted of the following: June 30 December 31 2000 1999 ------------------------------------------------------------------------------- U.S. Government contracts $2,007 $1,970 Other 1,545 1,483 ------------------------------------------------------------------------------- $3,552 $3,453 =============================================================================== 6 7 Note 6 - Inventories Inventories consisted of the following: June 30 December 31 2000 1999 ------------------------------------------------------------------------------- Commercial aircraft programs and long-term contracts in progress $ 19,169 $ 19,537 Commercial spare parts, general stock materials and other 1,912 2,042 ------------------------------------------------------------------------------- 21,081 21,579 Less advances and progress billings (14,888) (15,040) ------------------------------------------------------------------------------- $ 6,193 $ 6,539 =============================================================================== Inventory costs at June 30, 2000, included unamortized tooling of $1,240 and $510 relating to the 777 and Next-Generation 737, and excess deferred production costs of $1,368 and $627 relating to the 777 and Next-Generation 737 programs. There are no significant deferred production costs or unamortized tooling associated with the 717 program. Note 7 - Customer and Commercial Financing Customer and commercial financing consisted of the following: June 30 December 31 2000 1999 ------------------------------------------------------------------------------- Aircraft financing Notes receivable $ 673 $ 781 Investment in sales-type/financing leases 989 1,497 Operating lease equipment, at cost, Less accumulated depreciation of $327 and $304 2,090 2,357 Commercial equipment financing Notes receivable 828 730 Investment in sales-type/financing leases 661 506 Operating lease equipment, at cost, Less accumulated depreciation of $72 and $92 507 408 ------------------------------------------------------------------------------- Less valuation allowance (202) (275) ------------------------------------------------------------------------------- $5,546 $6,004 =============================================================================== 7 8 Note 7 - Customer and Commercial Financing (continued) Financing for aircraft is collateralized by security in the related asset, and historically the Company has not experienced a problem in accessing such collateral when necessary. Commercial equipment financing also includes amounts attributable to regional aircraft, principally with fewer than 80 seats. The change in the valuation allowance for the first six months of 2000 consisted of the following: Valuation Allowance ------------------------------------------------------------------------------- Beginning balance - December 31, 1999 $(275) Charged to costs and expenses (9) Deductions from reserves 82 ------------------------------------------------------------------------------- Ending balance - June 30, 2000 $(202) =============================================================================== Note 8 - Accounts Payable and Other Liabilities Accounts payable and other liabilities consisted of the following: June 30 December 31 2000 1999 ------------------------------------------------------------------------------- Accounts payable $ 5,042 $ 4,909 Accrued compensation and employee benefit costs 2,559 2,421 Dividends payable 126 128 Lease and other deposits 429 647 Other 3,162 3,164 ------------------------------------------------------------------------------- $11,318 $11,269 =============================================================================== Note 9 - Postretirement Plans Beginning January 1, 2000, the actuarial assumptions used to calculate net periodic pension income were the following: a discount rate of 7.50%, an expected return on plan assets of 9.25%, and an annual rate of compensation increase of 5.50%. The increase in the expected return on plan assets from 9.00% as of December 31, 1999, to 9.25% resulted in additional net periodic pension income of $21 in the second quarter of 2000 and $42 for the six months ended June 30, 2000. 8 9 Note 10 - Debt Short- and long-term debt consisted of the following: June 30 December 31 2000 1999 ------------------------------------------------------------------------------- Unsecured debentures and notes: 8.25% due Jul. 1, 2000 $ 200 $ 200 8 3/8% due Feb. 15, 2001 176 177 7.565% due Mar. 30, 2002 50 52 9.25% due Apr. 1, 2002 120 120 6 3/4% due Sep. 15, 2002 299 298 6.35% due Jun. 15, 2003 300 300 7 7/8% due Feb. 15, 2005 206 207 6 5/8% due Jun. 1, 2005 294 293 6.875% due Nov. 1, 2006 249 248 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 7.865% 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 27 30 Senior medium-term notes, 5.6% - 7.6%, due through 2017 1,350 1,426 Subordinated medium-term notes, 5.5% - 8.3%, due through 2004 45 45 Capital lease obligations due through 2008 420 386 Other notes 267 363 ------------------------------------------------------------------------------- $6,590 $6,732 =============================================================================== 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. Total debt interest, including amounts capitalized, was $259 and $261 for the six-month periods ended June 30, 2000 and 1999, and interest payments were $253 and $239, respectively. Additionally, Boeing Capital Corporation (BCC), a wholly owned subsidiary of the Company, has filed shelf registrations with the Securities and Exchange Commission totaling $1,200, on which $1,060 has been drawn. BCC has additionally filed a Form S-3 Registration Statement for a public shelf registration of $2,500 in debt securities, and has made no draw-downs as of June 30, 2000. Short-term debt and current portion of long-term debt as of June 30, 2000, consist of the following: $376 of unsecured debentures and notes, $300 of senior debt securities, senior medium-term notes, and subordinated medium-term notes, $71 of capital lease obligations, and $186 of other notes. 9 10 Note 11 - Shareholders' Equity Changes in shareholders' equity for the six-month periods ended June 30, 2000 and 1999, consisted of the following: ------------------------------------------------------------------------------- 2000 1999 (Shares in thousands) Shares Amount Shares Amount ------------------------------------------------------------------------------- Common stock Beginning balance - January 1 1,011,870 $ 5,059 1,011,870 $ 5,059 ------------------------------------------------------------------------------- Ending balance - June 30 1,011,870 $ 5,059 1,011,870 $ 5,059 =============================================================================== Additional paid-in capital Beginning balance - January 1 $ 1,684 $ 1,147 Share-based compensation 127 96 Treasury shares issued for incentive stock plans, net (22) (26) Tax benefit related to incentive stock plans 4 5 ShareValue Trust market value adjustment 21 431 ------------------------------------------------------------------------------- Ending balance - June 30 $ 1,814 $ 1,653 =============================================================================== Treasury stock Beginning balance - January 1 102,357 $(4,161) 35,846 $(1,321) Treasury shares issued for incentive stock plans, net (1,017) 41 (1,597) 59 Treasury shares acquired 8,700 (348) 16,286 (676) ------------------------------------------------------------------------------- Ending balance - June 30 110,040 $(4,468) 50,535 $(1,938) =============================================================================== Retained earnings Beginning balance - January 1 $10,487 $ 8,706 Net earnings 1,038 1,170 Cash dividends declared (253) (271) ------------------------------------------------------------------------------- Ending balance - June 30 $11,272 $ 9,605 =============================================================================== Accumulated other comprehensive income Beginning balance - January 1 $ 6 $ (23) Unrealized losses on certain investments (6) Foreign currency translation adjustment 4 ------------------------------------------------------------------------------- Ending balance - June 30 $ 4 $ (23) =============================================================================== Unearned compensation Beginning balance - January 1 $ (12) $ (17) Amortization 2 1 Forfeitures 2 ------------------------------------------------------------------------------- Ending balance - June 30 $ (10) $ (14) =============================================================================== ShareValue Trust Beginning balance - January 1 38,696 $(1,601) 38,167 $(1,235) Shares acquired from dividend reinvestment 281 278 Market value adjustment (21) (431) ------------------------------------------------------------------------------- Ending balance - June 30 38,977 $(1,622) 38,445 $(1,666) =============================================================================== 10 11 Note 11 - Shareholders' Equity (continued) For the six months ended June 30, 2000 and 1999, the Company did not incur items to be reported in comprehensive income that were not already included in the reported net earnings, except for the $4 currency translation adjustment and $6 unrealized losses on certain investments reported for the six months ended June 30, 2000. As a result, comprehensive income and net earnings were substantially the same for these periods. Note 12 - Share-Based Compensation Share-based plans expense consisted of the following: Six months ended Three months ended June 30 June 30 ------------------------------------------------------------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------- Performance shares $ 58 $36 $32 $22 ShareValue Trust 36 36 18 18 Stock Options, other 33 24 17 10 ------------------------------------------------------------------------------- $127 $96 $67 $50 =============================================================================== 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. Major contingencies are discussed below. 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. As of June 30, 2000, 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 11 12 1990, was based on the Company's belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, that the Team would establish a claim for contract adjustments for a minimum of $250, that there was a range of reasonably possible results on termination for convenience, and that it was prudent to provide for what the Company then believed was the upper range of possible loss on termination for convenience, which was $350. On July 1, 1999, the United States Court of Appeals for the Federal Circuit reversed a March 31, 1998, judgment of the United States Court of Federal Claims for the Team. The 1998 judgment was based on a determination that the Government had not exercised the required discretion before issuing a termination for default. It converted the termination to a termination for convenience, and determined the Team was entitled to be paid $1,200, plus statutory interest from June 26, 1991, until paid. The Court of Appeals remanded the case to the Court of Federal Claims for a determination as to whether the Government is able to sustain the burden of showing a default was justified and other proceedings. Final resolution of the A-12 litigation will depend on such litigation and possible further appeals or negotiations with the Government. In the Company's opinion, the loss provision continues to provide adequately for the reasonably possible reduction in value of A-12 net contracts in process as of June 30, 2000, as a result of a termination of the contract for the convenience of the Government. The Company has been provided with an opinion of outside counsel that (i) the Government's termination of the contract for default was contrary to law and fact, (ii) the rights and obligations of the Company are the same as if the termination had been issued for the convenience of the Government, and (iii) subject to prevailing on the issue that the termination is properly one for the convenience of the Government, the probable recovery by the Company is not less than $250. 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 then executive officers. Additional lawsuits of a similar nature have been filed in the same court. These lawsuits were consolidated on February 24, 1998. 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 period from April 7, 1997 through October 22, 1997. By order dated May 1, 2000, the Court certified two subclasses of plaintiffs in the action: a. all persons or entities who purchased Boeing stock or call options or who sold put options during the period from July 21, 1997 through October 22, 1997, and b. all persons or entities who purchased McDonnell Douglas stock on or after April 7, 1997 and who held such stock until it converted to Boeing stock pursuant to the merger. The plaintiffs seek compensatory damages and treble damages. The action is currently set for trial on June 4, 2001. 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. 12 13 On October 19, 1999, an indictment was returned by a federal grand jury sitting in the District of Columbia charging that McDonnell Douglas Corporation (MDC), a wholly owned subsidiary of the Company, and MDC's Douglas Aircraft Company division, conspired to and made false statements and concealed material facts on export license applications and in connection with export licenses, and possessed and sold machine tools in violation of the Export Administration Act. The indictment also charged one employee with participation in the alleged conspiracy; the indictment has since been dismissed as against this employee. The indictment relates to the sale and export to China in 1993-1995 of surplus, used machine tools sold by Douglas Aircraft Company to China National Aero- Technology Import and Export Corporation for use in connection with the MD- 80/90 commercial aircraft Trunkliner Program in China. As a result of the indictment, the Department of State has discretion to deny defense-related export privileges to MDC or a division or subsidiary of MDC. The agency exercised that discretion on January 5, 2000, by establishing a "denial policy" with respect to defense-related exports of MDC and its subsidiaries; most of MDC's major existing defense programs were, however, excepted from that policy due to overriding U.S. foreign policy and national security interests. Other exceptions may be granted. There can, however, be no assurance as to how the Department will exercise its discretion as to program or transaction exceptions for other programs or future defense-related exports. In addition, the Department of Commerce has authority to temporarily deny other export privileges to, and the Department of Defense has authority to suspend or debar from contracting with the military departments, MDC or a division or subsidiary of MDC. Neither agency has taken action adverse to MDC or its divisions or subsidiaries thus far. Based upon all available information, the Company does not expect actions that would have a material adverse effect on its financial position or continuing operations. In the unanticipated event of a conviction, MDC would be subject to Department of State and Department of Commerce denials or revocations of MDC export licenses. MDC also would be subject to Department of Defense debarment proceedings. On February 25, 2000, a purported class action lawsuit alleging gender discrimination and harassment was filed against The Boeing Company, Boeing North American, Inc. and McDonnell Douglas Corporation. The complaint, filed with the United States District Court in Seattle, alleges that the Company has engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against females over the course of many years. The complaint, Beck v. Boeing, names 28 women who have worked for Boeing in the Puget Sound area; Wichita, Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On March 15, an amended complaint was filed naming an additional 10 plaintiffs, including the first from California. The lawsuit attempts to represent all women who currently work for the Company, or who have worked for the Company in the past several years. The Company has denied the allegation that it has engaged in any unlawful "pattern and practice" and believes that the plaintiffs cannot satisfy the rigorous requirements necessary to achieve the class action status they seek. Plaintiffs' motion for class certification must be filed by August 25, 2000. The Company intends to vigorously contest this lawsuit. 13 14 Note 14 - Business Segment Data Segment information for revenues, earnings, and research and development consisted of the following: Six months ended Three months ended June 30 June 30 ------------------------------------------------------------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------- Revenues: Commercial Airplanes $15,051 $19,917 $ 9,880 $10,122 Military Aircraft and Missiles 6,057 6,177 3,158 3,210 Space and Communications 3,457 3,272 1,798 1,729 Customer and Commercial Financing/Other 355 357 180 184 Accounting differences/eliminations (169) (209) (175) (123) ------------------------------------------------------------------------------- Operating revenues $24,751 $29,514 $14,841 $15,122 =============================================================================== Earnings from operations: Commercial Airplanes $ 1,141 $ 844 $ 882 $ 448 Military Aircraft and Missiles 548 690 250 368 Space and Communications 22 155 (38) 94 Customer and Commercial Financing/Other 220 192 115 104 Accounting differences/eliminations (247) (120) (199) (91) Share-based plans (127) (96) (67) (50) Other unallocated expense (76) (133) (18) (80) ------------------------------------------------------------------------------- Earnings from operations $ 1,481 $ 1,532 $ 925 $ 793 Other income, principally interest 222 375 73 335 Interest and debt expense (210) (219) (107) (110) ------------------------------------------------------------------------------- Earnings before income taxes $ 1,493 $ 1,688 $ 891 $ 1,018 Income taxes 455 518 271 317 ------------------------------------------------------------------------------- Net earnings $ 1,038 $ 1,170 $ 620 $ 701 =============================================================================== Research and development: Commercial Airplanes $ 263 $ 366 $ 160 $ 184 Military Aircraft and Missiles 125 119 64 57 Space and Communications 275 226 151 109 ------------------------------------------------------------------------------- Total research and development expense $ 663 $ 711 $ 375 $ 350 =============================================================================== For internal reporting purposes, the Company records Commercial Airplanes segment revenues 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 revenues for these transfers are eliminated in the 'Accounting differences/eliminations' caption. 14 15 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 1999 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 revenues, a loss is not recognized until delivery is made, which is not in accordance with generally accepted accounting principles. For the 717 program, the cost of the specific units delivered is reduced, on a per-unit basis, by the amount previously recognized for forward losses. Proceeds from certain Commercial Airplanes segment suppliers attributable to participation in development efforts are accounted for as a reduction in the cost of inventory received from the supplier under the program accounting method, and as an expense reduction in the period the proceeds are received for internal measurement purposes. These adjustments between the internal measurement method and the program accounting method are included in the 'Accounting differences/eliminations' caption of net earnings. These adjustments totaled $(321) and $(7) for the six months ended June 30, 2000 and 1999. Customer advance payments prior to delivery may be delayed or contractually deferred from a baseline schedule, resulting in the recognition of interest income. Beginning in first quarter 2000, revenues and income resulting from deferred customer advances were identified to the Commercial Airplanes segment, and had previously been identified to the Customer and Commercial Financing/Other segment. For the first six months of 1999, $27 of revenues and operating income had been reclassified from the Customer and Commercial Financing/Other segment to the Commercial Airplanes segment to conform with the 2000 presentation. 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 differences 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 ------------------------------------------------------------------------------- | 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 new business | | and new business opportunities (including "new frontier" aerospace | | opportunities and e-commerce global aerospace and defense trading | | exchange), revenues and revenue growth potential, execution of post-strike | | recovery plans, operating margins and margin growth potential, deliveries, | | compliance with delivery schedules, performance against company targets, | | research and development, new products, current and future markets for the | | Company's products, acquisition of the Hughes space and communications | | business and synergies expected in connection therewith, orders and | | contracts for company products, decisions regarding production of company | | products, launches, sales, earnings, cash, disposition of certain company | | businesses, performance against key metrics of the Company's value | | scorecard, inventory turns, facilities consolidation, overhead reduction, | | supplier base reduction, and other trend projections. This forward-looking | | information is based upon a number of assumptions including assumptions | | regarding demand; current and future markets for the Company's products and | | services; internal performance; product performance; customer financing; | | customer, supplier and subcontractor performance; customer model | | selections; favorable outcomes of certain pending sales campaigns; supplier | | contract negotiations; price escalation; government policies and actions; | | successful negotiation of contracts with the Company's labor unions; | | regulatory approvals; and successful execution of acquisition and | | divestiture plans. 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 continued research and | | development, production recovery, production rate increases and decreases, | | production system initiatives, timing of product deliveries and launches, | | supplier contract negotiations, asset management plans, acquisition and | | divestiture plans, procurement plans, and other cost-reduction efforts; | | acceptance of new products and services; product performance risks; the | | cyclical nature of some of the Company's businesses; volatility of the | | market for certain products and services; domestic and international | | competition in the defense, space and commercial areas; continued | | integration of acquired businesses; uncertainties associated with | | regulatory certifications of the Company's commercial aircraft by the U.S. | | Government and foreign governments; actions by regulatory agencies in | | regard to the proposed acquisition of the Hughes space and communications | | business and other new ventures; other regulatory uncertainties; collective | | bargaining labor disputes; performance issues with key suppliers, | | subcontractors and customers; governmental export and import policies; | | factors that result in significant and prolonged disruption to air travel | | worldwide; global trade policies; worldwide political stability and | | economic conditions, particularly in Asia; real estate market fluctuations | | in areas where company facilities are located; price escalation trends; the | | outcome of political and legal processes, including uncertainty regarding | | government funding of certain programs; 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; legal, financial and governmental risks related to | | international transactions; legal proceedings; and other economic, | | political and technological risks and uncertainties. Additional | | information regarding these factors is contained in the Company's SEC | | filings, including, without limitation, the Company's Annual Report on Form | | 10-K for the year ended 1999. | ------------------------------------------------------------------------------- 16 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Revenues -------- Sales of $24.8 billion for the first six months of 2000 were 16% lower than sales for the comparable period of 1999. Sales of $14.8 billion in second quarter 2000 were 2% lower than sales for the comparable period of 1999. For the first six months, a total of 242 commercial aircraft were delivered in 2000 (including one Airborne Laser 747), compared with 313 for the same period in 1999. In second quarter 2000, 167 commercial airplanes were delivered compared with 165 in second quarter 1999. Approximately 490 commercial aircraft deliveries are currently projected for the full year 2000, compared with 620 in 1999. Total sales for 2000 are projected to be in the $51 billion range, compared with $58 billion in 1999. Commercial jet aircraft deliveries were as follows: Six months ended Three months ended June 30 June 30 -------------------------------------------------------------------- Model 2000 1999 2000 1999 -------------------------------------------------------------------- 717 11 (5) - 8 (4) - 737 Classic 2 25 - 11 737 Next-Generation 141 139 102 78 747 12* 26 8 12 757 28 36 18 19 767 18 25 13 14 777 27 45 17 22 MD-80 - 8 (8) - 6 (6) MD-90 - 6 - 1 MD-11 3 3 1 2 -------------------------------------------------------------------- Total 242 313 167 165 ==================================================================== *Includes one Airborne Laser 747 Commercial jet aircraft deliveries included deliveries under operating lease, which are identified by parentheses in the table above. Aircraft accounted for as operating leases have minimal revenues recorded at the time of delivery. 17 18 Military Aircraft and Missiles segment deliveries included the following: Six months ended Three months ended June 30 June 30 ---------------------------------------------------------------- Model 2000 1999 2000 1999 ---------------------------------------------------------------- C-17 6 5 3 3 F-15 5 21 1 12 F/A-18C/D 14 14 8 8 F/A-18E/F 11 6 7 4 T-45TS 9 6 5 3 CH-47 4 7 3 4 AH-64 Intl (New Builds) 4 6 2 3 AH-64 Reman 29 23 15 12 Space and Communications segment deliveries included the following: Six months ended Three months ended June 30 June 30 ---------------------------------------------------------------- Model 2000 1999 2000 1999 ---------------------------------------------------------------- 767 AWACS - 2 - - Delta II 2 5 - 3 Delta III - 1 - 1 Earnings -------- Net earnings for the second quarter of 2000 were $620 million, compared with $701 million for the same period in 1999. The second quarter 1999 results included net interest income of $289 million, or $181 million after tax, associated with a partial agreement between the Company and the Internal Revenue Service on an IRS examination of the years 1988 through 1991. Net earnings for the first half of 2000 were $1,038 million, or 11.3% lower than the net earnings of $1,170 million for the same period of 1999. Earnings for the first six months of 2000 included a pretax gain of $41 million, or $26 million on an after-tax basis, on a sale of a long-held equity instrument, and interest income of $53 million, or $33 million on an after-tax basis, related to interest income from a federal income tax audit settlement. Net earnings for the first six months of 1999 included the second-quarter interest income from the partial tax agreement discussed above. Research and development expense for the first six months of 2000 totaled $663 million. This represents a 6.7% decrease from the same period in 1999. Research and development expense totaled $375 million for the quarter, compared with $350 million for the same period of 1999. Commercial Airplanes research and development expense of $160 million for second quarter 2000 was lower than the $184 million expense for second quarter 1999, principally due to reduced spending attributable to the 767-400ER and 717 programs. Commercial Airplanes research and development for 2000 includes increased spending attributable to development of two longer-range 777 models. Total Commercial Airplanes research and development expense is projected to increase in the second half of 2000 since first-half 2000 spending was impacted by the 40-day work stoppage by the 18 19 Society of Professional Engineering Employees in Aerospace (SPEEA) which ended March 19, 2000. Space and Communications segment research and development expense of $151 million for second quarter 2000 was higher than the $109 million expense for the second quarter of 1999, and principally reflects continued spending on the Delta IV program and development for Connexion by Boeing, a mobile, high-speed, broad-band, two-way data communications service for global travelers. Based on current programs and schedules, research and development expense for the full year 2000 is projected to be approximately $1.5 billion, compared with $1.3 billion in 1999. Income taxes have been settled with the Internal Revenue Service (IRS) for all years through 1978, and all IRS examinations have been completed through 1991. Issues not resolved at the IRS examination stage are either in appeals with the IRS or are being litigated. The Company has filed refund claims for additional research and development tax credits, primarily in relation to its fixed-price government development programs. Successful resolutions will result in increased income to the Company. In December 1996, The Boeing Company filed suit in the U.S. District Court for the Western District of Washington for the refund of over $400 million in federal income taxes and related interest. The suit challenged the IRS method of allocating research and development costs for the purpose of determining tax incentive benefits on export sales through the Company's Domestic International Sales Corporation (DISC) and its Foreign Sales Corporation (FSC) for the years 1979 through 1987. In September 1998, the Company's position prevailed when the District Court granted the Company's motion for summary judgment. The U.S. Department of Justice has appealed this decision. If the Company were to prevail, the refund would include interest computed to the payment date. The issue could affect tax computations for subsequent years; however, the financial impact would depend on the final resolution of audits for those years. The European Union filed a challenge to U.S. Foreign Sales Corporation tax provisions with the World Trade Organization (WTO). On February 25, 2000, the WTO issued a final decision upholding this challenge. Officials representing the United States on trade issues continue to seek resolution through a negotiated settlement. It is not possible to predict what impact, if any, this issue will have on future earnings pending final determination of the manner and scope of the U.S. Government response. The Company has significant financing assets and off-balance-sheet commitments that are impacted by the market value of various jet aircraft. 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 market value, however, could result in the requirement to adjust related reserves. The Company will continue to monitor this market. 19 20 Operating Earnings ------------------ Commercial Airplanes Second quarter 2000 commercial jet aircraft deliveries totaled 167 compared with 165 during the same period in 1999, and 75 for first quarter 2000. The increase in second quarter 2000 deliveries relative to the first quarter resulted from the Company substantially recovering from the first-quarter 2000 SPEEA strike. Commercial Airplanes segment second quarter 2000 operating earnings, based on the unit cost of airplanes delivered, were $882 million, compared with $448 million for the same period in 1999. The overall Commercial Airplanes segment operating profit margin was approximately 8.9% for the second quarter of 2000, compared with 4.4% for the same period in 1999 and 5.0% for the first quarter of 2000. The second quarter 2000 margin increase over the same period in 1999 primarily reflects improvements in the production process. The margin increase over first quarter 2000 additionally reflects margin improvements due to airplanes substantially built in the first quarter but delivered in the second quarter. As of June 30, 2000, the Company had cumulatively delivered 23 717 program aircraft. The 717 program is accounted for under the program method of accounting described in Note 1 to the audited consolidated financial statements in the Company's 1999 Annual Report. The Company has established the program accounting quantity at 200 units. The Company will record 717 deliveries on a break-even basis until such time as program reviews indicate positive gross profit within the program accounting quantity. Such program reviews could include revised assumptions of revenues and costs, or an increase in the program quantity if warranted by additional program orders. Current firm contracts for the 717 program include a contract for 50 airplanes with Trans World Airlines (TWA) of which four have delivered. In April 1999, Moody's rating agency lowered TWA's outlook from Stable to Negative. Military Aircraft and Missiles Military Aircraft and Missiles segment second quarter 2000 operating earnings were $250 million, compared with $368 million for the same period in 1999. The operating margin of 7.9% for second quarter 2000 compares with a second quarter 1999 margin of 11.5%. The lower earnings in second quarter 2000 reflect fewer F-15 deliveries, less favorable program performance on certain helicopter programs, and lower margins associated with various aerospace support contracts. The second quarter 1999 segment operating earnings also reflected a $45 million charge related to a decision by the government of Greece to forego the purchase of F-15 aircraft. In second quarter 2000, the U.S. Navy signed a multi-year contract for 222 F/A-18E/F Super Hornet aircraft. The five-year, $8.9 billion contract joins the other 62 F/A-18E/F already on contract, for a total of 284 planes. The first aircraft under the multi-year contract will be delivered later this year. The United Kingdom announced its selection of the C-17 for its strategic airlift requirement and the Meteor air-to-air missile system for its fleet of 20 21 Eurofighters. The United Kingdom agreed to lease four C-17s. Assembly on the first C-17 for the United Kingdom began on June 27. The Company is a member of the international team developing the Meteor missile and will assist with aircraft-weapon systems integration, risk management and marketing activities in selected markets. The $3.1 billion development contract for the RAH-66 Comanche helicopter was signed in second quarter 2000. Boeing is a 50% partner in this program with United Technologies. The program will manufacture and deliver 13 new helicopters for development and operational testing. The Company also reached an agreement with the U.S. Army to proceed with a second multi-year procurement of Apache attack helicopters. The agreement, worth up to $2.6 billion, authorizes as many as 298 aircraft. Space and Communications Space and Communications had an operating loss of $38 million for the second quarter of 2000, compared with operating earnings of $94 million in the same period in 1999. The reduced earnings reflect $42 million of additional research and development expense in second quarter 2000 relative to second quarter 1999. Second quarter 2000 results were also impacted by a pretax charge of $55 million associated with the incurred costs of a planned demonstration launch of a Delta III rocket in August 2000. Some additional costs will be expensed as incurred in the third quarter up to the time of launch. The commercial satellite market is the key factor in determining the need for commercial launch services. Recent delays in the start-up of commercial satellite programs and system changes have caused a softening of the market. These factors, combined with the lack of a successful Delta III launch, may adversely affect the future financial condition of Delta III program. The Company's decision to perform a demonstration launch at company expense is intended to prove system reliability. The Company continues to monitor potential exposures for the Delta III program by assessing the estimated revenues attributable to future Delta III launches, including revenue for launch positions that are currently unsold, along with assessing inventory and supplier commitments. On March 12, 2000, Sea Launch, a joint venture of which Boeing is a 40% partner, experienced a mission failure. A Joint Review Failure Oversight Board was formed to identify the root cause of the failure and the corrective action required. On June 12, 2000, the Oversight Board reached full consensus that corrective actions were being implemented satisfactorily. The next launch for the Sea Launch venture occurred July 28, 2000, and was a mission success. The Company to date has extended customer guarantees totaling $273 million to cover contingent exposures in the event certain future launches are not successful or the venture fails to perform launches. A portion of any payments made under these guarantees would be subject to reimbursement by other venture partners. The Sea Launch venture could also incur a significant financial exposure from continued softening of the launch market. In the second quarter, the Company announced its intent to purchase Autometric Inc., a leading supplier of software products and services in the geospatial information technology marketplace. This acquisition is in keeping with the Company's strategy to make niche acquisitions in key areas in order to provide the skill and technologies necessary to enhance the Company's global leadership in large-scale systems integration. 21 22 On January 13, 2000, the Company announced an agreement to acquire the Hughes space and communications business and related operations for $3.75 billion. The transaction is subject to regulatory and government reviews and is expected to be finalized by the end of third quarter 2000. Hughes is a technological leader in space-based communications, reconnaissance, surveillance and imaging systems. It is also a leading manufacturer of commercial satellites. Under the definitive agreement, the Company will acquire Hughes Electron Dynamics, a supplier of electronic components for satellites, and Spectrolab, a provider of solar cells and panels for satellites. Customer and Commercial Financing/Other Revenues consist principally of interest from financing receivables and lease income from operating lease equipment. Segment earnings additionally reflect depreciation on leased equipment and expenses recorded against the valuation allowance. No interest expense on debt is included in Customer and Commercial Financing/Other segment earnings. Liquidity and Capital Resources ------------------------------- The Company's financial liquidity position remains strong, with cash and short- term investments totaling $4.9 billion at June 30, 2000, after repurchasing 8.7 million shares for $348 million during the first six months of 2000. To date, the Company has repurchased 116 million shares for $4.7 billion under a share repurchase plan approved by the Board of Directors. Excluding Boeing Capital Corporation (BCC), a financing subsidiary wholly owned by the Company, total long-term debt is at 29% of total shareholders' equity plus debt. The consolidated long-term debt, including BCC, is at 35% of total shareholders' equity plus debt. Revolving credit line agreements with a group of major banks, totaling $2.40 billion, remain available but unused. Also, BCC has an unused balance of $140 million on its $1.2 billion shelf registration, and an additional shelf registration of $2.5 billion. 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. Backlog ------- Contractual backlog of unfilled orders (which excludes purchase options and announced orders for which definitive contracts have not been executed, and unobligated U.S. Government contract funding) was as follows (dollars in billions): June 30 March 31 December 31 ---------------------------------------------------------------- 2000 2000 1999 ---------------------------------------------------------------- Commercial Airplanes $ 77.1 $ 75.7 $73.0 Military Aircraft and Missiles 18.8 16.8 15.6 Space and Communications 9.1 9.6 10.6 ---------------------------------------------------------------- Total contractual backlog $105.0 $102.1 $99.2 ================================================================ 22 23 Unobligated U.S. Government contract funding not included in backlog totaled $24.5 billion at June 30, 2000, compared with $24.4 billion at December 31, 1999. Derivative Instruments and Hedging Activities --------------------------------------------- The Company will be required to adopt Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, at the beginning of 2001. The Company has begun evaluating the impact that will result from adopting SFAS No. 133; however, since this evaluation has not been completed, the Company cannot assess the impact on the financial statements at this time. Revenue Recognition ------------------- The Company has reviewed Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. The Company's revenue recognition practices were already consistent with SAB No. 101, so its promulgation had no impact on the Company's financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has financial instruments that are subject to interest rate risk, principally short-term investments, fixed-rate notes receivable attributable to customer financing, and debt obligations issued at a fixed rate. Historically, the Company has not experienced material gains or losses due to interest rate changes when selling short-term investments or fixed-rate notes receivable. Additionally, the Company uses interest rate swaps to manage exposure to interest rate changes. Based on the current holdings of short-term investments and fixed-rate notes, as well as underlying swaps, the exposure to interest rate risk is not material. Fixed-rate debt obligations issued by the Company are generally not callable until maturity. The Company is subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. As a general policy, the Company substantially hedges foreign currency commitments of future payments and receipts by purchasing foreign currency-forward contracts. As of June 30, 2000, the notional value of such derivatives was $464 million, with a net unrealized loss of $30 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. 23 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant legal proceedings are related to matters covered by insurance. Major contingencies are discussed below. 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. As of June 30, 2000, inventories included approximately $581 million of recorded costs on the A-12 contract, against which the Company has established a loss provision of $350 million. The amount of the provision, which was established in 1990, was based on the Company's belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, that the Team would establish a claim for contract adjustments for a minimum of $250 million, that there was a range of reasonably possible results on termination for convenience, and that it was prudent to provide for what the Company then believed was the upper range of possible loss on termination for convenience, which was $350 million. On July 1, 1999, the United States Court of Appeals for the Federal Circuit reversed a March 31, 1998, judgment of the United States Court of Federal Claims for the Team. The 1998 judgment was based on a determination that the Government had not exercised the required discretion before issuing a termination for default. It converted the termination to a termination for convenience, and determined the Team was entitled to be paid $1,200 million, plus statutory interest from June 26, 1991, until paid. The Court of Appeals remanded the case to the Court of Federal Claims for a determination as to whether the Government is able to sustain the burden of showing a default was justified and other proceedings. Final resolution of the A-12 litigation will depend on such litigation and possible further appeals or negotiations with the Government. In the Company's opinion, the loss provision continues to provide adequately for the reasonably possible reduction in value of A-12 net contracts in process as of June 30, 2000, as a result of a termination of the contract for the convenience of the Government. The Company has been provided with an opinion of outside counsel that (i) the Government's termination of the contract for 24 25 default was contrary to law and fact, (ii) the rights and obligations of the Company are the same as if the termination had been issued for the convenience of the Government, and (iii) subject to prevailing on the issue that the termination is properly one for the convenience of the Government, the probable recovery by the Company is not less than $250 million. 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 then executive officers. Additional lawsuits of a similar nature have been filed in the same court. These lawsuits were consolidated on February 24, 1998. 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 period from April 7, 1997 through October 22, 1997. By order dated May 1, 2000, the Court certified two subclasses of plaintiffs in the action: a. all persons or entities who purchased Boeing stock or call options or who sold put options during the period from July 21, 1997 through October 22, 1997, and b. all persons or entities who purchased McDonnell Douglas stock on or after April 7, 1997 and who held such stock until it converted to Boeing stock pursuant to the merger. The plaintiffs seek compensatory damages and treble damages. The action is currently set for trial on June 4, 2001. 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 October 19, 1999, an indictment was returned by a federal grand jury sitting in the District of Columbia charging that McDonnell Douglas Corporation (MDC), a wholly owned subsidiary of the Company, and MDC's Douglas Aircraft Company division, conspired to and made false statements and concealed material facts on export license applications and in connection with export licenses, and possessed and sold machine tools in violation of the Export Administration Act. The indictment also charged one employee with participation in the alleged conspiracy; the indictment has since been dismissed as against this employee. The indictment relates to the sale and export to China in 1993-1995 of surplus, used machine tools sold by Douglas Aircraft Company to China National Aero- Technology Import and Export Corporation for use in connection with the MD- 80/90 commercial aircraft Trunkliner Program in China. As a result of the indictment, the Department of State has discretion to deny defense-related export privileges to MDC or a division or subsidiary of MDC. The agency exercised that discretion on January 5, 2000, by establishing a "denial policy" with respect to defense-related exports of MDC and its subsidiaries; most of MDC's major existing defense programs were, however, excepted from that policy due to overriding U.S. foreign policy and national security interests. Other exceptions may be granted. There can, however, be no assurance as to how the Department will exercise its discretion as to program or transaction exceptions for other programs or future defense-related exports. In addition, the Department of Commerce has authority to temporarily deny other export privileges to, and the Department of Defense has authority to suspend or debar from contracting with the military departments, MDC or a division or subsidiary of MDC. Neither agency has taken action adverse to MDC or its divisions or subsidiaries thus far. Based upon all available information, the Company does not expect actions that would have a material adverse effect on 25 26 its financial position or continuing operations. In the unanticipated event of a conviction, MDC would be subject to Department of State and Department of Commerce denials or revocations of MDC export licenses. MDC also would be subject to Department of Defense debarment proceedings. On February 25, 2000, a purported class action lawsuit alleging gender discrimination and harassment was filed against The Boeing Company, Boeing North American, Inc. and McDonnell Douglas Corporation. The complaint, filed with the United States District Court in Seattle, alleges that the Company has engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against females over the course of many years. The complaint, Beck v. Boeing, names 28 women who have worked for Boeing in the Puget Sound area; Wichita, Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On March 15, an amended complaint was filed naming an additional 10 plaintiffs, including the first from California. The lawsuit attempts to represent all women who currently work for the Company, or who have worked for the Company in the past several years. The Company has denied the allegation that it has engaged in any unlawful "pattern and practice" and believes that the plaintiffs cannot satisfy the rigorous requirements necessary to achieve the class action status they seek. Plaintiffs' motion for class certification must be filed by August 25, 2000. The Company intends to vigorously contest this lawsuit. 26 27 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3) Articles of Incorporation and By Laws (i) By-Laws, as amended and restated on May 1, 2000. Filed herewith. (10) Material Contracts Management Contracts and Compensatory Plans. (i) Amendment No. 1, dated as of June 26, 2000, to Employment Agreement with Harry C. Stonecipher dated August 1, 1997. Filed herewith. (ii) 1999 Bonus and Retention Award Plan, as adopted on April 26, 1999. Filed herewith. (iii) 1997 Incentive Stock Plan, as amended on May 1, 2000. (Exhibit 99.1 of the Company's Registration Statement on Form S-8 (File No. 333-41920), filed July 21, 2000.) (15) Letter from independent accountants regarding unaudited interim financial information. Page 55. (27) Financial Data Schedule for the six-month period ending June 30, 2000. Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter covered by this report. 27 28 REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS The condensed consolidated statement of financial position as of June 30, 2000, the condensed consolidated statements of operations for the six-month periods ended June 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the three- and six-month periods ended June 30, 2000 and 1999, have been reviewed by the registrant's independent accountants, Deloitte & Touche LLP, whose report covering their review of the financial statements follows. 28 29 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Shareholders The Boeing Company Seattle, Washington We have reviewed the accompanying condensed consolidated statement of financial position of The Boeing Company and subsidiaries (the "Company") as of June 30, 2000, and the related condensed consolidated statements of operations for the three- and six-month periods ended June 30, 2000 and 1999, and the related condensed consolidated statements of cash flows six-month periods ended June 30, 2000 and 1999. 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial position of the Company as of December 31, 1999, 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 28, 2000, 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, 1999, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Seattle, Washington July 21, 2000 29 30 - - - - - - - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE BOEING COMPANY ------------------------------ (Registrant) August 2, 2000 /s/ Laurette T. Koellner ---------------- ------------------------------ (Date) Laurette T. Koellner Vice President of Finance & Corporate Controller 30 31 EXHIBIT (3)(i) BY-LAWS OF THE BOEING COMPANY (As amended and restated May 1, 2000) 31 32 THE BOEING COMPANY BY-LAWS TABLE OF CONTENTS ARTICLE I Stockholders' Meetings Page ---- Section 1. Annual Meetings 1 Section 2. Special Meetings 1 Section 3. Place of Meeting 1 Section 4. Notice of Meetings 1 Section 5. Waivers of Notice 2 Section 6. Quorum 2 Section 7. Proxies 2 7.1 Appointment 2 7.2 Delivery to Corporation; Duration 3 Section 8. Inspectors of Election 3 8.1 Appointment 3 8.2 Duties 3 8.3 Determination of Proxy Validity 3 Section 9. Fixing the Record Date 3 9.1 Meetings 3 9.2 Consent to Corporate Action Without a Meeting 4 9.3 Dividends, Distributions, and Other Rights 4 9.4 Voting List 4 Section 10. Action By Stockholders Without a Meeting 5 Section 11. Business and Nominations at Stockholders' Meetings 5 11.1 Business and Nominations at Annual Meetings 5 11.2 Stockholder Notice 6 11.3 Business and Nominations at Special Meetings 6 11.4 Stockholder Meeting Procedures 6 11.5 Public Announcement of Stockholders' Meetings 7 Section 12. Notice to Corporation 7 ARTICLE II Board of Directors Section 1. Number and Term of Office 7 Section 2. Nomination and Election 7 2.1 Nomination 7 2.2 Election 7 Section 3. Place of Meeting 8 Section 4. Annual Meeting 8 Section 5. Stated Meetings 8 Section 6. Special Meetings 8 6.1 Convenors and Notice 8 6.2 Waiver of Notice 8 Section 7. Quorum and Manner of Acting 8 Section 8. Chairman of the Board 9 Section 9. Resignations 9 Section 10. Removal of Directors 9 Section 11. Filling of Vacancies Not Caused by Removal 9 Section 12. Directors' Fees 9 Section 13. Action Without a Meeting 9 32 33 ARTICLE III Board Committees Section 1. Audit Committee 9 Section 2. Other Committees 10 2.1 Committee Powers 10 2.2 Committee Members 10 Section 3. Quorum and Manner of Acting 10 ARTICLE IV Officers and Agents: Terms, Compensation, Removal, Vacancies Section 1. Officers 10 Section 2. Term of Office 11 Section 3. Salaries of Elected Officers 11 Section 4. Bonuses 11 Section 5. Removal of Elected and Appointed Officers 11 Section 6. Vacancies 11 ARTICLE V Officers' Duties and Powers Section 1. Chairman of the Board 11 Section 2. President 11 Section 3. Chief Executive Officer 12 Section 4. Vice Presidents and Controller 12 Section 5. Secretary 12 Section 6. Treasurer 12 Section 7. Additional Powers and Duties 12 Section 8. Disaster Emergency Powers of Acting Officers 12 ARTICLE VI Stock and Transfers of Stock Section 1. Stock Certificates 13 Section 2. Transfer Agents and Registrars 13 Section 3. Transfers of Stock 14 Section 4. Lost Certificates 14 ARTICLE VII Miscellaneous Section 1. Fiscal Year 14 Section 2. (Repealed) Section 3. Signing of Negotiable Instruments 14 Section 4. Indemnification of Directors and Officers 14 4.1 Right to Indemnification 14 4.2 Right of Indemnitee to Bring Suit 15 4.3 Nonexclusivity of Rights 16 4.4 Insurance, Contracts, and Funding 16 4.5 Persons Serving Other Entities 16 4.6 Indemnification of Employees and Agents 16 of the Corporation 4.7 Procedures for the Submission of Claims 16 33 34 ARTICLE VIII Amendments Section 1. Amendment of the By-Laws: General 17 Section 2. Amendments as to Compensation and Removal of Officers 17 Section 3. Amendments as to Shareholder Meetings, Directors 17 Section 4. Amendment of this Article VIII 17 BY-LAWS OF THE BOEING COMPANY ARTICLE I Stockholders' Meetings SECTION 1. Annual Meetings. The Annual Meeting of the stockholders shall be held on the last Monday in the month of April in each year, or, if that day be a legal holiday, on the next succeeding day not a legal holiday, at 11:00 a.m., for the election of directors and the transaction of such other business as may come before the meeting. SECTION 2. Special Meetings. A special meeting of the stockholders may be called at any time by the Board of Directors, or by stockholders holding together at least twenty-five percent of the outstanding shares of stock entitled to vote, except as otherwise provided by statute or by the Certificate of Incorporation or any amendment thereto. SECTION 3. Place of Meeting. All meetings of the stockholders of the Corporation shall be held at such place or places within or without the State of Delaware as may from time to time be fixed by the Board of Directors or as shall be specified or fixed in the respective notices or waivers of notice thereof. SECTION 4. Notice of Meetings. Except as otherwise required by statute and as set forth below, notice of each annual or special meeting of stockholders shall be given to each stockholder of record entitled to vote at such meeting not less than thirty nor more than sixty (or the maximum number permitted by applicable law) days before the meeting date. If the Corporation has an Interested Stockholder as defined in Article EIGHTH of the Certificate of Incorporation, notice of each special meeting of stockholders shall be given to each stockholder of record entitled to vote at such meeting not less than fifty-five nor more than sixty (or the maximum number permitted by applicable law) days before the meeting date, unless the calling of such meeting is ratified by the affirmative vote of a majority of the Continuing Directors as defined in Article EIGHTH of the Certificate of Incorporation, in which case notice of such special meeting shall be given to each stockholder of record entitled to vote at such meeting not less than thirty nor more than sixty (or the maximum number permitted by applicable law) days before the meeting date. Such notice shall be given by delivering to each stockholder a written or printed notice thereof either personally or by mailing such notice in a postage-prepaid envelope addressed to the stockholder's address as it appears on the stock books of the Corporation. Except as otherwise required by statute, no publication of any notice of a meeting of stockholders shall be required. Every notice of a meeting of stockholders shall state the place, date, and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 34 35 SECTION 5. Waivers of Notice. Whenever any notice is required to be given to any stockholder under the provisions of these By-Laws, the Certificate of Incorporation, or the Delaware General Corporation Law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. The attendance of a stockholder at a meeting, in person or by proxy, shall constitute a waiver of notice of such meeting, except when a stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 6. Quorum. At all meetings of stockholders, except when otherwise provided by statute or by the Certificate of Incorporation or any amendment thereto, or by the By- Laws, the presence, in person or by proxy duly authorized, of the holders of one-third of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business; and except as otherwise provided by statute or rule of law, or by the Certificate of Incorporation or any amendment thereto, or by the By-Laws, the vote, in person or by proxy, of the holders of a majority of the shares constituting such quorum shall be binding upon all stockholders of the Corporation. In the absence of a quorum, a majority of the shares present in person or by proxy and entitled to vote may adjourn any meeting, from time to time but not for a period of more than thirty days at any one time, until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. Unless otherwise provided by statute, no notice of an adjourned meeting need be given. SECTION 7. Proxies. 7.1 Appointment. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy. Such authorization may be accomplished by (a) the stockholder or such stockholder's authorized officer, director, employee, or agent executing a writing or causing his or her signature to be affixed to such writing by any reasonable means, including facsimile signature, or (b) by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the intended holder of the proxy or to a proxy solicitation firm, proxy support service, or similar agent duly authorized by the intended proxy holder to receive such transmission; provided, that any such telegram, cablegram, or other electronic transmission must either set forth or be accompanied by information from which it can be determined that the telegram, cablegram, or other electronic transmission was authorized by the stockholder. Any copy, facsimile telecommunication, or other reliable reproduction of the writing or transmission by which a stockholder has authorized another person to act as proxy for such stockholder may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication, or other reproduction shall be a complete reproduction of the entire original writing or transmission. 35 36 7.2 Delivery to Corporation; Duration. A proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting or the delivery to the Corporation of the consent to corporate action in writing. A proxy shall become invalid three years after the date of its execution, unless otherwise provided in the proxy. A proxy with respect to a specified meeting shall entitle the holder thereof to vote at any reconvened meeting following adjournment of such meeting but shall not be valid after the final adjournment thereof. SECTION 8. Inspectors of Election. 8.1 Appointment. In advance of any meeting of stockholders, the Board of Directors of the Corporation shall appoint one or more persons to act as inspectors of election at such meeting and to make a written report thereof. The Board of Directors may designate one or more persons to serve as alternate inspectors to serve in place of any inspector who is unable or fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chairman of such meeting shall appoint one or more persons to act as inspector of elections at such meeting. 8.2 Duties. The inspectors shall: (a) ascertain the number of shares of the Corporation outstanding and the voting power of each such share; (b) determine the shares represented at the meeting and the validity of proxies and ballots; (c) count all votes and ballots; (d) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by them; and (e) certify their determination of the number of shares represented at the meeting and their count of the votes and ballots. Each inspector of election shall, before entering upon the discharge of his or her duties, take and sign an oath to faithfully execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors of election may appoint or retain other persons or entities to assist them in the performance of their duties. 8.3 Determination of Proxy Validity. The validity of any proxy or ballot executed for a meeting of stockholders shall be determined by the inspectors of election in accordance with the applicable provisions of the Delaware General Corporation Law as then in effect. In determining the validity of any proxy transmitted by telegram, cablegram, or other electronic transmission, the inspectors shall record in writing the information upon which they relied in making such determination. SECTION 9. Fixing the Record Date. 9.1 Meetings. For the purpose of determining stockholders entitled to notice of and to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall be not fewer than thirty nor more than sixty (or the maximum number permitted by applicable law) days before the date of such meeting. If the corporation has an Interested Stockholder as defined in Article EIGHTH of the Certificate of Incorporation, the record date for each special meeting of stockholders shall be not fewer than fifty-five nor more than sixty (or the maximum number permitted by applicable law) days before the meeting date, unless the calling of such meeting is ratified by the affirmative vote of a majority of the Continuing Directors, as defined in Article EIGHTH of 36 37 the Certificate of Incorporation. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of and to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 9.2 Consent to Corporate Action Without a Meeting. For the purpose of determining the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (or the maximum number permitted by applicable law) days after the date on which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by Chapter 1 of the Delaware General Corporation Law as now or hereafter amended, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the records of proceedings of meetings of stockholders. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by Chapter 1 of the Delaware General Corporation Law as now or hereafter amended, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. 9.3 Dividends, Distributions, and Other Rights. For the purpose of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolu- tion fixing the record date is adopted, and which record date shall be not more than sixty (or the maximum number permitted by applicable law) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 9.4. Voting List. At least ten days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting shall be made, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. This list shall be open to examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at such meeting for inspection by any stockholder who is present. 37 38 SECTION 10. Action by Stockholders Without a Meeting. Subject to the provisions of Article NINTH of the Certificate of Incorporation, any action which could be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, are (a) signed by the holders of outstanding stock having not fewer than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and (b) delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the records of proceedings of meetings of stockholders. Delivery made to the Corporation's registered office shall be by hand or by certified mail or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless written consents signed by a sufficient number of stockholders to take such action are delivered to the Corporation, in the manner required by this section, within sixty (or the maximum number permitted by applicable law) days of the date of the earliest dated consent delivered to the Corporation in the manner required by this section. The validity of any consent executed by a proxy for a stockholder pursuant to a telegram, cablegram, or other means of electronic transmission transmitted to such proxy holder by or upon the authorization of the stockholder shall be determined by or at the direction of the Secretary of the Corporation. A written record of the information upon which the person making such determination relied shall be made and kept in the records of the proceedings of the stockholders. Any such consent shall be inserted in the minute book as if it were the minutes of a meeting of the stockholders. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION 11. Business and Nominations at Stockholders' Meetings. 11.1 Business and Nominations at Annual Meetings. In addition to the election of directors, other proper business may be transacted at the annual meeting of stockholders, provided that such business is a proper matter for stockholder action and is properly brought before such meeting. To be properly brought before an annual meeting, nominations of persons for election to the Board of Directors and business to be considered by stockholders must be (a) made or brought by or at the direction of the Board of Directors, or (b) made or brought before the meeting by a stockholder of the Corporation who is a stockholder of record at the time of giving notice as required in this By-Law, who is entitled to vote at the meeting, and who complies with the notice procedures set forth in this By-Law. Notice by a stockholder pursuant to (b) above must be in writing, in accordance with Section 12 of this Article I, and received by the Secretary not earlier than the one-hundred and twentieth day nor later than the close of business on the ninetieth day prior to the date specified in Section 1 of this Article I for such annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty days before or more than sixty days after such date, notice by the stockholder must be received by the Secretary not earlier than the one-hundred and twentieth day prior to such annual meeting and not later than the close of business on the ninetieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. 38 39 11.2 Stockholder Notice. Any stockholder notice given pursuant to Section 11.1 shall set forth (i) the name and address of the stockholder proposing such business and of the beneficial owner, if any, on whose behalf the proposal or nomination is made; (ii) a representation that the stockholder is entitled to vote at such meeting and a statement of the number of shares of the Corporation which are owned by the stockholder and the number of shares which are beneficially owned by the beneficial owner, if any; (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons or to propose the business specified in the notice; and (iv) as to each person the stockholder proposes to nominate for election or re-election as a director, the name and address of such person and such other information regarding such nominee as would be required in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had such nominee been nominated by the Board of Directors, and a description of any arrangements or understandings, between the stockholder and such nominee and any other persons (including their names), pursuant to which the nomination is to be made, and the written consent of each such nominee to being named in the proxy statement as a nominee and to serving as a director if elected; or, as to each matter the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, the language of the business matter (if appropriate), and any material interest of the stockholder in such business. 11.3 Business and Nominations at Special Meetings. At any special meeting of the stockholders, only such business as is specified in the notice of such special meeting given by or at the direction of the person or persons calling such meeting, in accordance with Section 2 of this Article I, shall come before such meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph 11.1 of this By- Law shall be delivered to the Secretary not earlier than the one hundred and twentieth day nor later than the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. 39 40 11.4 Stockholder Meeting Procedures. No business shall be conducted nor director nominations made at any meeting of stockholders except in accordance with this Section 11. If the facts warrant, the Board of Directors, or the chairman of a stockholders' meeting at which directors are to be elected, may determine and declare (a) that a proposal does not constitute proper business to be transacted at the meeting or (b) that business was not properly brought before the meeting in accordance with the provisions of this Section 11 or (c) that a nomination was not made in accordance with this Section 11; and, if it is so determined, the defective proposal or nomination shall be disregarded and shall not be transacted or acted upon. The right of stockholders to bring business before or to make nominations pursuant to the foregoing procedure is subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation. The procedures set forth in this Section 11 for stockholders' bringing business before a stockholders' meeting or stockholders' making nominations for the election of directors are in addition to, and not in lieu or limitation of, (a) any procedures now in effect or hereafter adopted by or at the direction of the Board of Directors or any committee thereof and (b) the requirements set forth in Rule 14a-8 and Rule 14a-11 under Section 14 of the Securities Exchange Act of 1934, or any successor provisions. 11.5 Public Announcement of Stockholders' Meetings. For purposes of this By- Law, "public announcement" as to an annual or special meeting of stockholders shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. In no event shall the public announcement of an adjournment of an annual or special meeting commence a new time period for the giving of a stockholder's notice as described above. SECTION 12. Notice to Corporation. Any written notice required to be delivered by a stockholder to the Corporation pursuant to Section 11.1 of this Article I or Section 2.1 of Article II must be given, either by personal delivery or by registered or certified mail, postage prepaid, to the Secretary at the Corporation's executive offices in the City of Seattle, State of Washington. ARTICLE II Board of Directors SECTION 1. Number and Term of Office. The number of directors shall be thirteen, but the number may be increased, or decreased to not less than three, from time to time, either by the directors by adoption of a resolution to such effect or by the stockholders by amendment of the By-Laws in accordance with Article VIII hereof. The directors shall be divided into three classes, each of which shall be composed as nearly as possible of one-third of the directors. Each director shall serve for the term to which the director was elected, and until a successor shall have been elected and qualified or until the director's prior death, resignation, or removal. At each annual election, directors shall be chosen for a full three-year term to succeed those whose terms expire. 40 41 SECTION 2. Nomination and Election. 2.1 Nomination. Only persons who are nominated in accordance with Article I, Section 11 of these By-Laws shall be eligible for election as directors. 2.2 Election. At each election of directors, the persons receiving the greatest number of votes shall be the directors. SECTION 3. Place of Meeting. Meetings of the Board of Directors, or of any committee thereof, may be held either within or without the State of Delaware. SECTION 4. Annual Meeting. Each year the Board of Directors shall meet in connection with the annual meeting of stockholders for the purpose of electing officers and for the transaction of other business. No notice of such meeting is required. Such annual meeting may be held at any other time or place which shall be specified in a notice given as hereinafter provided for special meetings of the Board, or in a consent and waiver of notice thereof, signed by all the directors. SECTION 5. Stated Meetings. The Board of Directors may, by resolution adopted by affirmative vote of a majority of the whole Board, from time to time appoint the time and place for holding stated meetings of the Board, if by it deemed advisable; and such stated meetings shall thereupon be held at the time and place so appointed, without the giving of any special notice with regard thereto. In case the day appointed for a stated meeting shall fall upon a legal holiday, such meeting shall be held on the next following day, not a legal holiday, at the regularly appointed hour. Except as otherwise provided in the By-Laws, any and all business may be transacted at any stated meeting. SECTION 6. Special Meetings. 6.1 Convenors and Notice. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board or any two directors. Notice of a special meeting of the Board of Directors, stating the place, day, and hour of the meeting, shall be given to each director in writing (by mail, wire, facsimile, or personal delivery) or orally (by telephone or in person). 6.2 Waiver of Notice. With respect to a special meeting of the Board of Directors, a written waiver, signed by a director, shall be deemed equivalent to notice to that director. A director's attendance at a meeting shall constitute that director's waiver of notice of such meeting, except when the director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the waiver of notice of such meeting. 41 42 SECTION 7. Quorum and Manner of Acting. Except as herein otherwise provided, forty percent of the total number of directors fixed by or in the manner provided in these By-Laws at the time of any stated or special meeting of the Board or, if vacancies exist on the Board of Directors, forty percent of such number of directors then in office, provided, however, that such number may not be less than one-third of the total number of directors fixed by or in the manner provided in these By-Laws, shall constitute a quorum for the transaction of business; and, except as otherwise required by statute or by the Certificate of Incorporation or any amendment thereto, or by the By-Laws, the act of a majority of the directors present at any such meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn any meeting, from time to time, until a quorum is present. No notice of any adjourned meeting need be given. SECTION 8. Chairman of the Board. The Chairman of the Board shall preside, when present, at all meetings of the Board, except as otherwise provided by law. SECTION 9. Resignations. Any director of the Corporation may resign at any time by giving written notice thereof to the Secretary. Such resignation shall take effect at the time specified therefor or if the time is not specified, upon delivery thereof; and, unless otherwise specified with respect thereto, the acceptance of such resignation shall not be necessary to make it effective. SECTION 10. Removal of Directors. Any director may be removed solely for cause by the affirmative vote of the holders of record of a majority of the outstanding shares of stock entitled to vote, at a meeting of the stockholders called for the purpose; and the vacancy on the Board caused by any such removal may be filled by the stockholders at such meeting or at any subsequent meeting. SECTION 11. Filling of Vacancies Not Caused by Removal. In case of any increase in the number of directors, or of any vacancy created by death or resignation, the additional director or directors may be elected or, as the case may be, the vacancy or vacancies may be filled, either (a) by the Board of Directors at any meeting, (i) if the Corporation has an Interested Stockholder as defined in Article EIGHTH of the Certificate of Incorporation, by the affirmative vote of a majority of the Continuing Directors, as defined in Article EIGHTH, or (ii) if the Corporation does not have an Interested Stockholder, by the affirmative vote of a majority of the remaining directors, though less than a quorum; or (b) by the stockholders entitled to vote, either at an annual meeting or at a special meeting thereof called for the purpose, by the affirmative vote of a majority of the outstanding shares entitled to vote at such meeting. SECTION 12. Directors' Fees. The Board of Directors shall have authority to determine from time to time the amount of compensation which shall be paid to its members for attendance at meetings of the Board or of any committee of the Board. SECTION 13. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 42 43 ARTICLE III Board Committees SECTION 1. Audit Committee. In addition to any committees appointed pursuant to Section 2 of this Article, there shall be an Audit Committee, appointed annually by the Board of Directors, consisting of at least three directors who are not members of management. It shall be the responsibility of the Audit Committee to review the scope and results of the annual independent audit of books and records of the Corporation and its subsidiaries and to discharge such other responsibilities as may from time to time be assigned to it by the Board of Directors. The Audit Committee shall meet at such times and places as the members deem advisable, and shall make such recommendations to the Board of Directors as they consider appropriate. SECTION 2. Other Committees. 2.1 Committee Powers. The Board of Directors may appoint standing or temporary committees and invest such committees with such powers as it may see fit, with power to subdelegate such powers if deemed desirable by the Board of Directors; but no such committee shall have the power or authority of the Board of Directors to adopt, amend, or repeal the By-Laws of the Corporation or approve, adopt or recommend to the stockholders of the Corporation any action or matter expressly required by the Certificate of Incorporation, these By-Laws or the Delaware General Corporation Law to be submitted to stockholders for approval. 2.2 Committee Members. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. SECTION 3. Quorum and Manner of Acting. A majority of the number of directors composing any committee of the Board of Directors, as established and fixed by resolution of the Board of Directors, shall constitute a quorum for the transaction of business at any meeting of such committee but, if less than a majority are present at a meeting, a majority of such directors present may adjourn the meeting from time to time without further notice. The act of a majority of the members of a committee present at a meeting at which a quorum is present shall be the act of such committee. 43 44 ARTICLE IV Officers and Agents: Terms, Compensation, Removal, Vacancies SECTION 1. Officers. The elected officers of the Corporation shall be a Chairman of the Board (who shall be a director), a President (who shall be a director), and one or more Vice Presidents (each of whom may be assigned by the Board of Directors or the Chief Executive Officer an additional title descriptive of the functions assigned to such officer and one or more of whom may be designated Executive or Senior Vice President). The Board may also elect one or more Vice Chairmen. The Board of Directors shall also designate either the Chairman of the Board or the President as the Chief Executive Officer of the Corporation. The Board of Directors shall appoint a Controller, a Secretary, and a Treasurer. Any number of offices, whether elective or appointive, may be held by the same person. The Chief Executive Officer may, by a writing filed with the Secretary, designate titles as officers for employees and agents and appoint Assistant Secretaries and Assistant Treasurers, as, from time to time, may appear to be necessary or advisable in the conduct of the affairs of the Corporation and may, in the same manner, terminate or change such titles. SECTION 2. Term of Office. So far as practicable, all elected officers shall be elected at the annual meeting of the Board in each year, and shall hold office until the annual meeting of the Board in the next subsequent year and until their respective successors are chosen. The Controller, Secretary, and Treasurer shall hold office at the pleasure of the Board. SECTION 3. Salaries of Elected Officers. The salaries paid to the elected officers of the Corporation shall be authorized or approved by the Board of Directors. SECTION 4. Bonuses. None of the officers, directors, or employees of the Corporation or any of its subsidiary corporations shall at any time be paid any bonus or share in the earnings or profits of the Corporation or any of its subsidiary corporations except pursuant to a plan approved by affirmative vote of two- thirds of the members of the Board of Directors. SECTION 5. Removal of Elected and Appointed Officers. Any elected or appointed officer may be removed at any time, either for or without cause, by affirmative vote of a majority of the whole Board of Directors, at any meeting called for the purpose. SECTION 6. Vacancies. If any vacancy occurs in any office, the Board of Directors may elect or appoint a successor to fill such vacancy for the remainder of the term. 44 45 ARTICLE V Officers' Duties and Powers SECTION 1. Chairman of the Board. The Chairman of the Board shall preside, when present, at all meetings of the stockholders (except as otherwise provided by statute) and at all meetings of the Board of Directors. The Chairman shall have general power to execute bonds, deeds, and contracts in the name of the Corporation; to affix the corporate seal; to sign stock certificates; and to perform such other duties and services as shall be assigned to or required of the Chairman by the Board of Directors. SECTION 2. President. The President shall have general power to execute bonds, deeds, and contracts in the name of the Corporation and to affix the corporate seal; to sign stock certificates; during the absence or disability of the Chairman of the Board to exercise the Chairman's powers and to perform the Chairman's duties; and to perform such other duties and services as shall be assigned to or required of the President by the Board of Directors; provided, that if the office of President is vacant, the Chairman shall exercise the duties ordinarily exercised by the President until such time as a President is elected or appointed. SECTION 3. Chief Executive Officer. The officer designated by the Board of Directors as the Chief Executive Officer of the Corporation shall have general and active control of its business and affairs. The Chief Executive Officer shall have general power to appoint or designate all employees and agents of the Corporation whose appointment or designation is not otherwise provided for and to fix the compensation thereof, subject to the provisions of these By-Laws; to remove or suspend any employee or agent who shall not have been elected or appointed by the Board of Directors or other body; to suspend for cause any employee, agent, or officer, other than an elected officer, pending final action by the body which shall have appointed such employee, agent, or officer; and to exercise all the powers usually pertaining to the office held by the Chief Executive Officer of a corporation. SECTION 4. Vice Presidents and Controller. The several Vice Presidents and the Controller shall perform all such duties and services as shall be assigned to or required of them, from time to time, by the Board of Directors or the Chief Executive Officer, respectively. SECTION 5. Secretary. The Secretary shall attend to the giving of notice of all meetings of stockholders and of the Board of Directors and shall keep and attest true records of all proceedings thereat. The Secretary shall have charge of the corporate seal and have authority to attest any and all instruments or writings to which the same may be affixed and shall keep and account for all books, documents, papers, and records of the Corporation relating to its corporate organization. The Secretary shall have authority to sign stock certificates and shall generally perform all the duties usually appertaining to the office of secretary of a corporation. In the absence of the Secretary, an Assistant Secretary or Secretary pro tempore shall perform the duties of the Secretary. 45 46 SECTION 6. Treasurer. The Treasurer shall have the care and custody of all moneys, funds, and securities of the Corporation, and shall deposit or cause to be deposited all funds of the Corporation in accordance with directions or authorizations of the Board of Directors or the Chief Executive Officer. The Treasurer shall have power to sign stock certificates, to indorse for deposit or collection, or otherwise, all checks, drafts, notes, bills of exchange, or other commercial paper payable to the Corporation, and to give proper receipts or discharges therefor. In the absence of the Treasurer, an Assistant Treasurer shall perform the duties of the Treasurer. SECTION 7. Additional Powers and Duties. In addition to the foregoing especially enumerated duties and powers, the several officers of the Corporation shall perform such other duties and exercise such further powers as may be provided in these By-Laws or as the Board of Directors may from time to time determine, or as may be assigned to them by any superior officer. SECTION 8. Disaster Emergency Powers of Acting Officers. If, as a result of a disaster or other state of emergency, the Chief Executive Officer is unable to perform the duties of that office, (a) the powers and duties of the Chief Executive Officer shall be performed by the employee with the highest base salary who shall be available and capable of performing such powers and duties and, if more than one such employee has the same base salary, by the employee whose surname begins with the earliest letter of the alphabet among the group of those employees with the same base salary; and (b) the officer performing such duties shall continue to perform such powers and duties until the Chief Executive Officer becomes capable of performing those duties or until the Board of Directors shall have elected a new Chief Executive Officer or designated another individual as Acting Chief Executive Officer; and (c) such officer shall have the power in addition to all other powers granted to the Chief Executive Officer by these By-Laws and by the Board of Directors to appoint an acting President, acting Vice President-Finance, acting Controller, acting Secretary, and acting Treasurer, if any of the persons duly elected to any such office is not by reason of such disaster or emergency able to perform the duties of such office, each of such acting appointees to serve in such capacities until the officer for whom the appointee is acting becomes capable of performing the duties of such office or until the Board of Directors shall have designated another individual to perform such duties or have elected another person to fill such office; and (d) any such acting officer so appointed shall be entitled to exercise all powers vested by the By-Laws or the Board of Directors in the duly elected officer for whom the acting officer is acting; and (e) anyone transacting business with this Corporation may rely upon a certification by any two officers of the Corporation that a specified individual has succeeded to the powers of the Chief Executive Officer and that such person has appointed other acting officers as herein provided and any person, firm, corporation, or other entity to which such certification has been delivered by such officers may continue to rely upon it until notified of a change in writing signed by two officers of this Corporation. 46 47 ARTICLE VI Stock and Transfers of Stock SECTION 1. Stock Certificates. Every stockholder shall be entitled to a certificate, signed by the Chairman of the Board or the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares owned by the stockholder in the Corporation. Any and all of the signatures on a certificate may be a facsimile. If any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent, or registrar at the date of issue. SECTION 2. Transfer Agents and Registrars. The Board of Directors may, in its discretion, appoint responsible banks or trust companies in the Borough of Manhattan, in the City of New York, State of New York, and in such other city or cities as the Board may deem advisable, from time to time, to act as transfer agents and registrars of the stock of the Corporation; and, when such appointments shall have been made, no stock certificate shall be valid until countersigned by one of such transfer agents and registered by one of such registrars. SECTION 3. Transfers of Stock. Shares of stock may be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificates or by written power of attorney to sell, assign, and transfer the same, signed by the record holder thereof; but no transfer shall affect the right of the Corporation to pay any dividend upon the stock to the holder of record thereof, or to treat the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon the books of the Corporation. SECTION 4. Lost Certificates. The Board of Directors may provide for the issuance of new certificates of stock to replace certificates of stock lost, stolen, mutilated, or destroyed, or alleged to be lost, stolen, mutilated, or destroyed, upon such terms and in accordance with such procedures as the Board of Directors shall deem proper and prescribe. ARTICLE VII Miscellaneous SECTION 1. Fiscal Year. The fiscal year of the Corporation shall be the calendar year. SECTION 2. (Repealed in its entirety by vote of the stockholders, May 5, 1975.) SECTION 3. Signing of Negotiable Instruments. All bills, notes, checks, or other instruments for the payment of money shall be signed or countersigned by such officer or officers and in such manner as from time to time may be prescribed by resolution (whether general or special) of the Board of Directors. 47 48 SECTION 4. Indemnification of Directors and Officers. 4.1 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any actual or threatened action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation or that, being or having been such a director or officer or an employee of the Corporation, he or she is or was serving at the request of an executive officer of the Corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as such a director, officer, employee, or agent or in any other capacity while serving as such a director, officer, employee, or agent, shall be indemnified and held harmless by the Corporation to the full extent permitted by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), or by other applicable law as then in effect, against all expense, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) actually and reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the indemnitee's heirs, executors, and administrators; provided, however, that except as provided in Section 4.2 with respect to proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized or ratified by the Board of Directors of the Corporation. The right to indemnification conferred in this Section 4.1 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an under-taking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Section 4.1 or otherwise; and provided, further, that an advancement of expenses shall not be made if the Corporation's Board of Directors makes a good faith determination that such payment would violate law or public policy. 48 49 4.2 Right of Indemnitee to Bring Suit. If a claim under Section 4.1 is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall also be entitled to be paid the expense of prosecuting or defending such suit. The indemnitee shall be presumed to be entitled to indemnification under this Section 4 upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking has been tendered to the Corporation), and thereafter the Corporation shall have the burden of proof to overcome the presumption that the indemnitee is not so entitled. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee is not entitled to indemnification shall be a defense to the suit or create a presumption that the indemnitee is not so entitled. 4.3 Nonexclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Section 4 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provisions of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or disinterested directors, or otherwise. Notwith- standing any amendment to or repeal of this Section 4, or of any of the procedures established by the Board of Directors pursuant to Section 4.7, any indemnitee shall be entitled to indemnification in accordance with the provisions hereof and thereof with respect to any acts or omissions of such indemnitee occurring prior to such amendment or repeal. 4.4 Insurance, Contracts, and Funding. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee, or agent of the Corporation or another corporation, partnership, joint venture, trust, or other enterprise against any expense, liability, or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability, or loss under the Delaware General Corporation Law. The Corporation may, without further stockholder approval, enter into contracts with any indemnitee in furtherance of the provisions of this Section 4 and may create a trust fund, grant a security interest, or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Section 4. 4.5 Persons Serving Other Entities. Any person who is or was a director, officer, or employee of the Corporation who is or was serving (i) as a director or officer of another corporation of which a majority of the shares entitled to vote in the election of its directors is held by the Corporation or (ii) in an executive or management capacity in a partnership, joint venture, trust, or other enterprise of which the Corporation or a wholly owned subsidiary of the Corporation is a general partner or has a majority ownership shall be deemed to be so serving at the request of an executive officer of the Corporation and entitled to indemnification and advancement of expenses under Section 4.1. 49 50 4.6 Indemnification of Employees and Agents of the Corporation. The Corporation may, by action of its Board of Directors, authorize one or more executive officers to grant rights to advancement of expenses to employees or agents of the Corporation on such terms and conditions as such officer or officers deem appropriate under the circumstances. The Corporation may, by action of its Board of Directors, grant rights to indemnification and advancement of expenses to employees or agents or groups of employees or agents of the Corporation with the same scope and effect as the provisions of this Section 4 with respect to the indemnification and advancement of expenses of directors and officers of the Corporation; provided, however, that an undertaking shall be made by an employee or agent only if required by the Board of Directors. 4.7 Procedures for the Submission of Claims. The Board of Directors may establish reasonable procedures for the submission of claims for indemnification pursuant to this Section 4, determination of the entitlement of any person thereto, and review of any such determination. Such procedures shall be set forth in an appendix to these By-Laws and shall be deemed for all purposes to be a part hereof. ARTICLE VIII Amendments SECTION 1. Amendment of the By-Laws: General. Except as herein otherwise expressly provided, the By-Laws of the Corporation may be altered or repealed in any particular and new By-Laws, not inconsistent with any provision of the Certificate of Incorporation or any provision of law, may be adopted, either by the affirmative vote of the holders of record of a majority in number of the shares present in person or by proxy and entitled to vote at an annual meeting of stockholders or at a special meeting thereof, the notice of which special meeting shall include the form of the proposed altera- tion or repeal or of the proposed new By-Laws, or a summary thereof; or either (a) by the affirmative vote of a majority of the whole Board of Directors at any meeting thereof, or (b) by the affirmative vote of all the directors present at any meeting at which a quorum, less than a majority, is present; provided, in either of the latter cases, that the notice of such meeting shall include the form of the proposed alteration or repeal or of the proposed new By-Laws, or a summary thereof. SECTION 2. Amendments as to Compensation and Removal of Officers. Notwithstanding anything contained in these By-Laws to the contrary, the affirmative vote of the holders of record of a majority of the Voting Stock, as defined in Article EIGHTH of the Certificate of Incorporation, at a meeting of the stockholders called for the purpose, shall be required to alter, amend, repeal, or adopt any provision inconsistent with Sections 3, 4 and 5 of Article IV hereof, notice of which meeting shall include the form of the proposed amendment, or a summary thereof. SECTION 3. Amendments as to Stockholders' Meetings, Directors. Notwithstanding anything contained in these By-Laws to the contrary, either (a) the affirmative vote of a majority of the Continuing Directors, as defined in Article EIGHTH of the Certificate of Incorporation, or (b) the affirmative vote of the holders of record of at least seventy-five percent of the Voting Stock, as defined in Article EIGHTH of the Certificate of Incorporation, shall be required to alter, amend, repeal, or adopt any provision inconsistent with Sections 1, 2, and 4 of Article I and Sections 1, 10, and 11 of Article II. 50 51 SECTION 4. Amendment of this Article VIII. Notwithstanding anything contained in these By-Laws to the contrary, either (a) the recommendation of a majority of the Continuing Directors, as defined in Article EIGHTH of the Certificate of Incorporation, together with the affirmative vote of the holders of record of a majority of the Voting Stock, as defined in Article EIGHTH of the Certificate of Incorporation, or (b) the affirmative vote of the holders of record of at least seventy-five percent of the Voting Stock, as defined in Article EIGHTH of the Certificate of Incorporation, shall be required to alter, amend, repeal, or adopt any provision inconsistent with this Article VIII. 51 52 EXHIBIT (10)(i) AMENDMENT NO. 1 AMENDMENT NO. 1 dated as of June 26, 2000, to the Amended and Restated Employment Agreement (the "Agreement") between The Boeing Company (the "Company") and Harry C. Stonecipher ("Executive"). WHEREAS, the Agreement provides that the Employment Period (as defined therein) shall not extend beyond May 16, 2001; and WHEREAS, the Company has asked Executive to continue to serve as President and Chief Operating Officer for an additional year beyond such date and Executive has agreed to do so; NOW, THEREFORE, in consideration of the foregoing, the parties hereby agree that the final sentence of Section 2 of the Agreement is amended to read in its entirety as follows: Notwithstanding any other provision of this Section 2, in no event shall the Employment Period extend beyond May 16, 2002. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of the day and year first written above. THE BOEING COMPANY By: /s/ James B. Dagnon /s/ Harry C. Stonecipher ------------------- ------------------------ James B. Dagnon Harry C. Stonecipher Senior Vice President - People 52 53 EXHIBIT (10)(ii) The Boeing Company 1999 Bonus and Retention Award Plan 1. Purpose. The purpose of this Plan is to permit the payment of extraordinary types of compensation, such as signing bonuses, bonuses associated with certain transactions, and any other non-base pay awards, to certain employees of The Boeing Company and its subsidiaries, without such payments being contingent upon earnings or profits of the Company. In addition, the Plan is intended to authorize management to enter into retention incentive arrangements and similar agreements where it is determined that entering into such agreements, and the payment of amounts thereunder, is in the best interest of the Company. 2. Administration. The Plan shall be administered by the Senior Vice President- People, or his delegate. 3. Eligibility and Participation. All employees of The Boeing Company and its subsidiaries who are not elected officers shall be eligible to receive awards under this Plan. Participation shall be in the discretion of management. 4. Report of Payments under the Plan. On a semi-annual basis, or more often as requested by the Compensation Committee, management shall report to the Committee on the types and amounts of awards made under this Plan. 5. Forms of Awards. Awards under this Plan shall be made entirely in cash, except that in the case of corporate dispositions or similar transactions, awards of stock or stock options in any successor company may be substituted for cash. 6. Term of the Plan. The Plan shall become effective upon approval by a two-thirds majority of the members of the Board of Directors, and shall remain in effect until termination by the Board. 7. Amendment. The Plan may be amended by the Compensation Committee of the Board of Directors. 8. No Right to Employment. Nothing in this Plan shall be construed to confer upon any employee of Plan participant any right to continue in the employ of the Company. 9. Nonassignability. No awards authorized or made pursuant to the Plan shall be subject in any manner to assignment, alienation, transfer, attachment or any other legal process, and any attempt to subject any such award to any of the foregoing shall be void. 53 54 EXHIBIT (15) Letter from Independent Accountants Regarding Unaudited Interim Financial Information The Boeing Company and Subsidiaries See Deloitte & Touche LLP letter on page 55. 54 55 July 31, 2000 The Boeing Company Seattle, Washington We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of The Boeing Company and subsidiaries (the "Company") for the three and six-month periods ended June 30, 2000 and 1999 as indicated in our report dated July 21, 2000; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, is incorporated by reference in Registration Statement Nos. 2-48576, 33-25332, 33-31434, 33-43854, 33-52773, 33-58798, 333-03191, 333-16363, 333-26867, 333-32461, 333-32491, 333-32499, 333-32567, and 333-35324 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 55